COSTCO WHOLESALE CORP /NEW 10-K

Item 8—Financial Statements and Supplementary Data COSTCO WHOLESALE CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm 31 Consolidated Statements of Income 34 Consolidated Statements of Comprehensive Income 35 Consolidated Balance Sheets 36 Consolidated Statements of Equity 37 Consolidated Statements of Cash Flows 38 Notes to Consolidated Financial Statements 39 30 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Costco Wholesale Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries (the Company) as of September 3, 2023, and August 28, 2022, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 53-week period ended September 3, 2023, and the 52-week periods ended August 28, 2022, and August 29, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 3, 2023, and August 28, 2022, and the results of its operations and its cash flows for each of the 53-week period ended September 3, 2023, and the 52-week periods ended August 28, 2022, and August 29, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 3, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 10, 2023, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 31 Table of Contents Evaluation of workers' compensation self-insurance liabilities As discussed in Note 1 to the consolidated financial statements, the Company estimates its self-insurance liabilities by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated self-insurance liabilities as of September 3, 2023, were $1,513 million, a portion of which related to workers’ compensation self-insurance liabilities for the United States operations. We identified the evaluation of the Company’s workers’ compensation self-insurance liabilities for the United States operations as a critical audit matter because of the extent of specialized skill and knowledge needed to evaluate the underlying assumptions and judgments made by the Company in the actuarial models. Specifically, subjective auditor judgment was required to evaluate the Company's selected loss rates and initial expected losses used in the actuarial models. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s self-insurance workers' compensation process. This included controls related to the development and selection of the assumptions listed above used in the actuarial calculation and review of the actuarial report. We involved actuarial professionals with specialized skills and knowledge who assisted in: • Assessing the actuarial models used by the Company for consistency with generally accepted actuarial standards • Evaluating the Company’s ability to estimate self-insurance workers' compensation liabilities by comparing its historical estimates with actual incurred losses and paid losses • Evaluating the above listed assumptions underlying the Company’s actuarial estimates by developing an independent expectation of the self-insurance workers' compensation liabilities and comparing them to the amounts recorded by the Company. /s/ KPMG LLP We have served as the Company’s auditor since 2002. Seattle, Washington October 10, 2023 32 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Costco Wholesale Corporation: Opinion on Internal Control Over Financial Reporting We have audited Costco Wholesale Corporation and subsidiaries ’ (the Company) internal control over financial reporting as of September 3, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 3, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 3, 2023, and August 28, 2022, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 53-week period ended September 3, 2023, and the 52-week periods ended August 28, 2022, and August 29, 2021 , and the related notes (collectively, the consolidated financial statements), and our report dated October 10, 2023, expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Seattle, Washington October 10, 2023 33 Table of Contents COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) 53 Weeks Ended 52 Weeks Ended 52 Weeks Ended September 3, 2023 August 28, 2022 August 29, 2021 REVENUE Net sales $ 237,710 $ 222,730 $ 192,052 Membership fees 4,580 4,224 3,877 Total revenue 242,290 226,954 195,929 OPERATING EXPENSES Merchandise costs 212,586 199,382 170,684 Selling, general and administrative 21,590 19,779 18,537 Operating income 8,114 7,793 6,708 OTHER INCOME (EXPENSE) Interest expense ( 160 ) ( 158 ) ( 171 ) Interest income and other, net 533 205 143 INCOME BEFORE INCOME TAXES 8,487 7,840 6,680 Provision for income taxes 2,195 1,925 1,601 Net income including noncontrolling interests 6,292 5,915 5,079 Net income attributable to noncontrolling interests — ( 71 ) ( 72 ) NET INCOME ATTRIBUTABLE TO COSTCO $ 6,292 $ 5,844 $ 5,007 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic $ 14.18 $ 13.17 $ 11.30 Diluted $ 14.16 $ 13.14 $ 11.27 Shares used in calculation (000’s) Basic 443,854 443,651 443,089 Diluted 444,452 444,757 444,346 The accompanying notes are an integral part of these consolidated financial statements. 34 Table of Contents COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (amounts in millions) 53 Weeks Ended 52 Weeks Ended 52 Weeks Ended September 3, 2023 August 28, 2022 August 29, 2021 NET INCOME INCLUDING NONCONTROLLING INTERESTS $ 6,292 $ 5,915 $ 5,079 Foreign-currency translation adjustment and other, net 24 ( 721 ) 181 Comprehensive income 6,316 5,194 5,260 Less: Comprehensive income attributable to noncontrolling interests — 36 93 COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO $ 6,316 $ 5,158 $ 5,167 The accompanying notes are an integral part of these consolidated financial statements. 35 Table of Contents COSTCO WHOLESALE CORPORATION CONSOLIDATED BALANCE SHEETS (amounts in millions, except par value and share data) September 3, 2023 August 28, 2022 ASSETS CURRENT ASSETS Cash and cash equivalents $ 13,700 $ 10,203 Short-term investments 1,534 846 Receivables, net 2,285 2,241 Merchandise inventories 16,651 17,907 Other current assets 1,709 1,499 Total current assets 35,879 32,696 OTHER ASSETS Property and equipment, net 26,684 24,646 Operating lease right-of-use assets 2,713 2,774 Other long-term assets 3,718 4,050 TOTAL ASSETS $ 68,994 $ 64,166 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable $ 17,483 $ 17,848 Accrued salaries and benefits 4,278 4,381 Accrued member rewards 2,150 1,911 Deferred membership fees 2,337 2,174 Current portion of long-term debt 1,081 73 Other current liabilities 6,254 5,611 Total current liabilities 33,583 31,998 OTHER LIABILITIES Long-term debt, excluding current portion 5,377 6,484 Long-term operating lease liabilities 2,426 2,482 Other long-term liabilities 2,550 2,555 TOTAL LIABILITIES 43,936 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; 442,793,000 and 442,664,000 shares issued and outstanding 2 2 Additional paid-in capital 7,340 6,884 Accumulated other comprehensive loss ( 1,805 ) ( 1,829 ) Retained earnings 19,521 15,585 Total Costco stockholders’ equity 25,058 20,642 Noncontrolling interests — 5 TOTAL EQUITY 25,058 20,647 TOTAL LIABILITIES AND EQUITY $ 68,994 $ 64,166 The accompanying notes are an integral part of these consolidated financial statements. 36 Table of Contents COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF EQUITY (amounts in millions) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Costco Stockholders’ Equity Noncontrolling Interests Total Equity Shares (000’s) Amount BALANCE AT AUGUST 30, 2020 441,255 $ 4 $ 6,698 $ ( 1,297 ) $ 12,879 $ 18,284 $ 421 $ 18,705 Net income — — — — 5,007 5,007 72 5,079 Foreign-currency translation adjustment and other, net — — — 160 — 160 21 181 Stock-based compensation — — 668 — — 668 — 668 Release of vested restricted stock units (RSUs), including tax effects 1,928 — ( 312 ) — — ( 312 ) — ( 312 ) Repurchases of common stock ( 1,358 ) — ( 23 ) — ( 472 ) ( 495 ) — ( 495 ) Cash dividends declared — — — — ( 5,748 ) ( 5,748 ) — ( 5,748 ) BALANCE AT AUGUST 29, 2021 441,825 4 7,031 ( 1,137 ) 11,666 17,564 514 18,078 Net income — — — — 5,844 5,844 71 5,915 Foreign-currency translation adjustment and other, net — — — ( 686 ) — ( 686 ) ( 35 ) ( 721 ) Stock-based compensation — — 728 — — 728 — 728 Release of vested RSUs, including tax effects 1,702 — ( 363 ) — — ( 363 ) — ( 363 ) Dividend to noncontrolling interest — — — — — — ( 208 ) ( 208 ) Acquisition of noncontrolling interest — — ( 499 ) ( 6 ) — ( 505 ) ( 337 ) ( 842 ) Repurchases of common stock ( 863 ) — ( 15 ) — ( 427 ) ( 442 ) — ( 442 ) Cash dividends declared and other — ( 2 ) 2 — ( 1,498 ) ( 1,498 ) — ( 1,498 ) BALANCE AT AUGUST 28, 2022 442,664 2 6,884 ( 1,829 ) 15,585 20,642 5 20,647 Net income — — — — 6,292 6,292 — 6,292 Foreign-currency translation adjustment and other, net — — — 24 — 24 — 24 Stock-based compensation — — 778 — — 778 — 778 Release of vested RSUs, including tax effects 1,470 — ( 303 ) — — ( 303 ) — ( 303 ) Repurchases of common stock ( 1,341 ) — ( 24 ) — ( 653 ) ( 677 ) — ( 677 ) Cash dividends declared and other — — 5 — ( 1,703 ) ( 1,698 ) ( 5 ) ( 1,703 ) BALANCE AT SEPTEMBER 3, 2023 442,793 $ 2 $ 7,340 $ ( 1,805 ) $ 19,521 $ 25,058 $ — $ 25,058 The accompanying notes are an integral part of these consolidated financial statements. 37 Table of Contents COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in millions) 53 Weeks Ended 52 Weeks Ended 52 Weeks Ended September 3, 2023 August 28, 2022 August 29, 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income including noncontrolling interests $ 6,292 $ 5,915 $ 5,079 Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization 2,077 1,900 1,781 Non-cash lease expense 412 377 286 Stock-based compensation 774 724 665 Impairment of assets and other non-cash operating activities, net 495 39 144 Changes in operating assets and liabilities: Merchandise inventories 1,228 ( 4,003 ) ( 1,892 ) Accounts payable ( 382 ) 1,891 1,838 Other operating assets and liabilities, net 172 549 1,057 Net cash provided by operating activities 11,068 7,392 8,958 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments ( 1,622 ) ( 1,121 ) ( 1,331 ) Maturities and sales of short-term investments 937 1,145 1,446 Additions to property and equipment ( 4,323 ) ( 3,891 ) ( 3,588 ) Other investing activities, net 36 ( 48 ) ( 62 ) Net cash used in investing activities ( 4,972 ) ( 3,915 ) ( 3,535 ) CASH FLOWS FROM FINANCING ACTIVITIES Repayments of short-term borrowings ( 935 ) ( 6 ) — Proceeds from short-term borrowings 917 53 41 Repayments of long-term debt ( 75 ) ( 800 ) ( 94 ) Tax withholdings on stock-based awards ( 303 ) ( 363 ) ( 312 ) Repurchases of common stock ( 676 ) ( 439 ) ( 496 ) Cash dividend payments ( 1,251 ) ( 1,498 ) ( 5,748 ) Financing lease payments ( 291 ) ( 176 ) ( 67 ) Dividend to noncontrolling interest — ( 208 ) — Acquisition of noncontrolling interest — ( 842 ) — Other financing activities, net — ( 4 ) 188 Net cash used in financing activities ( 2,614 ) ( 4,283 ) ( 6,488 ) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 15 ( 249 ) 46 Net change in cash and cash equivalents 3,497 ( 1,055 ) ( 1,019 ) CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 10,203 11,258 12,277 CASH AND CASH EQUIVALENTS END OF YEAR $ 13,700 $ 10,203 $ 11,258 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 125 $ 145 $ 149 Income taxes, net $ 2,234 $ 1,940 $ 1,527 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Cash dividend declared, but not yet paid $ 452 $ — $ — Capital expenditures included in liabilities $ 170 $ 156 $ 184 The accompanying notes are an integral part of these consolidated financial statements. 38 Table of Contents COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions, except share, per share, and warehouse count data) 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 September 3, 2023, Costco operated 861 warehouses worldwide: 591 in the United States (U.S.) located in 46 states, Washington, D.C., and Puerto Rico, 107 in Canada, 40 in Mexico, 33 in Japan, 29 in the United Kingdom (U.K.), 18 in Korea, 15 in Australia, 14 in Taiwan, five in China, four in Spain, two in France, and one each in Iceland, New Zealand, and Sweden. The Company operates e-commerce websites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia. Basis of Presentation The consolidated financial statements include the accounts of Costco and its subsidiaries. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. All material inter-company transactions between and 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. Fiscal Year End The Company operates on a 52/53-week fiscal year basis with the year ending on the Sunday closest to August 31. References to 2023 relate to the 53-week fiscal year ended September 3, 2023. References to 2022 and 2021 relate to the 52-week fiscal years ended August 28, 2022, and August 29, 2021. 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. Reclassification Reclassifications were made to the 2022 and 2021 consolidated statements of cash flows to conform with current year presentation. Cash and Cash Equivalents The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to four days. Credit and debit card receivables were $ 2,282 and $ 2,010 at the end of 2023 and 2022. Short-Term Investments Short-term investments generally consist of debt securities (U.S. Government and Agency Notes), with maturities at the date of purchase of three months to five years. Investments with maturities beyond five 39 Table of Contents years may be classified, based on the Company’s determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. These available-for-sale investments have a low level of inherent credit risk given they are issued by the U.S. Government and Agencies. Changes in their fair value are primarily attributable to changes in interest rates and market liquidity. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis. The Company periodically evaluates unrealized losses in its investment securities for credit impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be impaired as the result of a credit loss, the Company recognizes the loss in interest income and other, net in the consolidated statements of income. Fair Value of Financial Instruments The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company’s financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 2 , 3 , and 4 for the carrying value and fair value of the Company’s investments, derivative instruments, and fixed-rate debt. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Significant unobservable inputs that are not corroborated by market data. The Company’s valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two-sided markets, quotes, benchmark curves including but not limited to treasury benchmarks, Secured Overnight Financing Rate and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred. Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance price and adjusted for unamortized discounts or premiums and debt issuance costs. Discounts, premiums and debt issuance costs are amortized to interest expense over the term of the loan. The estimated fair 40 Table of Contents value of the Company's long-term debt is based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit. Receivables, Net Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other receivables. Vendor receivables include discounts and volume rebates. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor, in which case the receivables are presented on a net basis. Reinsurance receivables are held by the Company’s wholly-owned captive insurance subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the amounts assumed under reinsurance, which are presented within other current liabilities in the consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under co-branded credit card arrangements. Third-party pharmacy receivables generally relate to amounts due from members’ insurers. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items. The valuation allowance related to receivables was not material to our consolidated financial statements at the end of 2023 and 2022. Merchandise Inventories Merchandise inventories consist of the following: 2023 2022 United States $ 12,153 $ 13,160 Canada 1,579 1,966 Other International 2,919 2,781 Merchandise inventories $ 16,651 $ 17,907 Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels have been determined. An immaterial LIFO charge was recorded in 2023. Due to inflation in 2022, a $ 438 charge was recorded to merchandise costs to increase the cumulative LIFO valuation on merchandise inventories at August 28, 2022. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the first-in, first-out (FIFO) basis. The Company provides for estimated inventory losses between physical inventory counts using estimates based on experience. The provision is adjusted periodically to reflect physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable. Property and Equipment, Net Property and equipment are stated at cost. Depreciation and amortization expense is computed primarily using the straight-line method over estimated useful lives. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any renewals that are reasonably certain at the date the leasehold improvements are made. 41 Table of Contents The Company capitalizes certain computer software and costs incurred in developing or obtaining software for internal use. During development, these costs are included in construction in progress. To the extent that the assets become ready for their intended use, these costs are included in equipment and fixtures and amortized on a straight-line basis over their estimated useful lives. Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change asset function or useful life are capitalized. Assets removed during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the end of 2023 and 2022 were immaterial. The following table summarizes the Company's property and equipment balances at the end of 2023 and 2022: Estimated Useful Lives 2023 2022 Land N/A $ 8,590 $ 7,955 Buildings and improvements 5 - 50 years 22,001 20,120 Equipment and fixtures 3 - 20 years 11,512 10,275 Construction in progress N/A 1,266 1,582 43,369 39,932 Accumulated depreciation and amortization ( 16,685 ) ( 15,286 ) Property and equipment, net $ 26,684 $ 24,646 The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss is recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group’s fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. Impairment charges recognized in 2023 were immaterial. In 2022 and 2021, the Company recognized write-offs of $ 118 and $ 84 for information technology assets which are reflected in SG&A. Leases The Company leases land, buildings, and/or equipment 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 purchase price stated in the agreement; 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, which are recognized as variable lease payments. Our leases do not contain any material residual value guarantees or material restrictive covenants. 42 Table of Contents The Company determines at inception whether a contract is or contains a lease. Non-lease components and the lease components to which they relate are accounted for together as a single lease component for all asset classes. 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. 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. 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 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. Impairment of ROU assets is evaluated in a similar manner as described in Property and Equipment, Net above. During 2023, the Company recognized charges totaling $391, primarily related to the impairment of certain leased assets associated with charter shipping activities. This charge is included in merchandise costs. The Company's asset retirement obligations (ARO) primarily relate to leasehold improvements that must be removed at the end of a lease. These obligations are generally recorded as a discounted liability, with an offsetting asset at the inception of the lease term, based upon the estimated fair value of the costs to remove the improvements. These liabilities are accreted over time to the projected future value of the obligation. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases are included in other liabilities in the accompanying consolidated balance sheet. Goodwill and Acquired Intangible Assets Goodwill represents the excess of acquisition cost over the fair value of the net assets acquired and is not subject to amortization. The Company reviews goodwill annually in the fourth quarter for impairment or when circumstances indicate carrying value may exceed the fair value. This evaluation is performed at the reporting unit level. If a qualitative assessment indicates that it is more likely than not that the fair value is less than carrying value, a quantitative analysis is completed using either the income or market approach, or a combination of both. The income approach estimates fair value based on expected discounted future cash flows, while the market approach uses comparable public companies and transactions to develop metrics to be applied to historical and expected future operating results. Goodwill is included in other long-term assets in the consolidated balance sheets. The following table summarizes goodwill by reportable segment: United States Canada Other International Total Balance at August 29, 2021 $ 953 $ 28 $ 15 $ 996 Changes in currency translation — ( 1 ) ( 2 ) ( 3 ) Balance at August 28, 2022 $ 953 $ 27 $ 13 $ 993 Changes in currency translation — ( 1 ) 2 1 Balance at September 3, 2023 $ 953 $ 26 $ 15 $ 994 Definite-lived intangible assets, which are not material, are included in other long-term assets on the consolidated balance sheets and are amortized on a straight-line basis over their estimated lives, which approximates the pattern of expected economic benefit. Insurance/Self-insurance Liabilities Claims for employee health-care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability, inventory loss, and other exposures are funded 43 Table of Contents predominantly through self-insurance. Insurance coverage is maintained for certain risks to limit exposures arising from very large losses. The Company uses various risk management mechanisms, including a wholly-owned captive insurance subsidiary (the captive) and participates in a reinsurance program. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated using historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences, claims, or expenses differ from these assumptions and historical trends. At the end of 2023 and 2022, these insurance liabilities were $ 1,513 and $ 1,364 in the aggregate, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature. The captive receives direct premiums, which are netted against the Company’s premium costs in SG&A expenses in the consolidated statements of income. The captive participates in a reinsurance program that includes third-party participants. The participant agreements and practices of the reinsurance program are designed to limit a participating members’ individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company retains its primary obligation to the policyholders for prior activity. Derivatives The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries with functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. Some of these contracts contain credit-risk-related contingent features that require settlement of outstanding contracts upon certain triggering events. The aggregate fair value amounts of derivative instruments in a net liability position and the amount needed to settle the instruments immediately if the credit-risk-related contingent features were triggered were immaterial at the end of 2023 and 2022. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $ 1,068 and $ 1,242 at the end of 2023 and 2022. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2023 and 2022. The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2023, 2022 and 2021. The Company is exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodity products used in retail and manufacturing operations, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases and normal sales” exception under authoritative guidance and require no mark-to-market adjustment. Foreign Currency The functional currencies of the Company’s international subsidiaries are their local currencies. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and expenses of the Company’s consolidated foreign operations are translated at average exchange rates prevailing during the year. 44 Table of Contents The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the consolidated statements of income. Generally, these include the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their functional currency. Also included are realized foreign-currency gains or losses from settlements of forward foreign-exchange contracts. These items were $ 46 and $ 84 in 2023 and 2022 and immaterial in 2021. Revenue Recognition The Company recognizes sales for the amount of consideration collected from the member, which includes gross shipping fees where applicable, and is net of sales taxes collected and remitted to government agencies and member returns. The Company reserves for estimated returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company records, on a gross basis, a refund liability and an asset for recovery, which are included in other current liabilities and other current assets, respectively, in the consolidated balance sheets. The Company offers merchandise in the following core merchandise categories: foods and sundries, non-foods, and fresh foods. The Company also provides expanded products and services through warehouse ancillary and other businesses. The majority of revenue from merchandise sales is recognized at the point of sale. Revenue generated through e-commerce or special orders is generally recognized upon shipment to the member. For merchandise shipped directly to the member, shipping and handling costs are expensed as incurred as fulfillment costs and included in merchandise costs in the consolidated statements of income. In certain ancillary businesses, revenue is deferred until the member picks up merchandise at the warehouse. Deferred sales are included in other current liabilities in the consolidated balance sheets. The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis. The Company is the principal when it has control of the merchandise or service before it is transferred to the member, which generally is established when Costco is primarily responsible for merchandising decisions, pricing discretion, and maintains the relationship with the member, including assurance of member service and satisfaction. The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. Deferred membership fees at the end of 2023 and 2022 were $ 2,337 and $ 2,174 . In most countries, the Company's Executive members qualify for a 2% reward on qualified purchases, subject to an annual maximum value, which does not expire and is redeemable at Costco warehouses. The Company accounts for this reward as a reduction in sales, net of the estimated impact of non-redemptions (breakage), with the corresponding liability classified as accrued member rewards in the consolidated balance sheets. Estimated breakage is computed based on redemption data. For 2023, 2022, and 2021, the net reduction in sales was $ 2,576 , $ 2,307 , and $ 2,047 . The Company sells and otherwise provides proprietary shop cards that do not expire and are redeemable at the warehouse or online for merchandise or membership. Revenue from shop cards is recognized upon redemption, and estimated breakage is recognized based on redemption data. The Company accounts for outstanding shop card balances as a shop card liability, net of estimated breakage. Shop card liabilities are included in other current liabilities in the consolidated balance sheets. Citibank, N.A. is the exclusive issuer of co-branded credit cards to U.S. members. The Company receives various forms of consideration from Citibank, including a royalty on purchases made on the card outside of Costco. A portion of the royalty is used to fund the rebate that cardholders receive, after taking into consideration breakage, which is calculated based on rebate redemption data. The rebates are issued in February and expire on December 31. The Company also maintains co-branded credit card arrangements in Canada and certain other International subsidiaries. 45 Table of Contents Merchandise Costs Merchandise costs consist of the purchase price or manufacturing costs of inventory sold, inbound and outbound shipping charges and all costs related to the Company’s depot, fulfillment and manufacturing operations, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods departments and certain ancillary businesses. Vendor Consideration The Company receives funds from vendors for discounts and a variety of other programs. These programs are evidenced by agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of salaries, benefits and workers’ compensation costs for warehouse employees (other than fresh foods departments and certain ancillary businesses which are reflected in merchandise costs) as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, stock compensation expense, credit and debit card processing fees, utilities, preopening, as well as other operating costs incurred to support warehouse and e-commerce website operations. Retirement Plans The Company's 401(k) retirement plan is available to all U.S. employees over the age of 18 who have completed 90 days of employment. The plan allows participants to make wage deferral contributions, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for employees in Canada and contributes a percentage of each employee's wages. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans, which are not material. Amounts expensed under all plans were $ 914 , $ 824 , and $ 748 for 2023, 2022, and 2021, and are predominantly included in SG&A expenses in the consolidated statements of income. Stock-Based Compensation The Company grants stock-based compensation, primarily to employees and non-employee directors. Grants to executive officers are generally performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. Restricted Stock Units (RSUs) granted to employees and to non-employee directors generally vest over five years and three years and are subject to quarterly vesting in the event of retirement or voluntary termination. Employees who attain at least 25 years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date. Forfeitures are recognized as they occur. Compensation expense for awards is predominantly recognized using the straight-line method over the requisite service period for the entire award. The terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more and five or more years of service with the Company, respectively. Recipients are not entitled to vote or receive dividends on unvested and undelivered shares. Compensation expense for the accelerated shares is recognized upon achievement of the long-service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the 46 Table of Contents common stock on the measurement date less the present value of the expected dividends forgone during the vesting period. Stock-based compensation expense is predominantly included in SG&A expenses in the consolidated statements of income. Certain stock-based compensation costs are capitalized or included in the cost of merchandise. See Note 7 for additional information on the Company’s stock-based compensation plans. Income Taxes The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases, credits and loss carry-forwards. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized. The timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions requires significant judgment. The benefits of uncertain tax positions are recorded in the Company’s consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records changes as appropriate. Net Income per Common Share Attributable to Costco The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs. Stock Repurchase Programs Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 6 for additional information. Note 2—Investments The Company’s investments were as follows: 2023: Cost Basis Unrealized Losses, Net Recorded Basis Available-for-sale: Government and agency securities $ 650 $ ( 17 ) $ 633 Held-to-maturity: Certificates of deposit 901 — 901 Total short-term investments $ 1,551 $ ( 17 ) $ 1,534 47 Table of Contents 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 years ended September 3, 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 2023 or 2022. The maturities of available-for-sale and held-to-maturity securities at the end of 2023 are as follows: Available-For-Sale Held-To-Maturity Cost Basis Fair Value Due in one year or less $ 111 $ 110 $ 901 Due after one year through five years 337 330 — Due after five years 202 193 — Total $ 650 $ 633 $ 901 Note 3—Fair Value Measurement Assets and Liabilities Measured at Fair Value on a Recurring Basis The table below presents information regarding the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting the valuation techniques utilized to determine such fair value. Level 2 2023 2022 Investment in government and agency securities $ 633 $ 529 Forward foreign-exchange contracts, in asset position (1) 18 34 Forward foreign-exchange contracts, in (liability) position (1) ( 7 ) ( 2 ) Total $ 644 $ 561 ____________ (1) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the consolidated balance sheets. At September 3, 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 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. 48 Table of Contents Note 4—Debt Short-Term Borrowings The Company maintains various short-term bank credit facilities, with a borrowing capacity of $ 1,234 and $ 1,257 , in 2023 and 2022. Short-term borrowings outstanding were immaterial at the end of 2023 and 2022. Long-Term Debt The Company's long-term debt consists primarily of Senior Notes, described below. The Company at its option may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100 % of the principal amount or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon certain events, a holder has the right to require a repurchase at a price of 101 % of the principal amount plus accrued and unpaid interest. Interest on all outstanding long-term debt is payable semi-annually. 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 Japanese subsidiary, valued using Level 3 inputs. In May 2023, the Japanese subsidiary repaid $ 75 of its Guaranteed Senior Notes. At the end of 2023 and 2022, the fair value of the Company's long-term debt, including the current portion, was approximately $ 5,738 and $ 6,033 . The carrying value of long-term debt consisted of the following: 2023 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 484 590 Total long-term debt 6,484 6,590 Less unamortized debt discounts and issuance costs 26 33 Less current portion (1) 1,081 73 Long-term debt, excluding current portion $ 5,377 $ 6,484 _______________ (1) Net of unamortized debt discounts and issuance costs. Maturities of long-term debt during the next five fiscal years and thereafter are as follows: 2024 $ 1,081 2025 103 2026 76 2027 2,250 2028 — Thereafter 2,974 Total $ 6,484 49 Table of Contents Note 5—Leases The tables below present information regarding the Company's lease assets and liabilities. 2023 2022 Assets Operating lease right-of-use assets $ 2,713 $ 2,774 Finance lease assets (1) 1,325 1,620 Total lease assets $ 4,038 $ 4,394 Liabilities Current Operating lease liabilities (2) $ 220 $ 239 Finance lease liabilities (2) 129 245 Long-term Operating lease liabilities 2,426 2,482 Finance lease liabilities (3) 1,303 1,383 Total lease liabilities $ 4,078 $ 4,349 _______________ (1) Included in other long-term assets in the consolidated balance sheets. (2) Included in other current liabilities in the consolidated balance sheets. (3) Included in other long-term liabilities in the consolidated balance sheets. 2023 2022 Weighted-average remaining lease term (years) Operating leases 20 20 Finance leases 24 17 Weighted-average discount rate Operating leases 2.47 % 2.26 % Finance leases 4.47 % 3.97 % The components of lease expense, excluding short-term lease costs and sublease income (which were not material), were as follows: 2023 2022 2021 Operating lease costs (1) $ 309 $ 297 $ 296 Finance lease costs: Amortization of lease assets (1) 169 128 50 Interest on lease liabilities (2) 54 45 37 Variable lease costs (1) 160 157 151 Total lease costs $ 692 $ 627 $ 534 _______________ (1) Included in selling, general and administrative expenses and merchandise costs in the consolidated statements of income. (2) Included in interest expense and merchandise costs in the consolidated statements of income. 50 Table of Contents Supplemental cash flow information related to leases was as follows: 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows — operating leases $ 287 $ 277 $ 282 Operating cash flows — finance leases 54 45 37 Financing cash flows — finance leases 291 176 67 Operating lease assets obtained in exchange for new or modified leases 202 231 350 Financing lease assets obtained in exchange for new or modified leases 100 794 399 As of September 3, 2023, future minimum payments during the next five fiscal years and thereafter are as follows: Operating Leases (1) Finance Leases 2024 $ 277 $ 180 2025 230 175 2026 226 100 2027 206 91 2028 191 92 Thereafter 2,271 1,579 Total (2) 3,401 2,217 Less amount representing interest 755 785 Present value of lease liabilities $ 2,646 $ 1,432 _______________ (1) Operating lease payments have not been reduced by future sublease income of $ 83 . (2) Excludes $ 843 of lease payments for leases that have been signed but not commenced. Note 6—Equity Dividends Cash dividends declared in 2023 totaled $ 3.84 per share, as compared to $ 3.38 in 2022. The Company's current quarterly dividend rate is $ 1.02 per share. Stock Repurchase Programs The Company's stock repurchase program is conducted under a $ 4,000 authorization by the Board of Directors, which expires in January 2027. As of the end of 2023, the remaining amount available under the authorization was $ 3,563 . The following table summarizes the Company’s stock repurchase activity: Shares Repurchased (000’s) Average Price per Share Total Cost 2023 1,341 $ 504.68 $ 677 2022 863 511.46 442 2021 1,358 364.39 495 These amounts may differ from repurchases of common stock in the consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. Purchases are made 51 Table of Contents 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 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 the end of 2023, 8,747,000 shares were available to be granted as RSUs, and the following awards were outstanding: • 2,869,000 time-based RSUs, which vest upon continued employment or service over specified periods of time; and • 176,000 performance-based RSUs, of which 135,000 were granted to executive officers subject to the determination of the attainment of performance targets for 2023. This determination occurred in September 2023, at which time at least 33% of the units vested, as a result of the long service of all executive officers, with the exception of one executive officer who has less than 25 years of service. The remaining awards vest upon continued employment over specified periods of time. Please refer to Note 1 for accelerated vesting requirements. The following table summarizes RSU transactions during 2023: Number of Units (in 000’s) Weighted-Average Grant Date Fair Value Outstanding at the end of 2022 3,449 $ 338.41 Granted 1,814 471.47 Vested and delivered ( 2,102 ) 352.53 Forfeited ( 116 ) 398.31 Outstanding at the end of 2023 3,045 $ 405.63 The weighted-average grant date fair value of RSUs granted was $ 471.47 , $ 476.06 , and $ 369.15 in 2023, 2022, and 2021. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2023 was $ 790 and the weighted-average period of time over which this cost will be recognized is 1.6 years. Included in the outstanding balance at the end of 2023 were approximately 1,050,000 RSUs vested but not yet delivered. Summary of Stock-Based Compensation The following table summarizes stock-based compensation expense and the related tax benefits: 2023 2022 2021 Stock-based compensation expense $ 774 $ 724 $ 665 Less recognized income tax benefit 163 154 140 Stock-based compensation expense, net $ 611 $ 570 $ 525 52 Table of Contents Note 8— Taxes Income Taxes Income before income taxes is comprised of the following: 2023 2022 2021 Domestic $ 6,264 $ 5,759 $ 4,931 Foreign 2,223 2,081 1,749 Total $ 8,487 $ 7,840 $ 6,680 The provisions for income taxes are as follows: 2023 2022 2021 Federal: Current $ 1,056 $ 798 $ 718 Deferred 33 ( 35 ) 84 Total federal 1,089 763 802 State: Current 374 333 265 Deferred 10 ( 5 ) 11 Total state 384 328 276 Foreign: Current 732 851 557 Deferred ( 10 ) ( 17 ) ( 34 ) Total foreign 722 834 523 Total provision for income taxes $ 2,195 $ 1,925 $ 1,601 The reconciliation between the statutory tax rate and the effective rate for 2023, 2022, and 2021 is as follows: 2023 2022 2021 Federal taxes at statutory rate $ 1,782 21.0 % $ 1,646 21.0 % $ 1,403 21.0 % State taxes, net 302 3.6 267 3.4 243 3.6 Foreign taxes, net 160 1.9 231 3.0 92 1.4 Employee stock ownership plan (ESOP) ( 25 ) ( 0.3 ) ( 23 ) ( 0.3 ) ( 91 ) ( 1.3 ) Other ( 24 ) ( 0.3 ) ( 196 ) ( 2.5 ) ( 46 ) ( 0.7 ) Total $ 2,195 25.9 % $ 1,925 24.6 % $ 1,601 24.0 % The Company recognized total net tax benefits of $ 62 , $ 130 and $ 163 in 2023, 2022 and 2021. These include benefits of $ 54 , $ 94 and $ 75 , related to stock-based compensation. During 2021, there was a net tax benefit of $ 70 related to the portion of the special dividend paid through the Company's 401(k) plan. 53 Table of Contents The components of the deferred tax assets (liabilities) are as follows: 2023 2022 Deferred tax assets: Equity compensation $ 89 $ 84 Deferred income/membership fees 309 302 Foreign tax credit carry forward 250 201 Operating lease liabilities 678 727 Accrued liabilities and reserves 761 694 Other 20 5 Total deferred tax assets 2,107 2,013 Valuation allowance ( 422 ) ( 313 ) Total net deferred tax assets 1,685 1,700 Deferred tax liabilities: Property and equipment ( 867 ) ( 962 ) Merchandise inventories ( 380 ) ( 231 ) Operating lease right-of-use assets ( 655 ) ( 701 ) Foreign branch deferreds ( 87 ) ( 85 ) Total deferred tax liabilities ( 1,989 ) ( 1,979 ) Net deferred tax liabilities $ ( 304 ) $ ( 279 ) The deferred tax accounts at the end of 2023 and 2022 include deferred income tax assets of $ 491 and $ 445 , included in other long-term assets; and deferred income tax liabilities of $ 795 and $ 724 , included in other long-term liabilities. In 2023 and 2022, the Company had valuation allowances of $ 422 and $ 313 , primarily related to foreign tax credits that the Company believes will not be realized due to carry forward limitations. The foreign tax credit carry forwards are set to expire beginning in fiscal 2030. The Company generally no longer considers fiscal year earnings of non-U.S. consolidated subsidiaries after 2017 to be indefinitely reinvested (other than China and Taiwan) and has recorded the estimated incremental foreign withholding taxes (net of available foreign tax credits) and state income taxes payable assuming a hypothetical repatriation to the U.S. The Company considers undistributed earnings of certain non-U.S. consolidated subsidiaries, which totaled $ 3,225 , to be indefinitely reinvested and has not provided for withholding or state taxes. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2023 and 2022 is as follows: 2023 2022 Gross unrecognized tax benefit at beginning of year $ 16 $ 33 Gross increases—current year tax positions 1 1 Gross increases—tax positions in prior years 11 12 Gross decreases—tax positions in prior years ( 11 ) ( 12 ) Gross decreases—settlements — ( 12 ) Lapse of statute of limitations ( 1 ) ( 6 ) Gross unrecognized tax benefit at end of year $ 16 $ 16 54 Table of Contents The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2023 and 2022, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that if recognized would favorably affect the effective income tax rate in future periods is $ 14 and $ 15 at the end of 2023 and 2022. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Accrued interest and penalties recognized during 2023 and 2022, and accrued at the end of each respective period were not material. The Company is currently under audit by several jurisdictions in the United States and abroad. Some audits may conclude in the next 12 months, and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months. The Company files income tax returns in the United States, various state and local jurisdictions, in Canada, and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2018. The Company is currently subject to examination in California for fiscal years 2013 to present. Other Taxes The Company is subject to 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. 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 of potentially dilutive common shares outstanding (shares in 000’s): 2023 2022 2021 Net income attributable to Costco $ 6,292 $ 5,844 $ 5,007 Weighted average basic shares 443,854 443,651 443,089 RSUs 598 1,106 1,257 Weighted average diluted shares 444,452 444,757 444,346 Note 10—Commitments and Contingencies Legal Proceedings The Company is involved in many 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 losses 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 55 Table of Contents 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 monitors for developments that 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: the remedies or penalties sought are indeterminate or unspecified; the legal and/or factual theories are not well developed; and/or 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 sought relief under the California Labor Code, including civil penalties and attorneys’ fees. On April 26, 2023, the court entered a final judgment in favor of the Company. The plaintiff appealed the judgment in June 2023. 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 was 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 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, and the 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 the Company'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 September 2023 the parties reached an agreement in principle on a settlement for an immaterial amount. 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.). 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 56 Table of Contents 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). Following final approval of the settlement, the case was dismissed on April 14, 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 August 2023, the parties reached an agreement in principle on a settlement for an immaterial amount. 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.). The case was settled for an immaterial amount and was dismissed with prejudice in May 2023. 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.). On September 27, 2022, the parties reached a settlement for an immaterial amount, which is subject to 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). 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 plaintiff 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 arbitration of the plaintiff's individual claims. 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). 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). In December 2022, the case was settled for an immaterial amount, and the case was dismissed. In May 2022, an employee filed a PAGA 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 filed against the Company 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 57 Table of Contents increased insurance costs associated with opioid abuse in 43 states and American Samoa. Claims against the Company filed in federal court outside the MDL have been asserted by certain counties and cities in Florida and Georgia; claims filed by certain cities and counties in New York are pending in state court. 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 were 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 sought from the individual defendants' damages, injunctive relief, costs, and attorneys' fees. On March 28, 2023, the court granted the defendants' motion to dismiss the action. The plaintiffs subsequently made a demand that the Board of Directors take various actions, including among other things, pursuing claims against directors and officers of the type asserted in the litigation. A demand review committee of the Board has been appointed to make a recommendation to the Board as to the demand. In February 2023, Go Green Norcal, LLC filed an arbitration demand against the Company. The demand alleged a breach of a supply agreement and sought unspecified damages and cancellation of a loan from the Company. In March 2023, the Company filed its answer, denying any breach by the Company, along with counterclaims against Go Green and an affiliate for breach of contract, negligent misrepresentation, and an accounting. In August 2023 the plaintiff asserted that its damages exceed $ 70 million. In January 2023 the Company received a Civil Investigative Demand from the U.S. Attorney's Office, Western District of Washington, requesting documents. The government is conducting a False Claims Act investigation concerning whether the Company presented or caused to be presented to the federal government for payment false claims relating to prescription medications. 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. 58 Table of Contents Note 11—Segment Reporting The Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S., Canada, Mexico, Japan, the U.K., Korea, Australia, Taiwan, China, Spain, France, 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 Note 1 . 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 Canada Other International Total 2023 Total revenue $ 176,630 $ 33,056 $ 32,604 $ 242,290 Operating income 5,392 1,448 1,274 8,114 Depreciation and amortization 1,599 183 295 2,077 Additions to property and equipment 3,288 281 754 4,323 Property and equipment, net 18,760 2,443 5,481 26,684 Total assets 49,189 6,420 13,385 68,994 2022 Total revenue $ 165,294 $ 31,675 $ 29,985 $ 226,954 Operating income 5,268 1,346 1,179 7,793 Depreciation and amortization 1,436 180 284 1,900 Additions to property and equipment 2,795 388 708 3,891 Property and equipment, net 17,205 2,459 4,982 24,646 Total assets 44,904 6,558 12,704 64,166 2021 Total revenue $ 141,398 $ 27,298 $ 27,233 $ 195,929 Operating income 4,470 1,093 1,145 6,708 Depreciation and amortization 1,339 177 265 1,781 Additions to property and equipment 2,612 272 704 3,588 Property and equipment, net 15,993 2,317 5,182 23,492 Total assets 39,589 5,962 13,717 59,268 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: 2023 2022 2021 Foods and Sundries $ 96,175 $ 85,629 $ 77,277 Non-Foods 60,865 61,100 55,966 Fresh Foods 31,977 29,527 27,183 Warehouse Ancillary and Other Businesses 48,693 46,474 31,626 Total net sales $ 237,710 $ 222,730 $ 192,052 59 Table of Contents Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.