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 May 31, 2016
OR
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER 0-22793
PriceSmart, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware |
33-0628530 |
|
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
9740 Scranton Road, San Diego, CA 92121
(Address of principal executive offices)
(858) 404-8800
(Registrant’s telephone number, including area code)
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. |
|
Yes ☒ |
No ☐ |
|
Indicate by check mark whether the registrant has submitted electronically 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 (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). |
|
Yes ☒ |
No ☐ |
|
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. (Check one): |
|
Large accelerated filer ☒ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Smaller Reporting Company ☐ |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
|
Yes ☐ |
No ☒ |
The registrant had 30,394,175 shares of its common stock, par value $0.0001 per share, outstanding at July 1, 2016.
INDEX TO FORM 10-Q
i
PriceSmart, Inc.’s (“PriceSmart,” "we" or the “Company”) unaudited consolidated balance sheet as of May 31, 2016 and the consolidated balance sheet as of August 31, 2015, the unaudited consolidated statements of income for the three and nine months ended May 31, 2016 and 2015, the unaudited consolidated statements of comprehensive income for the three and nine months ended May 31, 2016 and 2015, the unaudited consolidated statements of equity for the nine months ended May 31, 2016 and 2015, and the unaudited consolidated statements of cash flows for the nine months ended May 31, 2016 and 2015, are included herein. Also included herein are the notes to the unaudited consolidated financial statements.
1
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
|
|
|
|
|
2016 |
|
August 31, |
||
|
|
|
(Unaudited) |
|
2015 |
||
|
ASSETS |
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
202,616 |
|
$ |
157,072 |
|
Short-term restricted cash |
|
|
518 |
|
|
61 |
|
Receivables, net of allowance for doubtful accounts of $0 as of May 31, 2016 and August 31, 2015, respectively |
|
|
5,949 |
|
|
9,662 |
|
Merchandise inventories |
|
|
253,778 |
|
|
267,175 |
|
Prepaid expenses and other current assets |
|
|
18,030 |
|
|
22,535 |
|
Total current assets |
|
|
480,891 |
|
|
456,505 |
|
Long-term restricted cash |
|
|
2,618 |
|
|
1,464 |
|
Property and equipment, net |
|
|
456,584 |
|
|
433,040 |
|
Goodwill |
|
|
35,652 |
|
|
35,871 |
|
Deferred tax assets |
|
|
15,009 |
|
|
14,845 |
|
Other non-current assets (includes $3,889 and $4,129 as of May 31, 2016 and August 31, 2015, respectively, for the fair value of derivative instruments) |
|
|
48,271 |
|
|
39,182 |
|
Investment in unconsolidated affiliates |
|
|
10,798 |
|
|
10,317 |
|
Total Assets |
|
$ |
1,049,823 |
|
$ |
991,224 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
10,127 |
|
$ |
6,606 |
|
Accounts payable |
|
|
245,096 |
|
|
241,978 |
|
Accrued salaries and benefits |
|
|
18,502 |
|
|
17,977 |
|
Deferred membership income |
|
|
21,127 |
|
|
20,184 |
|
Income taxes payable |
|
|
5,425 |
|
|
9,595 |
|
Other accrued expenses (includes $192 and $66 as of May 31, 2016 and August 31, 2015, respectively, for the fair value of foreign currency forward contracts) |
|
|
21,910 |
|
|
23,558 |
|
Dividends payable |
|
|
10,629 |
|
|
— |
|
Long-term debt, current portion |
|
|
16,099 |
|
|
17,169 |
|
Total current liabilities |
|
|
348,915 |
|
|
337,067 |
|
Deferred tax liabilities |
|
|
1,879 |
|
|
1,755 |
|
Long-term portion of deferred rent |
|
|
8,817 |
|
|
6,595 |
|
Long-term income taxes payable, net of current portion |
|
|
1,044 |
|
|
1,402 |
|
Long-term debt, net of current portion |
|
|
71,462 |
|
|
73,365 |
|
Other long-term liabilities (includes $1,684 and $1,699 for the fair value of derivative instruments and $3,791 and $2,757 for post employment plans as of May 31, 2016 and August 31, 2015, respectively) |
|
|
5,475 |
|
|
4,456 |
|
Total Liabilities |
|
|
437,592 |
|
|
424,640 |
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
Common stock, $0.0001 par value, 45,000,000 shares authorized; 31,214,715 and 30,977,764 shares issued and 30,394,175 and 30,184,584 shares outstanding (net of treasury shares) as of May 31, 2016 and August 31, 2015, respectively |
|
|
3 |
|
|
3 |
|
Additional paid-in capital |
|
|
409,979 |
|
|
403,168 |
|
Tax benefit from stock-based compensation |
|
|
11,290 |
|
|
10,711 |
|
Accumulated other comprehensive loss |
|
|
(106,431) |
|
|
(101,512) |
|
Retained earnings |
|
|
328,804 |
|
|
283,611 |
|
Less: treasury stock at cost; 820,540 shares as of May 31, 2016 and 793,180 shares as of August 31, 2015 |
|
|
(31,414) |
|
|
(29,397) |
|
Total Equity |
|
|
612,231 |
|
|
566,584 |
|
Total Liabilities and Equity |
|
$ |
1,049,823 |
|
$ |
991,224 |
See accompanying notes.
3
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
||||||||||||
|
|
Three Months Ended |
Nine Months Ended |
||||||||||
|
|
May 31, |
May 31, |
May 31, |
May 31, |
||||||||
|
|
2016 |
2015 |
2016 |
2015 |
||||||||
|
Revenues: |
||||||||||||
|
Net warehouse club sales |
$ |
684,547 |
$ |
675,314 |
$ |
2,134,365 |
$ |
2,043,849 | ||||
|
Export sales |
7,091 | 9,465 | 21,872 | 24,126 | ||||||||
|
Membership income |
11,475 | 11,189 | 34,226 | 32,202 | ||||||||
|
Other income |
1,149 | 1,135 | 3,661 | 3,244 | ||||||||
|
Total revenues |
704,262 | 697,103 | 2,194,124 | 2,103,421 | ||||||||
|
Operating expenses: |
||||||||||||
|
Cost of goods sold: |
||||||||||||
|
Net warehouse club |
590,500 | 578,868 | 1,832,183 | 1,743,772 | ||||||||
|
Export |
6,742 | 8,992 | 20,799 | 22,953 | ||||||||
|
Selling, general and administrative: |
||||||||||||
|
Warehouse club operations |
62,745 | 60,754 | 188,348 | 179,006 | ||||||||
|
General and administrative |
16,439 | 14,214 | 48,086 | 41,681 | ||||||||
|
Pre-opening expenses |
13 | 33 | 389 | 3,411 | ||||||||
|
Loss/(gain) on disposal of assets |
334 | 724 | 399 | 1,087 | ||||||||
|
Total operating expenses |
676,773 | 663,585 | 2,090,204 | 1,991,910 | ||||||||
|
Operating income |
27,489 | 33,518 | 103,920 | 111,511 | ||||||||
|
Other income (expense): |
||||||||||||
|
Interest income |
322 | 283 | 780 | 813 | ||||||||
|
Interest expense |
(1,571) | (1,615) | (4,480) | (4,759) | ||||||||
|
Other income (expense), net |
(222) | (311) | (1,018) | (4,602) | ||||||||
|
Total other income (expense) |
(1,471) | (1,643) | (4,718) | (8,548) | ||||||||
|
Income before provision for income taxes and |
26,018 | 31,875 | 99,202 | 102,963 | ||||||||
|
Provision for income taxes |
(9,168) | (10,750) | (33,113) | (36,378) | ||||||||
|
Income (loss) of unconsolidated affiliates |
(13) | 70 | 362 | 92 | ||||||||
|
Net income |
16,837 |
$ |
21,195 |
$ |
66,451 | 66,677 | ||||||
|
Net income per share available for distribution: |
||||||||||||
|
Basic net income per share |
$ |
0.55 |
$ |
0.70 |
$ |
2.19 |
$ |
2.20 | ||||
|
Diluted net income per share |
$ |
0.55 |
$ |
0.70 |
$ |
2.19 |
$ |
2.20 | ||||
|
Shares used in per share computations: |
||||||||||||
|
Basic |
29,951 | 29,883 | 29,918 | 29,834 | ||||||||
|
Diluted |
29,955 | 29,888 | 29,923 | 29,841 | ||||||||
|
Dividends per share |
$ |
— |
$ |
— |
$ |
0.70 |
$ |
0.70 | ||||
See accompanying notes.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
|
May 31, |
|
May 31, |
|
May 31, |
|
May 31, |
||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
|
Net income |
|
$ |
16,837 |
|
$ |
21,195 |
|
$ |
66,451 |
|
$ |
66,677 |
|
Other Comprehensive Income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (1) |
|
$ |
6,509 |
|
$ |
(1,684) |
|
$ |
(4,383) |
|
$ |
(24,241) |
|
Defined benefit pension plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost and actuarial gains included in net periodic pensions cost |
|
|
(6) |
|
|
(11) |
|
|
(14) |
|
|
(35) |
|
Total defined benefit pension plan |
|
|
(6) |
|
|
(11) |
|
|
(14) |
|
|
(35) |
|
Derivative instruments: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains/(losses) on change in |
|
|
(191) |
|
|
38 |
|
|
(522) |
|
|
3,506 |
|
Total derivative instruments |
|
|
(191) |
|
|
38 |
|
|
(522) |
|
|
3,506 |
|
Other comprehensive income (loss) |
|
|
6,312 |
|
|
(1,657) |
|
|
(4,919) |
|
|
(20,770) |
|
Comprehensive income |
|
$ |
23,149 |
|
$ |
19,538 |
|
$ |
61,532 |
|
$ |
45,907 |
|
(1) |
Translation adjustments arising in translating the financial statements of a foreign entity have no effect on the income taxes of that foreign entity. They may, however, affect: (a) the amount, measured in the parent entity's reporting currency, of withholding taxes assessed on dividends paid to the parent entity and (b) the amount of taxes assessed on the parent entity by the government of its country. The Company has determined that the reinvestment of earnings of its foreign subsidiaries are indefinite because of the long-term nature of the Company's foreign investment plans. Therefore, deferred taxes are not provided for on translation adjustments related to non-remitted earnings of the Company's foreign subsidiaries. |
|
(2) |
See Note 9 - Derivative Instruments and Hedging Activities. |
See accompanying notes.
5
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Benefit |
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
Additional |
|
From |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Common Stock |
|
Paid-in |
|
Stock Based |
|
Comprehensive |
|
Retained |
|
Treasury Stock |
|
Total |
|||||||||||
|
|
|
Shares |
|
Amount |
|
Capital |
|
Compensation |
|
Income(Loss) |
|
Earnings |
|
Shares |
|
Amount |
|
Equity |
|||||||
|
Balance at August 31, 2014 |
|
30,951 |
|
$ |
3 |
|
$ |
397,150 |
|
$ |
9,505 |
|
$ |
(49,286) |
|
$ |
215,613 |
|
741 |
|
$ |
(24,720) |
|
$ |
548,265 |
|
Purchase of treasury stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
50 |
|
|
(4,500) |
|
|
(4,500) |
|
Issuance of restricted stock award |
|
25 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
Forfeiture of restricted stock awards |
|
(9) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
Exercise of stock options |
|
3 |
|
|
— |
|
|
49 |
|
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
49 |
|
Stock-based compensation |
|
— |
|
|
— |
|
|
4,622 |
|
|
1,220 |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
5,842 |
|
Dividend paid to stockholders |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,564) |
|
— |
|
|
— |
|
|
(10,564) |
|
Dividend payable to stockholders |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,564) |
|
— |
|
|
— |
|
|
(10,564) |
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
66,677 |
|
— |
|
|
— |
|
|
66,677 |
|
Other comprehensive income (loss) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(20,770) |
|
|
— |
|
— |
|
|
— |
|
|
(20,770) |
|
Balance at May 31, 2015 |
|
30,970 |
|
$ |
3 |
|
$ |
401,821 |
|
$ |
10,725 |
|
$ |
(70,056) |
|
$ |
261,162 |
|
791 |
|
$ |
(29,220) |
|
$ |
574,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2015 |
|
30,978 |
|
$ |
3 |
|
$ |
403,168 |
|
$ |
10,711 |
|
$ |
(101,512) |
|
$ |
283,611 |
|
793 |
|
$ |
(29,397) |
|
$ |
566,584 |
|
Purchase of treasury stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
27 |
|
|
(2,017) |
|
|
(2,017) |
|
Issuance of restricted stock award |
|
233 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
Forfeiture of restricted stock awards |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
Exercise of stock options |
|
4 |
|
|
— |
|
|
80 |
|
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
80 |
|
Stock-based compensation |
|
— |
|
|
— |
|
|
6,731 |
|
|
579 |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
7,310 |
|
Dividend paid to stockholders |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,629) |
|
— |
|
|
— |
|
|
(10,629) |
|
Dividend payable to stockholders |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,629) |
|
— |
|
|
— |
|
|
(10,629) |
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
66,451 |
|
— |
|
|
— |
|
|
66,451 |
|
Other comprehensive income (loss) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(4,919) |
|
|
— |
|
— |
|
|
— |
|
|
(4,919) |
|
Balance at May 31, 2016 |
|
31,215 |
|
$ |
3 |
|
$ |
409,979 |
|
$ |
11,290 |
|
$ |
(106,431) |
|
$ |
328,804 |
|
820 |
|
$ |
(31,414) |
|
$ |
612,231 |
See accompanying notes.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
||||
|
|
|
May 31, |
|
May 31, |
||
|
|
|
2016 |
|
2015 |
||
|
Operating Activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
66,451 |
|
$ |
66,677 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
29,003 |
|
|
25,173 |
|
Allowance for doubtful accounts |
|
|
— |
|
|
2 |
|
(Gain)/loss on sale of property and equipment |
|
|
399 |
|
|
1,087 |
|
Deferred income taxes |
|
|
(1,222) |
|
|
3,388 |
|
Excess tax benefit on stock-based compensation |
|
|
(579) |
|
|
(1,220) |
|
Equity in (gains) losses of unconsolidated affiliates |
|
|
(362) |
|
|
(92) |
|
Stock-based compensation |
|
|
6,731 |
|
|
4,622 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
Receivables, prepaid expenses and other current assets, accrued salaries and benefits, |
|
|
(2,281) |
|
|
(9,101) |
|
Merchandise inventories |
|
|
13,397 |
|
|
(39,801) |
|
Accounts payable |
|
|
631 |
|
|
15,003 |
|
Net cash provided by (used in) operating activities |
|
|
112,168 |
|
|
65,738 |
|
Investing Activities: |
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(51,462) |
|
|
(63,041) |
|
Deposits for land purchase option agreements |
|
|
(442) |
|
|
903 |
|
Proceeds from disposal of property and equipment |
|
|
96 |
|
|
67 |
|
Investment in joint ventures |
|
|
(119) |
|
|
(1,360) |
|
Net cash provided by (used in) investing activities |
|
|
(51,927) |
|
|
(63,431) |
|
Financing Activities: |
|
|
|
|
|
|
|
Proceeds from long-term bank borrowings |
|
|
7,370 |
|
|
45,477 |
|
Repayment of long-term bank borrowings |
|
|
(10,191) |
|
|
(27,783) |
|
Proceeds from short-term bank borrowings |
|
|
18,829 |
|
|
34,970 |
|
Repayment of short-term bank borrowings |
|
|
(15,214) |
|
|
(33,300) |
|
Cash dividend payments |
|
|
(10,629) |
|
|
(10,564) |
|
Release of restricted cash |
|
|
— |
|
|
2,920 |
|
Excess tax benefit on stock-based compensation |
|
|
579 |
|
|
1,220 |
|
Purchase of treasury stock |
|
|
(2,017) |
|
|
(4,500) |
|
Proceeds from exercise of stock options |
|
|
80 |
|
|
49 |
|
Net cash provided by (used in) financing activities |
|
|
(11,193) |
|
|
8,489 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3,504) |
|
|
(2,301) |
|
Net increase (decrease) in cash and cash equivalents |
|
|
45,544 |
|
|
8,495 |
|
Cash and cash equivalents at beginning of period |
|
|
157,072 |
|
|
137,098 |
|
Cash and cash equivalents at end of period |
|
$ |
202,616 |
|
$ |
145,593 |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
Interest, net of amounts capitalized |
|
$ |
3,991 |
|
$ |
4,391 |
|
Income taxes |
|
$ |
39,297 |
|
$ |
33,583 |
|
Dividends declared but not paid |
|
$ |
10,629 |
|
$ |
10,564 |
See accompanying notes.
7
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
May 31, 2016
NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. As of May 31, 2016, the Company had 38 consolidated warehouse clubs in operation in 12 countries and one U.S. territory (six in Costa Rica and Colombia; five in Panama; four in Trinidad; three in Guatemala, Honduras and the Dominican Republic; two in El Salvador and Nicaragua; and one each in Aruba, Barbados, Jamaica, and the United States Virgin Islands), of which the Company owns 100% of the corresponding legal entities (see Note 2 - Summary of Significant Accounting Policies). In January 2014, the Company acquired land in Pereira, Colombia and in the city of Medellin, Colombia and leased land in the city of Bogota, Colombia. The Company built new warehouse clubs at these three sites, and opened the Bogota location in October 2014 and opened the other two sites in November 2014. Together with the three warehouse clubs that were operating prior to these openings in Colombia (one in Barranquilla and two in Cali), these three new clubs brought the number of PriceSmart warehouse clubs operating in Colombia to six. In September 2014, the Company acquired land in La Chorrera ("Costa Verde"), west of Panama City, Panama, on which the Company opened its fifth PriceSmart warehouse club in Panama in June 2015. In April 2015, the Company acquired land in Managua, Nicaragua. The Company constructed and opened a warehouse club on this site in November 2015. In May 2015, the Company purchased land in Chia, a city north of Bogota, Colombia where it is currently constructing a new warehouse club that is expected to open in September 2016. On December 4, 2015, the Company signed an option to acquire two properties and then swap them for 59,353 square feet of land adjacent to our San Pedro Sula warehouse club in Honduras. The Company exercised the option and completed the swap in May 2016, and the acquired land will be used to expand the parking lot for the San Pedro Sula warehouse club. The Company continues to explore other potential sites for future warehouse clubs in Central America, the Caribbean and Colombia.
Basis of Presentation - The interim 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 U.S. Securities and Exchange Commission ("SEC"). These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2015 (the “2015 Form 10-K”). The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation.
The Company has evaluated subsequent events through the date and time these financial statements were issued.
Reclassifications to consolidated balance sheet recorded during fiscal year 2016 for fiscal year 2015 – Certain reclassifications to the consolidated balance sheet have been made to prior fiscal year amounts to conform to the presentation in the current fiscal year.
The Company early adopted ASU 2015-17 as of the second quarter of fiscal year 2016 with retrospective application to prior periods. Accordingly, the Company reclassified current deferred tax assets and liabilities to long-term on its consolidated balance sheet reported for fiscal year ended 2015, which increased long-term deferred tax assets by $7.4 million and decreased long-term deferred tax liabilities by $438,000. As of the third quarter of fiscal year 2016, the Company no longer refers to these as Deferred tax assets-long term and Deferred tax liabilities-long term, and rather identifies them as Deferred tax assets and Deferred tax liabilities within their respective non-current balance sheet locations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2015 balance sheet line item as previously reported |
|
|
Amount reclassified |
|
|
August 31, 2015 balance sheet line item as currently reported |
|
Deferred tax assets- current |
|
$ |
7,849 |
|
$ |
(7,849) |
|
$ |
— |
|
Deferred tax assets - non-current |
|
$ |
7,464 |
|
$ |
7,381 |
|
$ |
14,845 |
|
Deferred tax liabilities - current |
|
$ |
30 |
|
$ |
(30) |
|
$ |
— |
|
Deferred tax liabilities - non-current |
|
$ |
2,193 |
|
$ |
(438) |
|
$ |
1,755 |
8
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s wholly owned subsidiaries and the Company's investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations, and cash flows for the periods presented. The results for interim periods are not necessarily indicative of the results for the full year. As of May 31, 2016, all of the Company's subsidiaries were wholly owned. Additionally, the Company's ownership interest in real estate development joint ventures as of May 31, 2016 is listed below:
|
|
|||||||
|
Real Estate Development Joint Ventures |
Countries |
Ownership |
Basis of |
||||
|
GolfPark Plaza, S.A. |
Panama |
50.0 |
% |
Equity(1) |
|||
|
Price Plaza Alajuela PPA, S.A. |
Costa Rica |
50.0 |
% |
Equity(1) |
|||
|
(1) |
Joint venture interests are recorded as investment in unconsolidated affiliates on the consolidated balance sheets. |
Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Variable Interest Entities – The Company reviews and determines at the start of each arrangement, or subsequently if a reconsideration event occurs, whether any of its investments in joint ventures are Variable Interest Entities (“VIE”) and whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. The Company has determined that the joint ventures for GolfPark Plaza (Panama) and Price Plaza Alajuela (Costa Rica) are VIEs. The Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method.
Cash and Cash Equivalents – Cash and cash equivalents represent cash and short-term investments with maturities of three months or less when purchased and proceeds due from credit and debit card transactions, which are generally settled within a few days of the underlying transaction.
Restricted Cash – The changes in restricted cash are disclosed within the consolidated statement of cash flows based on the nature of the restriction. The following table summarizes the restricted cash reported by the Company (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
August 31, |
||
|
|
|
2016 |
|
2015 |
||
|
Short-term restricted cash: |
|
|
|
|
|
|
|
Restricted cash for land purchase option agreements |
|
$ |
442 |
|
$ |
— |
|
Other short-term restricted cash |
|
$ |
76 |
|
$ |
61 |
|
Total short-term restricted cash |
|
$ |
518 |
|
$ |
61 |
|
Long-term restricted cash: |
|
|
|
|
|
|
|
Other long-term restricted cash (1) |
|
$ |
2,618 |
|
$ |
1,464 |
|
Total long-term restricted cash |
|
$ |
2,618 |
|
$ |
1,464 |
|
Total restricted cash |
|
$ |
3,136 |
|
$ |
1,525 |
|
(1) |
Other long-term restricted cash consists mainly of cash deposits held within banking institutions or with external fund managers in compliance with federal regulatory requirements in Panama to pay a specified benefit on retirement, voluntary departure or death of employees. Additionally, the Company records as long-term restricted cash amounts deposited in designated banking institutions for other regulatory requirements in Costa Rica. |
Tax Receivables – The Company pays Value Added Tax (“VAT”) or similar taxes (“input VAT”), income taxes, and other taxes within the normal course of its business in most of the countries in which it operates related to the procurement of merchandise and/or services it acquires and/or on sales and taxable income. The Company also collects VAT or similar taxes on behalf of the government (“output VAT”) for merchandise and/or services it sells. If the output VAT exceeds the input VAT, then
9
the difference is remitted to the government, usually on a monthly basis. If the input VAT exceeds the output VAT, this creates a VAT receivable. In most countries where the Company operates, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit card directly to the government as advance payments of VAT and/or income tax. In the case of VAT, these procedures alter the natural offset of input and output VAT and generally leave the Company with a net VAT receivable, forcing the Company to process significant refund claims on a recurring basis. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due, this creates an income tax receivable. The Company either requests a refund of these tax receivables or applies the balance to expected future tax payments. These refund or offset processes can take anywhere from several months to several years to complete.
In most countries where the Company operates, the tax refund process is defined and structured with regular refunds or offsets. However, in three countries there either is not, or the governments have alleged that there is not, a clearly defined process in the laws and regulations to allow the authorities to refund VAT receivables. The Company, together with its tax and legal advisers, is currently appealing these interpretations in court and expects to prevail. In one of these countries, where there is recent favorable jurisprudence, the government performed an audit to verify the amount of the VAT receivables as a required precursor to any refund. The balance of the VAT receivables in these countries was $6.9 million and $6.5 million as of May 31, 2016 and August 31, 2015, respectively. In another country in which the Company has warehouse clubs, beginning in fiscal year 2015, a new minimum income tax mechanism took effect, which requires the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The current rules (which the Company has challenged in court) do not clearly allow the Company to obtain a refund or to offset this excess income tax against other taxes. As of May 31, 2016, the Company had deferred tax assets of approximately $1.7 million in this country. Also, the Company had an income tax receivable balance of $2.2 million as of May 31, 2016 related to excess payments from fiscal years 2015 and 2016. The Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will succeed in its refund request and/or court challenge on this matter.
The Company's policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:
|
· |
Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where the Company's subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year. |
|
· |
Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where the Company's subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery. |
The following table summarizes the VAT receivables reported by the Company (in thousands):
|
|
||||||
|
|
May 31, |
August 31, |
||||
|
|
2016 |
2015 |
||||
|
Prepaid expenses and other current assets |
$ |
954 |
$ |
4,673 | ||
|
Other non-current assets |
30,483 | 22,239 | ||||
|
Total amount of VAT receivable reported |
$ |
31,437 |
$ |
26,912 | ||
The following table summarizes the Income tax receivables reported by the Company (in thousands):
|
|
||||||
|
|
May 31, |
August 31, |
||||
|
|
2016 |
2015 |
||||
|
Prepaid expenses and other current assets |
$ |
3,619 |
$ |
2,941 | ||
|
Other non-current assets |
10,017 | 8,772 | ||||
|
Total amount of income tax receivable reported |
$ |
13,636 |
$ |
11,713 | ||
10
Lease Accounting – Certain of the Company's operating leases where the Company is the lessee (see Revenue Recognition Policy for lessor accounting) provide for minimum annual payments that increase over the expected life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis beginning when the Company takes possession of the property and extending over the expected term of the related lease including renewal options when the exercise of the option is reasonably assured as an economic penalty may be incurred if the option is not exercised. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the leases is accrued as deferred rent and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts in its straight-line computation for the effect of any “rental holidays” and lessor-paid tenant improvements. In addition to the minimum annual payments, in certain locations, the Company pays additional contingent rent based on a contractually stipulated percentage of sales.
Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or market. The Company provides for estimated inventory losses and obsolescence between physical inventory counts on the basis of a percentage of sales. The provision is adjusted periodically to reflect the trend of actual physical inventory count results, with physical inventories occurring primarily in the second and fourth fiscal quarters. In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.
Fair Value Measurements – The Company measures the fair value for all financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring basis. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.
The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company was not required to revalue any assets or liabilities utilizing Level 1 or Level 3 inputs at the balance sheet dates. The Company's Level 2 assets and liabilities revalued at the balance sheet dates, on a recurring basis, primarily included cash flow hedges (interest rate swaps and cross-currency interest rate swaps) and forward foreign exchange contracts. In addition, the Company utilizes Level 2 inputs in determining the fair value of long-term debt. The Company has elected not to revalue long-term debt because this debt will be settled at the carrying value and not at the fair market value. The Company did not make any significant transfers in and out of Level 1 and Level 2 fair value tiers during the periods reported on herein.
Non-financial assets and liabilities are revalued and recognized at fair value subsequent to initial recognition when there is evidence of impairment. For the periods reported, no impairment of such non-financial assets was recorded.
The disclosure of fair value of certain financial assets and liabilities recorded at cost is as follows:
Cash and cash equivalents: The carrying value approximates fair value due to the short maturity of these instruments.
Short-term restricted cash: The carrying value approximates fair value due to the short maturity of these instruments.
Long-term restricted cash: Other long-term restricted cash consists mainly of cash deposits held within banking institutions or with external fund managers in compliance with federal regulatory requirements in Panama to pay a specified benefit on retirement, voluntary departure or death of employees. The amount of these payments is predetermined by a formula based on an employee's earnings history and tenure of service. Since the obligation to provide benefits are based on services that the employees have rendered, the cost associated with providing the benefits is recognized as the employee provides those services. The employees' rights to receive payment on these plans are not dependent on their reaching certain thresholds like age or tenure. Therefore, the carrying value approximates fair value because payments on these plans are not time dependent in nature. Additionally, the Company records as long-term restricted cash amounts deposited in designated banking institutions for other regulatory requirements in Costa Rica.
Accounts receivable: The carrying value approximates fair value due to the short maturity of these accounts.
Short-term VAT and Income tax receivables: The carrying value approximates fair value due to the short maturity of these accounts.
11
Long-term VAT and Income tax receivables: The fair value of long-term receivables would normally be measured using a discounted cash flow analysis based on the current market interest rates for similar types of financial instruments, with an estimate of the time these receivables are expected to be outstanding. However, the Company is not able to provide an estimate on the time these receivables owed to the Company by various government agencies are expected to be outstanding; therefore, the Company has not presented a fair value on the long-term VAT and Income tax receivables.
Short-term debt: The carrying value approximates fair value due to the short maturity of these instruments.
Long-term debt: The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments. These inputs are not quoted prices in active markets but they are either directly or indirectly observable; therefore, they are classified as Level 2 inputs. The carrying value and fair value of the Company’s debt as of May 31, 2016 and August 31, 2015 is as follows (in thousands):
|
|
||||||||||||
|
|
May 31, 2016 |
August 31, 2015 |
||||||||||
|
|
Carrying |
Fair Value(1) |
Carrying |
Fair Value(1) |
||||||||
|
Long-term debt, including current portion |
$ |
87,561 |
$ |
85,441 |
$ |
90,534 |
$ |
88,307 | ||||
|
(1) |
The Company has disclosed the fair value of long-term debt, including debt for which it has entered into cross-currency interest rate swaps, using the derivative obligation as of May 31, 2016 and August 31, 2015, to estimate the fair value of long-term debt, which includes the effects that the cross-currency interest rate swaps have had on the fair value of long-term debt. |
Derivatives Instruments and Hedging Activities – The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates. In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting. If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be offset in accumulated other comprehensive income (loss) until the hedged item completes its contractual term. If any portion of the hedge is deemed ineffective, the change in fair value of the hedged assets or liabilities will be immediately recognized in earnings during the period. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. Valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets were not changed from previous practice during the reporting period. 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, however, that this practice effectively mitigates counterparty risk.
Cash Flow Instruments. The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries. The swaps are designated as cash flow hedges of interest expense risk. These instruments are considered effective hedges and are recorded using hedge accounting. The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S. dollar. The swaps are designated as cash flow hedges of the currency risk related to payments on the U.S. denominated debt. These instruments are also considered to be effective hedges and are recorded using hedge accounting. Under cash flow hedging, the effective portion of the fair value of the derivative, calculated as the net present value of the future cash flows, is deferred on the consolidated balance sheets in accumulated other comprehensive loss. If any portion of an interest rate swap is determined to be an ineffective hedge, the gains or losses from changes in fair value would be recorded directly in the consolidated statements of income. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. See Note 9 - Derivative Instruments and Hedging Activities for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of May 31, 2016 and August 31, 2015.
Fair Value Instruments. The Company is exposed to foreign-currency exchange rate fluctuations in the normal course of business. The Company is also exposed to foreign-currency exchange rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flow attributable to currency exchange movements. The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency
12
is other than the U.S. dollar. Currently, these contracts are treated for accounting purposes as fair value instruments and do not qualify for derivative hedge accounting, and as such the Company does not apply derivative hedge accounting to record these transactions. As a result, these contracts are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company seeks to mitigate foreign-currency exchange-rate 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 and are limited to less than one year in duration. See Note 9 - Derivative Instruments and Hedging Activities for information on the fair value of open, unsettled forward foreign-exchange contracts as of May 31, 2016 and August 31, 2015.
Early Settlement of Derivative Instruments Qualifying for Hedge Accounting. During the fourth quarter of fiscal year 2015, the Company's Colombia subsidiary paid off the outstanding principal balance of U.S. $24.0 million on loan agreements that were entered into by the subsidiary with Scotiabank & Trust (Cayman) Ltd before the scheduled loan payment dates. The Company's Colombia subsidiary also settled the cross-currency interest rate swaps that it had entered into with the Bank of Nova Scotia ("Scotia Bank") related to these loans during the fourth quarter of fiscal year 2015. As indicated above, for a derivative instrument to qualify for cash flow hedge accounting there must be an expectation that the derivative instrument will be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge. As part of the determination that a derivative instrument is highly effective at offsetting the exposure, the Company must determine that that the forecasted transaction will occur; therefore, an entity's past ability to accurately predict forecasted transactions should be considered when determining if a hedged transaction qualifies for cash flow hedge accounting. To the extent an entity has developed a pattern of changing the probability of occurrence of forecasted transactions, the ability of the entity to accurately predict forecasted transactions and the propriety of using hedge accounting in the future for similar forecasted transactions would be called into question. The Company believes that the settlements of these derivatives does not demonstrate such a pattern and does not disqualify the Company from the application of hedge accounting for the remaining hedging instruments and underlying loans whose terms and conditions remain unchanged. The Company classifies cash payments or proceeds from termination of derivatives as net cash provided by (used in) operating activities within the consolidated statements of cash flows.
The following tables summarize financial assets and liabilities measured and recorded at fair value on a recurring basis in the Company’s consolidated balance sheet as of May 31, 2016 and August 31, 2015 (in thousands) for derivatives that qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets |
|
Significant |
|
Significant |
|
|
||||
|
Assets and Liabilities as of May 31, 2016 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
||||
|
Other non-current assets – (Cross-currency interest rate swaps) |
|
$ |
— |
|
$ |
3,889 |
|
$ |
— |
|
$ |
3,889 |
|
Other long-term liabilities – (Interest rate swaps) |
|
|
— |
|
|
(448) |
|
|
— |
|
|
(448) |
|
Other long-term liabilities – (Cross-currency interest rate swaps) |
|
|
— |
|
|
(1,236) |
|
|
— |
|
|
(1,236) |
|
Total |
|
$ |
— |
|
$ |
2,205 |
|
$ |
— |
|
$ |
2,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets |
|
Significant |
|
Significant |
|
|
||||
|
Assets and Liabilities as of August 31, 2015 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
||||
|
Other non-current assets – (Cross-currency interest rate swaps) |
|
$ |
— |
|
$ |
4,129 |
|
$ |
— |
|
$ |
4,129 |
|
Other long-term liabilities – (Interest rate swaps) |
|
|
— |
|
|
(387) |
|
|
— |
|
|
(387) |
|
Other long-term liabilities – (Cross-currency interest rate swaps) |
|
|
— |
|
|
(1,312) |
|
|
— |
|
|
(1,312) |
|
Total |
|
$ |
— |
|
$ |
2,430 |
|
$ |
— |
|
$ |
2,430 |
13
The following tables summarize financial assets and liabilities measured and recorded at fair value on a recurring basis in the Company’s consolidated balance sheet as of May 31, 2016 and August 31, 2015 (in thousands) for derivatives that do not qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets |
|
Significant |
|
Significant |
|
|
||||
|
Assets and Liabilities as of May 31, 2016 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
||||
|
Other accrued expenses (Foreign currency forward contracts) |
|
$ |
— |
|
$ |
(192) |
|
$ |
— |
|
$ |
(192) |
|
Net fair value of derivatives designated as hedging instruments that do not qualify for hedge accounting |
|
$ |
— |
|
$ |
(192) |
|
$ |
— |
|
$ |
(192) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets |
|
Significant |
|
Significant |
|
|
||||
|
Assets and Liabilities as of August 31, 2015 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
||||
|
Other accrued expenses (Foreign currency forward contracts) |
|
$ |
— |
|
$ |
(66) |
|
$ |
— |
|
$ |
(66) |
|
Net fair value of derivatives designated as hedging instruments that do not qualify for hedge accounting |
|
$ |
— |
|
$ |
(66) |
|
$ |
— |
|
$ |
(66) |
Goodwill – The table below presents goodwill resulting from certain business combinations as of May 31, 2016 and August 31, 2015 (in thousands). The change in goodwill is a result of foreign exchange translation losses.
|
|
|||||||||
|
|
May 31, |
August 31, |
|||||||
|
|
2016 |
2015 |
Change |
||||||
|
Goodwill |
$ |
35,652 |
$ |
35,871 |
$ |
(219) | |||
The Company reviews goodwill at the entity level for impairment. The Company first reviews qualitative factors for each reporting unit, in determining if an annual goodwill test is required. If the Company's review of qualitative factors indicates a requirement for a test of goodwill impairment, the Company then will assess whether the carrying amount of a reporting unit is greater than zero and exceeds its fair value established during the Company's prior test of goodwill impairment ("established fair value"). If the carrying amount of a reporting unit at the entity level is greater than zero and its established fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If either the carrying amount of the reporting unit is not greater than zero or if the carrying amount of the entity exceeds its established fair value, the Company performs a second test to determine whether goodwill has been impaired and to calculate the amount of that impairment.
Revenue Recognition – The Company recognizes merchandise sales revenue when title passes to the customer. For e-commerce sales, revenue is recognized upon pickup of the merchandise by the member or when the common carrier takes possession of the merchandise. Membership income represents annual membership fees paid by the Company’s warehouse club members, which are recognized ratably over the 12-month term of the membership. Membership refunds are prorated based on the remaining term of the membership; accordingly, no refund reserve is required to be established for the periods presented. The Company recognizes and presents revenue-producing transactions on a net of value added/sales tax basis.
The Company began offering Platinum memberships in Costa Rica during fiscal year 2013, which provides members with a 2% rebate on most items, up to an annual maximum of $500.00. Platinum members can apply this rebate to future purchases at the warehouse club at the end of the annual membership period. The Company records this 2% rebate as a reduction of revenue at the time of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses. The rebate is issued annually to Platinum members on March 1 and expires August 31. Any rebate amount not redeemed by August 31 is recognized as breakage revenue. The Company periodically reviews expired unused rebates outstanding, and the expired unused rebates are recognized as Revenues: Other income on the consolidated statements of income. The Company has determined that breakage revenue is insignificant; therefore, it records 100% of the Platinum membership liability at the time of sale, rather than estimating breakage.
14
The Company recognizes gift certificate sales revenue when the certificates are redeemed. The outstanding gift certificates are reflected as other accrued expenses in the consolidated balance sheets. These gift certificates generally have a one-year stated expiration date from the date of issuance. However, the absence of a large volume of transactions for gift certificates impairs the Company's ability to make a reasonable estimate of the redemption levels for gift certificates. Therefore, the Company assumes a 100% redemption rate that is the equivalent of no breakage prior to expiration of the gift certificate. The Company periodically reviews unredeemed outstanding gift certificates, and the gift certificates that have expired are recognized as Revenues: Other income on the consolidated statements of income.
Operating leases, where the Company is the lessor, with lease payments that have fixed and determinable rent increases are recognized as revenue on a straight-line basis over the expected lease term. The Company also accounts in its straight-line computation for the effect of any "rental holidays." Contingent rental revenue is recognized as the contingent rent becomes due per the individual lease agreements.
Insurance Reimbursements – Receipts from insurance reimbursements up to the amount of the losses recognized are considered recoveries. These recoveries are accounted for when they are probable of receipt. Insurance recoveries are not recognized prior to the recognition of the related cost. Anticipated proceeds in excess of the amount of loss recognized are considered gains and are subject to gain contingency guidance. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the insurance claim are resolved.
The Company’s Guatemala Pradera warehouse club experienced a fire in its merchandise receiving department during the early morning hours of June 4, 2015. No members or employees were in the warehouse club at the time. The fire was extinguished, but caused considerable smoke and some fire damage. The warehouse club was closed for nine days and reopened on June 13, 2015. The Company is insured for these costs and filed an insurance claim with its insurance provider. During the quarter ended August 31, 2015, the Company recorded an initial receivable of approximately $2.8 million against the expected insurance payment related to expenses associated with the write off of inventory, equipment disposals, building repairs, other associated costs recognized related to the fire and for current replacement costs for assets lost in the fire in excess of the net book value (disposal cost). The Company received as of August 31, 2015 approximately $300,000 in payments against the claim filed and the receivable recorded. Of this amount, approximately $76,000 was recorded as a gain on disposal of assets, as proceeds received from the insurance reimbursement were in excess of the amount of loss recognized on the disposal of assets. Additionally, the Company recorded approximately $28,000 for the disposal of assets damaged during the fire, for which it had not yet been reimbursed. As of August 31, 2015, the Company's receivable related to this insurance claim was approximately $2.6 million. The Company’s insurance policy also addresses coverage for business interruption. During the fourth quarter of fiscal year 2015, the Company filed a claim with its insurance carrier for approximately $332,000 related to business interruption for which the Company did not record a receivable. Insurance proceeds for reimbursements related to business interruptions are considered gain contingencies and are not recognized in the financial statements until the period in which all contingencies are resolved and the gain is realized. During the fourth quarter of fiscal year 2015, the Company expensed to cost of goods sold, net warehouse club expenses of approximately $165,000 related to the write off of inventory not covered by insurance. Additionally, the Company expensed to selling, general and administrative expenses approximately $34,000 in salaries related to the clean up and preparation of the warehouse club for reopening.
The Company received the final insurance settlement payments of approximately $3.1 million during the quarter ended November 30, 2015. As a result, the Company recorded a credit to cost of goods sold of approximately $165,000 during the period that reflects the reversal of the inventory written off previously and now covered under the claim and gain on the disposal of assets for $85,000 that included reimbursement from the insurance for assets disposed of in fiscal year 2015. Additionally, the Company recorded during the quarter ended November 30, 2015 other income from insurance proceeds of approximately $202,000 during the period that reflects the amount reimbursed to the Company for business interruption coverage, net of taxes and other miscellaneous amounts charged to the Company by the insurance company for storage of the damaged inventory.
Cost of Goods Sold – The Company includes the cost of merchandise, food service and bakery raw materials in cost of goods sold. The Company also includes in cost of goods sold the external and internal distribution and handling costs for supplying merchandise, raw materials and supplies to the warehouse clubs. External costs include inbound freight, duties, drayage, fees, insurance, and non-recoverable value-added tax related to inventory shrink, spoilage and damage. Internal costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation at its distribution facilities and payroll and other direct costs for in-store demonstrations.
Vendor consideration consists primarily of volume rebates, time-limited product promotions, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates that are not threshold-based are incorporated into the unit cost of merchandise, reducing the inventory cost and cost of goods sold. Volume rebates that are threshold-based are recorded as a reduction to cost of goods sold when the Company achieves established purchase levels that are confirmed by the
15
vendor in writing or upon receipt of funds. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is reclassified as a reduction to inventory. Product promotions are generally linked to coupons that provide for reimbursement to the Company from the vendor of the product being promoted. Slotting fees are related to consideration received by the Company from vendors for preferential "end cap" placement of the vendor's products within the warehouse club. Demonstration reimbursements are related to consideration received by the Company from vendors for the in-store promotion of the vendors' products. The Company records the reduction in cost of goods sold on a transactional basis for these programs. Prompt payment discounts are taken in substantially all cases, and therefore are applied directly to reduce the acquisition cost of the related inventory, with the resulting effect recorded to cost of goods sold when the inventory is sold.
Selling, General and Administrative – Selling, general and administrative expenses are comprised primarily of expenses associated with warehouse club operations. Warehouse club operations include the operating costs of the Company's warehouse clubs, including all payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation, and bank and credit card processing fees. Also included in selling, general and administrative expenses are the payroll and related costs for the Company's U.S. and regional purchasing and management centers.
Pre-Opening Costs – The Company expenses pre-opening costs (the costs of start-up activities, including organization costs and rent) as incurred.
Asset Impairment Costs – The Company periodically evaluates its long-lived assets for indicators of impairment. Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity. These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair value. Future business conditions and/or activity could differ materially from the projections made by management causing the need for additional impairment charges.
Contingencies and Litigation – The Company records and reserves for loss contingencies if (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can be reasonably estimated. If one or both criteria for accrual are not met, but there is at least a reasonable possibility that a loss will occur, the Company does not record a reserve for a loss contingency but describes the contingency within a note and provides detail, when possible, of the estimated potential loss or range of loss. If an estimate cannot be made, a statement to that effect is made.
Foreign Currency Translation – The assets and liabilities of the Company’s foreign operations are translated to U.S. dollars when the functional currency in the Company’s international subsidiaries is the local currency and not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss. These adjustments will affect net income upon the sale or liquidation of the underlying investment. Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of income.
The following table summarizes the amounts recorded for the three and nine months ended May 31, 2016 and 2015 (in thousands):