Close

Form 10-Q COSTCO WHOLESALE CORP For: Nov 23

FREE Breaking News Alerts from StreetInsider.com!

E-mail Address

StreetInsider.com Top Tickers, 4/19/2024

1. NFLX
2. TSM
3. ISRG
4. INFY
5. SNV
6. TSLA
7. SPY
8. SMCI
9. PPG
10. JWN


December 18, 2014 3:45 PM EST

�
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549�
FORM 10-Q

�
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November�23, 2014
or
�
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-20355
Costco Wholesale Corporation
(Exact name of registrant as specified in its charter)

Washington
�
91-1223280
(State or other jurisdiction of
incorporation or organization)
�
(I.R.S. Employer Identification No.)
999 Lake Drive, Issaquah, WA 98027
(Address of principal executive offices) (Zip Code)
(Registrants telephone number, including area code): (425)�313-8100
Indicate by check mark whether the registrant (1)�has filed all reports required to be filed by Section�13 or 15(d)�of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)�has been subject to such filing requirements for the past 90 days. YES�� �NO�o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ����NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer �
��
Accelerated filer o
Non-accelerated filer o�(Do not check if a smaller company)
��
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES�o���NO��
The number of shares outstanding of the issuer's common stock as of December�11, 2014 was 440,504,400.
�



COSTCO WHOLESALE CORPORATION
INDEX TO FORM 10-Q�
�
�
Page
PART�I
�
Item�1.
�
�
�
�
�
Item 2.
Item 3.
Item 4.
�
�
�
PART�II
�
Item 1.
Item�1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
�

2

PART IFINANCIAL INFORMATION
Item�1Financial Statements
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in millions, except par value and share data)
(unaudited)
�
November�23,
2014
�
August�31,
2014
ASSETS
�
�
�
CURRENT ASSETS
�
�
�
Cash and cash equivalents
$
5,969

�
$
5,738

Short-term investments
1,650

�
1,577

Receivables, net
1,248

�
1,148

Merchandise inventories
9,644

�
8,456

Deferred income taxes and other current assets
645

�
669

Total current assets
19,156

�
17,588

PROPERTY AND EQUIPMENT
�
�
�
Land
4,697

�
4,716

Buildings and improvements
12,541

�
12,522

Equipment and fixtures
5,022

�
4,845

Construction in progress
499

�
592

�
22,759

�
22,675

Less accumulated depreciation and amortization
(7,961
)
�
(7,845
)
Net property and equipment
14,798

�
14,830

OTHER ASSETS
659

�
606

TOTAL ASSETS
$
34,613

�
$
33,024

LIABILITIES AND EQUITY
�
�
�
CURRENT LIABILITIES
�
�
�
Accounts payable
$
9,783

�
$
8,491

Accrued salaries and benefits
2,224

�
2,231

Accrued member rewards
768

�
773

Accrued sales and other taxes
420

�
442

Deferred membership fees
1,305

�
1,254

Other current liabilities
1,519

�
1,221

Total current liabilities
16,019

�
14,412

LONG-TERM DEBT, excluding current portion
5,034

�
5,093

DEFERRED INCOME TAXES AND OTHER LIABILITIES
990

�
1,004

Total liabilities
22,043

�
20,509

COMMITMENTS AND CONTINGENCIES


�


EQUITY
�
�
�
Preferred stock $.005 par value; 100,000,000 shares authorized; no shares issued and outstanding
0

�
0

Common stock $.005 par value; 900,000,000 shares authorized; 440,499,000 and 437,683,000 shares issued and outstanding
2

�
2

Additional paid-in capital
4,963

�
4,919

Accumulated other comprehensive loss
(388
)
�
(76
)
Retained earnings
7,782

�
7,458

Total Costco stockholders equity
12,359

�
12,303

Noncontrolling interests
211

�
212

Total equity
12,570

�
12,515

TOTAL LIABILITIES AND EQUITY
$
34,613

�
$
33,024


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

3

COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share data)
(unaudited)�
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
REVENUE
�
�
�
Net sales
$
26,284

�
$
24,468

Membership fees
582

�
549

Total revenue
26,866

�
25,017

OPERATING EXPENSES
�
�
�
Merchandise costs
23,385

�
21,824

Selling, general and administrative
2,696

�
2,501

Preopening expenses
15

�
24

Operating income
770

�
668

OTHER INCOME (EXPENSE)
�
�
�
Interest expense
(26
)
�
(27
)
Interest income and other, net
35

�
18

INCOME BEFORE INCOME TAXES
779

�
659

Provision for income taxes
274

�
228

Net income including noncontrolling interests
505

�
431

Net income attributable to noncontrolling interests
(9
)
�
(6
)
NET INCOME ATTRIBUTABLE TO COSTCO
$
496

�
$
425

NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
�
�
�
Basic
$
1.13

�
$
0.97

Diluted
$
1.12

�
$
0.96

Shares used in calculation (000s)
�
�
�
Basic
438,760

�
437,970

Diluted
442,210

�
442,420

CASH DIVIDENDS DECLARED PER COMMON SHARE
$
0.355

�
$
0.31












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

4

COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in millions)
(unaudited)�
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
NET INCOME INCLUDING NONCONTROLLING INTERESTS
$
505

�
$
431

Foreign-currency translation adjustment and other, net
(322
)
�
84

Comprehensive income
183

�
515

Less: Comprehensive income attributable to noncontrolling interests
(1
)
�
9

COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO
$
184

�
$
506








































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

5

COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions)
(unaudited)
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
CASH FLOWS FROM OPERATING ACTIVITIES
�
�
�
Net income including noncontrolling interests
$
505

�
$
431

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
�
�
�
Depreciation and amortization
254

�
231

Stock-based compensation
150

�
112

Excess tax benefits on stock-based awards
(62
)
�
(65
)
Other non-cash operating activities, net
(22
)
�
11

Changes in operating assets and liabilities:
�
�
�
Increase in merchandise inventories
(1,328
)
�
(1,420
)
Increase in accounts payable
1,445

�
1,311

Other operating assets and liabilities, net
186

�
328

Net cash provided by operating activities
1,128

�
939

CASH FLOWS FROM INVESTING ACTIVITIES
�
�
�
Purchases of short-term investments
(426
)
�
(809
)
Maturities and sales of short-term investments
342

�
544

Additions to property and equipment
(555
)
�
(574
)
Other investing activities, net
(14
)
�
13

Net cash used in investing activities
(653
)
�
(826
)
CASH FLOWS FROM FINANCING ACTIVITIES
�
�
�
Change in bank checks outstanding
(21
)
�
2

Proceeds from short-term borrowings
36

�
20

Proceeds from exercise of stock options
10

�
5

Minimum tax withholdings on stock-based awards
(177
)
�
(163
)
Excess tax benefits on stock-based awards
62

�
65

Repurchases of common stock
(18
)
�
0

Net cash used in financing activities
(108
)
�
(71
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(136
)
�
13

Net increase in cash and cash equivalents
231

�
55

CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
5,738

�
4,644

CASH AND CASH EQUIVALENTS END OF PERIOD
$
5,969

�
$
4,699

�
�
�
�
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
�
�
�
Cash paid during the first quarter for:
�
�
�
Interest (reduced by $2 and $2 interest capitalized in 2015 and 2014, respectively)
$
33

�
$
32

Income taxes, net
$
150

�
$
0

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
�
�
�
Cash dividend declared, but not yet paid
$
156

�
$
137







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

6

COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data)
(unaudited)
Note 1Summary 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 select private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At November�23, 2014, Costco operated 671 warehouses worldwide: 474 United States (U.S.) locations (in 43 states, Washington, D.C., and Puerto Rico), 88 Canada locations, 34 Mexico locations, 26 United Kingdom (U.K.) locations, 20 Japan locations, 11 Korea locations, 10 Taiwan locations, 7 Australia locations and 1 Spain location. The Company's online business operates websites in the U.S., Canada, U.K., and Mexico.
Basis of Presentation
The condensed consolidated financial statements include the accounts of Costco, its wholly-owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Companys equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries and other consolidated entities have been eliminated in consolidation. The Companys net income excludes income attributable to noncontrolling interests in Taiwan and Korea. Unless otherwise noted, references to net income relate to net income attributable to Costco.
These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's annual report filed on Form 10-K for the fiscal year ended August�31, 2014.
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. References to the first quarters of 2015 and 2014 relate to the 12-week fiscal quarters ended November�23, 2014, and November�24, 2013, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
Fair Value of Financial Instruments
The Company accounts for certain assets and liabilities at fair value. The carrying value of the Companys financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate

7



Note 1Summary of Significant Accounting Policies (Continued)

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 Companys investments, derivative instruments, and fixed-rate debt, respectively.
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 Companys current financial liabilities have fair values that approximate their carrying values. The Companys long-term financial liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted for any applicable unamortized discounts or premiums. There have been no material changes to the valuation techniques utilized in the fair value measurement of assets and liabilities as disclosed in the Company's 2014 Form 10-K.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market, as determined primarily by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S. merchandise inventories. Merchandise inventories for all foreign operations are primarily valued by the retail inventory method and are stated using the first-in, first-out (FIFO) method. 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 rates and inventory levels for the year have been determined. At November�23, 2014, and August�31, 2014, the cumulative impact of the LIFO valuation on merchandise inventories was $107 and $109, respectively.
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 Companys international subsidiaries, whose functional currency is not the U.S. dollar. 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. These contracts do not contain any credit-risk-related contingent features. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $554 and $585 at November�23, 2014, and August�31, 2014, respectively. While the Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship, there can be no assurance that this practice is effective. The contracts are limited to less than one year in duration. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts as of November�23, 2014, and August�31, 2014.
The unrealized gains or losses recognized in interest income and other, net in the accompanying condensed consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts was a gain of $23 in the first quarter of 2015 and immaterial in the first quarter of 2014.

8



Note 1Summary of Significant Accounting Policies (Continued)

The Company is exposed to fluctuations in prices for the energy it consumes, particularly electricity and natural gas, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities. The Company also enters into variable-priced contracts for some purchases of electricity and 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 or normal sales exception under authoritative guidance and thus require no mark-to-market adjustment.
Foreign Currency
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 accompanying condensed consolidated statements of income. Generally, this includes 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 resulted in an immaterial net loss in the first quarter of 2015 and a $9 net gain in the first quarter of 2014.
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 both additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is calculated as 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 5 for additional information.
Recent Accounting Pronouncements Not Yet Adopted
In April 2014, the Financial Accounting Standards Board (FASB) issued guidance that changed the criteria for reporting discontinued operations, as well as requiring new disclosures about discontinued operations and disposals of components of an entity that do not qualify for discontinued operations reporting. This guidance is effective for fiscal years beginning after December�15, 2014, with early adoption permitted for disposals that have not been reported in financial statements previously issued. The Company will adopt this guidance at the beginning of fiscal year 2016. Adoption is not expected to have a material impact on the Companys consolidated financial statements or disclosures.
In May 2014, the FASB issued a new standard on the recognition of revenue from contracts with customers. The guidance changed the criteria for reporting revenue, as well as requiring disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Companies can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. The new standard is effective for fiscal years, and interim periods within those years, beginning after December�15, 2016. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2018. The Company is evaluating the impact of this standard on its consolidated financial statements and disclosures.

9

Note 2Investments
The Company's major categories of investments have not materially changed from the annual reporting period ended August�31, 2014. The Companys investments were as follows:
�
November�23, 2014:
Cost
Basis
�
Unrealized
Gains, Net
�
Recorded
Basis
Available-for-sale:
�
�
�
�
�
Government and agency securities
$
1,501

�
$
4

�
$
1,505

Asset and mortgage-backed securities
4

�
0

�
4

Total available-for-sale
1,505

�
4

�
1,509

Held-to-maturity:
�
�
�
�
�
Certificates of deposit
141

�
�
�
141

Total short-term investments
$
1,646

�
$
4

�
$
1,650


August�31, 2014:
Cost
Basis
�
Unrealized
Gains, Net
�
Recorded
Basis
Available-for-sale:
�
�
�
�
�
Government and agency securities
$
1,404

�
$
1

�
$
1,405

Asset and mortgage-backed securities
4

�
0

�
4

Total available-for-sale
1,408

�
1

�
1,409

Held-to-maturity:
�
�
�
�
�
Certificates of deposit
155

�
�
�
155

Bankers' acceptances
13

�
�
�
13

Total held-to-maturity
168

�
�
�
168

Total short-term investments
$
1,576

�
$
1

�
$
1,577

At November�23, 2014, and August�31, 2014, available-for-sale securities that were in continuous unrealized-loss positions were not material. There were no unrealized gains and losses on cash and cash equivalents at the end of the first quarter of 2015 and 2014.
The proceeds from sales of available-for-sale securities were $17 and $10 during the first quarter of 2015 and 2014, respectively. Gross realized gains or losses from sales of available-for-sale securities during the first quarter of 2015 and 2014 were not material.
The maturities of available-for-sale and held-to-maturity securities at November�23, 2014, were as follows:
�
Available-For-Sale
�
Held-To-Maturity
�
Cost�Basis
�
Fair�Value
�
Due in one year or less
$
286

�
$
286

�
$
141

Due after one year through five years
1,135

�
1,138

�
0

Due after five years
84

�
85

�
0

�
$
1,505

�
$
1,509

�
$
141


10

Note 3Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present information regarding the Companys financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy reflecting the valuation techniques utilized to determine fair value.
November�23, 2014:
Level�1
�
Level�2
Money market mutual funds(1)
$
243

�
$
0

Investment in government and agency securities
0

�
1,505

Investment in asset and mortgage-backed securities
0

�
4

Forward foreign-exchange contracts, in asset position(2)
0

�
23

Forward foreign-exchange contracts, in (liability) position(2)
0

�
0

Total
$
243

�
$
1,532

�
August�31, 2014:
Level�1
�
Level 2
Money market mutual funds(1)
$
312

�
$
0

Investment in government and agency securities
0

�
1,405

Investment in asset and mortgage-backed securities
0

�
4

Forward foreign-exchange contracts, in asset position(2)
0

�
3

Forward foreign-exchange contracts, in (liability) position(2)
0

�
(3
)
Total
$
312

�
$
1,409

�_______________
(1)
Included in cash and cash equivalents in the accompanying condensed consolidated balance sheets.
(2)
The asset and the liability values are included in deferred income taxes and other current assets and other current liabilities, respectively, in the accompanying condensed consolidated balance sheets. See Note 1 for additional information on derivative instruments.
The Company did not hold any Level 3 financial assets or liabilities that were measured at fair value on a recurring basis at November�23, 2014, or August�31, 2014. There were no financial assets or liabilities measured on a recurring basis using significant unobservable inputs (Level 3) and there were no transfers in or out of Level 1, 2, or 3 during the first quarter of 2015 or 2014.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Financial assets measured at fair value on a nonrecurring basis include held-to-maturity investments that are carried at amortized cost and are not remeasured to fair value on a recurring basis. There were no fair value adjustments to these financial assets during the first quarter of 2015 or 2014.
Nonfinancial assets measured at fair value on a nonrecurring basis include items such as long-lived assets that are measured at fair value resulting from an impairment, if deemed necessary. Fair value adjustments to these nonfinancial assets and liabilities were immaterial during the first quarter of 2015 and there were none during the first quarter of 2014.

11

Note 4Debt
The estimated fair value of the Companys debt was based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit risk. Substantially all of the Company's long-term debt is classified as Level 2.
The carrying and estimated fair values of the Companys long-term debt consisted of the following:
�
�
November�23, 2014
�
August�31, 2014
�
Carrying
Value
�
Fair
Value
�
Carrying
Value
�
Fair
Value
0.65% Senior Notes due December 2015
$
1,200

�
$
1,204

�
$
1,199

�
$
1,203

5.5% Senior Notes due March 2017
1,099

�
1,212

�
1,099

�
1,223

1.125% Senior Notes due December 2017
1,100

�
1,097

�
1,100

�
1,095

1.7% Senior Notes due December 2019
1,198

�
1,176

�
1,198

�
1,186

Other long-term debt
437

�
450

�
497

�
510

Long-term debt, excluding current portion
$
5,034

�
$
5,139

�
$
5,093

�
$
5,217

Note 5Equity and Comprehensive Income
Dividends
The Companys current quarterly dividend rate is $0.355 per share, compared to $0.31 per share in the first quarter of 2014. On October�28, 2014, the Board of Directors declared a quarterly cash dividend in the amount of $0.355 per share, which was paid on November�28, 2014.
Stock Repurchase Programs
In the first quarter of 2015, the Company repurchased 139,000 shares, at an average price of $126.43, totaling $18. The remaining amount available for stock repurchases under our approved plan, which expires in April 2015, was $2,703 at November�23, 2014. There was no stock repurchase activity in the first quarter of 2014. These amounts may differ from the stock repurchase balances in the condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of a 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.

12



Note 5Equity and Comprehensive Income (Continued)

Components of Equity and Comprehensive Income
The following tables show the changes in equity attributable to Costco and the noncontrolling interests of consolidated subsidiaries and other entities in which the Company has a controlling interest, but less than total ownership:
�
Attributable to Costco
�
Noncontrolling
Interests
�
Total
Equity
Equity at August�31, 2014
$
12,303

�
$
212

�
$
12,515

Comprehensive income:
�
�
�
�
�
Net income
496

�
9

�
505

Foreign-currency translation adjustment and other, net
(312
)
�
(10
)
�
(322
)
Comprehensive income
184

�
(1
)
�
183

Stock-based compensation
150

�
0

�
150

Stock options exercised, including tax effects
17

�
0

�
17

Release of vested restricted stock units (RSUs), including tax effects
(121
)
�
0

�
(121
)
Repurchases of common stock
(18
)
�
0

�
(18
)
Cash dividends declared
(156
)
�
0

�
(156
)
Equity at November�23, 2014
$
12,359

�
$
211

�
$
12,570


�
Attributable to Costco
�
Noncontrolling
Interests
�
Total
Equity
Equity at September�1, 2013
$
10,833

�
$
179

�
$
11,012

Comprehensive income:
�
�
�
�
�
Net income
425

�
6

�
431

Foreign-currency translation adjustment and other, net
81

�
3

�
84

Comprehensive income
506

�
9

�
515

Stock-based compensation
112

�
0

�
112

Stock options exercised, including tax effects
8

�
0

�
8

Release of vested RSUs, including tax effects
(101
)
�
0

�
(101
)
Cash dividends declared
(137
)
�
0

�
(137
)
Equity at November�24, 2013
$
11,221

�
$
188

�
$
11,409

Note 6Stock-Based Compensation
The Sixth Restated 2002 Stock Incentive Plan (Sixth Plan) authorized the issuance of 16,000,000 shares (9,143,000 RSUs) of common stock for future grants. The Company issues new shares of common stock upon exercise of stock options and upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares equal to the minimum statutory withholding taxes.
Summary of Restricted Stock Unit Activity
At November�23, 2014, 3,992,000 shares were available to be granted as RSUs and the following awards were outstanding:
"
8,507,000 time-based RSUs that vest upon continued employment over specified periods of time;

13



Note 6Stock-Based Compensation (Continued)

"
255,000 performance-based RSUs granted to certain executive officers of the Company for which the performance targets have been met. Further restrictions lapse upon achievement of continued employment over specified periods of time; and
"
269,000 performance-based RSUs to be granted to executive officers of the Company upon achievement of performance targets for fiscal 2015, as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year. These awards are not included in the table below.
The following table summarizes RSU transactions during the first quarter of 2015:
�
Number�of
Units
(in�000s)
�
Weighted-Average
Grant Date Fair
Value
Outstanding at August�31, 2014
9,117

�
$
86.92

Granted
3,748

�
125.15

Vested and delivered
(4,066
)
�
87.25

Forfeited
(37
)
�
109.13

Outstanding at November�23, 2014
8,762

�
$
103.04

The remaining unrecognized compensation cost related to non-vested RSUs at November�23, 2014 was $865, and the weighted-average period of time over which this cost will be recognized is 1.9 years.
Summary of Stock-Based Compensation
The following table summarizes stock-based compensation expense and the related tax benefits under the Companys plans:
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
Stock-based compensation expense before income taxes
$
150

�
$
112

Less recognized income tax benefit
(51
)
�
(38
)
Stock-based compensation expense, net of income taxes
$
99

�
$
74


14

Note 7Net Income per Common and Common Equivalent Share
The following table shows the amounts used in computing net income per share and the effect on net income and the weighted average number of shares of potentially dilutive common shares outstanding (shares in 000s):
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
Net income available to common stockholders after assumed conversions of dilutive securities
$
496

�
$
425

Weighted average number of common shares used in basic net income per common share
438,760

�
437,970

RSUs and stock options
3,429

�
4,421

Conversion of convertible notes
21

�
29

Weighted average number of common shares and dilutive potential of common stock used in diluted net income per share
442,210

�
442,420

Note 8Commitments and Contingencies
Legal Proceedings
The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the end of the quarter, the Company has not recorded an accrual with respect to any matter described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot in our 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 the following matters, among others:
Numerous putative class actions have been brought around the United States against motor fuel retailers, including the Company, alleging that they have been overcharging consumers by selling gasoline or diesel that is warmer than�60 degrees without adjusting the volume sold to compensate for heat-related expansion or disclosing the effect of such expansion on the energy equivalent received by the consumer. The Company is named in the following actions: Raphael Sagalyn, et al., v. Chevron USA, Inc., et al., Case No.�07-430 (D. Md.); Phyllis Lerner, et al., v. Costco Wholesale Corporation, et al., Case No.�07-1216 (C.D. Cal.); Linda A. Williams, et al., v. BP Corporation North America, Inc., et al., Case No.�07-179 (M.D. Ala.); James Graham, et al. v. Chevron USA, Inc., et al., Civil Action No.�07-193 (E.D. Va.); Betty A. Delgado, et al., v. Allsups, Convenience Stores, Inc., et al., Case No.�07-202 (D.N.M.); Gary Kohut, et al. v. Chevron USA, Inc., et al., Case No.�07-285 (D. Nev.); Mark Rushing, et al., v. Alon USA, Inc., et al., Case No.�06-7621 (N.D. Cal.); James Vanderbilt, et al., v. BP Corporation North America, Inc., et al., Case No.�06-1052 (W.D. Mo.); Zachary Wilson, et al., v. Ampride, Inc., et al., Case No.�06-2582 (D.Kan.); Diane Foster, et al., v. BP North America Petroleum, Inc., et al., Case No.�07-02059 (W.D. Tenn.); Mara Redstone, et al., v. Chevron USA, Inc., et al., Case No.�07-20751 (S.D. Fla.); Fred Aguirre, et al. v. BP West Coast Products LLC, et al., Case No.�07-1534

15



Note 8Commitments and Contingencies (Continued)

(N.D. Cal.); J.C. Wash, et al., v. Chevron USA, Inc., et al.; Case No.�4:07cv37 (E.D. Mo.); Jonathan Charles Conlin, et al., v. Chevron USA, Inc., et al.; Case No.�07 0317 (M.D. Tenn.); William Barker, et al. v. Chevron USA, Inc., et al.; Case No.�07-cv-00293 (D.N.M.); Melissa J. Couch, et al. v. BP Products North America, Inc., et al., Case No.�07cv291 (E.D. Tex.); S. Garrett Cook, Jr., et al., v. Hess Corporation, et al., Case No.�07cv750 (M.D. Ala.); Jeff Jenkins, et al. v. Amoco Oil Company, et al., Case No.�07-cv-00661 (D. Utah); and Mark Wyatt, et al., v. B. P. America Corp., et al., Case No.�07-1754 (S.D. Cal.). On June�18, 2007, the Judicial Panel on Multidistrict Litigation assigned the action, entitled In re Motor Fuel Temperature Sales Practices Litigation, MDL Docket No 1840, to Judge Kathryn Vratil in the United States District Court for the District of Kansas. On April�12, 2009, the Company agreed to settle the actions in which it is named as a defendant. Under the settlement, which was subject to final approval by the court, the Company agreed, to the extent allowed by law and subject to other terms and conditions in the agreement, to install over five years from the effective date of the settlement temperature-correcting dispensers in the States of Alabama, Arizona, California, Florida, Georgia, Kentucky, Nevada, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Utah, and Virginia. Other than payments to class representatives, the settlement does not provide for cash payments to class members. On September�22, 2011, the court preliminarily approved a revised settlement, which did not materially alter the terms. On April�24, 2012, the court granted final approval of the revised settlement. A class member who objected has filed a notice of appeal from the order approving the settlement. Plaintiffs have moved for an award of $10 in attorneys fees, as well as an award of costs and payments to class representatives. The Company has opposed the motion. On March 20, 2014, the Company filed a notice invoking a most favored nation provision under the settlement, under which it seeks to adopt provisions in later settlements with certain other defendants, an invocation that class counsel has opposed.
On October�4, 2006, the Company received a grand jury subpoena from the United States Attorneys Office for the Central District of California, seeking records relating to the Companys receipt and handling of hazardous merchandise returned by Costco members and other records. The Company has entered into a tolling agreement with the United States Attorneys Office.
The Company has received notices from most states stating that they have appointed an agent to conduct an examination of the books and records of the Company to determine whether it has complied with state unclaimed property laws. In addition to seeking the turnover of unclaimed property subject to escheat laws, the states may seek interest, penalties, costs of examinations, and other relief. Certain states have separately also made requests for payment by the Company concerning a specific type of property.
The Company has received from the Drug Enforcement Administration subpoenas and administrative inspection warrants concerning the Company's fulfillment of prescriptions related to controlled substances and related practices. Offices of the United States Attorney in various districts have communicated to the Company their belief that the Company has committed civil regulatory violations concerning these subjects. The Company is seeking to cooperate with these processes.
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 Companys financial position; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter.

16

Note 9Segment Reporting
The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Australia, and Spain and through majority-owned subsidiaries in Taiwan and Korea. Reportable segments are largely based on managements 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 the same 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�31, 2014, and Note 1 above. All material inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, are incurred on behalf of the Company's Canadian and Other International Operations, but are included in the U.S. Operations because those costs are not allocated internally and generally come under the responsibility of the Company's U.S. management team.
�
United�States
Operations
�
Canadian
Operations
�
Other
International
Operations
�
Total
Twelve Weeks Ended November 23, 2014
�
�
�
�
�
�
�
Total revenue
$
19,181

�
$
4,231

�
$
3,454

�
$
26,866

Operating income
433

�
196

�
141

�
770

Depreciation and amortization
188

�
28

�
38

�
254

Additions to property and equipment
436

�
46

�
73

�
555

Net property and equipment
10,301

�
1,627

�
2,870

�
14,798

Total assets
23,318

�
5,009

�
6,286

�
34,613

Twelve Weeks Ended November 24, 2013
�
�
�
�
�
�
�
Total revenue
$
17,724

�
$
4,124

�
$
3,169

�
$
25,017

Operating income
364

�
189

�
115

�
668

Depreciation and amortization
170

�
28

�
33

�
231

Additions to property and equipment
385

�
67

�
122

�
574

Net property and equipment
9,855

�
1,667

�
2,732

�
14,254

Total assets
21,825

�
4,772

�
5,722

�
32,319

Year Ended August 31, 2014
�
�
�
�
�
�
�
Total revenue
$
80,477

�
$
17,943

�
$
14,220

�
$
112,640

Operating income
1,880

�
796

�
544

�
3,220

Depreciation and amortization
755

�
124

�
150

�
1,029

Additions to property and equipment
1,245

�
204

�
544

�
1,993

Net property and equipment
10,132

�
1,662

�
3,036

�
14,830

Total assets
21,929

�
4,892

�
6,203

�
33,024

�

17

Item�2Managements Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, and warehouse count data)
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section�27A of the Securities Act of 1933, and Section�21E of the Securities Exchange Act of 1934. They include statements that address activities, events, conditions or developments that we expect or anticipate may occur in the future and may relate to such matters as net sales growth, increases in comparable store sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, capital spending, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation, and the demand for our products and services. Forward-looking statements may also be identified by the words believe, project, expect, anticipate, estimate, intend, strategy, future, opportunity, plan, may, should, will, would, will be, will continue, will likely result, and similar expressions. Forward-looking statements involve risks and uncertainties that may cause actual events, results, or performance to differ materially from those indicated by such statements. These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real estate, actions of vendors, rising costs associated with employees (including health care costs), energy and certain commodities, geopolitical conditions, and other risks identified from time to time in the Company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements, except as required by law.
This management discussion should be read in conjunction with the management discussion included in our fiscal 2014 annual report on Form 10-K, previously filed with the SEC.
OVERVIEW
We operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories will produce high sales volumes and rapid turnover. This turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables us to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters.
We believe that the most important driver of increasing our profitability is sales growth, particularly comparable sales growth. We define comparable warehouse sales as sales from warehouses open for more than one year, including remodels, relocations and expansions, as well as online sales related to websites operating for more than one year. Comparable sales growth is achieved through increasing the shopping frequency from new and existing members and the amount they spend on each visit. Sales comparisons can also be particularly influenced by two factors that are beyond our control, including fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations) and changes in the cost of gasoline and associated competitive conditions (primarily impacting our U.S. and Canadian operations). The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term. Another substantial factor in sales growth is the health of the economies in which we do business, especially the United States. Sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, including a wide range of global, national and regional wholesalers and retailers, including supermarkets, supercenters, department and specialty stores, gasoline stations, and internet-based retailers.

18


Item�2Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) (amounts in millions, except per share, share, and warehouse count data)

While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and to our merchandise mix, including increasing the penetration of our private label items.
Our philosophy is to provide our members with quality goods and services at the most competitive prices. We do not focus in the short term on maximizing prices that our members can be charged, but instead seek to maintain what we believe is a perception among our members of our pricing authority  consistently providing the most competitive values. Our investments in merchandise pricing can, from time to time, include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, all negatively impacting near-term gross margin as a percentage of sales. We believe that our gasoline business draws members to our warehouses, but it has a significantly lower gross margin as a percentage of net sales relative to our non-gasoline business. A higher penetration of gasoline sales will generally lower our gross margin as a percentage of net sales.
We also achieve sales growth by opening new warehouses. As our warehouse base grows, available and desirable potential sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The negative aspects of such growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are increasingly less significant relative to the results of our total operations. Our rate of square footage growth is higher in foreign markets, due to the smaller base in those markets, and we expect that to continue.
Our membership format is an integral part of our business model and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase penetration of our Executive members, and sustain high renewal rates materially influences our profitability.
Our financial performance also depends heavily on our ability to control costs. While we believe that we have achieved successes in this area historically, some significant costs are partially outside our control, most particularly health care and utility expenses. With respect to expenses relating to the compensation of our employees, our philosophy is not to seek to minimize the wages and benefits that they earn. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business is operated on very low margins, modest changes in various items in the income statement, particularly gross margin and selling, general and administrative expenses, can have substantial impacts on net income.
Our operating model is generally the same across our U.S., Canada, and Other International operating segments (see Part I, Item 1, Note 9 of this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and benefit costs as a percentage of country sales, and/or less or no direct membership warehouse competition. Additionally, we operate our lower-margin gasoline business in the U.S., Canada, Australia, and U.K.
In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are references to the differences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies into U.S. dollars for financial reporting purposes. This impact of foreign-exchange rate changes is calculated based on the difference between the current period's currency exchange rates and the comparable prior-year period's currency exchange rates.
Our fiscal year ends on the Sunday closest to August�31. References to the first quarters of 2015 and 2014 relate to the twelve-week fiscal quarters ended November�23, 2014, and November�24, 2013, respectively.

19


Item�2Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) (amounts in millions, except per share, share, and warehouse count data)

Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise noted, references to net income relate to net income attributable to Costco.
Key items for the first quarter of 2015 as compared to the first quarter of 2014 include:
"
We opened eight new warehouses, six in the U.S. and two in our Other International segment, compared to 13 new warehouses in the first quarter of 2014;
"
Net sales increased 7% to $26,284, driven by a 5% increase in comparable sales and sales at warehouses opened in 2014 and 2015. Net and comparable sales were negatively impacted by changes in certain foreign currencies relative to the U.S. dollar and by decreases in the price of gasoline;
"
Membership fees increased 6% to $582, primarily due to membership sign-ups at existing and new warehouses and increased penetration of our higher-fee Executive Membership program;
"
Gross margin (net sales less merchandise costs) as a percentage of net sales increased 22 basis points, primarily due to our gasoline business;
"
Selling, general and administrative (SG&A) expenses as a percentage of net sales increased four basis points;
"
Net income increased 17% to $496, or $1.12 per diluted share compared to $425, or $0.96 per diluted share in 2014;
"
Changes in foreign currencies relative to the U.S. dollar adversely impacted diluted earnings per share by $0.04, primarily due to changes in the Canadian dollar; and
"
On October 28, 2014, our Board of Directors declared a quarterly cash dividend in the amount of $0.355 per share, which was paid subsequent to the end of the first quarter.

20


Item�2Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) (amounts in millions, except per share, share, and warehouse count data)

RESULTS OF OPERATIONS
Net Sales
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
Net Sales
$
26,284

�
$
24,468

Increases in net sales:
�
�
�
U.S.
8
%
�
5
%
International
5
%
�
7
%
Total Company
7
%
�
5
%
Increases in comparable warehouse sales:
�
�
�
U.S.
6
%
�
3
%
International
1
%
�
1
%
Total Company
5
%
�
3
%
Increases in comparable warehouse sales excluding the impact of gasoline price and foreign currency changes:
�
�
�
U.S.
7
%
�
4
%
International
7
%
�
6
%
Total Company
7
%
�
5
%
Net Sales
Net Sales increased $1,816 or 7% during the first quarter of 2015 compared to the first quarter of 2014. This was attributable to a 5% increase in comparable warehouse sales in the first quarter and sales at the 25 net new warehouses opened since the end of the first quarter of fiscal 2014.
During the first quarter, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $412, or 168 basis points, compared to the first quarter of 2014. The negative impact was primarily due to the Canadian dollar (approximately $314). Changes in gasoline prices negatively impacted net sales by approximately $203, or 83 basis points, due to a 7% decrease in the average sales price per gallon.
Comparable Sales
Comparable sales increased 5% in the first quarter and were positively impacted primarily by an increase in shopping frequency. Changes in foreign currencies relative to the U.S. dollar and gasoline prices negatively impacted comparable sales results, including the average amount spent by our members. In local currencies, International comparable sales increased 7%, 8% in Canada and 4% in our Other International segment. The increase in comparable sales also includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations), which this quarter occurred primarily in our Other International operations.

21


Item�2Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) (amounts in millions, except per share, share, and warehouse count data)

Membership Fees
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
Membership fees
$
582

�
$
549

Membership fees as a percentage of net sales
2.21
%
�
2.24
%
Total paid cardholders (000's)
42,500

�
39,800

Total cardholders (000's)
77,500

�
72,500

Membership fees increased 6% in the first quarter of 2015. This was primarily due to membership sign-ups at existing and new warehouses and increased penetration of our higher-fee Executive Membership program. Changes in foreign currencies relative to the U.S. dollar negatively impacted membership fees by approximately $10 for the first quarter of 2015. Our member renewal rates are currently 91% in the U.S. and Canada and 87% worldwide.
Gross Margin
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
Net sales
$
26,284

�
$
24,468

Less merchandise costs
23,385

�
21,824

Gross margin
$
2,899

�
$
2,644

Gross margin as a percentage of net sales
11.03
%
�
10.81
%

During the first quarter of 2015, the gross margin of our combined core merchandise categories (food and sundries, hardlines, softlines and fresh foods) decreased two basis points, primarily due to margin declines in hardlines and fresh foods. This measure, core merchandise gross margin stated as a percentage of their sales (rather than total net sales), eliminates the impact of changes in sales penetration and in gross margins in ancillary and other business categories.
Gross margin as a percentage of total net sales increased 22 basis points compared to the first quarter of 2014. We experienced significant gasoline price deflation in the quarter as compared to the prior year, which improved gross margin as a percentage of net sales because the deflation reduced the sales penetration of our gasoline business. Excluding the impact of this deflation, gross margin as a percentage of adjusted net sales increased 14 basis points due to: an increase in our warehouse ancillary and other business gross margin (primarily our gasoline business) contributed 20 basis points; a non-recurring legal settlement contributed seven basis points; partially offset by a negative contribution from core merchandise categories of 13 basis points, due to the lower sales penetration of these categories. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by $47 in the first quarter of 2015.
Gross margin on a segment basis, when expressed as a percentage of the segments own sales (segment gross margin percentage), increased in our U.S. operations, primarily due to our gasoline business. The segment gross margin percentage in our Canadian operations decreased primarily due to hardlines and fresh foods. The segment gross margin percentage in our Other International segment increased, primarily due to softlines.

22


Item�2Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) (amounts in millions, except per share, share, and warehouse count data)

Selling, General and Administrative Expenses
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
SG&A expenses
$
2,696

�
$
2,501

SG&A expenses as a percentage of net sales
10.26
%
�
10.22
%
SG&A expenses as a percentage of net sales increased four basis points compared to the first quarter of 2014. Excluding the effect of gasoline price deflation on net sales, SG&A expenses as a percentage of adjusted net sales was 10.18%, an improvement of four basis points as compared to the first quarter of 2014. This was due to lower warehouse operating costs of sixteen basis points, primarily as a result of leveraging payroll in our U.S. and Canadian operations through increased sales. This improvement was partially offset by higher stock compensation expense of 11 basis points due to the appreciation in the trading price of our stock and early vesting for long service. Central operating costs were higher by one basis point due to continued investment in modernizing our information systems, primarily incurred by our U.S. operations. Changes in foreign currencies relative to the U.S. dollar decreased our SG&A expenses by $35 in the first quarter of 2015.
Preopening Expense
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
Preopening expenses
$
15

�
$
24

Warehouse openings, including relocations
�
�
�
United States(1)
7

�
9

Canada
0

�
1

Other International
2

�
3

Total warehouse openings, including relocations
9

�
13

�_______________
(1)
Includes one relocation in the first quarter of 2015.
Preopening expenses include costs for startup operations related to new warehouses, development in new international markets, and expansions at existing warehouses. Preopening expenses vary due to the number of warehouse openings, the timing of the opening relative to our quarter-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new, or international market.
Interest Expense
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
Interest expense
$
26

�
$
27

Interest expense is primarily related to the $1,100 of 5.5% Senior Notes issued in fiscal 2007 and the $3,500 of Senior Notes issued in December 2012.

23


Item�2Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) (amounts in millions, except per share, share, and warehouse count data)

Interest Income and Other, Net
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
Interest income
$
13

�
$
12

Foreign-currency transaction gains, net
21

�
3

Other, net
1

�
3

Interest income and other, net
$
35

�
$
18

The increase in net foreign-currency transaction gains in the first quarter of 2015 was attributable to the favorable impact of mark-to-market adjustments for forward foreign exchange contracts as the U.S. dollar strengthened in certain international locations compared to the prior year. This increase was partially offset by the revaluation or settlement of monetary assets and liabilities during the quarter. See Derivatives and Foreign Currency sections in Part I, Item I, Note 1 of this report.
Provision for Income Taxes
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
Provision for income taxes
$
274

�
$
228

Effective tax rate
35.2
%
�
34.6
%
The increase in the effective tax rate for the first quarter of 2015 was due to immaterial discrete net tax charges compared to immaterial discrete net tax benefits in the first quarter of 2014.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash equivalents:
�
12 Weeks Ended
�
November�23,
2014
�
November�24,
2013
Net cash provided by operating activities
$
1,128

�
$
939

Net cash used in investing activities
(653
)
�
(826
)
Net cash used in financing activities
(108
)
�
(71
)
Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash equivalents, and short-term investment balances. Cash and cash equivalents and short-term investments were $7,619 and $7,315 at November 23, 2014, and August 31, 2014, respectively. Of these balances, approximately $1,500 and $1,383 represented debit and credit card receivables at the end of the first quarter of 2015 and of fiscal year 2014, respectively, primarily related to sales within the last week of our fiscal quarter or fiscal year.
In 2014, we changed our position regarding a portion of the undistributed earnings of our Canadian operations, which is no longer considered permanently reinvested. This change resulted in an immaterial U.S. tax liability, which was recorded in 2014.
Management believes that our cash position and operating cash flows will be sufficient to meet our capital requirements for the foreseeable future. We have not provided for U.S. deferred taxes on cumulative

24


Item�2Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) (amounts in millions, except per share, share, and warehouse count data)

undistributed earnings of certain non-U.S. consolidated subsidiaries as we deem such earnings to be indefinitely reinvested. This includes the remaining undistributed earnings of our Canadian operations that management maintains are indefinitely reinvested. We believe that our U.S. current and projected asset position is sufficient to meet our U.S. liquidity requirements and have no current plans to repatriate for use in the U.S. cash and cash equivalents and short-term investments held by these non-U.S. consolidated subsidiaries.�Cash and cash equivalents and short-term investments held at these subsidiaries and considered to be indefinitely reinvested totaled $1,965 at November�23, 2014.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $1,128 in the first quarter of 2015, compared to $939 in the first quarter of 2014. Our cash flow provided by operations is primarily derived from net sales and membership fees. Our cash flow used in operations generally consists of payments to our merchandise vendors, warehouse operating costs including payroll and employee benefits, credit card processing fees, and utilities. Cash used in operations also includes payments for income taxes.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $653 in the first quarter of 2015 compared to $826 in the first quarter of 2014. Our cash flow used in investing activities is primarily related to funding our warehouse expansion and remodeling activities. Net cash flows from investing activities also includes purchases and maturities of short-term investments.
Capital Expenditure Plans
We opened eight new warehouses and relocated one warehouse in the first quarter of 2015. For the remainder of fiscal 2015, we plan to open up to 25 additional warehouses, including the relocation of two warehouses. Our primary requirement for capital is the financing of land, buildings, and equipment for new and remodeled warehouses. To a lesser extent, capital is required for initial warehouse operations, the modernization of our information systems, and working capital. In the first quarter of 2015, we spent approximately $555, and it is our current intention to spend approximately $2,500 to $2,600 during fiscal 2015. These expenditures are expected to be financed with cash to be provided from operations, existing cash and cash equivalents, and short-term investments. There can be no assurance that current expectations will be realized and plans are subject to change upon further review of our capital expenditure needs.
Cash Flows from Financing Activities
Net cash used in financing activities totaled $108 in the first quarter of 2015 compared to $71 used in the first quarter of 2014. Cash flow used in financing activities primarily related to withholding tax payments on stock-based awards.
Stock Repurchase Programs
During the first quarter of 2015, we repurchased 139,000 shares of common stock, at an average price of $126.43, totaling approximately $18. There were no stock repurchases in the first quarter of 2014. The remaining amount available for stock repurchases under our approved plan was $2,703 at November�23, 2014. 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. Repurchased shares are retired, in accordance with the Washington Business Corporation Act.

25


Item�2Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) (amounts in millions, except per share, share, and warehouse count data)

Dividends
Our current quarterly cash dividend rate is $0.355 per share, or $1.42 per share on an annualized basis. On October�28, 2014, our Board of Directors declared a quarterly cash dividend of $0.355 per share payable to shareholders of record on November�14, 2014. The dividend was paid on November�28, 2014.
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate purposes. As of November 23, 2014, we had total borrowing capacity within these facilities of $425, of which $355 was maintained by our international operations. Of the $355, $162 is guaranteed by the Company.�There were $34 outstanding short-term borrowings under the bank credit facilities at the end of the first quarter of 2015, and none at the end of 2014.
The Company has letter of credit facilities, for commercial and stand-by letters of credit, totaling $150. The outstanding commitments under these facilities at the end of the first quarter of 2015 totaled $94, including $90 in stand-by letters of credit with expiration dates within one year. The bank credit facilities have various expiration dates, all within one year, and we generally intend to renew these facilities prior to their expiration. The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercial letters of credit then outstanding.
Contractual Obligations
As of the date of this report, there were no material changes to our contractual obligations outside the ordinary course of business since the end of our last fiscal year.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires that we make estimates and judgments. We base our estimates and judgments on historical experience and on assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Part II, Item�7, Managements Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K, for the fiscal year ended August�31, 2014. There have been no material changes to the critical accounting policies previously disclosed in that report.
Recent Accounting Pronouncements
See discussion of Recent Accounting Pronouncements in Note 1 to the condensed consolidated financial statements included in Part I, Item�1 of this Report.
Item 3Quantitative and Qualitative Disclosures About Market Risk
Our direct exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K, for the fiscal year ended August�31, 2014.

26

Item 4Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures are effective.
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART IIOTHER INFORMATION
Item�1Legal Proceedings
See discussion of Legal Proceedings in Note 8 to the condensed consolidated financial statements included in Part I, Item�1 of this Report.
Item�1ARisk Factors
In addition to the other information set forth in the Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K, for the fiscal year ended August�31, 2014. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K.
Item�2Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information on our common stock repurchase program activity for the first quarter of fiscal 2015 (amounts in millions, except share and per share data):
Period
Total Number of Shares Purchased
�
Average Price Paid Per Share
�
Total Number of Shares Purchased as Part of Publicly Announced Programs(1)
�
Maximum Dollar Value of Shares that May Yet be Purchased Under the Programs(1)
September 1, 2014 - September 28, 2014
0

�
$
0

�
0

�
$
2,721

September 29, 2014 - October 26, 2014
139,000

�
126.43

�
139,000

�
2,703

October 27, 2014 - November 23, 2014
0

�
0

�
0

�
2,703

Total first quarter
139,000

�
$
126.43

�
139,000

�
�
�_______________
(1)
Our stock repurchase program is conducted under a $4,000 authorization of our Board of Directors approved in April 2011, which expires in April 2015.
Item�3Defaults Upon Senior Securities
None.
Item�4Mine Safety Disclosures
Not applicable.
Item�5Other Information
None.

27

Item�6Exhibits
The following exhibits are filed as part of this Quarterly Report on Form 10-Q or are incorporated herein by reference.�
�
�
�
�
�
�
Incorporated by Reference
Exhibit
Number
�
Exhibit�Description
�
Filed
Herewith
�
Form
�
Period�Ending
�
Filing�Date
�
�
�
�
�
�
�
�
�
�
�
3.1
�
Articles of Incorporation of the registrant
�
�
�
8-K
�
�
�
8/30/1999
�
�
�
�
�
�
�
�
�
�
�
3.2
�
Bylaws of the registrant
�
�
�
8-K
�
�
�
8/24/2010
�
�
�
�
�
�
�
�
�
�
�
10.1.8*
�
Sixth Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-Employee
�
x
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
10.1.9*
�
Sixth Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-Non-Executive Director
�
x
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
10.1.10*
�
Sixth Restated 2002 Stock Incentive Plan Letter Agreement for 2015 Performance-Based Restricted Stock Units-Executive
�
x
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
10.6.2*
�
Fiscal 2015 Executive Bonus Plan
�
�
�
8-K
�
�
�
10/29/2014
�
�
�
�
�
�
�
�
�
�
�
10.6.3*
�
Executive Employment Agreement between W. Craig Jelinek and Costco Wholesale Corporation
�
�
�
8-K
�
�
�
11/28/2014
�
�
�
�
�
�
�
�
�
�
�
31.1
�
Rule 13(a) - 14(a) Certifications
�
x
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
32.1
�
Section 1350 Certifications
�
x
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
101.INS
�
XBRL Instance Document
�
x
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
101.SCH
�
XBRL Taxonomy Extension Schema Document
�
x
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
101.CAL
�
XBRL Taxonomy Extension Calculation Linkbase Document
�
x
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
101.DEF
�
XBRL Taxonomy Extension Definition Linkbase Document
�
x
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
101.LAB
�
XBRL Taxonomy Extension Label Linkbase Document
�
x
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
101.PRE
�
XBRL Taxonomy Extension Presentation Linkbase Document
�
x
�
�
�
�
�
�
______________
* Management contract, compensatory plan or arrangement.


28

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

�
COSTCO�WHOLESALE�CORPORATION
(Registrant)
�
�
�
December�18, 2014
By
�
/s/ W. CRAIG�JELINEK
Date
�
�
W. Craig Jelinek
President, Chief Executive Officer and Director
�
�
�
�
December�18, 2014
By
�
/s/ RICHARD�A. GALANTI
Date
�
�
Richard�A. Galanti
Executive Vice President, Chief Financial Officer and Director

29
Exhibit 10.1.8

COSTCO WHOLESALE CORPORATION
RESTRICTED STOCK UNIT AWARD AGREEMENT
1.
Grant of Stock Units. You are hereby granted Employee Stock Units covering the number of shares of Costco Wholesale Corp. common stock (the Shares) specified in the Grant Detail made available electronically in connection with the grant (the Detail). By accepting this grant, the Employee acknowledges and agrees that it is subject to the terms and conditions of this Agreement and of the Costco Wholesale Corporation Sixth Restated 2002 Stock Incentive Plan (the "Plan"), which is incorporated here by reference and a copy of which can be found on the Company's internal website or obtained through the Financial Planning Department.
2.
Vesting Schedule and Delivery of Shares.
(a) The Stock Units are not Shares; they will be converted into shares when the Stock Units are settled after vesting. Any Stock Units that have not vested under the Detail or this Agreement shall be forfeited. Generally, Stock Units will settle and be issued as Shares on the anniversary of the grant date under the schedule set forth in the Detail. You will receive the Shares within 10 business days of the vesting date. Fractional shares will be rounded down to the nearest whole number. A portion of your Shares will be withheld to cover taxes.
(b) Active employees who attain 25 or more years of service shall qualify for accelerated vesting: one-third of the then unvested Stock Units for 25 or more years of service; two-thirds of the newly granted Stock Units for 30 or more years of service or one-half of the then unvested Stock Units for those grants which have already received the accelerated vesting related to the 25 years of service; and all of the newly granted or then unvested Stock Units for 35 or more years of service. Long-service periods required for accelerated vesting require continuous years of service. Following this accelerated vesting, unvested Stock Units shall vest on a pro rata basis over the remaining term of the grant at the dates set forth in the Detail. For example:
If you receive on October 22 a grant of 6,000 Stock Units with a five-year vesting schedule and attain 25 years of service on the following April 15, at the next October 22 you will vest as to 1,200 Stock Units for the normal annual vesting (one-fifth times 6,000) and as to an additional 1,600 Stock Units due to years of service (6,000 minus 1,200 times one-third).
If you receive the same grant of 6,000 Stock Units with a five-year vesting schedule and had attained 25 years of service prior to the October 22 grant date, you would receive 2,000 Stock Units (6,000 times one-third) on the date of grant. If on the following April 15, you attained 30 years of service, then on the following October 22, you would receive 800 Stock Units for the normal annual vesting (6,000 minus 2,000 times one-fifth), and an additional 1,600 Stock Units due to years of service (6,000 minus 2,800 times one-half).
(c) If your employment is terminated other than for cause, you will vest in additional Stock Units as set forth below. For purposes of this subparagraph (c), the quarterly dates are: January 22; April 22; and July 22.
i. Except in the case of years when a new accelerated vesting threshold (25, 30, or 35 years of service) is or would be reached, for each complete quarter that has passed since the anniversary of the grant date you will vest in 25% of the Stock Units that were scheduled to vest during that grant year. For example, if you receive a grant on October 22 of 6,000 Stock Units with a five-year vesting schedule and you terminate on the next April 23 (two quarters later) you will vest as to 600 Stock Units (one-fifth times 6,000 times two-fourths). You will receive shares within 90 days of termination but no later than the vesting date on the grant anniversary.
ii. If you terminate after the grant date and have by the end of the immediately preceding calendar quarterly vesting date attained the required years of service, you will receive the pro rata number of Shares that have vested under the normal annual vesting and the Shares that you have qualified for based on accelerated vesting within 90 days of your termination, but no later than the vesting date on the grant anniversary. If under the example above you had received a grant of 6,000 Stock Units and had already attained 25 years of service prior to the date of grant, attained 30 years of service on the following April



15, and terminated on August 30, you would receive 600 Stock Units as a result of your pro rata number of shares from normal annual vesting (6,000 minus 2,000 times one-fifth times three-fourths), and an additional 1,700 Stock Units due to years of service (6,000 minus 2,600 times one-half).
iii. If you terminate before the end of the first quarterly date (January 22), you will not vest in any otherwise unvested shares. For example, if you receive a grant on October 22 of 6,000 Stock Units with a five-year vesting schedule and you attain 25-years of service on December 1, and you terminate on December 2, you would not receive any Stock Units from that award.
For purposes of this section 2(c), you will be treated as continuing in employment for a number of days following Termination as defined in Section 8(e) equal to the number of days of accrued vacation you have earned as of the date of your Termination, but no more than a maximum of six weeks (30 business days). If an anniversary of the grant date occurs during the accrued vacation period, you will vest and be paid on the anniversary date of the grant pursuant to section 2(a) and (b) above. This section 2(c) is subject in all events to the provision in section 3 requiring payment to be made within the short-term deferral period under Internal Revenue Code section 409A.
(d) Accelerated vesting also will occur at death. That vesting will be 100% if you were an officer at the Assistant Vice President level or above or if you have ten or more years of service. Otherwise, that vesting will be 50% (after giving credit for the quarterly vesting applied for terminations). Shares will be distributed within 90 days of death.
(e) No further vesting (including without limitation any accelerated vesting) shall occur if you are terminated for cause. Vesting shall continue during a leave of absence; provided, however, that the Administrator has the discretion to cancel Stock Units or forfeit vesting in connection with a leave of absence. No continued vesting, or Administrator action taken in connection with vesting, during a leave shall have the effect of creating a deferral of compensation for purposes of section 409A.
(f) If you voluntarily or involuntarily experience a change to employment status or to a position in the Company that is not eligible for a Stock Unit Grant or is eligible for a lesser number of Stock Units, except as otherwise determined by the Administrator, vesting shall cease at the time of such change or occur at the lesser number associated with the new position; in connection with the change in status or position, at the anniversary of the grant you will vest at your prior position award level based on the number of full quarters of service since the prior grant date anniversary achieved at that position prior to the change in status.
3.
Section 409A. This Stock Unit Agreement is intended to be exempt from section 409A as a short-term deferral, and the payment dates provided for in section 2 shall in all events occur within the short-term deferral period provided for in section 409A. Should a deferral of compensation nonetheless occur, the Agreement will be interpreted in a manner that complies with section 409A, including the six-month delay applicable to specified employees.
4.
No Shareholder Rights. Stock Units represent hypothetical shares of Stock. Until the Stock Units vest and Shares are issued, you shall not be entitled to any of the rights or benefits generally accorded to shareholders. Unless otherwise determined by the Administrator, delivery of Shares must be effected by book-entry credit to a custody account (the "Custody Account") maintained by you with a Custodian designated by the Company. You shall be the beneficial owner of any Shares properly credited to the Custody Account. You shall have no right to any dividend or distribution or vote or other shareholder rights with respect to such Shares if the record date is prior to the date the Custody Account is properly credited with the Shares.
5.
Taxes.
(a) For tax and withholding purposes, the value of any Shares issued shall be determined based on the closing stock price on the date of vesting, regardless of when the Shares are actually credited to a Custody Account. You shall be liable for any and all taxes, including (without limitation) withholding taxes, interest or penalties arising out of this grant, the vesting of Stock Units, any violation of section 409A that impacts this Stock Unit, or the transfer of Shares or other property in settlement of the Stock Units. In the event that the Company or the Employer (as defined below) is required to withhold taxes as a result of the grant



or vesting of Stock Units, the transfer of Shares or other property in settlement of the Stock Units, or any subsequent sale of Shares issued in settlement of such Stock Units, you shall surrender a sufficient number of whole Shares as necessary to cover all required withholding taxes and required social security contributions at the time the restrictions on the Stock Units lapse. To the extent that any surrender of Shares for payment is insufficient, you authorize the Company and its Affiliates, which are qualified to deduct tax at source, to deduct all applicable required withholding taxes and social security contributions from your compensation. You agree to pay any amounts that cannot be satisfied from wages or other cash compensation, to the extent permitted by law.
(b) Regardless of any action the Company or the Employee's employer (the "Employer") takes with respect to any or all income tax, social security, payroll tax, payment on account, other tax-related withholding or information reporting ("Tax-Related Items"), the Employee acknowledges and agrees that the ultimate liability for all Tax-Related Items legally due by Employee is and remains the Employee's responsibility and that the Company and the Employer: (i) make no representations nor undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of this grant of Stock Units, including the vesting of Stock Units, subsequent payment of Shares related to such Stock Units or the subsequent sale of any Shares acquired pursuant to such Stock Units; and (ii) do not commit to structure the terms or any aspect of this grant of Stock Units to reduce or eliminate the Employee's liability for Tax-Related Items. The Company may refuse to deliver Shares if the Employee fails to comply with the Employee's obligations in connection with the Tax-Related Items.
6.
Data Privacy Consent. The Employee consents, to the extent applicable law requires consent, to the collection, use and transfer, in electronic or other form, of the Employee's personal data by and among, as applicable, the Company and its Affiliates for the exclusive purpose of administering the Employee's participation in the Plan. The Employee understands that the Company, the Employer and their Affiliates hold certain personal information about the Employee, including name, home address and telephone number, date of birth, social security or insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company or by the Employer, details of all options or any other entitlement to shares of stock awarded, canceled, purchased, exercised, vested, unvested or outstanding in the Employee's favor for the purpose of administering the Plan ("Data"). The Employee understands that the Data may be transferred to third parties assisting in the administration of the Plan, that these recipients may be located in the Employee's country or elsewhere and that the recipient country may have different data privacy laws and protections than the Employee's country. The Employee may request a list with the names and addresses of any potential recipients of the Data, request information as to the nature of the Data provided to other parties, and withdraw the consent contained in this section, all by contacting the Financial Planning Department, and understands that refusing or withdrawing consent may affect his ability to participate in the Plan.
7.
Plan Information. The Employee acknowledges receipt of copies of the Plan and the Plan prospectus from the Company and agrees to receive shareholder information, including copies of any annual report, proxy statement and periodic report, from the investor relations section of the Company's website at http://www.costco.com. The Employee acknowledges that copies of the Plan, Plan prospectus, Plan information and shareholder information are also available upon written or telephonic request to the Financial Planning Department, 999 Lake Drive, Issaquah, WA 98027. If the Employee has received this or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control.
8.
Acknowledgment and Waiver. Employee agrees that:
(a) the Plan is discretionary in nature and may be modified, amended, suspended or terminated by the Company at any time unless otherwise provided in the Plan or this Agreement; and that the grant of Stock Units is discretionary and does not create any contractual or other right to receive future grants of Awards or other benefits in lieu of Awards, even if Awards have been granted repeatedly in the past;
(b) the Employee's participation in the Plan shall not create a right to further employment with the Company, does not create an employment contract with the Company, and shall not interfere with the ability of the Company to terminate the Employee's employment relationship at any time, with or without cause, and it is expressly agreed and understood that employment is terminable at the will of either party, insofar as permitted by law;



(c) the Stock Units and resulting benefits are an extraordinary item that is outside the scope of the Employee's employment contract, if any, and are not part of normal or expected compensation or salary for any purposes, including for purposes of calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments insofar as permitted by law;
(d) the future value of the Shares is unknown, may increase or decrease from the date of grant or vesting of the Stock Unit and cannot be predicted with certainty. No claim or entitlement to compensation or damages shall arise from termination of this grant of Stock Units or diminution in value of this grant of Stock Units resulting from changes in the value of the Companys stock or the Employee's Termination by the Company (for any reason whatsoever and whether or not in breach of local labor laws) and the Employee irrevocably releases the Company from, and agrees not to pursue against the Company, any such claim that may arise; and
(e) upon the Employees Termination (whether or not such Termination constitutes a breach of local labor laws), the Employee's right to receive benefits shall be only as set forth in this Agreement; his Termination shall be effective at the date reasonably anticipated by the Company and the Employee that the Employee will no longer be employed at a level equal to or greater than 21% of his average level of services over the immediately preceding thirty-six month period. Employees Termination will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of "garden leave" or similar period pursuant to local law); and the Company shall have the exclusive discretion to determine when the Employee is no longer actively employed for purposes of this grant of Stock Units.
9.
Miscellaneous.
(a) Stock Units shall not be sold, encumbered, pledged or otherwise disposed of, whether voluntarily or by operation of law. The Company shall not be required to treat as the owner of Stock Units, or associated benefits hereunder, any transferee to whom such Stock Units or benefits shall have been so transferred in violation of this Agreement.
(b) The parties agree to execute such further instruments and to take such action as may reasonably be necessary to carry out the intent of this Agreement.
(c) Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon delivery to the Employee at the Employee's address then on file with the Company.
(d) The Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Employee with respect to that subject matter and may not be modified adversely to the Employee's interest except by means of a writing signed by the Company and the Employee. This Agreement is governed by the laws of the State of Washington. In the event of any conflict between the terms and provisions of the Plan and this Agreement, the Plan terms and provisions shall govern (subject to section 9(e)). Capitalized terms used but not defined in this Agreement have the meanings assigned to them in the Plan. Certain other important terms governing this contract are contained in the Plan. If issues of interpretation arise under this Agreement, the judgment of the Administrator shall be final.
(e) To the extent the Company determines that this Agreement is subject to section 409A, but does not conform with the requirements thereof, the Company may at its sole discretion amend or replace the Agreement to cause the Agreement to comply with section 409A.
(f) The provisions of this Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
PLEASE RETAIN THIS AGREEMENT FOR YOUR RECORDS
Oct 2014 rev.



Exhibit 10.1.9

COSTCO WHOLESALE CORPORATION
RESTRICTED STOCK UNIT AWARD AGREEMENT

1.
Grant of Stock Units. You are hereby granted Non-Executive Director Stock Units covering the number of shares of Costco Wholesale Corp. common stock (the Shares) specified in the Grant Detail made available electronically in connection with the grant (the Detail). This grant is subject to the terms and conditions of this Agreement and of the Costco Wholesale Corporation Sixth Restated 2002 Stock Incentive Plan (the "Plan"), a copy of which can be obtained through the Financial Planning Department.
2.
Vesting Schedule and Delivery of Shares.
(a) The Stock Units are not Shares; they will be converted into Shares when the Stock Units vest. Generally, your Stock Units will vest into Shares on the schedule set forth in the Notice, and you will receive the Shares within ten business days of the vest date. Any Stock Units that have not vested under the Detail or this Agreement shall be forfeited. Fractional shares will be rounded down to the nearest whole number.
(b) Directors who terminate from service will receive daily vesting of Stock Units. For each day that has passed since the anniversary of your grant date you will vest in 1/365th of the Stock Units that were scheduled to vest that grant year. For example, if you receive a grant on October 22 of 2,400 Stock Units with a three-year vesting schedule and you terminate on the next April 23 (182 days later), you will vest as to 398 Stock Units (one-third times 2,4000 times [182/365]). You will receive shares within 90 days of termination.
(c) Directors who terminate from service after five or more years of service on the Board of Directors shall qualify for accelerated vesting on termination. Should you terminate after five years of service on the Board of Directors, 50% of the Stock Units that would otherwise be unvested at your termination date shall vest on termination. Should you terminate after ten years of service on the Board of Directors, 100% of the Stock Units that would otherwise be unvested at your termination date shall vest on termination. You will receive shares within 90 days of termination.
(d) Accelerated vesting also will occur at death. In the event of your death, you will vest in 100% of the otherwise unvested Stock Units. Shares will be distributed within 90 days of death.
3.
No Shareholder Rights. Stock Units represent hypothetical shares of Stock. Until the Stock Units vest, you shall not be entitled to any of the rights or benefits generally accorded to shareholders. Unless otherwise determined by the Administrator, delivery of Shares shall be effected by book-entry credit to a custody account (the "Custody Account") maintained by you with a Custodian designated by the Company. No delivery of Shares shall be made unless a Custody Account has been established for you. You shall be the beneficial owner of any Shares properly credited to the Custody Account. You shall have no right to any dividend or distribution or vote or other shareholder rights with respect to such Shares if the record date for such event is prior to the date the Custody Account is properly credited with such Shares.
4.
Taxes.
(a) For tax reporting and withholding purposes, the value of any Shares issued shall be determined based on the closing stock price on the date of vesting regardless of when the Shares are actually credited to a Custody Account. The Director shall be liable for any and all taxes, including withholding taxes, interest or penalties arising out of this grant, the vesting of Stock Units hereunder, or the transfer of Shares or other property in settlement of the Stock Units. In the event that the Company is required to withhold taxes as a result of the grant or vesting of Stock Units, the transfer of Shares or other property in settlement of the Stock Units, or any subsequent sale of Shares issued in settlement of such Stock Units, the Director shall surrender a sufficient number of whole Shares as necessary to cover all required withholding taxes and required social security contributions at the time the restrictions on the Stock Units lapse, unless alternative procedures for payment are established prior to the applicable vesting date by the Company. The Company has no obligation to provide for alternative procedures. To the extent that any surrender of Shares or payment of cash or alternative procedure for such payment is insufficient, the Director authorizes the Company and its Affiliates, which are qualified to deduct tax at source, to deduct all applicable required withholding taxes and social security contributions from the Directors compensation



unless the Director has made other arrangements to pay cash for such excess withholding obligation. The Director agrees to pay any amounts that cannot be satisfied from other cash compensation, to the extent permitted by law.
(b) Regardless of any action the Company takes with respect to any or all income tax, social security, payroll tax, payment on account, other tax-related withholding or information reporting ("Tax-Related Items"), the Director acknowledges and agrees that the ultimate liability for all Tax-Related Items legally due by him or her is and remains the Directors responsibility and that the Company: (i) make no representations nor undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of this grant of Stock Units, including the vesting of Stock Units, subsequent payment of Shares and/or cash related to such Stock Units or the subsequent sale of any Shares acquired pursuant to such Stock Units; and (ii) does not commit to structure the terms or any aspect of this grant of Stock Units to reduce or eliminate the Directors liability for Tax-Related Items. The Director shall pay the Company any amount of Tax-Related Items that the Company may be required to withhold as a result of the Directors participation in the Plan or the Directors receipt of Stock Units that cannot be satisfied by the means previously described. The Company may refuse to deliver Shares if the Director fails to comply with the Directors obligations in connection with the Tax-Related Items.
5.
Data Privacy Consent. The Director consents to the collection, use and transfer, in electronic or other form, of the Directors personal data by and among, as applicable, the Company and its Affiliates for the exclusive purpose of administering the Directors participation in the Plan. The Director understands that the Company and its Affiliates hold certain personal information about the Director, including name, home address and telephone number, date of birth, social security or insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares of stock awarded, canceled, purchased, exercised, vested, unvested or outstanding in the Directors favor for the purpose of administering the Plan ("Data"). The Director understands that the Data may be transferred to third parties assisting in the administration of the Plan, that these recipients may be located in the Directors country or elsewhere and that the recipient country may have different data privacy laws and protections than the Directors country. The Director may request a list with the names and addresses of any potential recipients of the Data, request information as to the nature of the Data provided to other parties, and withdraw the consent contained in this section, all by contacting the Financial Planning Department, and understands that refusing or withdrawing consent may affect his ability to participate in the Plan.
6.
Plan Information. The Director acknowledges that the Director has received copies of the Plan and the Plan prospectus from the Company and agrees to receive shareholder information, including copies of any annual report, proxy statement and periodic report, from the investor relations section of the Company's website at http://www.costco.com. The Director acknowledges that copies of the Plan, Plan prospectus, Plan information and shareholder information are also available upon written or telephonic request to the Financial Planning Department.
7.
Miscellaneous.
(a) Stock Units shall not be sold, encumbered, pledged or otherwise disposed of, whether voluntarily or by operation of law. The Company shall not be required to treat as the owner of Stock Units, and associated benefits hereunder, any transferee to whom such Stock Units or benefits shall have been so transferred in violation of this Agreement.
(b) The parties agree to execute such further instruments and to take such action as may reasonably be necessary to carry out the intent of this Agreement.
(c) Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon delivery to the Director at the address then on file with the Company.
(d) The Plan is incorporated herein by reference. The Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Director with respect to the subject matter hereof, and may not be modified adversely to the Directors interest except by means of a writing signed by the Company and the Director. This Agreement is governed by the laws of the State of Washington. In the



event of any conflict between the terms and provisions of the Plan and this Agreement, the Plan terms and provisions shall govern (subject to section 9(e)). Capitalized terms used but not defined in this Agreement have the meanings assigned to them in the Plan. Certain other important terms governing this contract are contained in the Plan. If issues of interpretation arise under this Agreement, the judgment of the Administrator shall be final.
(e) To the extent the Company determines that this Agreement is subject to section 409A, but does not conform with the requirements thereof, the Company may at its sole discretion amend or replace the Agreement to cause the Agreement to comply with section 409A.
(f) The provisions of this Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
Consent to Electronic Delivery: Costco Wholesale is offering electronic delivery of documents relating to its 2002 Stock Incentive Plan. Directors are not required to sign this consent to participate in the Companys plans, and those who choose not to receive documents electronically will continue to receive communications from the Company in paper format.
1.
You agree that the Company may deliver all securities disclosure documents by fax, as an attachment to e-mail, or as a fax, e-mail or physical letter notifying of the location of the disclosure documents for Directors securities on an internet web site or an intranet web site to which Director has access. The Company may post or attach disclosure documents in any widely available electronic format, such as in the hyper-text markup language (HTML), Adobes Portable Document Format (PDF), and Microsofts Word format (DOC). You can download the Adobe Acrobat Reader Software for free from Adobes website at www.adobe.com; it may be necessary to install this software before reading some disclosure documents.
2.
You acknowledge that you have regular access to internet, e-mail, and a standard word-processing software program and are familiar with the costs of subscribing to internet service.
3.
You may revoke or modify this consent at any time, this consent will continue to be effective for all purposes until you notify the Company that you have revoked or modified the information in the consent by fax, email, or regular mail notice to the Financial Planning Department, 999 Lake Drive, Issaquah, WA 98027.
RETAIN THIS AGREEMENT FOR YOUR RECORDS
OCT 2014 REV.



Exhibit 10.1.10

December 16, 2014
Dear Executive:
This letter specifies certain terms applicable to your Fiscal Year 2015 performance-based Restricted Stock Units (FY 2015 RSUs) in the event your employment is terminated due to your death, Disability, or for any other reason (other than for cause) prior to October�22, 2015 (an Eligible Termination). Capitalized terms not otherwise defined in this letter have the meanings assigned to such terms in the Costco Wholesale Corporation (the Company) Sixth Restated 2002 Stock Incentive Plan (the Plan).
The Compensation Committee of the Board of Directors has set performance goals for the FY 2015 RSUs. If the performance goals are not achieved, your FY 2015 RSUs automatically will be cancelled and terminate without the payment of any consideration to you. In the event you experience an Eligible�Termination and the Compensation�Committee of the Companys Board of Directors determines that the performance goals established for your FY 2015 RSUs have been achieved, you will receive the Shares underlying your FY 2015 RSUs, subject to Section�12.1 of the Plan and the October 2014 RSU Award Agreement, including (without limitation) the long service and quarterly vesting provisions applied for terminations. Any FY�2015 RSUs that do not become issuable pursuant to the terms of this letter automatically shall be cancelled and terminate without the payment of any consideration to you.
For example, if the Compensation Committee were to approve a grant of 21,000 FY�2015 RSUs, you have attained 30 years of service prior to October 22, 2014, and you experience an Eligible Termination (other than due to your death) on February 16, 2015, you would be eligible to receive 14,350 Shares (14,000 Shares (2/3�times 21,000), plus 350�Shares (20% of 7,000 (21,000 minus 14,000) multiplied by 1/4)), if the performance goals established for your FY 2015 RSUs are achieved. The remaining 6,650 Shares automatically would be cancelled.
Shares that become issuable will be delivered after the Compensation Committees certification of the performance results established for your FY�2015 RSUs and in accordance with the Companys established practices for settling the first anniversary vesting installment associated with performance-based RSUs, but in no event later than December�31, 2015.
For purposes of Code section 409A, each vesting installment that may be delivered to you pursuant to your FY 2015 RSUs shall be treated as a separate payment and the right to a series of installment payments pursuant to your FY 2015 RSUs shall be treated as the right to a series of separate and distinct payments.
By accepting the FY 2015 RSUs, you acknowledge your agreement with the terms in this letter and you acknowledge and agree that your FY 2015 RSUs will be subject to the terms and conditions of the Plan and the terms and conditions set forth in the form of Restricted Stock Unit Award Agreement attached to this letter (the RSU Agreement), except as otherwise expressly provided herein.
Thank you for your hard work and continued contribution to the success of the Company.

Sincerely,

COSTCO WHOLESALE CORPORATION

/s/ ROBERT E. NELSON
Robert E. Nelson
Vice President
Financial Planning & Investor Relations




Exhibit 31.1
CERTIFICATIONS
I, W. Craig Jelinek, certify that:
1)
I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation (the registrant);
2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5)
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.

Date: December�18, 2014
�
/s/����W. CRAIG�JELINEK
�
W. Craig Jelinek
�
President, Chief Executive Officer and Director
�




CERTIFICATIONS
I, Richard A. Galanti, certify that:
1)
I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation (the registrant);
2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5)
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.

Date: December�18, 2014
�
/s/����RICHARD�A. GALANTI
�
Richard A. Galanti
�
Executive�Vice�President,�Chief�Financial�Officer and Director
�




Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Costco Wholesale Corporation (the Company) on Form 10-Q for the quarter ended November�23, 2014, as filed with the Securities and Exchange Commission (the Report), I, W. Craig Jelinek, President, Chief Executive Officer and Director of the Company, certify, pursuant to 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ W. CRAIG�JELINEK
�
Date: December�18, 2014
W. Craig Jelinek
�
�
President, Chief Executive Officer and Director
�
�
A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to the Securities and Exchange Commission or its staff upon request.




CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Costco Wholesale Corporation (the Company) on Form 10-Q for the quarter ended November�23, 2014, as filed with the Securities and Exchange Commission (the Report), I, Richard A. Galanti, Executive Vice President, Chief Financial Officer and Director of the Company, certify, pursuant to 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ RICHARD�A. GALANTI
�
Date: December�18, 2014
Richard A. Galanti
�
�
Executive�Vice�President, Chief�Financial�Officer and Director
�
�
A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to the Securities and Exchange Commission or its staff upon request.



Serious News for Serious Traders! Try StreetInsider.com Premium Free!

You May Also Be Interested In





Related Categories

SEC Filings