Costco 2005 Annual Report Download - page 23

Interest Expense
Interest expense totaled $36,651 in fiscal 2004, compared to $36,920 in fiscal 2003. Interest expense in both
fiscal 2004 and 2003 includes interest on the 3
1
⁄ 2 % Zero Coupon Notes, 7
1
⁄ 8 %and5
1
⁄ 2 % Senior Notes and on
balances outstanding under the Company’s bank credit facilities and promissory notes. The decrease was primar-
ily a result of the Company’s reduction in short-term borrowings, principally related to its foreign subsidiaries.
This decrease was substantially offset by increases in interest rates on the Senior Notes due to interest rate swap
agreements converting the interest rate from fixed to floating.
Interest Income and Other
Interest income and other totaled $51,627 in fiscal 2004, compared to $38,525 in fiscal 2003. The increase
primarily reflects greater interest earned on higher cash and cash equivalents balances and short-term invest-
ments. In addition, a reduction in the expense to record minority interest in the earnings of foreign subsidiaries
was reported in fiscal 2004 as the Company increased its ownership in Costco Wholesale UK Limited to 100%.
Provision for Income Taxes
The effective income tax rate on earnings was 37% in fiscal 2004 and 37.75% in fiscal 2003. The decrease
in the effective income tax rate is primarily attributable to lower statutory income tax rates for foreign operations
and one-time benefits associated with certain tax planning strategies.
Liquidity and Capital Resources (dollars in thousands, except per share amounts)
Cash Flows
The Company’s primary sources of liquidity are cash flows generated from warehouse operations and our
existing cash and cash equivalents and short-term investments balances, which were $3,459,857 and $3,129,882
at August 28, 2005 and August 29, 2004, respectively. Net cash provided by operating activities totaled
$1,783,177 in fiscal 2005 compared to $2,098,783 in fiscal 2004, a decrease of $315,606. Higher net income and
a decrease in net merchandise inventories (merchandise inventory less accounts payable) year-over-year in-
creased cash flow from operating activities by $391,571. This increase was offset by decreases in cash flow from
operating assets and liabilities of $706,855, primarily relating to the timing in the collection of certain receivables
and in payments of income taxes in fiscal 2005 as compared to fiscal 2004.
A significant component of net cash used in investing activities continues to be the purchase of property and
equipment related to the Company’s warehouse expansion and remodel projects. Net cash used in investing activ-
ities totaled $2,058,729 in fiscal 2005 compared to $1,048,481 in fiscal 2004, an increase of $1,010,248. The in-
crease in investing activities primarily relates to an increase in the net investment in short-term investments of
$768,596 and an increase in additions to property and equipment of $289,811 in fiscal 2005 over fiscal 2004.
Net cash used in financing activities totaled $518,651 in fiscal 2005 compared to $209,569 provided by fi-
nancing activities in fiscal 2004. The decrease of $728,220 primarily resulted from an increase in the repayment
of debt of $297,275 primarily relating to the repayment of the 7
1
⁄ 8 % Senior Notes, which matured on June 15,
2005, and repurchases of common stock of $413,252 under the Company’s $500,000 share repurchase program.
Dividends
Costco’s Board of Directors declared four quarterly cash dividends during fiscal year 2005. The first two
dividends of $0.10 per share were paid November 26, 2004 and February 25, 2005, to shareholders of record at
the close of business on November 5, 2004 and February 8, 2005, respectively. The third and fourth dividends of
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