Costco 2007 Annual Report Download - page 38

$22.71. Holders of the Zero Coupon Notes may require us to purchase the Zero Coupon Notes (at the
discounted issue price plus accrued interest to date of purchase) in August 2012. We may redeem, at
our option, the Zero Coupon Notes (at the discounted issue price plus accrued interest to date of
redemption) any time in or after August 2002. As of September 2, 2007, $832.4 million in principal
amount of the Zero Coupon Notes had been converted by note holders to shares of Costco Common
Stock, of which $61.2 million and $286.5 million in principal were converted in fiscal 2007 and 2006,
respectively, or $42.3 million and $188.9 million in fiscal 2007 and 2006, respectively, after factoring in
the related debt discount.
Derivatives
We have limited involvement with derivative financial instruments and use them only to manage well-
defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to
hedge the impact of fluctuations of foreign exchange on inventory purchases and typically have very
short terms. These forward contracts do not qualify for derivative hedge accounting. The aggregate
notional amount, which approximates the fair value of foreign exchange contracts outstanding at
September 2, 2007 and September 3, 2006, was $75.0 million and $63.5 million, respectively. The
mark-to-market adjustment related to these contracts was $0.9 million and $1.1 million at September 2,
2007 and September 3, 2006, respectively. The majority of the forward foreign exchange contracts
were entered into by our wholly-owned United Kingdom subsidiary, primarily to hedge U.S. dollar
merchandise inventory purchases.
Effective March 25, 2002, we entered into “fixed-to-floating” interest rate swaps to manage interest rate
risk associated with our 2002 Senior Notes, which matured and were retired in March 2007. The swaps
were designated and qualified as fair value hedges of the debt. As the terms of the swaps matched
those of the underlying hedged debt, changes in the fair value of the swaps were offset by
corresponding changes in the carrying amount of the hedged debt and resulted in no net earnings
impact. At September 3, 2006, the aggregate value of the swaps was $1 million and was recorded in
“deferred income taxes and other current assets” in our consolidated balance sheets. In March 2007,
upon maturity of the debt and expiration of the swap agreements, the aggregate fair value of the swaps
was zero.
We are exposed to market risk for changes in utility commodity pricing, which we partially mitigate
through the use of firm-price contracts with counterparties for approximately 23% of our locations in the
U.S. and Canada. The effects of these arrangements are not significant for any period presented.
Off-Balance Sheet Arrangements
With the exception of our operating leases, we have no off-balance sheet arrangements that have had,
or are reasonably likely to have, a material current or future effect on our financial condition or
consolidated financial statements.
Stock Repurchase Programs
In January and July of 2006, our Board of Directors approved an additional $1.00 billion and $2.00
billion of stock repurchases, respectively, which expire in 2009, bringing total authorizations by our
Board of Directors since inception of the program in fiscal 2005 to $4.50 billion. Subsequent to the end
of fiscal 2007, our Board of Directors approved an additional $1.30 billion of stock repurchases, which
expire in 2010.
During fiscal 2007, we repurchased 36.4 million shares at an average price of $54.39 totaling
approximately $1.98 billion. During fiscal 2006, we repurchased 28.4 million shares of common stock,
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