Costco 2006 Annual Report Download - page 28

fiscal 2006 resulted primarily from the repayment of the 7
1
⁄ 8 % Senior Notes in June 2005. In addition,
interest expense decreased on the 3
1
⁄ 2 % Zero Coupon Notes as note holders converted approximately
$190.9 million in principal amount of the Notes into common stock. The amount of interest capitalized
increased in fiscal 2006, contributing to the decrease in interest expense, as both interest rates and the
dollar amount of projects under construction increased. The overall decrease in interest expense in
fiscal 2006 was partially offset by the increase in interest rates on the 5
1
⁄ 2 % Senior Notes, which were
swapped into variable rate debt in March 2002.
2005 vs. 2004
Interest expense totaled $34.4 million in fiscal 2005, compared to $36.7 million in fiscal 2004. Interest
expense in both fiscal 2005 and 2004 included interest on the 3
1
⁄ 2 % Zero Coupon Notes, the 7
1
⁄ 8 %
and 5
1
⁄ 2 % Senior Notes, and on balances outstanding under our bank credit facilities and promissory
notes. The decrease was primarily a result of a decrease in interest on our 3
1
⁄ 2 % Zero Coupon Notes
as note holders converted approximately $280.8 million in principle amount of the Notes into common
stock during fiscal 2005. Additionally, capitalized interest increased year-over-year as interest rates
and construction costs increased in fiscal 2005 over fiscal 2004. These decreases were partially offset
by increases in interest on the Senior Notes as these fixed rate instruments were swapped into
variable rate debt in November 2001 and March 2002, which was mitigated by the fact that the 7
1
⁄ 8 %
Senior Notes matured and were repaid on June 15, 2005.
Interest Income and Other
Fiscal 2006 Fiscal 2005 Fiscal 2004
Interest income and other .............. $138,355 $109,096 $51,627
2006 vs. 2005
Interest income and other totaled $138.4 million in fiscal 2006, compared to $109.1 million in fiscal
2005. This increase primarily reflects increased interest income resulting from higher interest rates
earned, as well as an extra week in fiscal 2006 as compared to fiscal 2005.
2005 vs. 2004
Interest income and other totaled $109.1 million in fiscal 2005, compared to $51.6 million in fiscal 2004.
The increase primarily reflects increased interest income resulting from higher cash and cash
equivalents balances and short-term investments on hand throughout fiscal 2005, as well as higher
interest rates earned on the balances as compared to fiscal 2004.
Provision for Income Taxes
Fiscal 2006 Fiscal 2005 Fiscal 2004
Income tax expense ...................... $648,202 $485,870 $518,231
Effective tax rate ........................ 37.01% 31.37% 37.00%
The effective income tax rate on earnings in fiscal 2006, 2005 and 2004 was 37.01%, 31.37% and
37.00%, respectively. The low rate in fiscal 2005 was primarily attributable to a non-recurring $54.2
million income tax benefit resulting primarily from the settlement of a transfer pricing dispute between
the United States and Canada (covering the years 1996-2003) and a net tax benefit on excess foreign
tax credits on unremitted foreign earnings of $20.6 million. Excluding these benefits the effective
income tax rate on earnings in fiscal 2005 would have been 36.2%.
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