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 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 REVENUE Net sales $ 54,239 $ 50,937 $ 107,676 $ 100,354 Membership fees 1,027 967 2,027 1,913 Total revenue 55,266 51,904 109,703 102,267 OPERATING EXPENSES Merchandise costs 48,423 45,517 96,192 89,469 Selling, general and administrative 4,940 4,575 9,857 9,293 Operating income 1,903 1,812 3,654 3,505 OTHER INCOME (EXPENSE) Interest expense ( 34 ) ( 36 ) ( 68 ) ( 75 ) Interest income and other, net 114 25 167 67 INCOME BEFORE INCOME TAXES 1,983 1,801 3,753 3,497 Provision for income taxes 517 481 923 832 Net income including noncontrolling interests 1,466 1,320 2,830 2,665 Net income attributable to noncontrolling interests — ( 21 ) — ( 42 ) NET INCOME ATTRIBUTABLE TO COSTCO $ 1,466 $ 1,299 $ 2,830 $ 2,623 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic $ 3.30 $ 2.93 $ 6.37 $ 5.91 Diluted $ 3.30 $ 2.92 $ 6.37 $ 5.90 Shares used in calculation (000s): Basic 443,877 443,623 443,857 443,500 Diluted 444,475 444,916 444,503 444,760 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 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 NET INCOME INCLUDING NONCONTROLLING INTERESTS $ 1,466 $ 1,320 $ 2,830 $ 2,665 Foreign-currency translation adjustment and other, net 253 ( 35 ) 157 ( 107 ) Comprehensive income 1,719 1,285 2,987 2,558 Less: Comprehensive income attributable to noncontrolling interests — 21 — 44 COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO $ 1,719 $ 1,264 $ 2,987 $ 2,514 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 12, 2023 August 28, 2022 ASSETS CURRENT ASSETS Cash and cash equivalents $ 12,970 $ 10,203 Short-term investments 735 846 Receivables, net 2,714 2,241 Merchandise inventories 16,081 17,907 Other current assets 1,830 1,499 Total current assets 34,330 32,696 OTHER ASSETS Property and equipment, net 25,724 24,646 Operating lease right-of-use assets 2,859 2,774 Other long-term assets 3,935 4,050 TOTAL ASSETS $ 66,848 $ 64,166 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable $ 16,407 $ 17,848 Accrued salaries and benefits 4,483 4,381 Accrued member rewards 2,016 1,911 Deferred membership fees 2,412 2,174 Current portion of long-term debt 76 73 Other current liabilities 7,122 5,611 Total current liabilities 32,516 31,998 OTHER LIABILITIES Long-term debt, excluding current portion 6,506 6,484 Long-term operating lease liabilities 2,557 2,482 Other long-term liabilities 2,470 2,555 TOTAL LIABILITIES 44,049 43,519 COMMITMENTS AND CONTINGENCIES EQUITY Preferred stock $ 0.005 par value; 100,000,000 shares authorized; no shares issued and outstanding — — Common stock $ 0.005 par value; 900,000,000 shares authorized; 443,550,000 and 442,664,000 shares issued and outstanding 2 2 Additional paid-in capital 7,123 6,884 Accumulated other comprehensive loss ( 1,672 ) ( 1,829 ) Retained earnings 17,341 15,585 Total Costco stockholders’ equity 22,794 20,642 Noncontrolling interests 5 5 TOTAL EQUITY 22,799 20,647 TOTAL LIABILITIES AND EQUITY $ 66,848 $ 64,166 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 12, 2023 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 20, 2022 443,841 $ 2 $ 6,982 $ ( 1,925 ) $ 16,412 $ 21,471 $ 5 $ 21,476 Net income — — — — 1,466 1,466 — 1,466 Foreign-currency translation adjustment and other, net — — — 253 — 253 — 253 Stock-based compensation — — 148 — — 148 — 148 Release of vested restricted stock units (RSUs), including tax effects 3 — ( 1 ) — — ( 1 ) — ( 1 ) Repurchases of common stock ( 294 ) — ( 6 ) — ( 138 ) ( 144 ) — ( 144 ) Cash dividend declared — — — — ( 399 ) ( 399 ) — ( 399 ) BALANCE AT FEBRUARY 12, 2023 443,550 $ 2 $ 7,123 $ ( 1,672 ) $ 17,341 $ 22,794 $ 5 $ 22,799 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 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 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 12, 2023 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 28, 2022 442,664 $ 2 $ 6,884 $ ( 1,829 ) $ 15,585 $ 20,642 $ 5 $ 20,647 Net income — — — — 2,830 2,830 — 2,830 Foreign-currency translation adjustment and other, net — — — 157 — 157 — 157 Stock-based compensation — — 551 — — 551 — 551 Release of vested restricted stock units (RSUs), including tax effects 1,465 — ( 302 ) — — ( 302 ) — ( 302 ) Repurchases of common stock ( 579 ) — ( 10 ) — ( 275 ) ( 285 ) — ( 285 ) Cash dividends declared — — — — ( 799 ) ( 799 ) — ( 799 ) BALANCE AT FEBRUARY 12, 2023 443,550 $ 2 $ 7,123 $ ( 1,672 ) $ 17,341 $ 22,794 $ 5 $ 22,799 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 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 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 12, 2023 February 13, 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income including noncontrolling interests $ 2,830 $ 2,665 Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization 917 868 Non-cash lease expense 216 145 Stock-based compensation 549 516 Other non-cash operating activities, net 163 104 Deferred income taxes ( 18 ) ( 15 ) Changes in operating assets and liabilities: Merchandise inventories 1,849 ( 2,322 ) Accounts payable ( 1,417 ) 970 Other operating assets and liabilities, net 713 728 Net cash provided by operating activities 5,802 3,659 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments ( 396 ) ( 325 ) Maturities of short-term investments 512 753 Additions to property and equipment ( 1,947 ) ( 1,778 ) Other investing activities, net ( 34 ) ( 43 ) Net cash used in investing activities ( 1,865 ) ( 1,393 ) CASH FLOWS FROM FINANCING ACTIVITIES Repayments of short-term borrowings ( 520 ) ( 87 ) Proceeds from short-term borrowings 479 80 Repayments of long-term borrowings — ( 800 ) Tax withholdings on stock-based awards ( 302 ) ( 359 ) Repurchases of common stock ( 284 ) ( 115 ) Cash dividend payments ( 400 ) ( 350 ) Other financing activities, net ( 188 ) ( 36 ) Net cash used in financing activities ( 1,215 ) ( 1,667 ) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 45 ( 38 ) Net increase in cash and cash equivalents 2,767 561 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 10,203 11,258 CASH AND CASH EQUIVALENTS END OF PERIOD $ 12,970 $ 11,819 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the first half of the year for: Interest $ 62 $ 76 Income taxes, net $ 636 $ 469 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Cash dividend declared, but not yet paid $ 399 $ 351 Financing lease assets obtained in exchange for new or modified leases $ 47 $ 172 Operating lease assets obtained in exchange for new or modified leases $ 131 $ 60 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. At February 12, 2023, Costco operated 848 warehouses worldwide: 584 in the United States (U.S.) located in 46 states, Washington, D.C., and Puerto Rico, 107 in Canada, 40 in Mexico, 31 in Japan, 29 in the United Kingdom (U.K.), 18 in Korea, 14 in Taiwan, 14 in Australia, four in Spain, two each in France and China, and one each in Iceland, New Zealand, and Sweden. The Company operates e-commerce websites in the U.S., Canada, U.K., Mexico, Korea, Taiwan, Japan, and Australia. Basis of Presentation The condensed consolidated financial statements include the accounts of Costco, its wholly-owned subsidiaries, and a subsidiary in which it has a controlling interest. All material inter-company transactions among the Company and its consolidated subsidiaries have been eliminated in consolidation. Unless otherwise noted, references to net income relate to net income attributable to Costco. 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 28, 2022. 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 2023 is a 53-week year ending on September 3, 2023. References to the second quarter of 2023 and 2022 relate to the 12-week fiscal quarters ended February 12, 2023, and February 13, 2022. References to the first half of 2023 and 2022 relate to the 24 weeks ended February 12, 2023 and February 13, 2022. 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 Reclassification Reclassifications were made to the condensed consolidated statement of cash flows for the first half of 2022 to conform with current year presentation. Leases The Company leases land, buildings, equipment, and other assets at warehouses, offices, or within the operations that support supply chain and distribution channels. The Company reviews lease right-of-use assets for impairment when events or changes in circumstances indicate that the carrying amount of the asset group may not be fully recoverable. The Company also occasionally revisits and modifies the terms of its leasing arrangements. During the first quarter of 2023, the Company recognized a charge of $ 93 , primarily related to the termination costs and impairment of certain leased assets associated with charter shipping activities. This charge is included in merchandise costs. Note 2—Investments The Company's investments were as follows: February 12, 2023: Cost Basis Unrealized Losses, Net Recorded Basis Available-for-sale: Government and agency securities $ 595 $ ( 11 ) $ 584 Held-to-maturity: Certificates of deposit 151 — 151 Total short-term investments $ 746 $ ( 11 ) $ 735 August 28, 2022: Cost Basis Unrealized Losses, Net Recorded Basis Available-for-sale: Government and agency securities $ 534 $ ( 5 ) $ 529 Held-to-maturity: Certificates of deposit 317 — 317 Total short-term investments $ 851 $ ( 5 ) $ 846 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended February 12, 2023, and August 28, 2022 . At those dates, there were no available-for-sale securities in a material continuous unrealized-loss position. There were no sales of available-for-sale securities during the first half of 2023 or 2022. The maturities of available-for-sale and held-to-maturity securities at February 12, 2023 are as follows: Available-For-Sale Held-To-Maturity Cost Basis Fair Value Due in one year or less $ 177 $ 175 $ 151 Due after one year through five years 287 282 — Due after five years 131 127 — Total $ 595 $ 584 $ 151 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 12, 2023 August 28, 2022 Investment in government and agency securities $ 584 $ 529 Forward foreign-exchange contracts, in asset position (1) 6 34 Forward foreign-exchange contracts, in (liability) position (1) ( 18 ) ( 2 ) Total $ 572 $ 561 _______________ (1) 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 12, 2023, and August 28, 2022, the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers between levels during the first half of 2023 or 2022. 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. Please see Note 1 for additional information. Note 4—Debt The carrying value of the Company’s long-term debt consisted of the following: February 12, 2023 August 28, 2022 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 612 590 Total long-term debt 6,612 6,590 Less unamortized debt discounts and issuance costs 30 33 Less current portion (1) 76 73 Long-term debt, excluding current portion $ 6,506 $ 6,484 _______________ (1) Net of unamortized debt discounts and issuance costs . 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 $ 5,895 and $ 6,033 at February 12, 2023, and August 28, 2022. 11 Table of Contents Note 5—Equity Dividends A quarterly cash dividend of $ 0.90 per share was declared on January 19, 2023 and paid on February 17, 2023. The Company's quarterly dividend was $ 0.79 per share in the second quarter of 2022 and dividends totaled $ 1.80 and $ 1.58 per share in the first half of 2023 and 2022. Share Repurchase Program On January 19, 2023, the Board of Directors authorized a new share repurchase program in the amount of $ 4,000 , which expires in January 2027. This authorization revoked previously authorized but unused amounts, totaling $ 2,568 . At February 12, 2023, the remaining amount available under the program was $ 3,955 . The following table summarizes the Company's stock repurchase activity: Shares Repurchased (000s) Average Price per Share Total Cost Second quarter of 2023 294 $ 488.30 $ 144 First half of 2023 579 $ 492.06 $ 285 Second quarter of 2022 159 $ 518.73 $ 83 First half of 2022 236 $ 498.00 $ 118 These amounts may differ from the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each quarter. 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. 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 12, 2023, 8,703,000 shares were available to be granted as RSUs, and the following awards were outstanding: • 2,921,000 time-based RSUs, which vest upon continued employment over specified periods and accelerate upon achievement of a long-service term; • 41,000 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 a long-service term; and • 135,000 performance-based RSUs granted to executive officers of the Company, subject to achievement of performance targets for fiscal 2023, 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 2023, as it is currently deemed probable that the targets will be achieved. 12 Table of Contents The following table summarizes RSU transactions during the first half of 2023: Number of Units (in 000s) Weighted-Average Grant Date Fair Value Outstanding at August 28, 2022 3,449 $ 338.41 Granted 1,814 471.47 Vested and delivered ( 2,094 ) 352.57 Forfeited ( 72 ) 394.40 Outstanding at February 12, 2023 3,097 $ 405.46 The remaining unrecognized compensation cost related to RSUs unvested at February 12, 2023, was $ 1,031 , 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 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 Stock-based compensation expense $ 147 $ 128 $ 549 $ 516 Less recognized income tax benefits 24 23 113 108 Stock-based compensation expense, net $ 123 $ 105 $ 436 $ 408 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 of potentially dilutive common shares outstanding (shares in 000s): 12 Weeks Ended 24 Weeks Ended February 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 Net income attributable to Costco $ 1,466 $ 1,299 $ 2,830 $ 2,623 Weighted average basic shares 443,877 443,623 443,857 443,500 RSUs 598 1,293 646 1,260 Weighted average diluted shares 444,475 444,916 444,503 444,760 Anti-dilutive RSUs 6 — — — Anti-dilutive shares are excluded from the calculation of diluted shares and earnings per diluted share because their impact would increase earnings per diluted shares. 13 Table of Contents 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 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 monitor the matter for developments that will make the contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (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. On January 19, 2023, the court issued a Proposed/Tentative Statement of Decision Following Court Trial finding in favor of Costco. The plaintiff filed a request for further statement of decision and objections to the tentative decision. The parties are awaiting the court's review of plaintiff's filings and Costco's response thereto, after which the court will decide if it requires a hearing before a final decision issues. 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). In October 2019, the parties settled for an immaterial amount the seating claims on a representative basis, which received court approval in February 2020. The parties settled the temperature claims for an immaterial amount in April 2022, and court approval was received in May 2022. In June 2022, a business center employee raised similar claims, alleging failure to provide seating to employees who work at membership refund desks in California warehouses and business centers. Rodriguez v. Costco Wholesale Corp. (Case No. 22CV012847; Alameda Superior Court). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys' fees. The Company filed an answer denying the material allegations of the complaint. In March 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez v. Costco Wholesale Corp. (Case No. 2:19-cv-03454; C.D. Cal.). The Company filed an answer denying the material allegations of the complaint. In December 2019, the court issued an order denying class certification. In January 2020, the plaintiffs dismissed their Labor Code claims without prejudice, and the court remanded the action to state court. Settlement for an immaterial amount was agreed upon in 14 Table of Contents February 2021. Final court approval of the settlement was granted on May 3, 2022. A proposed intervenor appealed the denial of her motion to intervene. Her appeal was dismissed on February 15, 2023. 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 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 April 2022, Cappadora and a second plaintiff filed an action against the Company in New York state court, asserting the same class claims asserted in the federal action under the New York Labor Law and seeking preliminary approval of the class settlement. Cappadora and Sancho v. Costco Wholesale Corp. (Index No. 604757/2022; Nassau County Supreme Court). The state court granted preliminary approval of the settlement in October 2022. A final approval hearing is set for March 27, 2023. In August 2021, a former employee filed a similar suit, asserting class claims on behalf of certain non-exempt employees under New York Labor Law for failure to pay on a weekly basis. Umadat v. Costco Wholesale Corp. (Case No. 2:21-cv-4814; E.D.N.Y.). The Company filed an answer, denying the material allegations of the complaint. In April 2022, a former employee filed a similar suit, asserting class claims on behalf of certain non-exempt employees under New York Labor Law, as well as under the Fair Labor Standards Act, for failure to pay on a weekly basis and failure to pay overtime. Burian v. Costco Wholesale Corp. (Case No. 2:22-cv-02108; E.D.N.Y.). In September 2022, an amended complaint was filed, asserting class claims on behalf of certain non-exempt employees under New York Labor Law for failure to pay on a weekly basis. The Company responded by requesting permission to file a motion to dismiss. The court stayed the action pending the class settlement in the Cappadora matter noted above. 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. 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. The Company also filed an answer to the PAGA representative action, denying the material allegations. On September 27, 2022, the parties reached a settlement for an immaterial amount. The settlement requires court approval. 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). 15 Table of Contents 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 action under PAGA, asserting the same Labor Code violations and seeking civil penalties and attorneys' fees. The case has been stayed pending resolution of the motion to compel in the related case. In September 2021, an employee filed a class action against the Company alleging violations of the California Labor Code regarding failure to provide sick pay, failure to timely pay wages due at separation from employment, and for violations of California's unfair competition law. De Benning v. Costco Wholesale Corp. (Case No. 34-2021-00309030-CU-OE-GDS; Sacramento Superior Court). The Company answered the complaint in January 2022, denying its material allegations. In April 2022, a settlement for an immaterial amount was agreed upon, subject to court approval. Final approval of the settlement was granted on February 10, 2023. In March 2022, an employee filed a class action against the Company alleging violations of the California Labor Code regarding the failure to: pay wages, provide meal and rest periods, provide accurate wage statements, timely pay final wages, and reimburse business expenses. Diaz v. Costco Wholesale Corp. (Case No. 22STCV09513; Los Angeles Superior Court). The Company filed an answer denying the material allegations. In December 2022, the case was settled for an immaterial amount. In May 2022, an employee filed a PAGA-only representative action against the Company alleging claims under the California Labor Code regarding the payment of wages, meal and rest periods, the timeliness of wages and final wages, wage statements, accurate records and business expenses. Gonzalez v. Costco Wholesale Corp. (Case No. 22AHCV00255; Los Angeles Superior Court). The Company filed an answer denying the allegations. 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. Members of the Board of Directors, six corporate officers and the Company are defendants in a shareholder derivative action filed in June 2022 related to chicken welfare and alleged breaches of fiduciary duties. Smith, et ano. v. Vachris , et al., Superior Court of the State of Washington, County of King, No, 22-2-08937-7SEA. The complaint seeks from the individual defendants damages, injunctive relief, costs, and attorneys' fees. A motion to dismiss the amended complaint has been filed. The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows; it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter or year. 16 Table of Contents Note 9—Segment Reporting The Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S., Canada, Mexico, Japan, U.K., Korea, Taiwan, Australia, Spain, France, China, Iceland, New Zealand, and Sweden. Reportable segments are largely based on management’s organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are as described in 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 28, 2022, and Note 1 above. Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. The following table provides information for the Company's reportable segments: United States Operations Canadian Operations Other International Operations Total 12 Weeks Ended February 12, 2023 Total revenue $ 40,145 $ 7,299 $ 7,822 $ 55,266 Operating income 1,295 284 324 1,903 12 Weeks Ended February 13, 2022 Total revenue $ 37,567 $ 7,017 $ 7,320 $ 51,904 Operating income 1,179 301 332 1,812 24 Weeks Ended February 12, 2023 Total revenue $ 80,290 $ 14,655 $ 14,758 $ 109,703 Operating income 2,531 572 551 3,654 24 Weeks Ended February 13, 2022 Total revenue $ 73,884 $ 14,138 $ 14,245 $ 102,267 Operating income 2,297 594 614 3,505 52 Weeks Ended August 28, 2022 Total revenue $ 165,294 $ 31,675 $ 29,985 $ 226,954 Operating income 5,268 1,346 1,179 7,793 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 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 Foods and Sundries $ 21,926 $ 19,489 $ 43,374 $ 39,052 Non-Foods 14,741 15,105 28,773 29,267 Fresh Foods 7,376 6,959 14,093 13,398 Warehouse Ancillary and Other Businesses 10,196 9,384 21,436 18,637 Total net sales $ 54,239 $ 50,937 $ 107,676 $ 100,354 17 Table of Contents