10-Q 1 psmt-20180531x10q.htm 10-Q PSMT-10Q Q3 FY2018_Taxonomy2017

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q





 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended May 31, 2018

OR





 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from                to 



COMMISSION FILE NUMBER 0-22793

PriceSmart, Inc.

(Exact name of registrant as specified in its charter)



 

 

Delaware

 

33-0628530

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)



9740 Scranton Road, San Diego, CA 92121

(Address of principal executive offices)



(858) 404-8800

(Registrant’s telephone number, including area code)



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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).





 

Yes  

No  





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):







 

 

Large accelerated filer  

Accelerated filer  

Smaller Reporting Company  

Non-accelerated filer   (Do not check if a smaller reporting company)

Emerging growth company  



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.   



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).







 

Yes  

No  



The registrant had 30,461,536 shares of its common stock, par value $0.0001 per share, outstanding at June 30, 2018.

 



 

 


 

 

PRICESMART, INC.



INDEX TO FORM 10-Q





 

 



 

Page

PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS



CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2018  (UNAUDITED) AND AUGUST 31, 2017



CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2018 AND 2017 - UNAUDITED



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2018 AND 2017 - UNAUDITED



CONSOLIDATED STATEMENTS OF EQUITY FOR THE NINE MONTHS ENDED MAY 31, 2018 AND 2017 - UNAUDITED



CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MAY 31, 2018 AND 2017 - UNAUDITED



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

35 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

56 

ITEM 4.

CONTROLS AND PROCEDURES

57 

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

58 

ITEM 1A.

RISK FACTORS

58 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

59 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

59 

ITEM 4.

MINE SAFETY DISCLOSURES

59 

ITEM 5.

OTHER INFORMATION

59 

ITEM 6.

EXHIBITS

60 

 



 

i


 

PART I—FINANCIAL INFORMATION



ITEM 1.  FINANCIAL STATEMENTS



PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of May 31, 2018 and the consolidated balance sheet as of August 31, 2017, the unaudited consolidated statements of income for the three and nine months ended May 31, 2018 and 2017, the unaudited consolidated statements of comprehensive income for the three and nine months ended May 31, 2018 and 2017, the unaudited consolidated statements of equity for the nine months ended May 31, 2018 and 2017, and the unaudited consolidated statements of cash flows for the nine months ended May 31, 2018 and 2017, are included herein.  Also included herein are the notes to the unaudited consolidated financial statements.

 

1


 

PRICESMART, INC.

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)







 

 

 

 

 

 



 

 

 

 

 

 



 

May 31,

 

 

 



 

2018

 

August 31,



 

(Unaudited)

 

2017

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

141,164 

 

$

162,434 

Short-term restricted cash

 

 

676 

 

 

460 

Receivables, net of allowance for doubtful accounts of $32 and $7 as of May 31, 2018 and August 31, 2017, respectively

 

 

8,998 

 

 

6,460 

Merchandise inventories

 

 

326,200 

 

 

310,946 

Prepaid expenses and other current assets

 

 

32,680 

 

 

30,070 

Total current assets

 

 

509,718 

 

 

510,370 

Long-term restricted cash

 

 

2,973 

 

 

2,818 

Property and equipment, net

 

 

597,240 

 

 

557,829 

Goodwill

 

 

51,351 

 

 

35,642 

Other intangibles, net

 

 

15,593 

 

 

 —

Deferred tax assets

 

 

10,509 

 

 

15,412 

Other non-current assets (includes $4,081 and $2,547 as of May 31, 2018 and August 31, 2017, respectively, for the fair value of derivative instruments)

 

 

48,317 

 

 

44,678 

Investment in unconsolidated affiliates

 

 

10,769 

 

 

10,765 

Total Assets

 

$

1,246,470 

 

$

1,177,514 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Short-term borrowings

 

$

334 

 

$

 —

Accounts payable

 

 

268,976 

 

 

272,248 

Accrued salaries and benefits

 

 

23,594 

 

 

19,151 

Deferred income

 

 

23,785 

 

 

22,100 

Income taxes payable

 

 

5,124 

 

 

5,044 

Other accrued expenses

 

 

28,852 

 

 

26,483 

Dividends payable

 

 

10,652 

 

 

 —

Long-term debt, current portion

 

 

14,644 

 

 

18,358 

Total current liabilities

 

 

375,961 

 

 

363,384 

Deferred tax liability

 

 

5,884 

 

 

1,812 

Long-term portion of deferred rent

 

 

8,915 

 

 

8,914 

Long-term income taxes payable, net of current portion

 

 

7,740 

 

 

909 

Long-term debt, net of current portion

 

 

91,208 

 

 

87,939 

Other long-term liabilities (includes $537 and $682 for the fair value of derivative instruments and $5,115 and $5,051 for post-employment plans as of May 31, 2018 and August 31, 2017, respectively)

 

 

6,063 

 

 

5,789 

Total Liabilities

 

 

495,771 

 

 

468,747 



2


 





 

 

 

 

 

 



 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

Common stock $0.0001 par value, 45,000,000 shares authorized; 31,369,568 and 31,275,727 shares issued and 30,472,064 and 30,400,742 shares outstanding (net of treasury shares) as of May 31, 2018 and August 31, 2017, respectively

 

 

 

 

Additional paid-in capital

 

 

430,133 

 

 

422,395 

Tax benefit from stock-based compensation

 

 

11,486 

 

 

11,486 

Accumulated other comprehensive loss

 

 

(108,576)

 

 

(110,059)

Retained earnings

 

 

454,901 

 

 

420,866 

Less: treasury stock at cost, 897,504 and 874,985 shares as of May 31, 2018 and August 31, 2017, respectively

 

 

(37,840)

 

 

(35,924)

Total stockholders' equity attributable to PriceSmart, Inc. stockholders

 

 

750,107 

 

 

708,767 

Noncontrolling interest in consolidated subsidiaries

 

 

592 

 

 

 —

Total stockholders' equity

 

 

750,699 

 

 

708,767 

Total Liabilities and Equity

 

$

1,246,470 

 

$

1,177,514 



See accompanying notes.

3


 

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

May 31,

 

May 31,

 

May 31,

 

May 31,



 

2018

 

2017

 

2018

 

2017

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Net merchandise sales

 

$

750,473 

 

$

710,699 

 

$

2,312,447 

 

$

2,199,051 

Export sales

 

 

9,967 

 

 

6,475 

 

 

27,252 

 

 

25,381 

Membership income

 

 

12,852 

 

 

12,038 

 

 

37,930 

 

 

35,581 

Other revenue and income

 

 

8,909 

 

 

1,046 

 

 

11,207 

 

 

3,113 

Total revenues

 

 

782,201 

 

 

730,258 

 

 

2,388,836 

 

 

2,263,126 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

Net merchandise sales

 

 

641,249 

 

 

611,455 

 

 

1,977,840 

 

 

1,879,747 

Export sales

 

 

9,466 

 

 

6,143 

 

 

25,900 

 

 

24,085 

Non-merchandise

 

 

1,979 

 

 

 —

 

 

1,979 

 

 

 —

Selling, general and administrative:

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse club and other operations

 

 

76,259 

 

 

67,754 

 

 

217,712 

 

 

200,964 

General and administrative

 

 

24,079 

 

 

16,907 

 

 

63,167 

 

 

51,921 

Pre-opening expenses

 

 

352 

 

 

 

 

863 

 

 

(104)

Asset impairment

 

 

 —

 

 

 —

 

 

1,929 

 

 

 —

Loss/(gain) on disposal of assets

 

 

388 

 

 

364 

 

 

587 

 

 

1,106 

Total operating expenses

 

 

753,772 

 

 

702,632 

 

 

2,289,977 

 

 

2,157,719 

Operating income

 

 

28,429 

 

 

27,626 

 

 

98,859 

 

 

105,407 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

370 

 

 

392 

 

 

1,138 

 

 

1,443 

Interest expense

 

 

(1,362)

 

 

(1,828)

 

 

(3,609)

 

 

(5,126)

Other income (expense), net

 

 

(575)

 

 

1,101 

 

 

(87)

 

 

1,088 

Total other income (expense)

 

 

(1,567)

 

 

(335)

 

 

(2,558)

 

 

(2,595)

Income before provision for income taxes and
income (loss) of unconsolidated affiliates

 

 

26,862 

 

 

27,291 

 

 

96,301 

 

 

102,812 

Provision for income taxes

 

 

(8,128)

 

 

(8,459)

 

 

(40,950)

 

 

(31,885)

Income (loss) of unconsolidated affiliates

 

 

(18)

 

 

 

 

 

 

(1)

Net income

 

$

18,716 

 

$

18,838 

 

$

55,354 

 

$

70,926 

Less: net income (loss) attributable to noncontrolling interest

 

 

22 

 

 

 —

 

 

22 

 

 

 —

Net income attributable to PriceSmart, Inc.

 

$

18,694 

 

$

18,838 

 

$

55,332 

 

$

70,926 



 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to PriceSmart, Inc. per share available for distribution:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.61 

 

$

0.62 

 

$

1.82 

 

$

2.34 

Diluted

 

$

0.61 

 

$

0.62 

 

$

1.82 

 

$

2.34 

Shares used in per share computations:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

30,137 

 

 

30,043 

 

 

30,105 

 

 

30,010 

Diluted

 

 

30,137 

 

 

30,045 

 

 

30,105 

 

 

30,014 

Dividends per share

 

$

 —

 

$

 —

 

$

0.70 

 

$

0.70 



See accompanying notes.

4


 

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED—AMOUNTS IN THOUSANDS)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

May 31,

 

May 31,

 

May 31,

 

May 31,



 

2018

 

2017

 

2018

 

2017

Net income attributable to PriceSmart, Inc.

 

$

18,694 

 

$

18,838 

 

$

55,332 

 

$

70,926 

Other Comprehensive Income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (1)

 

$

(2,461)

 

$

(3,074)

 

$

(126)

 

$

(4,700)

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost and actuarial gains included in net periodic pensions cost

 

 

42 

 

 

43 

 

 

101 

 

 

29 

Total defined benefit pension plan

 

 

42 

 

 

43 

 

 

101 

 

 

29 

Derivative instruments: (2)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains/(losses) on change in
fair value of interest rate swaps

 

 

79 

 

 

(416)

 

 

1,516 

 

 

364 

Total derivative instruments

 

 

79 

 

 

(416)

 

 

1,516 

 

 

364 

Other comprehensive income (loss)

 

 

(2,340)

 

 

(3,447)

 

 

1,491 

 

 

(4,307)

Comprehensive income

 

$

16,354 

 

$

15,391 

 

$

56,823 

 

$

66,619 

Less: comprehensive income/(loss) attributable to noncontrolling interest

 

 

 

 

 —

 

 

 

 

 —

Comprehensive income attributable to PriceSmart, Inc. stockholders

 

$

16,346 

 

$

15,391 

 

$

56,815 

 

$

66,619 



(1)

Translation adjustments arising in translating the financial statements of a foreign entity have no effect on the income taxes of that foreign entity.  They may, however, affect: (a) the amount, measured in the parent entity's reporting currency, of withholding taxes assessed on dividends paid to the parent entity and (b) the amount of taxes assessed on the parent entity by the government of its country.  The Company has determined that the reinvestment of earnings of its foreign subsidiaries are indefinite because of the long-term nature of the Company's foreign investment plans.  Therefore, deferred taxes are not provided for on translation adjustments related to non-remitted earnings of the Company's foreign subsidiaries.

(2)

See Note 7 - Derivative Instruments and Hedging Activities.



See accompanying notes.



 

5


 

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED—AMOUNTS IN THOUSANDS)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Tax Benefit

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Total Stockholder's

 

 

 

 

 

 



 

 

 

 

 

 

Additional

 

From

 

Other

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 



 

Common Stock

 

Paid-in

 

Stock Based

 

Comprehensive

 

Retained

 

Treasury Stock

 

 

Attributable to

 

 

Noncontrolling

 

Total



 

Shares

 

Amount

 

Capital

 

Compensation

 

Income(Loss)

 

Earnings

 

Shares

 

Amount

 

 

PriceSmart, Inc.

 

 

Interest

 

Equity

Balance at August 31, 2016

 

31,238 

 

$

 

$

412,369 

 

$

11,321 

 

$

(103,951)

 

$

351,060 

 

836 

 

$

(32,731)

 

$

638,071 

 

$

 —

 

$

638,071 

Purchase of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

25 

 

 

(2,011)

 

 

(2,011)

 

 

 —

 

 

(2,011)

Issuance of restricted stock award

 

48 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Forfeiture of restricted stock awards

 

(35)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Exercise of stock options

 

 

 

 —

 

 

433 

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

433 

 

 

 —

 

 

433 

Stock-based compensation

 

 —

 

 

 —

 

 

7,328 

 

 

231 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,559 

 

 

 —

 

 

7,559 

Dividend paid to stockholders

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,641)

 

 —

 

 

 —

 

 

(10,641)

 

 

 —

 

 

(10,641)

Dividend payable to stockholders

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,643)

 

 —

 

 

 —

 

 

(10,643)

 

 

 —

 

 

(10,643)

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

70,926 

 

 —

 

 

 —

 

 

70,926 

 

 

 —

 

 

70,926 

Other comprehensive income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,307)

 

 

 —

 

 —

 

 

 —

 

 

(4,307)

 

 

 —

 

 

(4,307)

Balance at May 31, 2017

 

31,259 

 

$

 

$

420,130 

 

$

11,552 

 

$

(108,258)

 

$

400,702 

 

861 

 

$

(34,742)

 

$

689,387 

 

$

 —

 

$

689,387 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at August 31, 2017

 

31,276 

 

$

 

$

422,395 

 

$

11,486 

 

$

(110,059)

 

$

420,866 

 

875 

 

$

(35,924)

 

$

708,767 

 

$

 —

 

$

708,767 

Acquisition of Aeropost

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

562 

 

 

562 

Purchase of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

23 

 

 

(1,916)

 

 

(1,916)

 

 

 —

 

 

(1,916)

Issuance of restricted stock award

 

96 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Forfeiture of restricted stock awards

 

(7)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Exercise of stock options

 

 

 

 —

 

 

269 

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

269 

 

 

 —

 

 

269 

Stock-based compensation

 

 —

 

 

 —

 

 

7,469 

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,469 

 

 

 —

 

 

7,469 

Dividend paid to stockholders

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,645)

 

 —

 

 

 —

 

 

(10,645)

 

 

 —

 

 

(10,645)

Dividend payable to stockholders

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,652)

 

 —

 

 

 —

 

 

(10,652)

 

 

 —

 

 

(10,652)

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

55,332 

 

 —

 

 

 —

 

 

55,332 

 

 

22 

 

 

55,354 

Other comprehensive income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,483 

 

 

 —

 

 —

 

 

 —

 

 

1,483 

 

 

 

 

1,491 

Balance at May 31, 2018

 

31,369 

 

$

 

$

430,133 

 

$

11,486 

 

$

(108,576)

 

$

454,901 

 

898 

 

$

(37,840)

 

$

750,107 

 

$

592 

 

$

750,699 



See accompanying notes.



 

6


 



PRICESMART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED—AMOUNTS IN THOUSANDS)







 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended



 

May 31,

 

May 31,



 

2018

 

2017

Operating Activities:

 

 

 

 

 

 

Net income attributable to PriceSmart, Inc.

 

$

55,332 

 

$

70,926 

Adjustments to reconcile net income attributable to PriceSmart, Inc. to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

38,378 

 

 

34,445 

Allowance for doubtful accounts

 

 

25 

 

 

 —

Asset impairment and closure costs

 

 

1,929 

 

 

 —

(Gain)/loss on sale of property and equipment

 

 

587 

 

 

1,106 

Deferred income taxes

 

 

6,537 

 

 

3,143 

Equity in (gains) losses of unconsolidated affiliates

 

 

(3)

 

 

Stock-based compensation

 

 

7,469 

 

 

7,328 

Change in operating assets and liabilities:

 

 

 

 

 

 

Receivables, prepaid expenses and other current assets, non-current assets, accrued salaries and benefits, deferred membership income and other accruals

 

 

3,173 

 

 

(717)

Merchandise inventories

 

 

(15,254)

 

 

3,490 

Accounts payable

 

 

(7,408)

 

 

(32,825)

Net cash provided by (used in) operating activities

 

 

90,765 

 

 

86,897 

Investing Activities:

 

 

 

 

 

 

Business acquisition, net of cash acquired

 

 

(23,895)

 

 

 —

Additions to property and equipment

 

 

(74,788)

 

 

(99,541)

Deposits for land purchase option agreements

 

 

300 

 

 

(300)

Proceeds from disposal of property and equipment

 

 

93 

 

 

335 

Net cash provided by (used in) investing activities

 

 

(98,290)

 

 

(99,506)

Financing Activities:

 

 

 

 

 

 

Proceeds from long-term bank borrowings

 

 

28,500 

 

 

47,700 

Repayment of long-term bank borrowings

 

 

(28,931)

 

 

(11,009)

Proceeds from short-term bank borrowings

 

 

82,092 

 

 

678 

Repayment of short-term bank borrowings

 

 

(81,758)

 

 

(17,179)

Cash dividend payments

 

 

(10,645)

 

 

(10,641)

Purchase of treasury stock for tax withholding on stock compensation

 

 

(1,916)

 

 

(2,011)

Proceeds from exercise of stock options

 

 

269 

 

 

433 

Net cash provided by (used in) financing activities

 

 

(12,389)

 

 

7,971 

Effect of exchange rate changes on cash and cash equivalents and restricted cash

 

 

(985)

 

 

(2,391)

Net increase (decrease) in cash, cash equivalents

 

 

(20,899)

 

 

(7,029)

Cash, cash equivalents and restricted cash at beginning of period

 

 

165,712 

 

 

202,716 

Cash, cash equivalents and restricted cash at end of period

 

$

144,813 

 

$

195,687 



 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Dividends declared but not paid

 

$

10,652 

 

$

10,643 



7


 

The following table provides a breakdown of cash and cash equivalents, and restricted cash reported within the statement of cash flows:







 

 

 

 

 

 



 

Nine Months Ended



 

May 31,

 

May 31,



 

2018

 

2017

Cash and cash equivalents

 

$

141,164 

 

$

192,106 

Short-term restricted cash

 

 

676 

 

 

816 

Long-term restricted cash

 

 

2,973 

 

 

2,765 

Total cash and cash equivalents, and restricted cash shown in the statement of cash flows

 

$

144,813 

 

$

195,687 



See accompanying notes.



 

8


 

Table of Contents

PRICESMART, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

May 31, 2018

 

NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION



PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States.  As of May 31, 2018, the Company had 41 consolidated warehouse clubs in operation in 12 countries and one U.S. territory (seven each in Colombia and Costa Rica; five in Panama; four each in Trinidad and Dominican Republic;  three each in Guatemala and Honduras;  two each in El Salvador and Nicaragua; and one each in Aruba, Barbados,  Jamaica and the United States Virgin Islands), of which the Company owns 100% of the corresponding legal entities (see Note 2 - Summary of Significant Accounting Policies).  The Company opened a new warehouse club in Santa Ana, Costa Rica in October 2017, bringing the total warehouse clubs operating in Costa Rica to seven. The Company opened a new warehouse club in Santo Domingo, Dominican Republic in May 2018, bringing the total number of warehouse clubs operating in the Dominican Republic to four.  In May 2018, the Company acquired land in Panama and the Dominican Republic upon which the Company plans to construct new warehouse clubs. In Panama, the site is in the city of Santiago and, upon completion, will be the sixth warehouse club in Panama. In the Dominican Republic, the site is in the city of Santo Domingo and, upon completion, will be the fifth warehouse club in the Dominican Republic.  Both warehouse clubs are currently expected to open in the spring of 2019. Both of these warehouse clubs will be designed using our new small warehouse club format with sales floor square footage between 30,000 to 40,000 square feet, compared to 50,000 to 60,000 sales floor square footage within our most recent standard format warehouse club openings.  The Company continues to explore other potential sites for future warehouse clubs in Central America, the Caribbean and South America.



PriceSmart also operates a cross-border logistics and e-commerce business through its Aeropost, Inc. (“Aeropost”) subsidiary, which it purchased during March 2018.  Aeropost operates directly or via agency relationships in 38 countries in Latin America and the Caribbean and has distribution and administration facilities in Miami, Florida. 



Basis of Presentation – The interim unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and U.S. generally accepted accounting principles (GAAP) for interim financial information. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017 (the “2017 Form 10-K”).  The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries.  Inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation.



Reclassifications to consolidated statement of cash flows recorded during fiscal year 2018 for fiscal year 2017 – Accounting Standards Update (ASU) 2016-18 - The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years and will be applied using a retrospective transition method to each period presented.  The Company early adopted this ASU as of August 31, 2017. The adoption of this ASU impacted the presentation of cash flows with inclusion of restricted cash for each of the presented periods.



Additionally, the Company adopted Accounting Standards Update (ASU) 2016-09, effective as of September 1, 2017. The Company made certain elections and changes to account for share-based payments to employees according to the new standard as follows:



9


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Accounting for policy election to recognize forfeitures of restricted stock awards and units as they occur  The Company made a policy election to recognize forfeitures of restricted stock awards and units as they occur. Accordingly, the Company applied the modified retrospective transition method, with a cumulative-effect adjustment to prior year (August 31, 2017) retained earnings. Therefore, the Company recorded an increase to prior year retained earnings and a decrease to additional paid-in capital of $367,000 in each case. The table below summarizes the change to the prior year balance sheet (in thousands):





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

August 31, 2017

balance sheet line item

as previously reported

 

Amount

reclassified

 

August 31, 2017

balance sheet line item

as currently reported

Retained earnings

 

$

420,499 

 

$

367 

 

$

420,866 

Additional paid-in capital

 

$

422,762 

 

$

(367)

 

$

422,395 



Presentation of excess tax benefits and employee taxes paid on the statement of cash flows



·

According to ASU 2016-09, the cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation should be classified as a financing activity on the statement of cash flows, and the full retrospective transition method should be applied. The Company already classifies cash paid for tax withholdings as a financing activity; thus, the adoption did not change the Company’s classification for this activity. However, the Company has changed the naming convention from “Purchase of treasury stock” to “Purchase of treasury stock for tax withholding on stock compensation” in the statement of cash flows.



·

Furthermore, the new standard requires the Company to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The Company has adopted this change, retrospectively, which resulted in $231,000 being reclassified from a financing activity to an operating activity for the nine months ended May 31, 2017.





 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Principles of Consolidation – The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s wholly owned subsidiaries, subsidiaries in which it has a controlling interest, and the Company’s joint ventures for which the Company has determined that it is the primary beneficiary.  The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. The Company’s net income excludes income attributable to its noncontrolling interests.  Additionally, the interim consolidated financial statements also include the Company's investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method.  All significant inter-company accounts and transactions have been eliminated in consolidation.  The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows for the periods presented.  The results for interim periods are not necessarily indicative of the results for the full year. 



The Company determines whether any of the joint ventures in which it has made investments is a Variable Interest Entity (“VIE”) at the start of each new venture and if a reconsideration event has occurred.  At this time, the Company also considers whether it must consolidate a VIE and/or disclose information about its involvement in a VIE.  A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) that will absorb a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both.  A reporting entity must consider the rights and obligations conveyed by its variable interests and the relationship of its variable interests with variable interests held by other parties to determine whether its variable interests will absorb a majority of a VIE's expected losses, receive a majority of the VIE's expected residual returns, or both.  The reporting entity that consolidates a VIE is called the primary beneficiary of that VIE.  If the Company determines that it is not the primary beneficiary of the VIE, then the Company records its investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. Due to the nature of the joint ventures that the Company participates in and the continued commitments for additional financing, the Company determined these joint ventures are VIEs. 



10


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company has determined for its ownership interest in store-front joint ventures, within its Aeropost subsidiary, that the Company has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. Therefore, the Company has determined that it is the primary beneficiary of the VIEs and has consolidated these entities within its consolidated financial statements.  The Company's ownership interest in these store-front joint ventures, within its Aeropost subsidiary, for which the Company has consolidated their financial statements as of May 31, 2018, are listed below:







 

 

 

 

 

 

 

Aeropost Store-front Joint Ventures

 

Countries

 

Ownership

 

Basis of
Presentation

El Salvador

 

EL Salvador

 

60.0 

%

 

Consolidated

Guatemala

 

Guatemala

 

60.0 

%

 

Consolidated

Tortola

 

British Virgin Islands

 

50.0 

%

 

Consolidated

Trinidad

 

Trinidad

 

50.0 

%

 

Consolidated



For the Company's ownership interest in real estate development joint ventures, since all rights, obligations and the power to direct the activities of a VIE that most significantly impact the VIE's economic performance is shared equally by both parties within each joint venture, the Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method.  Under the equity method, the Company's investments in unconsolidated affiliates are initially recorded as an investment in the stock of an investee at cost and are adjusted for the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of the initial investment.  The Company's ownership interest in real estate development joint ventures for which the Company has recorded under the equity method as of May 31, 2018 are listed below:







 

 

 

 

 

 

 



 

 

 

 

 

 

 

Real Estate Development Joint Ventures

 

Countries

 

Ownership

 

Basis of
Presentation

GolfPark Plaza, S.A.

 

Panama

 

50.0 

%

 

Equity(1)

Price Plaza Alajuela PPA, S.A.

 

Costa Rica

 

50.0 

%

 

Equity(1)



(1)

Joint venture interests are recorded as investment in unconsolidated affiliates on the consolidated balance sheets.



Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.



Goodwill and Other Intangibles – Goodwill and intangibles totaled $66.9 million as of May 31, 2018 and $35.6 million as of August 31, 2017.   In March 2018, the Company acquired Aeropost, Inc., which resulted in the addition of $32.1 million of goodwill and other intangibles. Please see the table below for a description and amounts assigned to each major asset class.  Please refer to Note 8 – Acquisition for additional information pertaining to each asset class acquired in the business combination.  The Company reviews reported goodwill and other intangibles at the cash-generating unit level for impairment. The Company tests for impairment at least annually or when events or changes in circumstances indicate that it is more likely or than not that the asset is impaired.



The changes in the carrying amount of goodwill for the year ended May 31, 2018 are as follows (in thousands):







 

 

 



 

 

May 31,



 

 

2018

Goodwill at August 31, 2017

 

$

35,642 

Foreign currency exchange rate changes

 

 

(324)

Aeropost acquisition - see Note 8

 

 

16,033 

Goodwill at May 31, 2018

 

$

51,351 



11


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The table below summarizes our acquired other intangible assets (in thousands) arising from the Aeropost acquisition:







 

 

 



 

 

May 31,



 

 

2018

Other intangibles at August 31, 2017

 

$

 —

Trade name

 

 

5,100 

Developed technology

 

 

11,000 

Other intangibles at May 31, 2018

 

$

16,100 

Amortization

 

 

(507)

Net other intangibles at May 31, 2018

 

$

15,593 



 

 

 

Total goodwill and other intangibles, net

 

$

66,944 



The table below shows our estimated amortization of intangibles for fiscal years 2018 through 2022 and thereafter is as follows (in thousands):







 

 

 

 

Twelve Month Ended August 31

 

Amount

 

2018

 

$

1,120 

(1)

2019

 

 

2,404 

 

2020

 

 

2,411 

 

2021

 

 

2,404 

 

2022

 

 

2,404 

 

Thereafter

 

 

5,357 

 

Total

 

$

16,100 

 



(1)

Includes $507,000 of actual recorded amortization expense for the period ended May 31, 2018.



Tax Receivables  The Company pays Value Added Tax (“VAT”) or similar taxes (“input VAT”), income taxes, and other taxes within the normal course of its business in most of the countries in which it operates related to the procurement of merchandise and/or services it acquires and/or on sales and taxable income.  The Company also collects VAT or similar taxes on behalf of the government (“output VAT”) for merchandise and/or services it sells.  If the output VAT exceeds the input VAT, then the difference is remitted to the government, usually on a monthly basis.  If the input VAT exceeds the output VAT, this creates a VAT receivable.  In most countries where the Company operates, the governments have implemented additional collection procedures, such as requiring credit and debit card processors to remit a portion of sales processed via credit and debit card directly to the government as advance payments of VAT and/or income tax.  In the case of VAT, these procedures alter the natural offset of input and output VAT and generally leave the Company with a net VAT receivable, forcing the Company to process significant refund claims on a recurring basis. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due, this creates an income tax receivable.  The Company either requests a refund of these tax receivables or applies the balance to expected future tax payments.  These refund or offset processes can take anywhere from several months to several years to complete.



In most countries where the Company operates, the tax refund process is defined and structured with regular refunds or offsets.  However, as of August 31, 2016, there were three countries that lacked a clearly defined process. During the third and fourth quarters of fiscal year 2017, two of these countries clarified the refund mechanism, which we are currently pursuing. The Company, together with its tax and legal advisers, is currently seeking clarification in court in the remaining country without a clearly defined process and expects to prevail. The balance of the VAT receivable in the country with undefined refund mechanisms was approximately $377,000 and $1.2 million as of May 31, 2018, and August 31, 2017, respectively.  In another country in which the Company operates warehouse clubs, a new minimum income tax mechanism took effect in fiscal year 2015, which requires the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The rules (which the Company has challenged in court) effective for fiscal years 2015 to 2018 do not clearly allow the Company to obtain a refund or to offset this excess income tax against other taxes. As of May 31, 2018, and August 31, 2017, the Company had deferred tax assets of approximately $2.2 million and $2.0 million, respectively, in this country. Also, the Company had an income tax receivable balance of $5.5 million and $4.3 million as of May 31, 2018 and August 31, 2017, respectively, related to excess payments from fiscal years 2015 to 2017. The Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests, related appeals and/or court challenge on these matters. In the third quarter of fiscal year 2018, a revised minimum tax law was passed in this country, which beginning in fiscal 2019 will reduce the minimum tax rate.  Additionally,

12


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

this law clarifies rules for reimbursement of excess minimum tax paid, which the Company believes will facilitate this reimbursement on a go-forward basis.





The Company's policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:



·

Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where the Company's subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year.  The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year.



·

Long-term VAT and Income tax receivables, recorded as Other non-current assets:  This classification is used for amounts not approved for refund or credit in countries where the Company's subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes.  An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery. The Company does not currently have any allowances provided against VAT and income tax receivables.



The following table summarizes the VAT receivables reported by the Company (in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

May 31,

 

August 31,



 

2018

 

2017

Prepaid expenses and other current assets

 

$

7,256 

 

$

6,650 

Other non-current assets

 

 

19,758 

 

 

24,904 

Total amount of VAT receivables reported

 

$

27,014 

 

$

31,554 



The following table summarizes the Income tax receivables reported by the Company (in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

May 31,

 

August 31,



 

2018

 

2017

Prepaid expenses and other current assets

 

$

4,236 

 

$

6,403 

Other non-current assets

 

 

17,347 

 

 

10,492 

Total amount of Income tax receivables reported

 

$

21,583 

 

$

16,895 



Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or net realizable value.  The Company provides for estimated inventory losses and obsolescence between physical inventory counts on the basis of a percentage of sales.  The provision is adjusted periodically to reflect the trend of actual physical inventory count results, with physical inventories occurring primarily in the second and fourth fiscal quarters.  In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.



Stock Based Compensation  The Company utilizes three types of equity awards: stock options (“options”), restricted stock awards (“RSAs”) and restricted stock units (“RSUs”).  The Company adopted ASU 2016-09 – Compensation - Stock Compensation (Topic 718) on September 1, 2017, see Note 1 – Company Overview and Basis of Presentation for more information on the implementation. Compensation related to options is accounted for by applying the valuation technique based on the Black-Scholes model. Compensation related to RSAs and RSUs is based on the fair market value at the time of grant.  The Company recognizes the compensation cost related to these awards over the requisite service period as determined by the grant, amortized ratably or on a straight line basis over the life of the grant. As a result of adoption of ASU 2016-09, the Company currently accounts for actual forfeitures as they occur.  The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as income tax expense or benefit, based on ASU 2016-09. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as an operating cash flow in its consolidated statement of cash flows.

13


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



RSAs are outstanding shares of common stock and have the same cash dividend and voting rights as other shares of common stock. Shares of common stock subject to RSUs are not issued nor outstanding until vested, and RSUs do not have the same dividend and voting rights as common stock.  However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding.  Payments of dividend equivalents to employees are recorded as compensation expense.



Exit or Disposal Cost Obligations – In January 2017, the Company purchased a distribution center in Medley, Miami-Dade County, Florida. The Company transferred its Miami dry distribution center activities that were previously in a leased facility to the new facility during the third quarter of fiscal year 2017. As part of this transaction, the Company has recorded an exit obligation related to the lease of the previous distribution center. The obligation consists of the costs associated with the exit or disposal activity measured initially at its fair value as of May 1, 2017, the date on which the obligation was incurred. These costs are primarily comprised of the costs to terminate the operating lease and other associated costs, including costs to consolidate or close facilities, net of any potential sub-lease income the Company could receive during the remaining lease term. In periods subsequent to initial measurement, changes to the exit obligation, including any changes resulting from a revision to either the timing or the amount of estimated cash flows over the remaining lease period, is measured using the credit-adjusted risk-free rate that was used to measure the initial obligation. During the third quarter of fiscal year 2017, the Company initially recorded an obligation related to this exit activity for approximately $496,000 within other long-term liabilities. The Company’s exit obligation recorded as of May 31, 2018 and August 31, 2017 was immaterial.  Exit costs of approximately $870,000 were recorded to net merchandise cost of goods sold for the nine months ended May 31, 2018 and $751,000 for the nine months ended May 31, 2017. 



Fair Value Measurements – The Company measures the fair value for all financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring basis.  The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction.  A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.



The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.  The Company was not required to revalue any assets or liabilities utilizing Level 1 or Level 3 inputs at the balance sheet dates.  The Company's Level 2 assets and liabilities revalued at the balance sheet dates, on a recurring basis, consisted of cash flow hedges (interest rate swaps and cross-currency interest rate swaps) and forward foreign exchange contracts.  In addition, the Company utilizes Level 2 inputs in determining the fair value of long-term debt.  The Company did not make any significant transfers in and out of Level 1 and Level 2 fair value tiers during the periods reported on herein.



Non-financial assets and liabilities are revalued and recognized at fair value subsequent to initial recognition when there is evidence of impairment.  For the periods reported, no impairment of such non-financial assets was recorded.



The Company’s current and long-term financial assets and liabilities have fair values that approximate their carrying values. The Company’s 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.  There have been no significant changes in fair market value of the Company’s current and long-term financial assets, and there have been no material changes to the valuation techniques utilized in the fair value measurement of assets and liabilities as disclosed in the Company’s 2017 Form 10-K.

14


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



Derivatives Instruments and Hedging Activities – The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates.  In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation.  Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting.  If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be offset in accumulated other comprehensive income (loss) until the hedged item completes its contractual term.  Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change.  The Company did not change valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets from previous practice during the reporting period.  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, however, that this practice effectively mitigates counterparty risk.



Cash Flow Instruments.  The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries.  The swaps are designated as cash flow hedges of interest expense risk.  These instruments are considered effective hedges and are recorded using hedge accounting.  The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S. dollar.  The swaps are designated as cash flow hedges of the currency risk related to payments on the U.S. denominated debt.  These instruments are also considered to be effective hedges and are recorded using hedge accounting.  Under cash flow hedging, the entire gain or loss of the derivative, calculated as the net present value of the future cash flows, is deferred on the consolidated balance sheets in accumulated other comprehensive loss.  Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings.  See Note 7 - Derivative Instruments and Hedging Activities for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of May 31, 2018 and August 31, 2017.



Fair Value Instruments.  The Company is exposed to foreign currency exchange rate fluctuations in the normal course of business.  This includes exposure to foreign currency exchange rate fluctuations on U.S. dollar denominated liabilities within the Company’s international subsidiaries whose functional currency is other than the U.S. dollar.  The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flows attributable to currency exchange movements.  The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar.  Currently, these contracts are treated for accounting purposes as fair value instruments and do not qualify for derivative hedge accounting, and as such the Company does not apply derivative hedge accounting to record these transactions.  As a result, these contracts are valued at fair value with unrealized gains or losses reported in earnings during the period of the change.  The Company seeks to mitigate foreign currency exchange-rate 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 and are limited to less than one year in duration.  See Note 7 - Derivative Instruments and Hedging Activities for information on the fair value of open, unsettled forward foreign-exchange contracts as of May 31, 2018 and August 31, 2017.



Insurance Reimbursements – Receipts from insurance reimbursements up to the amount of the losses recognized are considered recoveries.  These recoveries are accounted for when they are probable of receipt.  Insurance recoveries are not recognized prior to the recognition of the related cost.  Anticipated proceeds in excess of the amount of loss recognized are considered gains and are subject to gain contingency guidance.  Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the insurance claim are resolved.



Self-Insurance  – As of October 1, 2017, PriceSmart, Inc. became self-insured for its employee medical health benefits and in doing so the Company has assumed the financial risk for providing health care benefits to its U.S. employees.  The Company contracted with Cigna Health and Life Insurance Company (“CHLIC”), a third party administrator, to process claims on its behalf under an Administrative Services Only (ASO) agreement.  The Company has elected to purchase “Stop Loss Insurance” to cover the risk in excess of certain dollar limits. The Company establishes an estimated accrual for its insurance program based on available comparable claims data, trends and projected ultimate costs of claims. This accrual is based on estimates prepared with the assistance of outside actuaries and the ultimate cost of these claims may vary from initial estimates and established accrual. The actuaries periodically update their estimates and the Company records such adjustments in the period in which such determination is made. The accrued obligation for this self-insurance program is included in “Accrued salaries and benefits” in the consolidated balance sheets and is $581,000 as of May 31, 2018. 



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PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Asset Impairment Costs – The Company periodically evaluates its long-lived assets for indicators of impairment. Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity. These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair value. Future business conditions and/or activity could differ materially from the projections made by management causing the need for additional impairment charges. The Company recorded an impairment charge of approximately $1.9 million for the nine months ended May 31, 2018 related to the write off of internally developed software for e-commerce due to the Company’s acquisition of Aeropost, Inc. and its digital e-commerce platform.



Foreign Currency Translation – The assets and liabilities of the Company’s foreign operations are translated to U.S. dollars when the functional currency in the Company’s international subsidiaries is the local currency and not U.S. dollars.  Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period.  The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss.  These adjustments will affect net income upon the sale or liquidation of the underlying investment.  Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date.  These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of income.



The following table summarizes the amounts recorded for the three and nine months ended May 31, 2018 and 2017 (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

May 31,

 

May 31,

 

May 31,

 

May 31,



 

2018

 

2017

 

2018

 

2017

Currency gain (loss)

 

$

(575)

 

$

1,101 

 

$

(87)

 

$

1,088 





Recent Accounting Pronouncements – Not Yet Adopted



FASB ASC 220 ASU 2018-02 - Income Statement—Reporting Comprehensive Income (Topic 220)— Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income



In February 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which helps organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (“tax reform”), enacted on December 22, 2017. ASU No. 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from tax reform. Additionally, ASU No. 2018-02 requires financial statement preparers to disclose (1) a description of their accounting policy for releasing income tax effects from accumulated other comprehensive income, (2) whether they elect to reclassify the stranded income tax effects from the tax reform, and (3) information about other income tax effects related to the application of the tax reform that are reclassified from accumulated other comprehensive income to retained earnings, if any. The amendments in this ASU are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.



FASB ASC 715 ASU 2017-09 - Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting



In May 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which seeks to provide clarity, reduce diversity in practice, and reduce cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, regarding a change to the terms or conditions of a share-based payment award.  This ASU provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified.

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PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.



FASB ASC 715 ASU 2017-07- Compensation—Retirement Benefits (Topic 715) — Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost



In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715) — Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is designed to improve guidance related to the presentation of defined benefit costs in the income statement. In particular, ASU 2017-07 requires that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.



FASB ASC 350 ASU 2017-04- Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment



In January 2017, the FASB issued Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.



Additionally, ASU 2017-04 requires any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.



FASB ASC 740 ASU 2016-16- Income Taxes (Topic 740)—Intra-Entity Transfers of Assets Other Than Inventory



In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740)—Intra-Entity Transfers of Assets Other than Inventory. Currently, U.S. GAAP prohibits recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset has been sold to an outside party. ASU 2016-16 states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.



The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.



FASB ASC 842 ASU 2016-02 -Leases (Topic 842): Amendments to the FASB Accounting Standards Codification



In February 2016, the FASB issued guidance codified in ASC 842, Leases, which supersedes the guidance in ASC 840, Leases.  ASC 842 will be effective for the Company on September 1, 2019, and the Company expects to apply the transition practical expedients allowed by the standard.  Note 5 – “Commitments and Contingencies” provides details on the Company’s current lease arrangements.  While the Company continues to evaluate the provisions of ASC 842 to determine how it will be affected, the primary effect will be to require recording right-of-use assets and corresponding lease obligations for current operating leases.  The Company expects the adoption of this guidance to have a material impact on the Company's consolidated balance sheets, but not on the consolidated statements of income or cash flows.



FASB ASC 606 ASU 2014-09 - Revenue from Contracts with Customers



In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition of revenue from contracts with customers. The guidance combines 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. 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. The Company is evaluating the impact of the adoption of this guidance on all of its sources of revenue and the resulting effect it will have on the Company's consolidated financial statements and related disclosures.

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PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



Recent Accounting Pronouncements Adopted



FASB ASC 815 ASU 2017-12 Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities



The FASB has issued Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which aims to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this ASU are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components, and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.



Additionally, the amendments (1) permit hedge accounting for risk components in hedging relationships involving non-financial risk and interest rate risk; (2) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; (3) continue to allow an entity to exclude option premiums and forward points from the assessment of hedge effectiveness; and (4) permit an entity to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness. The amendments in this ASU are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption allowed. The Company adopted this guidance during the third quarter of fiscal year 2018.  Adoption of this guidance did not have a material effect on the Company's consolidated financial statements.



FASB ASC 718 ASU 2016-09 - Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting 



In March 2016, the FASB issued new guidance on stock compensation intended to simplify accounting for share-based payment transactions. The guidance will change 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 adopted this guidance on September 1, 2017. 



·

The Company determined that the adoption of this guidance did not have a material effect on the result of operations and the calculation of earnings per share.  The Company has used the two-step method for the diluted earnings per share calculation over the last several years.

·

The adoption of this guidance and the amendments related to the presentation of employee taxes paid on the statement of cash flows did not have a material effect on the consolidated statements of cash flows.

·

The adoption of this guidance and the amendments related to the timing of when excess tax benefits are recognized, the effect of minimum statutory withholding requirements, forfeitures, and intrinsic value and the adoption of this methodology using the modified retrospective transition method resulted in the Company electing to eliminate the recording of the forfeiture rate on the expense recorded.  The elimination of the forfeiture rate required recording a cumulative-effect adjustment by increasing retained earnings and reducing Additional Paid in Capital, at the beginning of the year of adoption, which was September 1, 2017, for the service periods already incurred for unvested shares



FASB ASC 330 ASU 2015-11 -Inventory (Topic 330): Simplifying the Measurement of Inventory



In July 2015, the FASB issued guidance that will require an entity to measure in-scope inventory at the lower of cost and net realizable value.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This amendment applies to entities, like the Company, that measure inventory value using the average cost method.  The amendments in this ASU more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards.



The amendment in this ASU is effective on a prospective basis for public entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this guidance on September 1, 2017.  Adoption of this guidance did not have a material effect on the Company's consolidated financial statements.



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PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

FASB ASC 230 ASU 2016-18- Statement of Cash Flows (Topic 230)—Restricted Cash



In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)—Restricted Cash. This ASU addresses the diversity in practice that exists regarding the classification and the presentation of changes in restricted cash on the statement of cash flows.



The amendments in ASU No. 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years and will be applied using a retrospective transition method to each period presented.  The Company early adopted this ASU as of August 31, 2017. The adoption of this ASU impacted the presentation of cash flows with inclusion of restricted cash flows for each of the presented periods.



FASB ASC 230 ASU 2016-15- Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)



In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses stakeholders’ concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and Other Topics. In particular, ASU No. 2016-15 addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.



The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The amendments in this ASU should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company early adopted this guidance on December 1, 2017.  Adoption of this guidance did not have an effect on the Company's consolidated financial statements.



 

NOTE 3 – EARNINGS PER SHARE



The Company presents basic net income per share attributable to PriceSmart using the two-class method.  The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders and that determines basic net income per share attributable to PriceSmart for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to common stockholders.  A participating security is defined as a security that may participate in undistributed earnings with common stock.  The Company’s capital structure includes securities that participate with common stock on a one-for-one basis for distribution of dividends.  These are the restricted stock awards and restricted stock units issued pursuant to the 2013 Equity Incentive Award Plan.  The Company determines the diluted net income per share attributable to PriceSmart by using the more dilutive of the two class-method or the treasury stock method and by including the basic weighted average of outstanding stock options in the calculation of diluted net income per share attributable to PriceSmart under the two-class method and including all potential common shares assumed issued in the calculation of diluted net income per share attributable to PriceSmart under the treasury stock method.