COSTCO WHOLESALE CORP /NEW 10-Q

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 13, 2022 February 14, 2021 February 13, 2022 February 14, 2021 REVENUE Net sales $ 50,937 $ 43,888 $ 100,354 $ 86,235 Membership fees 967 881 1,913 1,742 Total revenue 51,904 44,769 102,267 87,977 OPERATING EXPENSES Merchandise costs 45,517 39,078 89,469 76,536 Selling, general and administrative 4,575 4,351 9,293 8,671 Operating income 1,812 1,340 3,505 2,770 OTHER INCOME (EXPENSE) Interest expense ( 36 ) ( 40 ) ( 75 ) ( 79 ) Interest income and other, net 25 19 67 48 INCOME BEFORE INCOME TAXES 1,801 1,319 3,497 2,739 Provision for income taxes 481 348 832 587 Net income including noncontrolling interests 1,320 971 2,665 2,152 Net income attributable to noncontrolling interests ( 21 ) ( 20 ) ( 42 ) ( 35 ) NET INCOME ATTRIBUTABLE TO COSTCO $ 1,299 $ 951 $ 2,623 $ 2,117 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic $ 2.93 $ 2.15 $ 5.91 $ 4.78 Diluted $ 2.92 $ 2.14 $ 5.90 $ 4.76 Shares used in calculation (000s): Basic 443,623 443,134 443,500 443,043 Diluted 444,916 444,494 444,760 444,440 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents COSTCO WHOLESALE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (amounts in millions) (unaudited) 12 Weeks Ended 24 Weeks Ended February 13, 2022 February 14, 2021 February 13, 2022 February 14, 2021 NET INCOME INCLUDING NONCONTROLLING INTERESTS $ 1,320 $ 971 $ 2,665 $ 2,152 Foreign-currency translation adjustment and other, net ( 35 ) 148 ( 107 ) 357 Comprehensive income 1,285 1,119 2,558 2,509 Less: Comprehensive income attributable to noncontrolling interests 21 28 44 56 COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO $ 1,264 $ 1,091 $ 2,514 $ 2,453 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents COSTCO WHOLESALE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (amounts in millions, except par value and share data) (unaudited) February 13, 2022 August 29, 2021 ASSETS CURRENT ASSETS Cash and cash equivalents $ 11,819 $ 11,258 Short-term investments 477 917 Receivables, net 2,232 1,803 Merchandise inventories 16,485 14,215 Other current assets 1,552 1,312 Total current assets 32,565 29,505 OTHER ASSETS Property and equipment, net 24,052 23,492 Operating lease right-of-use assets 2,840 2,890 Other long-term assets 3,621 3,381 TOTAL ASSETS $ 63,078 $ 59,268 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable $ 17,089 $ 16,278 Accrued salaries and benefits 4,347 4,090 Accrued member rewards 1,798 1,671 Deferred membership fees 2,244 2,042 Current portion of long-term debt — 799 Other current liabilities 6,067 4,561 Total current liabilities 31,545 29,441 OTHER LIABILITIES Long-term debt, excluding current portion 6,658 6,692 Long-term operating lease liabilities 2,588 2,642 Other long-term liabilities 2,311 2,415 TOTAL LIABILITIES 43,102 41,190 COMMITMENTS AND CONTINGENCIES EQUITY Preferred stock $ 0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding — — Common stock $ 0.01 par value; 900,000,000 shares authorized; 443,279,000 and 441,825,000 shares issued and outstanding 4 4 Additional paid-in capital 7,186 7,031 Accumulated other comprehensive loss ( 1,246 ) ( 1,137 ) Retained earnings 13,474 11,666 Total Costco stockholders’ equity 19,418 17,564 Noncontrolling interests 558 514 TOTAL EQUITY 19,976 18,078 TOTAL LIABILITIES AND EQUITY $ 63,078 $ 59,268 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents COSTCO WHOLESALE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (amounts in millions) (unaudited) 12 Weeks Ended February 13, 2022 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 21, 2021 443,434 $ 4 $ 7,064 $ ( 1,211 ) $ 12,606 $ 18,463 $ 537 $ 19,000 Net income — — — — 1,299 1,299 21 1,320 Foreign-currency translation adjustment and other, net — — — ( 35 ) — ( 35 ) — ( 35 ) Stock-based compensation — — 129 — — 129 — 129 Release of vested restricted stock units (RSUs), including tax effects 4 — ( 4 ) — — ( 4 ) — ( 4 ) Repurchases of common stock ( 159 ) — ( 3 ) — ( 80 ) ( 83 ) — ( 83 ) Cash dividend declared — — — — ( 351 ) ( 351 ) — ( 351 ) BALANCE AT FEBRUARY 13, 2022 443,279 $ 4 $ 7,186 $ ( 1,246 ) $ 13,474 $ 19,418 $ 558 $ 19,976 12 Weeks Ended February 14, 2021 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 22, 2020 442,955 $ 4 $ 6,725 $ ( 1,101 ) $ 9,232 $ 14,860 $ 449 $ 15,309 Net income — — — — 951 951 20 971 Foreign-currency translation adjustment and other, net — — — 140 — 140 8 148 Stock-based compensation — — 123 — — 123 — 123 Release of vested RSUs, including tax effects 7 — — — — — — — Repurchases of common stock ( 308 ) — ( 5 ) — ( 107 ) ( 112 ) — ( 112 ) Cash dividend declared — — — — ( 310 ) ( 310 ) — ( 310 ) BALANCE AT FEBRUARY 14, 2021 442,654 $ 4 $ 6,843 $ ( 961 ) $ 9,766 $ 15,652 $ 477 $ 16,129 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents COSTCO WHOLESALE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (amounts in millions) (unaudited) 24 Weeks Ended February 13, 2022 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 AUGUST 29, 2021 441,825 $ 4 $ 7,031 $ ( 1,137 ) $ 11,666 $ 17,564 $ 514 $ 18,078 Net income — — — — 2,623 2,623 42 2,665 Foreign-currency translation adjustment and other, net — — — ( 109 ) — ( 109 ) 2 ( 107 ) Stock-based compensation — — 518 — — 518 — 518 Release of vested restricted stock units (RSUs), including tax effects 1,690 — ( 359 ) — — ( 359 ) — ( 359 ) Repurchases of common stock ( 236 ) — ( 4 ) — ( 114 ) ( 118 ) — ( 118 ) Cash dividends declared — — — — ( 701 ) ( 701 ) — ( 701 ) BALANCE AT FEBRUARY 13, 2022 443,279 $ 4 $ 7,186 $ ( 1,246 ) $ 13,474 $ 19,418 $ 558 $ 19,976 24 Weeks Ended February 14, 2021 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 AUGUST 30, 2020 441,255 $ 4 $ 6,698 $ ( 1,297 ) $ 12,879 $ 18,284 $ 421 $ 18,705 Net income — — — — 2,117 2,117 35 2,152 Foreign-currency translation adjustment and other, net — — — 336 — 336 21 357 Stock-based compensation — — 465 — — 465 — 465 Release of vested RSUs, including tax effects 1,920 — ( 311 ) — — ( 311 ) — ( 311 ) Repurchases of common stock ( 521 ) — ( 9 ) — ( 180 ) ( 189 ) — ( 189 ) Cash dividends declared — — — — ( 5,050 ) ( 5,050 ) — ( 5,050 ) BALANCE AT FEBRUARY 14, 2021 442,654 $ 4 $ 6,843 $ ( 961 ) $ 9,766 $ 15,652 $ 477 $ 16,129 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents COSTCO WHOLESALE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in millions) (unaudited) 24 Weeks Ended February 13, 2022 February 14, 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income including noncontrolling interests $ 2,665 $ 2,152 Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization 868 820 Non-cash lease expense 145 124 Stock-based compensation 516 463 Other non-cash operating activities, net 104 ( 6 ) Deferred income taxes ( 15 ) ( 21 ) Changes in operating assets and liabilities: Merchandise inventories ( 2,322 ) ( 1,480 ) Accounts payable 970 191 Other operating assets and liabilities, net 728 442 Net cash provided by operating activities 3,659 2,685 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments ( 325 ) ( 384 ) Maturities of short-term investments 753 823 Additions to property and equipment ( 1,778 ) ( 1,466 ) Other investing activities, net ( 43 ) ( 10 ) Net cash used in investing activities ( 1,393 ) ( 1,037 ) CASH FLOWS FROM FINANCING ACTIVITIES Change in bank payments outstanding ( 10 ) ( 67 ) Repayments of long-term borrowings ( 800 ) — Tax withholdings on stock-based awards ( 359 ) ( 311 ) Repurchases of common stock ( 115 ) ( 186 ) Cash dividend payments ( 350 ) ( 4,740 ) Other financing activities, net ( 33 ) ( 46 ) Net cash used in financing activities ( 1,667 ) ( 5,350 ) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ( 38 ) 62 Net change in cash and cash equivalents 561 ( 3,640 ) CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 11,258 12,277 CASH AND CASH EQUIVALENTS END OF PERIOD $ 11,819 $ 8,637 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the first half of the year for: Interest $ 76 $ 78 Income taxes, net $ 469 $ 755 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Cash dividend declared, but not yet paid $ 351 $ 310 Financing lease assets obtained in exchange for new or modified leases $ 172 $ 135 Operating lease assets obtained in exchange for new or modified leases $ 60 $ 140 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents 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 13, 2022, Costco operated 828 warehouses worldwide: 572 in the United States (U.S.) located in 46 states, Washington, D.C., and Puerto Rico, 105 in Canada, 40 in Mexico, 30 in Japan, 29 in the United Kingdom (U.K.), 16 in Korea, 14 in Taiwan, 13 in Australia, four in Spain, two each in France and China, and one in Iceland. 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 inter-company transactions 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 on Form 10-K for the fiscal year ended August 29, 2021. 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 2022 is a 52-week year ending on August 28, 2022. References to the second quarter of 2022 and 2021 relate to the 12-week fiscal quarters ended February 13, 2022 and February 14, 2021, respectively. References to the first half of 2022 and 2021 relate to the 24 weeks ended February 13, 2022 and February 14, 2021, 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. These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable. Actual results could differ from those estimates and assumptions. 9 Table of Contents Property and Equipment, Net The Company capitalizes certain computer software and costs incurred in developing or obtaining software for internal use. The Company recognized a $ 118 write-off of certain information technology assets, which was recorded in the first quarter of 2022, in selling, general and administrative expenses, in the condensed consolidated statements of income. Reclassification Reclassifications were made to our second quarter and first half 2021 condensed consolidated statements of income to conform with current period presentation. Note 2—Investments The Company's investments were as follows: February 13, 2022: Cost Basis Unrealized Gains, Net Recorded Basis Available-for-sale: Government and agency securities $ 364 $ 1 $ 365 Held-to-maturity: Certificates of deposit 112 — 112 Total short-term investments $ 476 $ 1 $ 477 August 29, 2021: Cost Basis Unrealized Gains, Net Recorded Basis Available-for-sale: Government and agency securities $ 375 $ 6 $ 381 Held-to-maturity: Certificates of deposit 536 — 536 Total short-term investments $ 911 $ 6 $ 917 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended February 13, 2022, and August 29, 2021 . At those dates, there were no available-for-sale securities in a material continuous unrealized-loss position. There were no sales of available-for-sale securities during the first half of 2022 or 2021. The maturities of available-for-sale and held-to-maturity securities at February 13, 2022, are as follows: Available-For-Sale Held-To-Maturity Cost Basis Fair Value Due in one year or less $ 247 $ 247 $ 112 Due after one year through five years 117 118 — Total $ 364 $ 365 $ 112 10 Table of Contents 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 indicates the level within the fair value hierarchy reflecting the valuation techniques utilized. Level 2 February 13, 2022 August 29, 2021 Investment in government and agency securities (1) $ 373 $ 393 Forward foreign-exchange contracts, in asset position (2) 13 17 Forward foreign-exchange contracts, in (liability) position (2) ( 1 ) ( 2 ) Total $ 385 $ 408 _______________ (1) At February 13, 2022, $ 8 cash and cash equivalents and $ 365 short-term investments are included in the accompanying condensed consolidated balance sheets. At August 29, 2021, $ 12 cash and cash equivalents and $ 381 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 13, 2022, and August 29, 2021, 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 2022 or 2021. 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 2022 or 2021. Note 4—Debt The carrying value of the Company’s long-term debt consisted of the following: February 13, 2022 August 29, 2021 2.300 % Senior Notes due May 2022 $ — $ 800 2.750 % Senior Notes due May 2024 1,000 1,000 3.000 % Senior Notes due May 2027 1,000 1,000 1.375 % Senior Notes due June 2027 1,250 1,250 1.600 % Senior Notes due April 2030 1,750 1,750 1.750 % Senior Notes due April 2032 1,000 1,000 Other long-term debt 694 731 Total long-term debt 6,694 7,531 Less unamortized debt discounts and issuance costs 36 40 Less current portion (1) — 799 Long-term debt, excluding current portion $ 6,658 $ 6,692 _______________ (1) Net of unamortized debt discounts and issuance costs. 11 Table of Contents The fair value of the Senior Notes is estimated 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 $ 6,492 and $ 7,692 at February 13, 2022, and August 29, 2021. On December 1, 2021, the Company repaid, prior to maturity, the 2.300 % Senior Notes at a redemption price plus accrued interest as specified in the Notes' agreement. Note 5—Equity Dividends The Company’s current quarterly dividend is $ 0.79 per share, compared to $ 0.70 in the second quarter of 2021. On January 20, 2022, the Board of Directors declared a quarterly cash dividend in the amount of $ 0.79 per share, which was paid on February 18, 2022. Share Repurchase Program The Company's share repurchase program is conducted under a $ 4,000 authorization by the Board of Directors, which expires in April 2023. The remaining amount available under the approved plan was $ 3,132 at February 13, 2022. Share repurchase activity during the second quarter of 2022 and 2021 is summarized below: Shares Repurchased (000s) Average Price per Share Total Cost Second quarter of 2022 159 $ 518.73 $ 83 First half of 2022 236 $ 498.00 $ 118 Second quarter of 2021 308 $ 362.95 $ 112 First half of 2021 521 $ 361.52 $ 189 These amounts may differ from the repurchase balances in the accompanying condensed consolidated statements of cash flows due to changes in unsettled repurchases at quarter end. 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. 12 Table of Contents Note 6—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 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 13, 2022, 10,388,000 shares were available to be granted as RSUs, and the following awards were outstanding: • 3,403,000 time-based RSUs, which vest upon continued employment over specified periods and accelerate upon achievement of the long-service term; • 39,000 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 upon achievement of the long-service term; and • 82,000 performance-based RSUs, granted to executive officers of the Company, subject to achievement of performance targets for fiscal 2022, 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. The Company recognized compensation expense for these awards in the second quarter of 2022, as it is currently deemed probable that the targets will be achieved. The following table summarizes RSU transactions during the first half of 2022: Number of Units (in 000s) Weighted-Average Grant Date Fair Value Outstanding at August 29, 2021 4,349 $ 257.88 Granted 1,679 476.06 Vested and delivered ( 2,438 ) 290.20 Forfeited ( 66 ) 320.88 Outstanding at February 13, 2022 3,524 $ 338.29 The remaining unrecognized compensation cost related to RSUs unvested at February 13, 2022, was $ 985 , and the weighted-average period over which this cost will be recognized is 1.8 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 13, 2022 February 14, 2021 February 13, 2022 February 14, 2021 Stock-based compensation expense $ 128 $ 122 $ 516 $ 463 Less recognized income tax benefits 23 22 108 97 Stock-based compensation expense, net $ 105 $ 100 $ 408 $ 366 13 Table of Contents Note 7—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 13, 2022 February 14, 2021 February 13, 2022 February 14, 2021 Net income attributable to Costco $ 1,299 $ 951 $ 2,623 $ 2,117 Weighted average basic shares 443,623 443,134 443,500 443,043 RSUs 1,293 1,360 1,260 1,397 Weighted average diluted shares 444,916 444,494 444,760 444,440 Note 8—Commitments and Contingencies Legal Proceedings The Company is involved in a number of claims, proceedings and litigations arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. The Company has recorded immaterial accruals with respect to certain matters described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties. The Company is a defendant in an action commenced in July 2013 under the California Labor Code Private Attorneys General Act (PAGA) alleging violation of California Wage Order 7-2001 for failing to provide seating to employees who work at entrance and exit doors in California warehouses. Canela v. Costco Wholesale Corp. (Case No. 2013-1-CV-248813; Santa Clara Superior Court). The complaint 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. In December 2018, a depot employee raised similar claims, alleging that depot employees in California did not receive suitable seating or reasonably comfortable workplace temperature conditions. Lane v. Costco Wholesale Corp. (Case No. CIVDS 1908816; San Bernardino Superior Court). The Company filed an answer denying the material allegations of the complaint. In October 2019, the parties reached an agreement to settle for an immaterial amount the seating claims on a representative basis, which received court approval in February 2020. The workplace temperature claims continue in litigation. 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 14 Table of Contents Wholesale Corp. (Case No. 2:19-cv-03454; C.D. Cal.). The Company filed an answer denying the material allegations of the complaint. In December 2019, the court issued an order denying class certification. In January 2020, the plaintiffs dismissed their Labor Code claims without prejudice, and the court remanded the action to state court. The remand was appealed; the appeal is in abeyance due to a pending settlement for an immaterial amount that was agreed upon in February 2021. The Court preliminarily approved the settlement in October 2021, and the Court's final review is scheduled for May 2022. In May 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp . (Case No. 2:19-cv-01340; E.D. Cal.). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In September 2021 the court granted Costco’s motion for partial summary judgment and denied class certification. In August 2019, the plaintiff filed a companion case in state court seeking penalties under PAGA. Rough v. Costco Wholesale Corp. (Case No. FCS053454; Sonoma County Superior Court). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. The state court action has been stayed pending resolution of the federal action. In April 2020, an employee, alleging underpayment of sick pay, filed a class and representative action against the Company, alleging claims under California law for failure to pay all wages at termination and for Labor Code penalties under PAGA. Kristy v. Costco Wholesale Corp. (Case No. 5:20-cv-04119; N.D. Cal.). The case was stayed due to the plaintiff's bankruptcy, and his individual claim was settled for an immaterial amount. A request for dismissal of the class and representative action is pending. In December 2020, a former employee filed suit against the Company asserting collective and class claims on behalf of non-exempt employees under the Fair Labor Standards Act and New York Labor Law for failure to pay for all hours worked, failure to pay certain non-exempt employees on a weekly basis, and failure to provide proper wage statements and notices. The plaintiff also asserted individual retaliation claims. Cappadora v. Costco Wholesale Corp. (Case No. 1:20-cv-06067; E.D.N.Y.). An amended complaint was filed, and the Company denied the material allegations of the amended complaint. Based on an agreement in principle concerning settlement of the matter, involving a proposed payment by the Company of an immaterial amount, the federal action has been dismissed. In August 2021, a former employee filed a similar suit, asserting class claims on behalf of certain non-exempt employees under New York Labor Law for failure to pay on a weekly basis. Umadat v. Costco Wholesale Corp. (Case No. 2:21-cv-4814; E.D.N.Y.). The Company answered the complaint on October 21, 2021, denying the material allegations. In February 2021, a former employee filed a class action against the Company alleging violations of California Labor Code regarding payment of wages, meal and rest periods, wage statements, reimbursement of expenses, payment of final wages to terminated employees, and for unfair business practices. Edwards v. Costco Wholesale Corp. (Case No. 5:21-cv-00716: C.D. Cal.). In May 2021, the Company filed a motion to dismiss the complaint, which was granted with leave to amend. In June 2021, the plaintiff filed an amended complaint, which the Company moved to dismiss later that month. The court granted the motion in part in July 2021 with leave to amend. In August 2021, the plaintiff filed a second amended complaint and filed a separate representative action under PAGA asserting the same Labor Code claims and seeking civil penalties and attorneys' fees. The Company filed an answer to the second amended class action complaint, denying the material allegations. In July 2021, a former temporary staffing employee filed a class action against the Company and a staffing company alleging violations of the California Labor Code regarding payment of wages, meal and rest periods, wage statements, the timeliness of wages and final wages, and for unfair business practices. Dimas v. Costco Wholesale Corp. (Case No. STK-CV-UOE-2021-0006024; San Joaquin Superior Court). The Company has moved to compel arbitration of the plaintiff's individual claims and to dismiss the class action complaint. On September 7, 2021, the same former employee filed a separate representative 15 Table of Contents action under PAGA asserting the same Labor Code violations and seeking civil penalties and attorneys' fees. The complaint has not yet been served. In September 2021, an employee filed a class action against the Company alleging violations of the California Labor Code regarding the alleged failure to provide sick pay, failure to timely pay wages due at separation from employment, and for violations of California's unfair competition law. De Benning v. Costco Wholesale Corp. (Case No. 34-2021-00309030-CU-OE-GDS; Sacramento Superior Court). The Company answered the complaint in January 2022, denying its material allegations. Beginning in December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts of opioid abuses filed against various defendants by counties, cities, hospitals, Native American tribes, third-party payors, and others. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D. Ohio). Included are cases that name the Company, including actions filed by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor in Ohio, and a hospital in Texas, class actions filed on behalf of infants born with opioid-related medical conditions in 40 states, and class actions and individual actions filed on behalf of individuals seeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa. Claims against the Company in state courts in New Jersey, Oklahoma, Utah, and Arizona have been dismissed. The Company is defending all of the pending matters. 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. 16 Table of Contents Note 9—Segment Reporting The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, Japan, U.K., Korea, Australia, Spain, Iceland, France and China and through a majority-owned subsidiary in Taiwan. Reportable segments are largely based on management’s organization of the operating segments for operational decisions and assessments of financial performance, which 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 August 29, 2021, and Note 1 above. Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Effective for fiscal 2022, stock-based compensation was allocated to the segments in this reporting. This change reflected a decision to evaluate the financial performance of the segments inclusive of this expense. Operating income was restated in each of the segments for all prior periods to reflect this change. The following table provides information for the Company's reportable segments: United States Operations Canadian Operations Other International Operations Total 12 Weeks Ended February 13, 2022 Total revenue $ 37,567 $ 7,017 $ 7,320 $ 51,904 Operating income 1,179 301 332 1,812 12 Weeks Ended February 14, 2021 Total revenue $ 32,127 $ 6,001 $ 6,641 $ 44,769 Operating income 826 226 288 1,340 24 Weeks Ended February 13, 2022 Total revenue $ 73,884 $ 14,138 $ 14,245 $ 102,267 Operating income 2,297 594 614 3,505 24 Weeks Ended February 14, 2021 Total revenue $ 63,419 $ 12,012 $ 12,546 $ 87,977 Operating income 1,763 473 534 2,770 52 Weeks Ended August 29, 2021 Total revenue $ 141,398 $ 27,298 $ 27,233 $ 195,929 Operating income 4,470 1,093 1,145 6,708 Disaggregated Revenue The following table summarizes net sales by merchandise category; sales from e-commerce websites and business centers have been allocated to the applicable merchandise categories: 12 Weeks Ended 24 Weeks Ended February 13, 2022 February 14, 2021 February 13, 2022 February 14, 2021 Foods and Sundries $ 19,489 $ 17,624 $ 39,052 $ 35,643 Non-Foods 15,105 13,723 29,267 26,107 Fresh Foods 6,959 6,254 13,398 12,117 Ancillary and Other Businesses 9,384 6,287 18,637 12,368 Total net sales $ 50,937 $ 43,888 $ 100,354 $ 86,235 17 Table of Contents