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 February 16, 2020

or

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

Commission file number 0-20355

Costco Wholesale Corporation

(Exact name of registrant as specified in its charter)

Washington	91-1223280
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

999 Lake Drive, Issaquah, WA 98027

(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code): (425) 313-8100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 Par Value	COST	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	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 number of shares outstanding of the issuer's common stock as of March 4, 2020 was 441,579,952.

COSTCO WHOLESALE CORPORATION

INDEX TO FORM 10-Q 

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Statements of Income	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Equity	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
	Signatures	32

2

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in millions, except per share data) (unaudited)

 

	12 Weeks Ended						24 Weeks Ended
	February 16, 2020			February 17, 2019			February 16, 2020			February 17, 2019
REVENUE
Net sales	$	38,256		$	34,628		$	74,492		$	68,939
Membership fees	816			768			1,620			1,526
Total revenue	39,072			35,396			76,112			70,465
OPERATING EXPENSES
Merchandise costs	34,056			30,720			66,289			61,343
Selling, general and administrative	3,743			3,464			7,475			6,939
Preopening expenses	7			9			21			31
Operating income	1,266			1,203			2,327			2,152
OTHER INCOME (EXPENSE)
Interest expense	(34		)	(34		)	(72		)	(70		)
Interest income and other, net	45			46			80			68
INCOME BEFORE INCOME TAXES	1,277			1,215			2,335			2,150
Provision for income taxes	330			314			532			472
Net income including noncontrolling interests	947			901			1,803			1,678
Net income attributable to noncontrolling interests	(16		)	(12		)	(28		)	(22		)
NET INCOME ATTRIBUTABLE TO COSTCO	$	931		$	889		$	1,775		$	1,656
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
Basic	$	2.10		$	2.02		$	4.02		$	3.77
Diluted	$	2.10		$	2.01		$	4.00		$	3.74
Shares used in calculation (000s):
Basic	442,021			440,284			441,920			439,721
Diluted	443,727			442,337			443,704			442,535

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in millions) (unaudited)

 

	12 Weeks Ended				24 Weeks Ended
	February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
NET INCOME INCLUDING NONCONTROLLING INTERESTS	$	947	$	901	$	1,803	$	1,678
Foreign-currency translation adjustment and other, net	47		52		172		(82		)
Comprehensive income	994		953		1,975		1,596
Less: Comprehensive income attributable to noncontrolling interests	22		13		44		21
COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO	$	972	$	940	$	1,931	$	1,575

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in millions, except par value and share data) (unaudited)

	February 16, 2020			September 1, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	7,786		$	8,384
Short-term investments	929			1,060
Receivables, net	1,988			1,535
Merchandise inventories	11,850			11,395
Other current assets	1,150			1,111
Total current assets	23,703			23,485
PROPERTY AND EQUIPMENT
Land	6,696			6,417
Buildings and improvements	17,853			17,136
Equipment and fixtures	8,406			7,801
Construction in progress	906			1,272
Accumulated depreciation and amortization	(12,380		)	(11,736		)
Net property and equipment	21,481			20,890
OTHER ASSETS
Operating lease right-of-use assets	2,596			0
Other long-term assets	1,002			1,025
TOTAL ASSETS	$	48,782		$	45,400
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	11,072		$	11,679
Accrued salaries and benefits	3,415			3,176
Accrued member rewards	1,243			1,180
Deferred membership fees	1,865			1,711
Current portion of long-term debt	500			1,699
Other current liabilities	4,600			3,792
Total current liabilities	22,695			23,237
OTHER LIABILITIES
Long-term debt, excluding current portion	5,099			5,124
Long-term operating lease liabilities	2,446			0
Other long-term liabilities	1,543			1,455
TOTAL LIABILITIES	31,783			29,816
COMMITMENTS AND CONTINGENCIES
EQUITY
Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding	0			0
Common stock $0.01 par value; 900,000,000 shares authorized; 441,622,000 and 439,625,000 shares issued and outstanding	4			4
Additional paid-in capital	6,506			6,417
Accumulated other comprehensive loss	(1,280		)	(1,436		)
Retained earnings	11,384			10,258
Total Costco stockholders’ equity	16,614			15,243
Noncontrolling interests	385			341
TOTAL EQUITY	16,999			15,584
TOTAL LIABILITIES AND EQUITY	$	48,782		$	45,400

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(amounts in millions) (unaudited)

	12 Weeks Ended February 16, 2020
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests		Total Equity
	Shares (000s)		Amount
BALANCE AT NOVEMBER 24, 2019	441,778		$	4	$	6,391		$	(1,321	)	$	10,787		$	15,861		$	363	$	16,224
Net income	—		—		—			—			931			931			16		947
Foreign-currency translation adjustment and other, net	—		—		—			41			—			41			6		47
Stock-based compensation	—		—		118			—			—			118			—		118
Release of vested restricted stock units (RSUs), including tax effects	6		—		(1		)	—			—			(1		)	—		(1		)
Repurchases of common stock	(162	)	—		(2		)	—			(47		)	(49		)	—		(49		)
Cash dividend declared	—		—		—			—			(287		)	(287		)	—		(287		)
BALANCE AT FEBRUARY 16, 2020	441,622		$	4	$	6,506		$	(1,280	)	$	11,384		$	16,614		$	385	$	16,999
BALANCE AT
BALANCE AT	12 Weeks Ended February 17, 2019
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests		Total Equity
	Shares (000s)		Amount
BALANCE AT NOVEMBER 25, 2018	440,546		$	4	$	6,107		$	(1,331	)	$	8,387		$	13,167		$	312	$	13,479
Net income	—		—		—			—			889			889			12		901
Foreign-currency translation adjustment and other, net	—		—		—			51			—			51			1		52
Stock-based compensation	—		—		119			—			—			119			—		119
Release of vested RSUs, including tax effects	4		—		—			—			—			—			—		—
Repurchases of common stock	(561	)	—		(8		)	—			(109		)	(117		)	—		(117		)
Cash dividend declared and other	—		—		—			—			(251		)	(251		)	—		(251		)
BALANCE AT FEBRUARY 17, 2019	439,989		$	4	$	6,218		$	(1,280	)	$	8,916		$	13,858		$	325	$	14,183

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(amounts in millions) (unaudited)

	24 Weeks Ended February 16, 2020
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Shares (000s)		Amount
BALANCE AT SEPTEMBER 1, 2019	439,625		$	4	$	6,417		$	(1,436	)	$	10,258		$	15,243		$	341		$	15,584
Net income	—		—		—			—			1,775			1,775			28			1,803
Foreign-currency translation adjustment and other, net	—		—		—			156			—			156			16			172
Stock-based compensation	—		—		420			—			—			420			—			420
Release of vested restricted stock units (RSUs), including tax effects	2,259		—		(327		)	—			—			(327		)	—			(327		)
Repurchases of common stock	(262	)	—		(4		)	—			(75		)	(79		)	—			(79		)
Cash dividend declared	—		—		—			—			(574		)	(574		)	—			(574		)
BALANCE AT FEBRUARY 16, 2020	441,622		$	4	$	6,506		$	(1,280	)	$	11,384		$	16,614		$	385		$	16,999
	24 Weeks Ended February 17, 2019
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Shares (000s)		Amount
BALANCE AT SEPTEMBER 2, 2018	438,189		$	4	$	6,107		$	(1,199	)	$	7,887		$	12,799		$	304		$	13,103
Net income	—		—		—			—			1,656			1,656			22			1,678
Foreign-currency translation adjustment and other, net	—		—		—			(81		)	—			(81		)	(1		)	(82		)
Stock-based compensation	—		—		391			—			—			391			—			391
Release of vested RSUs, including tax effects	2,511		—		(270		)	—			—			(270		)	—			(270		)
Repurchases of common stock	(711	)	—		(10		)	—			(141		)	(151		)	—			(151		)
Cash dividend declared and other	—		—		—			—			(486		)	(486		)	—			(486		)
BALANCE AT FEBRUARY 17, 2019	439,989		$	4	$	6,218		$	(1,280	)	$	8,916		$	13,858		$	325		$	14,183

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in millions) (unaudited)

	24 Weeks Ended
	February 16, 2020			February 17, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income including noncontrolling interests	$	1,803		$	1,678
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization	758			683
Non-cash lease expense	77			0
Stock-based compensation	419			389
Other non-cash operating activities, net	14			6
Deferred income taxes	1			(27		)
Changes in operating assets and liabilities:
Merchandise inventories	(394		)	(449		)
Accounts payable	(537		)	(684		)
Other operating assets and liabilities, net	580			362
Net cash provided by operating activities	2,721			1,958
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments	(636		)	(457		)
Maturities and sales of short-term investments	777			621
Additions to property and equipment	(1,260		)	(1,317		)
Other investing activities, net	19			(18		)
Net cash used in investing activities	(1,100		)	(1,171		)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in bank payments outstanding	(17		)	262
Repayments of long-term debt	(1,200		)	(89		)
Tax withholdings on stock-based awards	(327		)	(270		)
Repurchases of common stock	(77		)	(149		)
Cash dividend payments	(573		)	(501		)
Other financing activities, net	(34		)	(2		)
Net cash used in financing activities	(2,228		)	(749		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	9			(13		)
Net change in cash and cash equivalents	(598		)	25
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR	8,384			6,055
CASH AND CASH EQUIVALENTS END OF PERIOD	$	7,786		$	6,080
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the first half of the year for:
Interest	$	60		$	68
Income taxes, net	$	380		$	677
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Cash dividend declared, but not yet paid	$	287		$	251

The accompanying notes are an integral part of these condensed consolidated financial statements.

8

COSTCO WHOLESALE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

Note 1—Summary of Significant Accounting Policies

Description of Business

Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. For the period ended February 16, 2020, Costco operated 785 warehouses worldwide: 546 in the United States (U.S.) located in 44 states, Washington, D.C., and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the United Kingdom (U.K.), 26 in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, two in Spain, and one each in Iceland, France and China. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, Taiwan, Japan, and Australia.

Basis of Presentation

The condensed consolidated financial statements include the accounts of Costco, its wholly owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. All material intercompany transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. The Company’s net income excludes income attributable to the noncontrolling interest in Taiwan. Unless otherwise noted, references to net income relate to net income attributable to Costco.

These unaudited condensed 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 Securities and Exchange Commission (SEC). While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report filed on Form 10-K for the fiscal year ended September 1, 2019.

Fiscal Year End

The Company operates on a 52/53 week fiscal year basis, with the fiscal year ending on the Sunday closest to August 31. Fiscal 2020 is a 52-week year ending on August 30, 2020. References to the second quarter of 2020 and 2019 relate to the 12-week fiscal quarters ended February 16, 2020, and February 17, 2019, respectively. References to the first half of 2020 and 2019 relate to the 24 weeks ended February 16, 2020, and February 17, 2019, respectively.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

9

Leases

The Company leases land and/or buildings at warehouses and certain other office and distribution facilities. Leases generally contain one or more of the following options, which the Company can exercise at the end of the initial term: (a) renew the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase the property at the then-fair market value; or (c) a right of first refusal in the event of a third-party offer.

Some leases include free-rent periods and step-rent provisions, which are recognized on a straight-line basis over the original term of the lease and any extension options that the Company is reasonably certain to exercise from the date the Company has control of the property. Certain leases provide for periodic rent increases based on price indices or the greater of minimum guaranteed amounts or sales volume. Our leases do not contain any material residual value guarantees or material restrictive covenants.

The Company determines at inception whether a contract is or contains a lease. The Company initially records right-of-use (ROU) assets and lease obligations for its finance and operating leases based on the discounted future minimum lease payments over the term. As the rate implicit in the Company’s leases is not easily determinable, the present value of the sum of the lease payments is calculated by using the Company’s incremental borrowing rate. The rate is determined using a portfolio approach based on the rate of interest the Company would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses quoted interest rates from financial institutions to derive the incremental borrowing rate. The lease term is defined as the noncancelable period of the lease plus any options to extend when it is reasonably certain that the Company will exercise the option.

Recent Accounting Pronouncements Adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02 - Leases (ASC 842), which required recognition on the balance sheet for the rights and obligations created by leases with terms greater than 12 months. The Company adopted ASC 842 using the modified retrospective transition method and elected to use the effective date of September 2, 2019, as the date of initial application. Consequently, the comparative periods presented continue to be in accordance with ASC 840, Leases, previously in effect.

The Company elected the package of practical expedients permitted under the transition guidance, allowing the Company to carry forward conclusions related to: (a) whether expired or existing contracts contain leases; (b) lease classification; and (c) initial direct costs for existing leases. The Company has elected not to record operating lease right-of-use assets or lease liabilities associated with leases with durations of 12 months or less. Lastly, the Company elected the practical expedient allowing aggregation of non-lease components with related lease components when evaluating accounting treatment for all classes of underlying assets.

Adoption of the new standard resulted in an initial increase to assets and liabilities of $2,632 related to recognition of operating lease right-of-use assets and operating lease obligations as of September 2, 2019. Other line item impacts in the Company's condensed consolidated balance sheet were not material. The standard did not materially impact the condensed consolidated statements of income and cash flows. For more information on the Company's lease arrangements refer to Note 5.

10

Note 2—Investments

The Company's investments were as follows:

February 16, 2020:	Cost Basis		Unrealized Gains, Net		Recorded Basis
Available-for-sale:
Government and agency securities	$	523	$	6	$	529
Held-to-maturity:
Certificates of deposit	400				400
Total short-term investments	$	923	$	6	$	929

September 1, 2019:	Cost Basis		Unrealized Gains, Net		Recorded Basis
Available-for-sale:
Government and agency securities	$	716	$	6	$	722
Held-to-maturity:
Certificates of deposit	338				338
Total short-term investments	$	1,054	$	6	$	1,060

Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended February 16, 2020, and September 1, 2019. At February 16, 2020, and September 1, 2019, available-for-sale securities that were in a continuous unrealized-loss position were not material. There were no sales of available-for-sale securities during the first half of 2020 or 2019.

The maturities of available-for-sale and held-to-maturity securities at February 16, 2020, are as follows:

	Available-For-Sale				Held-To-Maturity
	Cost Basis		Fair Value
Due in one year or less	$	196	$	197	$	400
Due after one year through five years	327		332		0
Total	$	523	$	529	$	400

11

Note 3—Fair Value Measurement

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below presents information regarding financial assets and liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy reflecting the valuation techniques utilized to determine fair value.

	Level 2
	February 16, 2020			September 1, 2019
Investment in government and agency securities(1)	$	666		$	766
Forward foreign-exchange contracts, in asset position(2)	6			15
Forward foreign-exchange contracts, in (liability) position(2)	(6		)	(4		)
Total	$	666		$	777

 

 _______________

(1) At February 16, 2020, $137 cash and cash equivalents and $529 short-term investments are included in the accompanying condensed consolidated balance sheets. At September 1, 2019, $44 cash and cash equivalents and $722 short-term investments are included in the accompanying condensed consolidated balance sheets.

(2) The asset and liability values are included in other current assets and other current liabilities, respectively, in the accompanying condensed consolidated balance sheets.

At February 16, 2020, and September 1, 2019, the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers between levels during the first half of 2020 or 2019.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are measured at fair value if determined to be impaired. There were no fair value adjustments to these items during the first half of 2020 or 2019.

Note 4—Debt

The carrying value of the Company’s long-term debt consisted of the following:

	February 16, 2020		September 1, 2019
1.70% Senior Notes due December 2019	$	0	$	1,200
1.75% Senior Notes due February 2020	500		500
2.15% Senior Notes due May 2021	1,000		1,000
2.25% Senior Notes due February 2022	500		500
2.30% Senior Notes due May 2022	800		800
2.75% Senior Notes due May 2024	1,000		1,000
3.00% Senior Notes due May 2027	1,000		1,000
Other long-term debt	824		852
Total long-term debt	5,624		6,852
Less unamortized debt discounts and issuance costs	25		29
Less current portion(1)	500		1,699
Long-term debt, excluding current portion	$	5,099	$	5,124

 _______________

(1) Net of unamortized debt discounts and issuance costs.

12

The estimated fair value of Senior Notes is valued using Level 2 inputs. Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japan subsidiary, valued using Level 3 inputs. The fair value of the Company's long-term debt, including the current portion, was approximately $5,772 and $6,997 at February 16, 2020, and September 1, 2019, respectively.

In December 2019, the Company paid the outstanding principal balance and interest on the 1.70% Senior Notes. Subsequent to the end of the quarter, on February 18, 2020, the Company paid the outstanding principal balance and interest on the 1.75% Senior Notes. Existing cash and cash equivalents and short-term investments were used to satisfy these obligations.

Note 5—Leases

The tables below present information regarding the Company's lease assets and liabilities:

	February 16, 2020
Assets
Operating lease right-of-use assets	$	2,596
Finance lease assets(1)	523
Total lease assets	$	3,119
Liabilities
Current
Operating(2)	$	168
Finance(2)	18
Long-term
Operating	2,446
Finance(3)	544
Total lease liabilities	$	3,176

 _______________

(1) Included in net property and equipment in the accompanying condensed consolidated balance sheets.

(2) Included in other current liabilities in the accompanying condensed consolidated balance sheets.

(3) Included in other long-term liabilities in the accompanying condensed consolidated balance sheets.

	February 16, 2020
Weighted-average remaining lease term (years)
Operating leases	22
Finance leases	19
Weighted-average discount rate
Operating leases	2.24	%
Finance leases	7.24	%

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The components of lease expense, excluding short-term lease costs and sublease income which were not material, were as follows:

	12 Weeks Ended		24 Weeks Ended
	February 16, 2020		February 16, 2020
Operating lease costs(1)	$	51	$	102
Finance lease costs:
Amortization of lease assets(1)	4		8
Interest on lease liabilities(2)	8		15
Variable lease costs(3)	22		36
Total lease costs	$	85	$	161

 _______________

(1) Generally included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.

(2) Included in interest expense in the accompanying condensed consolidated statements of income.

(3) Included in selling, general and administrative expenses and merchandise costs in the accompanying condensed consolidated statements of income. Amount excludes property taxes, which were immaterial.

Supplemental cash flow information related to leases was as follows:

	24 Weeks Ended
	February 16, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows — operating leases	$	93
Operating cash flows — finance leases	15
Financing cash flows — finance leases	34
Leased assets obtained in exchange for operating lease liabilities	47
Leased assets obtained in exchange for finance lease liabilities	167

As of February 16, 2020, future minimum payments during the next five fiscal years and thereafter are as follows:

	Operating Leases(1)		Finance Leases
2020	$	120	$	23
2021	220		47
2022	212		47
2023	219		51
2024	194		47
Thereafter	2,462		723
Total(2)	3,427		938
Less amount representing interest	813		376
Present value of lease liabilities	$	2,614	$	562

 _______________

(1) Operating lease payments have not been reduced by future sublease income of $101.

(2) Excludes $185 of lease payments for leases that have been signed but not commenced.

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As of September 1, 2019, future minimum payments, net of sub-lease income of $105, under noncancelable operating leases with terms of at least one year and capital leases reported under ASC 840 were as follows:

	Operating Leases		Capital Leases
2020	$	239	$	51
2021	229		53
2022	202		38
2023	193		39
2024	181		39
Thereafter	2,206		544
Total	$	3,250	764
Less amount representing interest			343
Net present value of minimum lease payments			$	421

Note 6—Equity

Dividends

The Company’s current quarterly dividend is $0.65 per share, compared to $0.57 in the second quarter of 2019. On January 23, 2020, the Board of Directors declared a quarterly dividend in the amount of $0.65 per share, which was paid on February 21, 2020.

Stock Repurchase Programs

Stock repurchase activity during the second quarter and first half of 2020 and 2019 is summarized below:

	Shares Repurchased (000s)	Average Price per Share		Total Cost
Second quarter of 2020	162	$	301.50	$	49
First half of 2020	262	$	299.40	$	79
Second quarter of 2019	561	$	208.72	$	117
First half of 2019	711	$	213.08	$	151

These amounts may differ from the stock repurchase balances in the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of a quarter. The remaining amount available for stock repurchases under the approved plan was $3,864 at February 16, 2020. Purchases are made from time to time, as conditions warrant, in the open market or in block purchases and pursuant to plans under SEC Rule 10b5-1.

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Note 7—Stock-Based Compensation

The 2019 Incentive Plan authorized the issuance of 17,500,000 shares (10,000,000 RSUs) of common stock for future grants, plus the remaining shares that were available for grant and the future forfeited shares from grants under the previous plan, up to a maximum aggregate of 27,800,000 shares (15,885,000 RSUs). The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares withheld for taxes.

Summary of Restricted Stock Unit Activity

At February 16, 2020, 13,535,000 shares were available to be granted as RSUs, and the following awards were outstanding:

• 5,133,000 time-based RSUs that vest upon continued employment over specified periods of time;

• 30,000 performance-based RSUs, granted to executive officers of the Company, for which the performance targets have been met. The awards vest upon continued employment over specified periods of time; and

• 123,000 performance-based RSUs, granted to executive officers of the Company, subject to achievement of performance targets for fiscal 2020, as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year. These awards are included in the table below and the Company recognized compensation expense for these awards as it is currently deemed probable that the targets will be achieved.

The following table summarizes RSU transactions during the first half of 2020:

	Number of Units (in 000s)		Weighted-Average Grant Date Fair Value
Outstanding at September 1, 2019	6,496		$	167.55
Granted	2,252		294.08
Vested and delivered	(3,351	)	188.91
Forfeited	(111	)	193.02
Outstanding at February 16, 2020	5,286		$	207.40

The remaining unrecognized compensation cost related to nonvested RSUs at February 16, 2020, was $913, and the weighted-average period over which this cost will be recognized is 1.7 years.

Summary of Stock-Based Compensation

The following table summarizes stock-based compensation expense and the related tax benefits:

	12 Weeks Ended				24 Weeks Ended
	February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
Stock-based compensation expense	$	118	$	119	$	419	$	389
Less recognized income tax benefit	21		23		87		84
Stock-based compensation expense, net	$	97	$	96	$	332	$	305

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Note 8—Taxes

Other Taxes

The Company is undergoing multiple examinations for value-added, sales-based, payroll, product, import or other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments from the authorities. In September 2019, the Company received an assessment related to a product tax audit covering multiple years. The Company recorded the charge in fiscal 2019 and is protesting the assessment. No adjustments have been made to this estimate in the first half of 2020. Other possible losses or range of possible losses associated with these matters are either immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain matters or a group of matters were to be decided adversely to the Company, it could result in a charge that might be material to the results of an individual fiscal quarter or year.

Note 9—Net Income per Common and Common Equivalent Share

The following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and potentially dilutive common shares outstanding (shares in 000s):

	12 Weeks Ended				24 Weeks Ended
	February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
Net income attributable to Costco	$	931	$	889	$	1,775	$	1,656
Weighted average basic shares	442,021		440,284		441,920		439,721
RSUs	1,706		2,053		1,784		2,814
Weighted average diluted shares	443,727		442,337		443,704		442,535
Anti-dilutive RSUs	—		1,667		—		—

Note 10—Commitments and Contingencies

Legal Proceedings

The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded immaterial accruals with respect to certain matters described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties.

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The Company is a defendant in a class action alleging violation of California Wage Order 7-2001 for failing to provide seating to member service assistants who act as greeters in the Company’s California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:13-CV-03598, N.D. Cal. filed July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees. The Company filed an answer denying the material allegations of the complaint. The action has been stayed pending review by the Ninth Circuit of the order certifying a class. In January 2019, an employee brought similar claims for relief concerning Costco employees engaged at member services counters in California. Rodriguez v. Costco Wholesale Corp. (Case No. RG19001310, Alameda Superior Court filed Jan. 4, 2019). The Company filed an answer denying the material allegations of the complaint. In December 2018, a depot employee raised similar claims, alleging that depot employees in California did not receive suitable seating or appropriate workplace temperature conditions. Lane v. Costco Wholesale Corp. (Dec. 6, 2018 Notice to California Labor and Workforce Development Agency). The Company filed an answer denying the material allegations of the complaint. In October the parties reached an agreement to settle the seating claims on a class basis, which received court approval in February 2020.

In January 2019, a former seasonal employee filed a class action, alleging failure to provide California seasonal employees meal and rest breaks, proper wage statements, and appropriate wages. Jadan v. Costco Wholesale Corp. (Case No. 19-CV-340438 Santa Clara Superior Court filed Jan. 3, 2019). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees. In October the parties reached an agreement on a class settlement, which is subject to court approval.

In March 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez v. Costco Wholesale Corp. (Case No. 2:19-cv-03454 C.D. Cal. filed Mar. 25, 2019). The Company filed an answer denying the material allegations of the complaint. In May 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp. (Case No. 2:19-cv-01340 E.D. Cal. filed May 28, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In June 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods, itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Martinez v. Costco Wholesale Corp. (Case No. 3:19-cv-05624 N.D. Cal. filed June 11, 2019). The Company filed an answer denying the material allegations of the complaint. In August 2019, Rough filed a companion case in state court seeking penalties under the California Labor Code Private Attorneys General Act. Rough v. Costco Wholesale Corp. (Case No. FCS053454, Sonoma County Superior Court, filed August 23, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In September 2019, an employee re-filed a class action against the Company alleging claims under California law for failure to pay wages, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Mosley v. Costco Wholesale Corp. (Case No. 2:19-cv-07935, C.D. Cal. filed Sept. 12, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees.

In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against various defendants by counties, cities, hospitals, Native American tribes, third-party payors, and others concerning the impacts of opioid abuse. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D. Ohio). Included are federal cases that name the Company, including actions filed by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor in Ohio, and class actions filed in thirty-eight states on behalf of infants born with opioid-related medical conditions. In 2019 similar actions were commenced against the Company in state courts in Utah and Arizona. Claims against the Company in state courts in New Jersey and Oklahoma have been dismissed. The Company is defending all of these matters.

18

The Company and its CEO and CFO are defendants in putative class actions brought on behalf of shareholders who acquired Company stock between June 6 and October 25, 2018. Johnson v. Costco Wholesale Corp., et al. (W.D. Wash. filed Nov. 5, 2018); Chen v. Costco Wholesale Corp., et al. (W.D. Wash. filed Dec. 11, 2018). The complaints allege violations of the federal securities laws stemming from the Company’s disclosures concerning internal control over financial reporting. They seek unspecified damages, equitable relief, interest, and costs and attorneys’ fees. On January 30, 2019, an order was entered consolidating the actions, and a consolidated amended complaint was filed on April 16. On November 26, the court entered an order dismissing the consolidated amended complaint and granting the plaintiffs leave to file a further amended complaint within 90 days.

Members of the Board of Directors, one other individual, and the Company are defendants in a shareholder derivative action related to the internal controls and related disclosures identified in the putative class actions, alleging that the individual defendants breached their fiduciary duties. Wedekind v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (W.D. Wash. filed Dec. 11, 2018). The complaint seeks unspecified damages, disgorgement of compensation, corporate governance changes, and costs and attorneys' fees. Because the complaint is derivative in nature, it does not seek monetary damages from the Company, which is a nominal defendant. By agreement among the parties the action has been stayed pending further proceedings in the class actions. Similar actions were filed in King County Superior Court on February 20, 2019, Elliott v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-04824-7), April 16, 2019, Brad Shuman, et ano. v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-10460-1), and June 12, 2019, Rahul Modi v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-15514-1). These actions have also been stayed.

In November 2016 and September 2017, the Company received notices of violation from the Connecticut Department of Energy and Environmental Protection regarding hazardous waste practices at its Connecticut warehouses, primarily concerning unsalable pharmaceuticals. The relief to be sought is not known at this time. The Company is seeking to cooperate concerning the resolution of these notices.

The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter or year.

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Note 11—Segment Reporting

The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Korea, Australia, Spain, Iceland, France and China and through a majority-owned subsidiary in Taiwan. Reportable segments are largely based on management’s organization of the operating segments for operational decisions and assessments of financial performance, which consider geographic locations. The material accounting policies of the segments are as described in the notes to the consolidated financial statements included in the Company's Annual Report filed on Form 10-K for the fiscal year ended September 1, 2019, and Note 1 above. Intersegment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, are incurred on behalf of the Company's Canadian and Other International operations, but are included in the U.S. operations because those costs generally come under the responsibility of the Company's U.S. management team.

The following table provides information for the Company's reportable segments:

	United States Operations		Canadian Operations		Other International Operations		Total
12 Weeks Ended February 16, 2020
Total revenue	$	28,523	$	5,231	$	5,318	$	39,072
Operating income	821		202		243		1,266
12 Weeks Ended February 17, 2019
Total revenue	$	25,872	$	4,792	$	4,732	$	35,396
Operating income	812		198		193		1,203
24 Weeks Ended February 16, 2020
Total revenue	$	55,588