UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2017 2018
OR
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☐ | 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)
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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.
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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).
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Yes ☒ | No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ☒ | Accelerated filer ☐ | Smaller Reporting Company ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes ☐ | No ☒ |
The registrant had 30,397,54030,461,536 shares of its common stock, par value $0.0001 per share, outstanding at June 30, 2017.2018.
INDEX TO FORM 10-Q
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1 | ||
| CONSOLIDATED BALANCE SHEETS AS OF MAY 31, | 2 |
| 4 | |
| 5 | |
| 6 | |
| 7 | |
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of May 31, 20172018 and the consolidated balance sheet as of August 31, 2016,2017, the unaudited consolidated statements of income for the three and nine months ended May 31, 20172018 and 2016,2017, the unaudited consolidated statements of comprehensive income for the three and nine months ended May 31, 20172018 and 2016,2017, the unaudited consolidated statements of equity for the nine months ended May 31, 20172018 and 2016,2017, and the unaudited consolidated statements of cash flows for the nine months ended May 31, 20172018 and 2016,2017, 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)
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| May 31, |
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| May 31, |
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| 2017 |
| August 31, |
| 2018 |
| August 31, | ||||
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| (Unaudited) |
| 2016 |
| (Unaudited) |
| 2017 | ||||
ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 192,106 |
| $ | 199,522 |
| $ | 141,164 |
| $ | 162,434 |
Short-term restricted cash |
| 816 |
| 518 |
| 676 |
| 460 | ||||
Receivables, net of allowance for doubtful accounts of $7 as of May 31, 2017 and August 31, 2016, respectively |
| 6,591 |
| 7,464 | ||||||||
Receivables, net of allowance for doubtful accounts of $32 and $7 as of May 31, 2018 and August 31, 2017, respectively |
| 8,998 |
| 6,460 | ||||||||
Merchandise inventories |
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| 279,417 |
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| 282,907 |
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| 326,200 |
|
| 310,946 |
Prepaid expenses and other current assets (includes $3 and $34 as of May 31, 2017 and August 31, 2016, respectively, for the fair value of foreign currency forward contracts) |
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| 21,805 |
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| 22,143 | ||||||
Prepaid expenses and other current assets |
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| 32,680 |
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| 30,070 | ||||||
Total current assets |
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| 500,735 |
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| 512,554 |
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| 509,718 |
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| 510,370 |
Long-term restricted cash |
| 2,765 |
| 2,676 |
| 2,973 |
| 2,818 | ||||
Property and equipment, net |
| 533,157 |
| 473,045 |
| 597,240 |
| 557,829 | ||||
Goodwill |
| 35,632 |
| 35,637 |
| 51,351 |
| 35,642 | ||||
Other intangibles, net |
| 15,593 |
| — | ||||||||
Deferred tax assets |
| 13,893 |
| 12,258 |
| 10,509 |
| 15,412 | ||||
Other non-current assets (includes $2,679 and $3,224 as of May 31, 2017 and August 31, 2016, respectively, for the fair value of derivative instruments) |
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| 46,928 |
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| 49,798 | ||||||
Other non-current assets (includes $4,081 and $2,547 as of May 31, 2018 and August 31, 2017, respectively, for the fair value of derivative instruments) |
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| 48,317 |
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| 44,678 | ||||||
Investment in unconsolidated affiliates |
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| 10,766 |
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| 10,767 |
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| 10,769 |
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| 10,765 |
Total Assets |
| $ | 1,143,876 |
| $ | 1,096,735 |
| $ | 1,246,470 |
| $ | 1,177,514 |
LIABILITIES AND EQUITY |
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Current Liabilities: |
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Short-term borrowings |
| $ | — |
| $ | 16,534 |
| $ | 334 |
| $ | — |
Accounts payable |
| 233,226 |
| 267,173 |
| 268,976 |
| 272,248 | ||||
Accrued salaries and benefits |
| 20,664 |
| 19,606 |
| 23,594 |
| 19,151 | ||||
Deferred membership income |
| 22,346 |
| 20,920 | ||||||||
Deferred income |
| 23,785 |
| 22,100 | ||||||||
Income taxes payable |
| 5,257 |
| 4,226 |
| 5,124 |
| 5,044 | ||||
Other accrued expenses (includes $400 and $144 as of May 31, 2017 and August 31, 2016, respectively, for the fair value of foreign currency forward contracts) |
| 20,788 |
| 24,880 | ||||||||
Other accrued expenses |
| 28,852 |
| 26,483 | ||||||||
Dividends payable |
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| 10,643 |
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| — |
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| 10,652 |
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| — |
Long-term debt, current portion |
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| 20,376 |
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| 14,565 |
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| 14,644 |
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| 18,358 |
Total current liabilities |
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| 333,300 |
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| 367,904 |
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| 375,961 |
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| 363,384 |
Deferred tax liability |
| 1,472 |
| 1,760 |
| 5,884 |
| 1,812 | ||||
Long-term portion of deferred rent |
| 8,890 |
| 8,961 |
| 8,915 |
| 8,914 | ||||
Long-term income taxes payable, net of current portion |
| 801 |
| 970 |
| 7,740 |
| 909 | ||||
Long-term debt, net of current portion |
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| 104,338 |
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| 73,542 |
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| 91,208 |
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| 87,939 |
Other long-term liabilities (includes $600 and $1,514 for the fair value of derivative instruments and $4,806 and $4,013 for post employment plans as of May 31, 2017 and August 31, 2016, respectively) |
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| 5,688 |
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| 5,527 | ||||||
Other long-term liabilities (includes $537 and $682 for the fair value of derivative instruments and $5,115 and $5,051 for post-employment plans as of May 31, 2018 and August 31, 2017, respectively) |
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| 6,063 |
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| 5,789 | ||||||
Total Liabilities |
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| 454,489 |
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| 458,664 |
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| 495,771 |
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| 468,747 |
2
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Equity: |
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Common stock $0.0001 par value, 45,000,000 shares authorized; 31,258,752 and 31,237,658 shares issued and 30,398,239 and 30,401,307 shares outstanding (net of treasury shares) as of May 31, 2017 and August 31, 2016, respectively |
| 3 |
| 3 | ||||||||
Stockholders' Equity: |
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Common stock $0.0001 par value, 45,000,000 shares authorized; 31,369,568 and 31,275,727 shares issued and 30,472,064 and 30,400,742 shares outstanding (net of treasury shares) as of May 31, 2018 and August 31, 2017, respectively |
| 3 |
| 3 | ||||||||
Additional paid-in capital |
| 420,130 |
| 412,369 |
| 430,133 |
| 422,395 | ||||
Tax benefit from stock-based compensation |
| 11,552 |
| 11,321 |
| 11,486 |
| 11,486 | ||||
Accumulated other comprehensive loss |
| (108,258) |
| (103,951) |
| (108,576) |
| (110,059) | ||||
Retained earnings |
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| 400,702 |
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| 351,060 |
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| 454,901 |
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| 420,866 |
Less: treasury stock at cost, 860,513 shares and 836,351 shares as of May 31, 2017 and August 31, 2016, respectively |
|
| (34,742) |
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| (32,731) | ||||||
Total Equity |
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| 689,387 |
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| 638,071 | ||||||
Less: treasury stock at cost, 897,504 and 874,985 shares as of May 31, 2018 and August 31, 2017, respectively |
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| (37,840) |
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| (35,924) | ||||||
Total stockholders' equity attributable to PriceSmart, Inc. stockholders |
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| 750,107 |
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| 708,767 | ||||||
Noncontrolling interest in consolidated subsidiaries |
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| 592 |
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| — | ||||||
Total stockholders' equity |
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| 750,699 |
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| 708,767 | ||||||
Total Liabilities and Equity |
| $ | 1,143,876 |
| $ | 1,096,735 |
| $ | 1,246,470 |
| $ | 1,177,514 |
See accompanying notes.
3
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||
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| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Revenues: |
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Net warehouse club sales |
| $ | 710,699 |
| $ | 684,547 |
| $ | 2,199,051 |
| $ | 2,134,365 | ||||||||||||
Net merchandise sales |
| $ | 750,473 |
| $ | 710,699 |
| $ | 2,312,447 |
| $ | 2,199,051 | ||||||||||||
Export sales |
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| 6,475 |
| 7,091 |
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| 25,381 |
| 21,872 |
| 9,967 |
| 6,475 |
| 27,252 |
| 25,381 | ||||||
Membership income |
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| 12,038 |
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| 11,475 |
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| 35,581 |
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| 34,226 |
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| 12,852 |
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| 12,038 |
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| 37,930 |
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| 35,581 |
Other income |
|
| 1,046 |
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| 1,149 |
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| 3,113 |
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| 3,661 | ||||||||||||
Other revenue and income |
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| 8,909 |
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| 1,046 |
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| 11,207 |
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| 3,113 | ||||||||||||
Total revenues |
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| 730,258 |
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| 704,262 |
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| 2,263,126 |
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| 2,194,124 |
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| 782,201 |
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| 730,258 |
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| 2,388,836 |
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| 2,263,126 |
Operating expenses: |
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Cost of goods sold: |
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Net warehouse club |
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| 611,455 |
| 590,500 |
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| 1,879,747 |
| 1,832,183 | ||||||||||||||
Export |
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| 6,143 |
| 6,742 |
|
| 24,085 |
| 20,799 | ||||||||||||||
Net merchandise sales |
| 641,249 |
| 611,455 |
| 1,977,840 |
| 1,879,747 | ||||||||||||||||
Export sales |
| 9,466 |
| 6,143 |
| 25,900 |
| 24,085 | ||||||||||||||||
Non-merchandise |
| 1,979 |
| — |
| 1,979 |
| — | ||||||||||||||||
Selling, general and administrative: |
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Warehouse club operations |
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| 67,754 |
| 62,745 |
|
| 200,964 |
| 188,348 | ||||||||||||||
Warehouse club and other operations |
| 76,259 |
| 67,754 |
| 217,712 |
| 200,964 | ||||||||||||||||
General and administrative |
|
| 16,907 |
| 16,439 |
|
| 51,921 |
| 48,086 |
| 24,079 |
| 16,907 |
| 63,167 |
| 51,921 | ||||||
Pre-opening expenses |
|
| 9 |
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| 13 |
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| (104) |
|
| 389 |
| 352 |
| 9 |
| 863 |
| (104) | ||||
Asset impairment |
|
| — |
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| — |
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| 1,929 |
|
| — | ||||||||||||
Loss/(gain) on disposal of assets |
|
| 364 |
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| 334 |
|
| 1,106 |
|
| 399 |
|
| 388 |
|
| 364 |
|
| 587 |
|
| 1,106 |
Total operating expenses |
|
| 702,632 |
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| 676,773 |
|
| 2,157,719 |
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| 2,090,204 |
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| 753,772 |
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| 702,632 |
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| 2,289,977 |
|
| 2,157,719 |
Operating income |
|
| 27,626 |
|
| 27,489 |
|
| 105,407 |
|
| 103,920 |
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| 28,429 |
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| 27,626 |
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| 98,859 |
|
| 105,407 |
Other income (expense): |
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Interest income |
|
| 392 |
| 322 |
|
| 1,443 |
| 780 |
| 370 |
| 392 |
| 1,138 |
| 1,443 | ||||||
Interest expense |
|
| (1,828) |
|
| (1,571) |
|
| (5,126) |
|
| (4,480) |
|
| (1,362) |
|
| (1,828) |
|
| (3,609) |
|
| (5,126) |
Other income (expense), net |
|
| 1,101 |
|
| (222) |
|
| 1,088 |
|
| (1,018) |
|
| (575) |
|
| 1,101 |
|
| (87) |
|
| 1,088 |
Total other income (expense) |
|
| (335) |
|
| (1,471) |
|
| (2,595) |
|
| (4,718) |
|
| (1,567) |
|
| (335) |
|
| (2,558) |
|
| (2,595) |
Income before provision for income taxes and |
|
| 27,291 |
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| 26,018 |
|
| 102,812 |
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| 99,202 |
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| 26,862 |
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| 27,291 |
|
| 96,301 |
|
| 102,812 |
Provision for income taxes |
|
| (8,459) |
|
| (9,168) |
|
| (31,885) |
|
| (33,113) |
|
| (8,128) |
|
| (8,459) |
|
| (40,950) |
|
| (31,885) |
Income (loss) of unconsolidated affiliates |
|
| 6 |
|
| (13) |
|
| (1) |
|
| 362 |
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| (18) |
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| 6 |
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| 3 |
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| (1) |
Net income |
|
| 18,838 |
| $ | 16,837 |
| $ | 70,926 |
|
| 66,451 |
| $ | 18,716 |
| $ | 18,838 |
| $ | 55,354 |
| $ | 70,926 |
Net income per share available for distribution: |
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Basic net income per share |
| $ | 0.62 |
| $ | 0.55 |
| $ | 2.34 |
| $ | 2.19 | ||||||||||||
Diluted net income per share |
| $ | 0.62 |
| $ | 0.55 |
| $ | 2.34 |
| $ | 2.19 | ||||||||||||
Less: net income (loss) attributable to noncontrolling interest |
|
| 22 |
|
| — |
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| 22 |
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| — | ||||||||||||
Net income attributable to PriceSmart, Inc. |
| $ | 18,694 |
| $ | 18,838 |
| $ | 55,332 |
| $ | 70,926 | ||||||||||||
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Net income attributable to PriceSmart, Inc. per share available for distribution: |
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Basic |
| $ | 0.61 |
| $ | 0.62 |
| $ | 1.82 |
| $ | 2.34 | ||||||||||||
Diluted |
| $ | 0.61 |
| $ | 0.62 |
| $ | 1.82 |
| $ | 2.34 | ||||||||||||
Shares used in per share computations: |
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Basic |
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| 30,043 |
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| 29,951 |
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| 30,010 |
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| 29,918 |
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| 30,137 |
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| 30,043 |
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| 30,105 |
|
| 30,010 |
Diluted |
|
| 30,045 |
|
| 29,955 |
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| 30,014 |
|
| 29,923 |
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| 30,137 |
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| 30,045 |
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| 30,105 |
|
| 30,014 |
Dividends per share |
| $ | — |
| $ | — |
| $ | 0.70 |
| $ | 0.70 |
| $ | — |
| $ | — |
| $ | 0.70 |
| $ | 0.70 |
See accompanying notes.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS)
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| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||
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| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Net income |
| $ | 18,838 |
| $ | 16,837 |
| $ | 70,926 |
| $ | 66,451 | ||||||||||||
Net income attributable to PriceSmart, Inc. |
| $ | 18,694 |
| $ | 18,838 |
| $ | 55,332 |
| $ | 70,926 | ||||||||||||
Other Comprehensive Income, net of tax: |
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Foreign currency translation adjustments (1) |
| $ | (3,074) |
| $ | 6,509 |
| $ | (4,700) |
| $ | (4,383) |
| $ | (2,461) |
| $ | (3,074) |
| $ | (126) |
| $ | (4,700) |
Defined benefit pension plan: |
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Amortization of prior service cost and actuarial gains included in net periodic pensions cost |
|
| 43 |
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| (6) |
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| 29 |
|
| (14) |
|
| 42 |
|
| 43 |
|
| 101 |
|
| 29 |
Total defined benefit pension plan |
|
| 43 |
|
| (6) |
|
| 29 |
|
| (14) |
|
| 42 |
|
| 43 |
|
| 101 |
|
| 29 |
Derivative instruments: (2) |
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Unrealized gains/(losses) on change in |
|
| (416) |
|
| (191) |
|
| 364 |
|
| (522) |
|
| 79 |
|
| (416) |
|
| 1,516 |
|
| 364 |
Total derivative instruments |
|
| (416) |
|
| (191) |
|
| 364 |
|
| (522) |
|
| 79 |
|
| (416) |
|
| 1,516 |
|
| 364 |
Other comprehensive income (loss) |
|
| (3,447) |
|
| 6,312 |
|
| (4,307) |
|
| (4,919) |
|
| (2,340) |
|
| (3,447) |
|
| 1,491 |
|
| (4,307) |
Comprehensive income |
| $ | 15,391 |
| $ | 23,149 |
| $ | 66,619 |
| $ | 61,532 |
| $ | 16,354 |
| $ | 15,391 |
| $ | 56,823 |
| $ | 66,619 |
Less: comprehensive income/(loss) attributable to noncontrolling interest |
|
| 8 |
|
| — |
|
| 8 |
|
| — | ||||||||||||
Comprehensive income attributable to PriceSmart, Inc. stockholders |
| $ | 16,346 |
| $ | 15,391 |
| $ | 56,815 |
| $ | 66,619 |
(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 7 - Derivative Instruments and Hedging Activities. |
See accompanying notes.
5
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Tax Benefit |
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Tax Benefit |
| Accumulated |
|
|
|
|
|
|
|
|
|
| Total Stockholder's |
|
|
|
|
|
| ||||
|
|
|
|
|
|
| Additional |
| From |
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
| From |
| Other |
|
|
|
|
|
|
|
|
|
| Equity |
|
|
|
|
|
| ||||||
|
| Common Stock |
| Paid-in |
| Stock Based |
| Comprehensive |
| Retained |
| Treasury Stock |
| Total |
| Common Stock |
| Paid-in |
| Stock Based |
| Comprehensive |
| Retained |
| Treasury Stock |
|
| Attributable to |
|
| Noncontrolling |
| Total | ||||||||||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Compensation |
| Income(Loss) |
| Earnings |
| Shares |
| Amount |
| Equity | ||||||||||||||||||||||||||||||||||||||
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 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — | |||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares |
| Amount |
| Capital |
| Compensation |
| Income(Loss) |
| Earnings |
| Shares |
| Amount |
|
| PriceSmart, Inc. |
|
| Interest |
| Equity | |||||||
Balance at August 31, 2016 |
| 31,238 |
| $ | 3 |
| $ | 412,369 |
| $ | 11,321 |
| $ | (103,951) |
| $ | 351,060 |
| 836 |
| $ | (32,731) |
| $ | 638,071 |
| 31,238 |
| $ | 3 |
| $ | 412,369 |
| $ | 11,321 |
| $ | (103,951) |
| $ | 351,060 |
| 836 |
| $ | (32,731) |
| $ | 638,071 |
| $ | — |
| $ | 638,071 |
Purchase of treasury stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 25 |
|
| (2,011) |
|
| (2,011) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 25 |
|
| (2,011) |
|
| (2,011) |
|
| — |
|
| (2,011) |
Issuance of restricted stock award |
| 48 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
| 48 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Forfeiture of restricted stock awards |
| (35) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
| (35) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Exercise of stock options |
| 8 |
|
| — |
|
| 433 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 433 |
| 8 |
|
| — |
|
| 433 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 433 |
|
| — |
|
| 433 |
Stock-based compensation |
| — |
|
| — |
|
| 7,328 |
|
| 231 |
|
| — |
|
| — |
| — |
|
| — |
|
| 7,559 |
| — |
|
| — |
|
| 7,328 |
|
| 231 |
|
| — |
|
| — |
| — |
|
| — |
|
| 7,559 |
|
| — |
|
| 7,559 |
Dividend paid to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,641) |
| — |
|
| — |
|
| (10,641) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,641) |
| — |
|
| — |
|
| (10,641) |
|
| — |
|
| (10,641) |
Dividend payable to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,643) |
| — |
|
| — |
|
| (10,643) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,643) |
| — |
|
| — |
|
| (10,643) |
|
| — |
|
| (10,643) |
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 70,926 |
| — |
|
| — |
|
| 70,926 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 70,926 |
| — |
|
| — |
|
| 70,926 |
|
| — |
|
| 70,926 |
Other comprehensive income (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| (4,307) |
|
| — |
| — |
|
| — |
|
| (4,307) |
| — |
|
| — |
|
| — |
|
| — |
|
| (4,307) |
|
| — |
| — |
|
| — |
|
| (4,307) |
|
| — |
|
| (4,307) |
Balance at May 31, 2017 |
| 31,259 |
| $ | 3 |
| $ | 420,130 |
| $ | 11,552 |
| $ | (108,258) |
| $ | 400,702 |
| 861 |
| $ | (34,742) |
| $ | 689,387 |
| 31,259 |
| $ | 3 |
| $ | 420,130 |
| $ | 11,552 |
| $ | (108,258) |
| $ | 400,702 |
| 861 |
| $ | (34,742) |
| $ | 689,387 |
| $ | — |
| $ | 689,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Balance at August 31, 2017 |
| 31,276 |
| $ | 3 |
| $ | 422,395 |
| $ | 11,486 |
| $ | (110,059) |
| $ | 420,866 |
| 875 |
| $ | (35,924) |
| $ | 708,767 |
| $ | — |
| $ | 708,767 | |||||||||||||||||||||||||
Acquisition of Aeropost |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 562 |
|
| 562 | |||||||||||||||||||||||||
Purchase of treasury stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 23 |
|
| (1,916) |
|
| (1,916) |
|
| — |
|
| (1,916) | |||||||||||||||||||||||||
Issuance of restricted stock award |
| 96 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | |||||||||||||||||||||||||
Forfeiture of restricted stock awards |
| (7) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | |||||||||||||||||||||||||
Exercise of stock options |
| 4 |
|
| — |
|
| 269 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 269 |
|
| — |
|
| 269 | |||||||||||||||||||||||||
Stock-based compensation |
| — |
|
| — |
|
| 7,469 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 7,469 |
|
| — |
|
| 7,469 | |||||||||||||||||||||||||
Dividend paid to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,645) |
| — |
|
| — |
|
| (10,645) |
|
| — |
|
| (10,645) | |||||||||||||||||||||||||
Dividend payable to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,652) |
| — |
|
| — |
|
| (10,652) |
|
| — |
|
| (10,652) | |||||||||||||||||||||||||
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 55,332 |
| — |
|
| — |
|
| 55,332 |
|
| 22 |
|
| 55,354 | |||||||||||||||||||||||||
Other comprehensive income (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| 1,483 |
|
| — |
| — |
|
| — |
|
| 1,483 |
|
| 8 |
|
| 1,491 | |||||||||||||||||||||||||
Balance at May 31, 2018 |
| 31,369 |
| $ | 3 |
| $ | 430,133 |
| $ | 11,486 |
| $ | (108,576) |
| $ | 454,901 |
| 898 |
| $ | (37,840) |
| $ | 750,107 |
| $ | 592 |
| $ | 750,699 |
See accompanying notes.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| ||||
|
| Nine Months Ended |
| Nine Months Ended | ||||||||
|
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 70,926 |
| $ | 66,451 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
| ||||||||
Net income attributable to PriceSmart, Inc. |
| $ | 55,332 |
| $ | 70,926 | ||||||
Adjustments to reconcile net income attributable to PriceSmart, Inc. to net cash provided by operating activities: |
|
|
|
| ||||||||
Depreciation and amortization |
| 34,445 |
| 29,003 |
| 38,378 |
| 34,445 | ||||
Allowance for doubtful accounts |
| 25 |
| — | ||||||||
Asset impairment and closure costs |
| 1,929 |
| — | ||||||||
(Gain)/loss on sale of property and equipment |
| 1,106 |
| 399 |
| 587 |
| 1,106 | ||||
Deferred income taxes |
| 3,143 |
| (1,222) |
| 6,537 |
| 3,143 | ||||
Excess tax benefit on stock-based compensation |
| (231) |
| (579) | ||||||||
Equity in (gains) losses of unconsolidated affiliates |
| 1 |
| (362) |
| (3) |
| 1 | ||||
Stock-based compensation |
| 7,328 |
| 6,731 |
| 7,469 |
| 7,328 | ||||
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
| ||||
Receivables, prepaid expenses and other current assets, non-current assets, accrued salaries and benefits, deferred membership income and other accruals |
| (1,104) |
| (2,281) |
| 3,173 |
| (717) | ||||
Merchandise inventories |
|
| 3,490 |
|
| 13,397 |
|
| (15,254) |
|
| 3,490 |
Accounts payable |
|
| (32,825) |
|
| 631 |
|
| (7,408) |
|
| (32,825) |
Net cash provided by (used in) operating activities |
|
| 86,279 |
|
| 112,168 |
|
| 90,765 |
|
| 86,897 |
Investing Activities: |
|
|
|
|
|
|
|
| ||||
Business acquisition, net of cash acquired |
| (23,895) |
| — | ||||||||
Additions to property and equipment |
| (99,541) |
| (51,462) |
| (74,788) |
| (99,541) | ||||
Deposits for land purchase option agreements |
| (300) |
| (442) |
|
| 300 |
|
| (300) | ||
Proceeds from disposal of property and equipment |
|
| 335 |
|
| 96 |
|
| 93 |
|
| 335 |
Investment in joint ventures |
|
| — |
|
| (119) | ||||||
Net cash provided by (used in) investing activities |
|
| (99,506) |
|
| (51,927) |
|
| (98,290) |
|
| (99,506) |
Financing Activities: |
|
|
|
|
|
|
|
| ||||
Proceeds from long-term bank borrowings |
| 47,700 |
| 7,370 |
| 28,500 |
| 47,700 | ||||
Repayment of long-term bank borrowings |
| (11,009) |
| (10,191) |
| (28,931) |
| (11,009) | ||||
Proceeds from short-term bank borrowings |
| 678 |
| 18,829 |
| 82,092 |
| 678 | ||||
Repayment of short-term bank borrowings |
| (17,179) |
| (15,214) |
| (81,758) |
| (17,179) | ||||
Cash dividend payments |
| (10,641) |
| (10,629) |
| (10,645) |
| (10,641) | ||||
Excess tax benefit on stock-based compensation |
| 231 |
| 579 | ||||||||
Purchase of treasury stock |
|
| (2,011) |
|
| (2,017) | ||||||
Purchase of treasury stock for tax withholding on stock compensation |
|
| (1,916) |
|
| (2,011) | ||||||
Proceeds from exercise of stock options |
|
| 433 |
|
| 80 |
|
| 269 |
|
| 433 |
Net cash provided by (used in) financing activities |
|
| 8,202 |
|
| (11,193) |
|
| (12,389) |
|
| 7,971 |
Effect of exchange rate changes on cash and cash equivalents |
|
| (2,391) |
|
| (3,504) | ||||||
Net increase (decrease) in cash and cash equivalents |
|
| (7,416) |
|
| 45,544 | ||||||
Cash and cash equivalents at beginning of period |
|
| 199,522 |
|
| 157,072 | ||||||
Cash and cash equivalents at end of period |
| $ | 192,106 |
| $ | 202,616 | ||||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash |
|
| (985) |
|
| (2,391) | ||||||
Net increase (decrease) in cash, cash equivalents |
|
| (20,899) |
|
| (7,029) | ||||||
Cash, cash equivalents and restricted cash at beginning of period |
|
| 165,712 |
|
| 202,716 | ||||||
Cash, cash equivalents and restricted cash at end of period |
| $ | 144,813 |
| $ | 195,687 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
| ||||
Dividends declared but not paid |
| $ | 10,643 |
| $ | 10,629 |
| $ | 10,652 |
| $ | 10,643 |
7
The following table provides a breakdown of cash and cash equivalents, and restricted cash reported within the statement of cash flows:
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| May 31, |
| May 31, | ||
|
| 2018 |
| 2017 | ||
Cash and cash equivalents |
| $ | 141,164 |
| $ | 192,106 |
Short-term restricted cash |
|
| 676 |
|
| 816 |
Long-term restricted cash |
|
| 2,973 |
|
| 2,765 |
Total cash and cash equivalents, and restricted cash shown in the statement of cash flows |
| $ | 144,813 |
| $ | 195,687 |
See accompanying notes.
78
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
May 31, 20172018
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, 2017,2018, the Company had 3941 consolidated warehouse clubs in operation in 12 countries and one U.S. territory (seven each in Colombia; six inColombia and Costa Rica; five in Panama; four each in Trinidad;Trinidad and Dominican Republic; three each in Guatemala Honduras and the Dominican Republic;Honduras; two each 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). The Company opened a new warehouse club in Chia, Colombia in September 2016, fiscal year 2017, which the Company constructed on land acquired in May 2015, bringing the total of warehouse clubs operating in Colombia to seven. In April 2015, the Company acquired land in Managua, Nicaragua. The Company constructed and then opened a warehouse club on this site in November 2015. In February 2017 the Company acquired land in Santa Ana, Costa Rica upon whichin October 2017, bringing the Company is currently building a new warehouse club. The Company currently plans to open this new warehouse club in the fall of 2017. With the six warehouse clubs currently operating in Costa Rica, this new warehouse club will bring the number of PriceSmarttotal warehouse clubs operating in Costa Rica to seven. The Company opened a new warehouse club in Santo Domingo, Dominican Republic in May 2018, bringing the total number of warehouse clubs operating in the Dominican Republic to four. In May 2018, the Company acquired land in Panama and the Dominican Republic upon which the Company plans to construct new warehouse clubs. In Panama, the site is in the city of Santiago and, upon completion, will be the sixth warehouse club in Panama. In the Dominican Republic, the site is in the city of Santo Domingo and, upon completion, will be the fifth warehouse club in the Dominican Republic. Both warehouse clubs are currently expected to open in the spring of 2019. Both of these warehouse clubs will be designed using our new small warehouse club format with sales floor square footage between 30,000 to 40,000 square feet, compared to 50,000 to 60,000 sales floor square footage within our most recent standard format warehouse club openings. The Company continues to explore other potential sites for future warehouse clubs in Central America, the Caribbean and Colombia.South America.
PriceSmart also operates a cross-border logistics and e-commerce business through its Aeropost, Inc. (“Aeropost”) subsidiary, which it purchased during March 2018. Aeropost operates directly or via agency relationships in 38 countries in Latin America and the Caribbean and has distribution and administration facilities in Miami, Florida.
Basis of Presentation -– The interim unaudited 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”). and U.S. generally accepted accounting principles (GAAP) for interim financial information. 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, 20162017 (the “2016“2017 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.
Reclassifications to consolidated statement of cash flows recorded during fiscal year 2018 for fiscal year 2017 – Accounting Standards Update (ASU) 2016-18 - The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years and will be applied using a retrospective transition method to each period presented. The Company has evaluated subsequent events throughearly adopted this ASU as of August 31, 2017. The adoption of this ASU impacted the datepresentation of cash flows with inclusion of restricted cash for each of the presented periods.
Additionally, the Company adopted Accounting Standards Update (ASU) 2016-09, effective as of September 1, 2017. The Company made certain elections and time these financial statements were issued.changes to account for share-based payments to employees according to the new standard as follows:
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Accounting for policy election to recognize forfeitures of restricted stock awards and units as they occur –The Company made a policy election to recognize forfeitures of restricted stock awards and units as they occur. Accordingly, the Company applied the modified retrospective transition method, with a cumulative-effect adjustment to prior year (August 31, 2017) retained earnings. Therefore, the Company recorded an increase to prior year retained earnings and a decrease to additional paid-in capital of $367,000 in each case. The table below summarizes the change to the prior year balance sheet (in thousands):
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| August 31, 2017 balance sheet line item as previously reported |
| Amount reclassified |
| August 31, 2017 balance sheet line item as currently reported | |||
Retained earnings |
| $ | 420,499 |
| $ | 367 |
| $ | 420,866 |
Additional paid-in capital |
| $ | 422,762 |
| $ | (367) |
| $ | 422,395 |
Presentation of excess tax benefits and employee taxes paid on the statement of cash flows
· | According to ASU 2016-09, the cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation should be classified as a financing activity on the statement of cash flows, and the full retrospective transition method should be applied. The Company already classifies cash paid for tax withholdings as a financing activity; thus, the adoption did not change the Company’s classification for this activity. However, the Company has changed the naming convention from “Purchase of treasury stock” to “Purchase of treasury stock for tax withholding on stock compensation” in the statement of cash flows. |
· | Furthermore, the new standard requires the Company to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The Company has adopted this change, retrospectively, which resulted in $231,000 being reclassified from a financing activity to an operating activity for the nine months ended May 31, 2017. |
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, subsidiaries in which it has a controlling interest, and the Company’s joint ventures for which the Company has determined that it is the primary beneficiary. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. The Company’s net income excludes income attributable to its noncontrolling interests. Additionally, the interim consolidated financial statements also include 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, 2017, 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, 2017 is listed below:
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The Company determines whether any of the joint ventures in which it has made investments is a Variable Interest Entity (“VIE”) at the start of each new venture and if a reconsideration event has occurred. At this time, the Company also considers whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) that will absorb a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. A reporting entity must consider the rights and obligations conveyed by its variable interests and the relationship of its variable interests with variable interests held by other parties to determine whether its variable interests will absorb a majority of a VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. The reporting entity that consolidates a VIE is called the primary beneficiary of that VIE.
If the Company determines that it is not the primary beneficiary of the VIE, then the Company records its investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. Due to the initial nature of the joint ventures that the Company participates in and the continued commitments for additional financing, the Company determined these joint ventures are VIEs. Since
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The Company has determined for its ownership interest in store-front joint ventures, within its Aeropost subsidiary, that the Company has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. Therefore, the Company has determined that it is the primary beneficiary of the VIEs and has consolidated these entities within its consolidated financial statements. The Company's ownership interest in these store-front joint ventures, within its Aeropost subsidiary, for which the Company has consolidated their financial statements as of May 31, 2018, are listed below:
Aeropost Store-front Joint Ventures | Countries | Ownership | Basis of | ||||
El Salvador | EL Salvador | 60.0 | % | Consolidated | |||
Guatemala | Guatemala | 60.0 | % | Consolidated | |||
Tortola | British Virgin Islands | 50.0 | % | Consolidated | |||
Trinidad | Trinidad | 50.0 | % | Consolidated |
For the Company's ownership interest in real estate development joint ventures, since all rights, obligations and the power to direct the activities of a VIE that most significantly impact the VIE's economic performance is shared equally by both parties within each joint venture, 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. Under the equity method, the Company's investments in unconsolidated affiliates are initially recorded as an investment in the stock of an investee at cost and are adjusted for the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of the initial investment. The Company's ownership interest in real estate development joint ventures for which the Company has recorded under the equity method as of May 31, 2018 are 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.
Goodwill and Other Intangibles – Goodwill and intangibles totaled $66.9 million as of May 31, 2018 and $35.6 million as of August 31, 2017. In March 2018, the Company acquired Aeropost, Inc., which resulted in the addition of $32.1 million of goodwill and other intangibles. Please see the table below for a description and amounts assigned to each major asset class. Please refer to Note 8 – Acquisition for additional information pertaining to each asset class acquired in the business combination. The Company reviews reported goodwill and other intangibles at the cash-generating unit level for impairment. The Company tests for impairment at least annually or when events or changes in circumstances indicate that it is more likely or than not that the asset is impaired.
The changes in the carrying amount of goodwill for the year ended May 31, 2018 are as follows (in thousands):
May 31, | |||
2018 | |||
Goodwill at August 31, 2017 | $ | 35,642 | |
Foreign currency exchange rate changes | (324) | ||
Aeropost acquisition - see Note 8 | 16,033 | ||
Goodwill at May 31, 2018 | $ | 51,351 |
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The table below summarizes our acquired other intangible assets (in thousands) arising from the Aeropost acquisition:
May 31, | |||
2018 | |||
Other intangibles at August 31, 2017 | $ | — | |
Trade name | 5,100 | ||
Developed technology | 11,000 | ||
Other intangibles at May 31, 2018 | $ | 16,100 | |
Amortization | (507) | ||
Net other intangibles at May 31, 2018 | $ | 15,593 | |
Total goodwill and other intangibles, net | $ | 66,944 |
The table below shows our estimated amortization of intangibles for fiscal years 2018 through 2022 and thereafter is as follows (in thousands):
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2018 |
| $ | 1,120 | (1) |
2019 |
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| 2,404 |
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| 2,411 |
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| 2,404 |
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| 2,404 |
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| 5,357 |
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Total |
| $ | 16,100 |
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(1) | Includes $507,000 of actual recorded amortization expense for the period ended May 31, 2018. |
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 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 and debit card processors to remit a portion of sales processed via credit and debit 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, as of May 31, 2017, in two countries there is either not a clearly defined process or the government has alleged
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there is not a clearly defined process to allow the authorities to refund VAT receivables. As of August 31, 2016, there were three countries withoutthat lacked a clearly defined process; however, duringprocess. During the third quarterand fourth quarters of fiscal year 2017, onetwo of these countries clarified the refund mechanism, which the Company iswe are currently pursuing. The Company, together with its tax and legal advisers, is currently seeking these clarificationsclarification in court in the two countriesremaining country without a clearly defined process and expects to prevail. The balance of the VAT receivablesreceivable in the two countriescountry with undefined refund mechanisms was $3.0 millionapproximately $377,000 and $1.6$1.2 million as of May 31, 20172018, and August 31, 2016,2017, respectively. In another country in which the Company operates warehouse clubs, a new minimum income tax mechanism took effect in fiscal year 2015, 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) effective for fiscal years 2015 to 2018 do not clearly allow the Company to obtain a refund or to offset this excess income tax against other taxes. As of May 31, 2018, and August 31, 2017, the Company had deferred tax assets of approximately $2.2 million and $2.0 million, respectively, in this country. Also, the Company had an income tax receivable balance of $3.9$5.5 million and $4.3 million as of May 31, 2018 and August 31, 2017, respectively, related to excess payments from fiscal years 2015 to 2017. 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 ultimately succeed in its refund requests, related appeals and/or court challenge on these matters. In the third quarter of fiscal year 2018, a revised minimum tax law was passed in this matter.country, which beginning in fiscal 2019 will reduce the minimum tax rate. Additionally,
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this law clarifies rules for reimbursement of excess minimum tax paid, which the Company believes will facilitate this reimbursement on a go-forward basis.
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 Company does not currently have any allowances provided against VAT and income tax receivables. |
The following table summarizes the VAT receivables reported by the Company (in thousands):
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Prepaid expenses and other current assets |
| $ | 1,426 |
| $ | 1,635 |
| $ | 7,256 |
| $ | 6,650 |
Other non-current assets |
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| 29,041 |
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| 32,502 |
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| 19,758 |
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| 24,904 |
Total amount of VAT receivables reported |
| $ | 30,467 |
| $ | 34,137 |
| $ | 27,014 |
| $ | 31,554 |
The following table summarizes the Income tax receivables reported by the Company (in thousands):
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Prepaid expenses and other current assets |
| $ | 5,958 |
| $ | 6,402 |
| $ | 4,236 |
| $ | 6,403 |
Other non-current assets |
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| 10,026 |
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| 10,376 |
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| 17,347 |
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| 10,492 |
Total amount of Income tax receivables reported |
| $ | 15,984 |
| $ | 16,778 |
| $ | 21,583 |
| $ | 16,895 |
Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or market.net realizable value. 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.
Stock Based Compensation – The Company offersutilizes three types of equity awards: stock options (“options”), restricted stock awards (“RSAs”) and restricted stock units (“RSUs”). The Company adopted ASU 2016-09 – Compensation - Stock Compensation (Topic 718) on September 1, 2017, see Note 1 – Company Overview and Basis of Presentation for more information on the implementation. Compensation related to options is accounted for by applying the valuation technique based on the Black-Scholes model. Compensation related to RSAs and RSUs is based on the fair market value at the time of grant with the application of an estimated forfeiture rate.grant. The Company recognizes the compensation cost related to these awards over the requisite service period as determined by the grant, amortized ratably or on a straight line basis over the life of the grant. As a result of adoption of ASU 2016-09, the Company currently accounts for actual forfeitures as they occur. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as income tax expense or benefit, based on ASU 2016-09. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as an operating cash flow in its consolidated statement of cash flows.
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over the life
RSAs are outstanding shares of the grant. The Company utilizes “modified grant-date accounting” for true-ups due to actual forfeitures at the vesting dates. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation as additional paid-in capitalcommon stock and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as a reduction in paid-in capital, based on the Tax Law Ordering method. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as a financing cash flow in its consolidated statement of cash flows, rather than as an operating cash flow.
RSAs have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding shares of common stock. Shares of common stock subject to RSUs are not issued nor outstanding until vested, and RSUs do not have the same dividend and voting rights as common stock. However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding. Payments of dividend equivalents to employees are recorded as compensation expense.
Exit or Disposal Cost Obligations – In January 2017, the Company purchased a distribution center in Medley, Miami-Dade County, Florida. The Company transferred the majority of its Miami dry distribution center activities that were previously in a leased facility to the new facility during the third quarter of fiscal year 2017. As part of this transaction, the Company has recorded an exit obligation related to the lease of the previous distribution center. The obligation consists of the costs associated with the exit or disposal activity measured initially at its fair value as of May 1, 2017, the date on which the obligation was incurred. These costs are primarily comprised of the costs to terminate the operating lease and other associated costs, including costs to consolidate or close facilities, net of any potential sub-lease income the Company could receive during the remaining lease term. In periods subsequent to initial measurement, changes to the exit obligation, including any changes resulting from a revision to either the timing or the amount of estimated cash flows over the remaining lease period, is measured using the credit-adjusted risk-free rate that was used to measure the initial obligation. During the third quarter of fiscal year 2017, the Company initially recorded an obligation related to this exit activity for approximately $496,000 within other long-term liabilities. The Company’s exit obligation recorded as of May 31, 2018 and August 31, 2017 is approximately $282,000.was immaterial. Exit costs of approximately $751,000$870,000 were recorded to warehouse expensesnet merchandise cost of goods sold for the threenine months ended May 31, 2018 and $751,000 for the nine months ended May 31, 2017.
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, consisted of 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 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 Company’s current and long-term financial assets and liabilities have fair values that approximate their carrying values. The Company’s long-term financial assets have fair values that approximate their carrying values. The Company’s 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 and debt issuance costs. There have been no significant changes in fair market value of the Company’s current and long-term financial assets, and 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 20162017 Form 10-K.
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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
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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. The Company did not change valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets 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 valueentire gain or loss 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 7 - 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, 20172018 and August 31, 2016.2017.
Fair Value Instruments. The Company is exposed to foreign-currencyforeign currency exchange rate fluctuations in the normal course of business. This includes exposure to foreign-currencyforeign currency exchange rate fluctuations on U.S. dollar denominated liabilities within the Company’s 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 flows 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 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-currencyforeign 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 7 - Derivative Instruments and Hedging Activities for information on the fair value of open, unsettled forward foreign-exchange contracts as of May 31, 20172018 and August 31, 2016.2017.
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.
Self-Insurance – As of October 1, 2017, PriceSmart, Inc. became self-insured for its employee medical health benefits and in doing so the Company has assumed the financial risk for providing health care benefits to its U.S. employees. The Company contracted with Cigna Health and Life Insurance Company (“CHLIC”), a third party administrator, to process claims on its behalf under an Administrative Services Only (ASO) agreement. The Company has elected to purchase “Stop Loss Insurance” to cover the risk in excess of certain dollar limits. The Company establishes an estimated accrual for its insurance program based on available comparable claims data, trends and projected ultimate costs of claims. This accrual is based on estimates prepared with the assistance of outside actuaries and the ultimate cost of these claims may vary from initial estimates and established accrual. The actuaries periodically update their estimates and the Company records such adjustments in the period in which such determination is made. The accrued obligation for this self-insurance program is included in “Accrued salaries and benefits” in the consolidated balance sheets and is $581,000 as of May 31, 2018.
15
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. The Company recorded an impairment charge of approximately $1.9 million for the nine months ended May 31, 2018 related to the write off of internally developed software for e-commerce due to the Company’s acquisition of Aeropost, Inc. and its digital e-commerce platform.
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, 2018 and 2017 (in thousands):
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Currency gain (loss) |
| $ | (575) |
| $ | 1,101 |
| $ | (87) |
| $ | 1,088 |
Recent Accounting Pronouncements – Not Yet Adopted
FASB ASC 220 ASU 2018-02 -Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which helps organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (“tax reform”), enacted on December 22, 2017. ASU No. 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from tax reform. Additionally, ASU No. 2018-02 requires financial statement preparers to disclose (1) a description of their accounting policy for releasing income tax effects from accumulated other comprehensive income, (2) whether they elect to reclassify the stranded income tax effects from the tax reform, and (3) information about other income tax effects related to the application of the tax reform that are reclassified from accumulated other comprehensive income to retained earnings, if any. The amendments in this ASU are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 715 ASU 2017-09 -Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting
In May 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which seeks to provide clarity, reduce diversity in practice, and reduce cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. This ASU provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified.
1216
The following table summarizes the amounts recordedamendments in this ASU are effective for the three and nine months ended May 31,annual periods beginning after December 15, 2017 and 2016 (in thousands):
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Currency gain (loss) |
| $ | 1,101 |
| $ | (222) |
| $ | 1,088 |
| $ | (1,018) |
Recent Accounting Pronouncements – Not Yet Adoptedinterim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 715 ASU 2017-07- Compensation—Retirement Benefits (Topic 715) — Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715) — Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is designed to improve guidance related to the presentation of defined benefit costs in the income statement. In particular, ASU 2017-07 requires that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 350 ASU 2017-04- Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Additionally, ASU 2017-04 removes the requirements forrequires any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 740 ASU 2016-16-Income Taxes (Topic 740)—Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740)—Intra-Entity Transfers of Assets Other than Inventory. Currently, U.S. GAAP prohibits recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset has been sold to an outside party. ASU 2016-16 states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.
The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 842 ASU 2016-02 -Leases (Topic 842): Amendments to the FASB Accounting Standards Codification
In February 2016, the FASB issued guidance codified in ASC 842, Leases, which supersedes the guidance in ASC 840, Leases. ASC 842 will be effective for the Company on September 1, 2019, and the Company expects to apply the transition practical expedients allowed by the standard. Note 5 – “Commitments and Contingencies” provides details on the Company’s current lease arrangements. While the Company continues to evaluate the provisions of ASC 842 to determine how it will be affected, the primary effect will be to require recording right-of-use assets and corresponding lease obligations for current operating leases. The Company expects the adoption of this guidance to have a material impact on the Company's consolidated balance sheets, but not on the consolidated statements of income or cash flows.
FASB ASC 606 ASU 2014-09 - Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition of revenue from contracts with customers. The guidance combines the requirements for reporting revenue and requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Transition is permitted 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, 2017. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2019. The Company is evaluating the impact of the adoption of this guidance on all of its sources of revenue and the resulting effect it will have on the Company's consolidated financial statements and related disclosures.
17
Recent Accounting Pronouncements Adopted
FASB ASC 815 ASU 2017-12 Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities
The FASB has issued Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which aims to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this ASU are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components, and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.
Additionally, the amendments (1) permit hedge accounting for risk components in hedging relationships involving non-financial risk and interest rate risk; (2) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; (3) continue to allow an entity to exclude option premiums and forward points from the assessment of hedge effectiveness; and (4) permit an entity to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness. The amendments in this ASU are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption allowed. The Company adopted this guidance during the third quarter of fiscal year 2018. Adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
FASB ASC 718 ASU 2016-09 - Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued new guidance on stock compensation intended to simplify accounting for share-based payment transactions. The guidance will change accounting for income taxes, forfeitures and minimum statutory tax withholding requirements. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance on September 1, 2017.
· | The Company determined that the adoption of this guidance did not have a material effect on the result of operations and the calculation of earnings per share. The Company has used the two-step method for the diluted earnings per share calculation over the last several years. |
· | The adoption of this guidance and the amendments related to the presentation of employee taxes paid on the statement of cash flows did not have a material effect on the consolidated statements of cash flows. |
· | The adoption of this guidance and the amendments related to the timing of when excess tax benefits are recognized, the effect of minimum statutory withholding requirements, forfeitures, and intrinsic value and the adoption of this methodology using the modified retrospective transition method resulted in the Company electing to eliminate the recording of the forfeiture rate on the expense recorded. The elimination of the forfeiture rate required recording a cumulative-effect adjustment by increasing retained earnings and reducing Additional Paid in Capital, at the beginning of the year of adoption, which was September 1, 2017, for the service periods already incurred for unvested shares. |
FASB ASC 330 ASU 2015-11 -Inventory (Topic 330): Simplifying the Measurement of Inventory
In July 2015, the FASB issued guidance that will require an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This amendment applies to entities, like the Company, that measure inventory value using the average cost method. The amendments in this ASU more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards.
The amendment in this ASU is effective on a prospective basis for public entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this guidance on September 1, 2017. Adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
18
FASB ASC 230 ASU 2016-18- Statement of Cash Flows (Topic 230)—Restricted Cash
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)—Restricted Cash. This ASU addresses the diversity in practice that exists regarding the classification and the presentation of changes in restricted cash on the statement of cash flows.
The amendments in ASU No. 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years and will be applied using a retrospective transition method to each period presented. The Company early adopted this ASU as of August 31, 2017. The adoption of this ASU will impactimpacted the presentation of cash flows with inclusion of restricted cash flows for each of the presented periods.
FASB ASC 740 ASU 2016-16-Income Taxes (Topic 740)—Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740)—Intra-Entity Transfers of Assets Other Than Inventory. Currently, U.S. GAAP prohibits recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset has been sold to an outside party. ASU 2016-16 states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.
The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The amendments should be applied on a modified retrospective basis
13
through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 230 ASU 2016-15- Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses stakeholders’ concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and Other Topics. In particular, ASU No. 2016-15 addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.
The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The amendments in this ASU should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company will evaluate the impact adoptionearly adopted this guidance on December 1, 2017. Adoption of this guidance maydid not have an effect on the Company's consolidated financial statements.
FASB ASC 718 ASU 2016-09 - Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued new guidance on stock compensation intended to simplify accounting for share-based payment transactions. The guidance will change accounting for income taxes, forfeitures, and minimum statutory tax withholding requirements. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2018. The Company is evaluating the impact that adoption of this guidance will have to the provision for income taxes and earnings per share amounts on the Company’s consolidated income statements for the change in the recognition of excess tax benefits or deficiencies. These amounts will be reflected as an operating activity instead of financing activity in the consolidated statements of cash flows. The Company is continuing to evaluate the impact of adoption of this guidance on the Company’s results of operations. Adoption of this guidance is not expected to have a material effect on the consolidated balance sheets, statements of cash flows, or related disclosures.
FASB ASC 842 ASU 2016-02 -Leases (Topic 842): Amendments to the FASB Accounting Standards Codification
In February 2016, the FASB issued guidance codified in ASC 842, Leases, which supersedes the guidance in ASC 840, Leases. ASC 842 will be effective for the Company on September 1, 2019, and the Company expects to apply the transition practical expedients allowed by the standard. Note 5 – Commitments and Contingencies provides details on the Company’s current lease arrangements. While the Company continues to evaluate the provisions of ASC 842 to determine how it will be affected, the primary effect will be to require recording right-of-use assets and corresponding lease obligations for current operating leases. The Company is continuing to evaluate the impact of adoption of this guidance on the Company's consolidated balance sheets and on the Company’s results of operations or cash flows.
FASB ASC 330 ASU 2015-11 -Inventory (Topic 330): Simplifying the Measurement of Inventory
In July 2015, the FASB issued guidance that will require an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This amendment applies to entities, like the Company, that measure inventory value using the average cost method. The amendments in this ASU more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards.
The amendment in this ASU is effective on a prospective basis for public entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted as of the beginning of an interim or annual reporting period. The Company continues to evaluate the impact adoption of this guidance may have on the Company's consolidated financial statements.
14
FASB ASC 606 ASU 2014-09 - Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition of revenue from contracts with customers. The guidance combines the requirements for reporting revenue and requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Transition is permitted 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, 2017. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2019. The Company is evaluating the impact of adoption of this guidance on all potentially significant revenue transactions that will be impacted by the new standard on the Company's consolidated financial statements and related disclosures as a result of adopting this standard.
Recent Accounting Pronouncements Adopted
FASB ASC 740 ASU 2015-17 -Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued amended guidance eliminating the requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent.
The amendment in this ASU is effective on a prospective or retrospective basis for public entities for fiscal years and interim periods within those annual periods beginning after December 15, 2016. Early adoption is allowed. The Company retrospectively adopted this amended guidance during the second quarter of fiscal year 2016 and now presents all deferred taxes as either long-term assets or long-term liabilities. The Company’s fiscal year 2016 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q presented the restatement of quarterly and annual periods for fiscal year 2015 to reflect the impact to the Consolidated Balance Sheets.
FASB ASC 350 ASU 2015-05 - Customers Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued amended guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts.
The amendments in this ASU are effective for public entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption was permitted. An entity was able to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company adopted this amended guidance as of September 1, 2016. Adoption of this guidance did not generate a change in accounting principle, changes in financial statement line items, or the requirement to prospectively or retrospectively adopt a method of transition.
NOTE 3 – EARNINGS PER SHARE
The Company presents basic net income per share attributable to PriceSmart using the two-class method. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders and that determines basic net income per share attributable to PriceSmart for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to common stockholders. A participating security is defined as a security that may participate in undistributed earnings with common stock. The Company’s capital structure includes securities that participate with common stock on a one-for-one basis for distribution of dividends. These are the restricted stock awards and restricted stock units issued pursuant to the 2013 Equity Incentive Award Plan. The Company determines the diluted net income per share attributable to PriceSmart by using the more dilutive of the two class-method or the treasury stock method and by including the basic weighted average of outstanding stock options in the calculation of diluted net income per share attributable to PriceSmart under the two-class method and including all potential common shares assumed issued in the calculation of diluted net income per share attributable to PriceSmart under the treasury stock method.
1519
The following table sets forth the computation of net income per share attributable to PriceSmart for the three and nine months ended May 31, 20172018 and 20162017 (in thousands, except per share amounts):
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| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||
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| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Net income |
| $ | 18,838 |
| $ | 16,837 |
| $ | 70,926 |
| $ | 66,451 | ||||||||||||
Net income attributable to PriceSmart, Inc. per share available for distribution: |
| $ | 18,694 |
| $ | 18,838 |
| $ | 55,332 |
| $ | 70,926 | ||||||||||||
Less: Allocation of income to unvested stockholders |
|
| (272) |
|
| (288) |
|
| (1,034) |
|
| (1,041) |
|
| (244) |
|
| (272) |
|
| (642) |
|
| (1,034) |
Net earnings available to common stockholders |
| $ | 18,566 |
| $ | 16,549 |
| $ | 69,892 |
| $ | 65,410 |
| $ | 18,450 |
| $ | 18,566 |
| $ | 54,690 |
| $ | 69,892 |
Basic weighted average shares outstanding |
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| 30,043 |
|
| 29,951 |
|
| 30,010 |
|
| 29,918 |
|
| 30,137 |
|
| 30,043 |
|
| 30,105 |
|
| 30,010 |
Add dilutive effect of stock options (two-class method) |
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| 2 |
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| 4 |
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| 4 |
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| 5 |
|
| — |
|
| 2 |
|
| — |
|
| 4 |
Diluted average shares outstanding |
|
| 30,045 |
|
| 29,955 |
|
| 30,014 |
|
| 29,923 |
|
| 30,137 |
|
| 30,045 |
|
| 30,105 |
|
| 30,014 |
Basic net income per share |
| $ | 0.62 |
| $ | 0.55 |
| $ | 2.34 |
| $ | 2.19 | ||||||||||||
Diluted net income per share |
| $ | 0.62 |
| $ | 0.55 |
| $ | 2.34 |
| $ | 2.19 | ||||||||||||
Basic |
| $ | 0.61 |
| $ | 0.62 |
| $ | 1.82 |
| $ | 2.34 | ||||||||||||
Diluted |
| $ | 0.61 |
| $ | 0.62 |
| $ | 1.82 |
| $ | 2.34 |
NOTE 4 – STOCKHOLDERS’ EQUITY
Dividends
The following table summarizes the dividends declared and paid during fiscal yearsyear 2018 and 2017 and 2016 (amounts are per share).
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| First Payment |
| Second Payment |
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| First Payment |
| Second Payment | ||||||||||||||||||||||||||||
Declared |
| Amount |
| Record |
| Date |
| Date |
| Amount |
| Record |
| Date |
| Date |
| Amount |
| Amount |
| Record |
| Date |
| Date |
| Amount |
| Record |
| Date |
| Date |
| Amount | ||||||
1/24/2018 |
| $ | 0.70 |
| 2/14/2018 |
| 2/28/2018 |
| N/A |
| $ | 0.35 |
| 8/15/2018 |
| N/A |
| 8/31/2018 |
| $ | 0.35 | |||||||||||||||||||||
2/1/2017 |
| $ | 0.70 |
| 2/15/2017 |
| 2/28/2017 |
| N/A |
| $ | 0.35 |
| 8/15/2017 |
| N/A |
| 8/31/2017 |
| $ | 0.35 |
| $ | 0.70 |
| 2/15/2017 |
| 2/28/2017 |
| N/A |
| $ | 0.35 |
| 8/15/2017 |
| 8/31/2017 |
| N/A |
| $ | 0.35 |
2/3/2016 |
| $ | 0.70 |
| 2/15/2016 |
| 2/29/2016 |
| N/A |
| $ | 0.35 |
| 8/15/2016 |
| 8/31/2016 |
| N/A |
| $ | 0.35 |
The Company anticipates the ongoing semi-annual payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, the amount of such dividends, and the establishment of record and payment dates is subject to final determination by the Board of Directors at its discretion after its review of the Company’s financial performance and anticipated capital requirements.
Comprehensive Income and Accumulated Other Comprehensive Loss
The following tables disclose the effects of each component of other comprehensive income (loss), net of tax (in thousands):
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| Nine Months Ended May 31, 2017 | ||||||||||
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| Foreign |
| Defined |
| Derivative |
| Total | ||||
Beginning balance, September 1, 2016 |
| $ | (102,242) |
| $ | (315) |
| $ | (1,394) |
| $ | (103,951) |
Other comprehensive income (loss) |
|
| (4,700) |
|
| — |
|
| 364 | (1) |
| (4,336) |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| — |
|
| 29 | (2) |
| — |
|
| 29 |
Ending balance, May 31, 2017 |
| $ | (106,942) |
| $ | (286) |
| $ | (1,030) |
| $ | (108,258) |
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended May 31, 2018 | |||||||
|
| Attributable to PriceSmart |
| Noncontrolling Interests |
| Total | |||
Beginning balance, September 1, 2017 |
| $ | (110,059) |
| $ | — |
| $ | (110,059) |
Foreign currency translation adjustments |
|
| (134) |
|
| 8 |
|
| (126) |
Defined benefit pension plans |
|
| 101 |
|
| — |
|
| 101 |
Derivative Instruments |
|
| 1,516 | (1) |
| — |
|
| 1,516 |
Ending balance, May 31, 2018 |
| $ | (108,576) |
| $ | 8 |
| $ | (108,568) |
1620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended May 31, 2016 | ||||||||||
|
| Foreign |
| Defined |
| Derivative |
| Total | ||||
Beginning balance, September 1, 2015 |
| $ | (100,540) |
| $ | (113) |
| $ | (859) |
| $ | (101,512) |
Other comprehensive income (loss) |
|
| (4,383) |
|
| — |
|
| (522) | (1) |
| (4,905) |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| — |
|
| (14) | (2) |
| — |
|
| (14) |
Ending balance, May 31, 2016 |
| $ | (104,923) |
| $ | (127) |
| $ | (1,381) |
| $ | (106,431) |
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended May 31, 2017 | |||||||
|
| Attributable to PriceSmart |
| Noncontrolling Interests |
| Total | |||
Beginning balance, September 1, 2016 |
| $ | (103,951) |
| $ | — |
| $ | (103,951) |
Foreign currency translation adjustments |
|
| (4,700) |
|
| — |
|
| (4,700) |
Derivative Instruments |
|
| 364 | (1) |
| — |
|
| 364 |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| 29 | (2) |
| — |
|
| 29 |
Ending balance, May 31, 2017 |
| $ | (108,258) |
| $ | — |
| $ | (108,258) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Twelve Months Ended August 31, 2016 | ||||||||||
|
| Foreign |
| Defined |
| Derivative |
| Total | ||||
Beginning balance, September 1, 2015 |
| $ | (100,540) |
| $ | (113) |
| $ | (859) |
| $ | (101,512) |
Other comprehensive income (loss) |
|
| (1,702) |
|
| (182) |
|
| (535) | (1) |
| (2,419) |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| — |
|
| (20) | (2) |
| — |
|
| (20) |
Ending balance, August 31, 2016 |
| $ | (102,242) |
| $ | (315) |
| $ | (1,394) |
| $ | (103,951) |
|
|
|
|
|
|
|
|
|
|
|
| Twelve Months Ended August 31, 2017 | |||||||
|
| Attributable to PriceSmart |
| Noncontrolling Interests |
| Total | |||
Beginning balance, September 1, 2016 |
| $ | (103,951) |
| $ | — |
| $ | (103,951) |
Foreign currency translation adjustments |
|
| (6,297) |
|
| — |
|
| (6,297) |
Defined benefit pension plans |
|
| (166) |
|
| — |
|
| (166) |
Derivative Instruments |
|
| 316 | (1) |
| — |
|
| 316 |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| 39 | (2) |
| — |
|
| 39 |
Ending balance, August 31, 2017 |
| $ | (110,059) |
| $ | — |
| $ | (110,059) |
(1) | See Note 7 - Derivative Instruments and Hedging Activities. |
(2) | Amounts reclassified from accumulated other comprehensive income (loss) related to the minimum pension liability are included in warehouse club operations in the Company's Consolidated Statements of Income. |
Retained Earnings Not Available for Distribution
The following table summarizes retained earnings designated as legal reserves of various subsidiaries which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| May 31, |
| August 31, | ||
|
| 2017 |
| 2016 | ||
Retained earnings not available for distribution |
| $ | 6,341 |
| $ | 5,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| May 31, |
| August 31, | ||
|
| 2018 |
| 2017 | ||
Retained earnings not available for distribution |
| $ | 6,753 |
| $ | 6,459 |
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business related to the Company’s operations and property ownership. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit. 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. In such cases, there may be a possible 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. 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. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency. The Company believes that the final disposition of the pending legal proceedings, claims and litigation will not have a material adverse effect on its financial position, results of operations or liquidity. It is possible, however, that the Company's future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to such matters.
1721
Taxes
Income Taxes – The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes.
The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than notmore-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. This requires significant judgment,In the usequarter ended May 31, 2018, as part of estimates, and the interpretation and applicationtax Company’s acquisition of complex tax laws. When facts and circumstances change,Aeropost, the Company reassesses these probabilities and records any changesbooked uncertain income tax positions in the consolidated financial statements as appropriate.amount of $3.1 million. There were no materialother significant changes in the Company's uncertain income tax positions as of May 31, 20172018 and August 31, 2016.2017.
In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies. As of May 31, 20172018 and August 31, 2016,2017, the Company has recorded within other accrued expenses a total of $3.5$3.0 million and $4.0$3.4 million, respectively, for various non-income tax related tax contingencies.
While the Company believes the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of litigation, in estimating probable additional income tax liability taking into account uncertain tax positions and in evaluating the probable additional tax associated with various non-income tax filing positions. As such, the Company is unable to make a reasonable estimate of the sensitivity to change of estimates affecting its recorded liabilities. As additional information becomes available, the Company assesses the potential liability and revises its estimates as appropriate.
DuringThe Company has various appeals pending before tax courts in its subsidiaries' jurisdictions. Any possible settlement could increase or decrease earnings but is not expected to be significant. Audit outcomes and the first quartertiming of fiscal year 2015, the Company received provisional tax assessments with respectaudit settlements are subject to deductibility and withholdings.significant uncertainty. One of the Company’s subsidiaries received provisional assessments claiming $2.6$2.8 million of taxes, penalties and interest related to withholding taxes on certain charges for services rendered by the Company. In addition, this subsidiary received provisional assessments totaling $5.2$5.6 million for lack of deductibility of the underlying service charges due to the lack of withholding. Based on a review of the Company's tax advisers' interpretation of local law, rulings and jurisprudence (including Supreme Court precedents with respect to the deductibility assessment), the Company expects to prevail in both instances and has not recorded a provision for these assessments. Also, inHowever, the Company had to submit these amounts as advance payments to the government while it appeals.
In another country wherein which the Company operates,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 appealed)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, 2018 and August 31, 2017, the Company had deferred tax assets of approximately $2.2 million and $2.0 million in this country.country, respectively. Also, the Company had an income tax receivable balance of $3.9$5.5 million and $4.3 million as of May 31, 2018 and August 31, 2017, respectively, related to excess payments from fiscal years 2015 2016 andto 2017. The Company has not placed any type of allowance on the recoverability of these tax receivables or deferred income taxes,tax assets, because the Company believes that it is more likely than not that it will succeed in its appealrefund request and/or court challenge on this matter.
The Company has not provided In the third quarter of fiscal year 2018, a revised minimum tax law was passed in this country, which beginning in fiscal 2019 will reduce the minimum tax rate. Additionally, this law clarifies rules for U.S. deferred taxes on cumulative non-U.S. undistributed earnings as such earnings are deemed byreimbursement of excess minimum tax paid, which the Company to be indefinitely reinvested. It is not practicable to determine the U.S. federal income tax liability that would be associated with such earnings because of the complexity of the computation.
believes will facilitate this reimbursement on a go-forward basis.
1822
The Company has not historically provided for U.S. deferred taxes on cumulative non-U.S. undistributed earnings as such earnings have been deemed by the Company to be indefinitely reinvested. However, subsequent to new United States tax legislation, PriceSmart made a provisional estimate of the one-time transitional repatriation tax on unremitted foreign earnings (“Transition Tax”) of approximately $13.4 million, which was recorded as an income tax expense in the second quarter of fiscal 2018. The cash amounts due for the Transition Tax will be offset by foreign tax credits expected to exceed $10.0 million, with the remainder to be paid in equal installments over 8 years.
Other Commitments
The Company is committed under non-cancelable operating leases for the rental of facilities and land. Future minimum lease commitments for facilities under these leases with an initial term in excess of one year are as follows (in thousands):
|
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
| Open |
|
| Maturity of |
| ||
Years ended May 31, |
| Locations(1) |
|
| Lease Liabilities (1) |
| ||
2018 |
| $ | 11,006 |
| ||||
2019 |
| 10,361 |
|
| $ | 13,509 |
| |
2020 |
| 9,871 |
|
| 12,138 |
| ||
2021 |
| 8,689 |
|
| 10,597 |
| ||
2022 |
|
| 7,563 |
|
| 9,284 |
| |
2023 |
|
| 9,412 |
| ||||
Thereafter |
|
| 88,920 |
|
|
| 113,315 |
|
Total |
| $ | 136,410 | (2)(3) |
| $ | 168,255 | (2)(3) |
(1) | Operating lease obligations have been reduced by approximately |
(2) |
|
| Future minimum lease payments include |
(3) | Future minimum lease payments do not include the approximately $31.6 million of minimum lease payments related to the Honduras lease extension contract entered into in June 2018. See Note 10 – Subsequent Events. |
In January 2017, the Company purchased a distribution center in Medley, Miami-Dade County, Florida. The Company transferred its Miami dry distribution center activities that were previously in the leased facility to the new facility during the third quarter of fiscal year 2017. Some portions of the vacated previously leased space were subleased (and subsequently returned to the landlord). As part of the agreement to return one sublease to the landlord, the Company was required to execute and deliver to the landlord of the leased facility a letter of credit (“LOC”) in the amount of $500,000 which entitles the landlord to draw on the LOC if certain conditions occur related to nonpayment by the new tenant. The balance of this LOC decreases at an annual rate of $125,000 starting in August 2018. Although this agreement is considered a guarantee, in measuring the fair value, the Company considers the risk and probability of default by the third party tenant as not likely nor probable based on the Company’s review of the third party tenant’s financial position as well as the third party’s considerable capital investment into the leased facility. Therefore, the Company has not recorded a liability for this guarantee.
The Company is also committed to non-cancelable construction serviceservices obligations for various warehouse club developments and expansions. As of May 31, 20172018 and as of August 31, 2016, these commitments were2017, the Company had approximately $5.6$7.9 million and $1.5 million, respectively,in contractual obligations for construction services not yet rendered.
The Company has entered into land purchase option agreements that have not been recorded as commitments, for which the Company has recorded within restricted cash and deposits as of May 31, 2018 and August 31, 2017 approximately $1.1 million.$545,000. The land purchase option agreements can generally be canceled at the sole option of the Company, with the deposits being fully refundable up and until all permits are issued. However, the deposit on one piece of land totaling approximately $50,000 would be forfeited if pending permits are not received and the Company were to decide not to proceed with the acquisition. Except as disclosed in Note 9 – Subsequent Events, theThe Company does not have a timetable forof when or if it will exercise these land purchase options, due to the uncertainty related to the completion of the Company's due diligence review.reviews. The Company's due diligence review includesreviews include evaluations of the legal status of theeach property, the zoning and permitting issues related to acquiring approval for the construction and operation of a warehouse club and any other issues related to the property itself that could render the property unsuitable or limit the property's economic viability as a warehouse club site. If the purchase option agreements are exercised, the cash use for purchase of land would be approximately $30.5$14.4 million. The Company may enter into additional land purchase option agreements in the future.
1923
The table below summarizes the Company’s interest in real estate joint ventures, commitments to additional future investments and the Company’s maximum exposure to loss as a resulttresult of its involvement in these joint venture as of May 31, 20172018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entity |
| % |
| Initial |
| Additional |
| Net |
| Company’s |
| Commitment |
| Company's |
| % |
| Initial |
| Additional |
| Net |
| Company’s |
| Commitment |
| Company's | ||||||||||||||
GolfPark Plaza, S.A. |
| 50 | % |
| $ | 4,616 |
| $ | 2,402 |
| $ | 297 |
| $ | 7,316 |
| $ | 99 |
| $ | 7,415 |
| 50 | % |
| $ | 4,616 |
| $ | 2,402 |
| $ | 274 |
| $ | 7,292 |
| $ | 99 |
| $ | 7,391 |
Price Plaza Alajuela, S.A. |
| 50 | % |
|
| 2,193 |
|
| 1,236 |
|
| 21 |
|
| 3,450 |
|
| 785 |
|
| 4,235 |
| 50 | % |
|
| 2,193 |
|
| 1,236 |
|
| 48 |
|
| 3,477 |
|
| 785 |
|
| 4,262 |
Total |
|
|
|
| $ | 6,809 |
| $ | 3,638 |
| $ | 318 |
| $ | 10,766 |
| $ | 884 |
| $ | 11,650 |
|
|
|
| $ | 6,809 |
| $ | 3,638 |
| $ | 322 |
| $ | 10,769 |
| $ | 884 |
| $ | 11,653 |
(1) | The parties intend to seek alternate financing for the project, which could reduce the amount of investments each party would be required to provide. The parties may mutually agree on changes to the project, which could increase or decrease the amount of contributions each party is required to provide. |
(2) | The maximum exposure is determined by adding the Company’s variable interest in the entity and any explicit or implicit arrangements that could require the Company to provide additional financial support. |
The Company contracts for distribution center services in Mexico. The contract for this distribution center's services expires on August 31, 2017,2020, with the applicable fees and rates to be reviewed at the beginning of each calendar year. Future minimum service commitments related to this contract through the end of the contract term are approximately $41,000.$373,000.
The Company contracts for off-site data recovery services as part of its disaster recovery plan. The contract for these data recovery services expires on November 30, 2019. Future minimum service commitments related to this contract are approximately $372,000 and $186,000 for each of the 12-month periods ending May 31, 2018 and 2019 and approximately $186,000 for the 12-monthremaining six-month period ending May 31, 2020.November 30, 2019, respectively.
NOTE 6 – DEBT
Short-term borrowings consist of lines of credit that are secured by certain assets of the Company and its subsidiaries, which, in some cases, are guaranteed by the Company. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Facilities Used |
|
|
|
|
|
| ||||
|
| Total Amount |
| Short-term |
| Letters of |
| Facilities |
| Weighted average |
| ||||
|
| of Facilities |
| Borrowings |
| Credit |
| Available |
| interest rate |
| ||||
May 31, 2017 |
| $ | 69,000 |
| $ | — |
| $ | 220 |
| $ | 68,780 |
| — | % |
August 31, 2016 |
| $ | 65,000 |
| $ | 16,534 |
| $ | 9,224 |
| $ | 39,242 |
| 10.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Facilities Outstanding |
|
|
|
|
|
| ||||
|
| Total Amount |
| Short-term |
| Letters of |
| Facilities |
| Weighted average |
| ||||
|
| of Facilities |
| Borrowings |
| Credit |
| Available |
| interest rate |
| ||||
May 31, 2018 |
| $ | 72,750 |
| $ | 334 |
| $ | 2,610 |
| $ | 69,806 |
| 4.0 | % |
August 31, 2017 |
| $ | 69,000 |
| $ | — |
| $ | 966 |
| $ | 68,034 |
| — | % |
As of May 31, 20172018 and August 31, 2016,2017, the Company had approximately $40.0 million of short-term facilities in the U.S. that require compliance with certain quarterly financial covenants. As of May 31, 20172018 and August 31, 2016,2017, the Company was in compliance with respect to these covenants. Each of the facilities expires annually and is normally renewed.
2024
The following table provides the changes in long-term debt for the nine months ended May 31, 2017:2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands) |
| Current |
| Long-term |
| Total |
| |||
Balances as of August 31, 2016 |
| $ | 14,565 |
| $ | 73,542 |
| $ | 88,107 | (1) |
Proceeds from long-term debt incurred during the period: |
|
|
|
|
|
|
|
|
|
|
MUFG Union Bank |
|
| — |
|
| 35,700 |
|
| 35,700 |
|
Trinidad subsidiary |
|
| 6,000 |
|
| 6,000 |
|
| 12,000 |
|
Repayments of long-term debt: |
|
|
|
|
|
|
|
|
|
|
Regularly scheduled loan payments |
|
| (225) |
|
| (10,784) |
|
| (11,009) |
|
Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) |
|
| 36 |
|
| (120) |
|
| (84) |
|
Balances as of May 31, 2017 |
| $ | 20,376 |
| $ | 104,338 |
| $ | 124,714 | (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands) |
| Current |
| Long-term |
| Total |
| |||
Balances as of August 31, 2017 |
| $ | 18,358 |
| $ | 87,939 |
| $ | 106,297 | (1) |
Proceeds from long-term debt incurred during the period: |
|
|
|
|
|
|
|
|
|
|
Panama subsidiary |
|
| 1,500 |
|
| 13,500 |
|
| 15,000 |
|
Honduras subsidiary |
|
| 1,350 |
|
| 12,150 |
|
| 13,500 |
|
Repayments of long-term debt: |
|
|
|
|
|
|
|
|
|
|
Repayment of loan by Honduras subsidiary with Scotiabank |
|
| (600) |
|
| (850) |
|
| (1,450) |
|
Repayment of loans by Honduras subsidiary with Citibank |
|
| (1,850) |
|
| (6,063) |
|
| (7,913) |
|
Repayment of loan by Trinidad subsidiary |
|
| (3,000) |
|
| (3,000) |
|
| (6,000) |
|
Regularly scheduled loan payments |
|
| (3,739) |
|
| (9,829) |
|
| (13,568) |
|
Reclassifications of long-term debt |
|
| 2,479 |
|
| (2,479) |
|
| — |
|
Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) |
|
| 146 |
|
| (160) |
|
| (14) |
|
Balances as of May 31, 2018 |
| $ | 14,644 |
| $ | 91,208 |
| $ | 105,852 | (3) |
(1) | The carrying amount of non-cash assets assigned as collateral for these loans was |
(2) | These foreign currency translation adjustments are recorded within Other comprehensive income. |
(3) | The carrying amount of non-cash assets assigned as collateral for these loans was |
In March 2018, the Company's Panama subsidiary entered into a loan agreement with Scotiabank. The agreement provides for a US $15.0 million loan to be repaid in five years, renewable at the Bank’s exclusive option for one additional period of five years. The loan is to be repaid with quarterly principal and monthly interest payments. The interest rate is set at the 90 day LIBOR rate plus 3%. The loan was funded on March 23, 2018.
In March 2018, December 2017 and September 2017 the Company’s Trinidad subsidiary paid off the outstanding principal balances of U.S. $1.5 million, $1.5 million, and $3.0 million, respectively, on a loan agreement entered into with Citibank.
In February 2018, the Company’s Honduras subsidiary refinanced its portfolio of loans with Citibank. The original notional amount of this portfolio of loans was $13.5 million, which the Company drew down in fiscal 2015. There was approximately $7.9 million of remaining principal outstanding at the time of the refinancing. Under the refinancing agreement, the portfolio of loans was combined into one loan and the notional amount of the loan increased back to the original $13.5 million, with the interest rate set at the 90 day LIBOR rate plus 3.0%. In conjunction with the refinancing of these loans, the Company’s Honduras subsidiary drew down the additional $5.6 million notional amount during February 2018. In addition, the Company’s Honduras subsidiary entered into a cross-currency interest rate swap with Citibank whereby the Company’s subsidiary will pay Honduras Lempiras at a fixed interest rate of 9.75%.
In January 2018, the Company’s Honduras subsidiary paid off the outstanding principal balance of U.S. $1.5 million on a loan agreement entered into with Scotiabank.
In August 2017, the Company’s Panama subsidiary paid off the outstanding principal balance of U.S. $13.3 million on a loan agreement entered into with Scotiabank. The Company’s subsidiary also settled the interest rate swap that it had entered into with Scotiabank related to this loan.
On March 31, 2017, the Company's Trinidad subsidiary entered into a loan agreement with Citibank, N.A. The agreement provides for a $12.0 million loan to be repaid in eight quarterly principal payments plus interest. The interest rate is set at the 90 day LIBOR rate plus 3%. The loan was funded on March 31, 2017. As of May 31, 2018, Company's Trinidad subsidiary has repaid $4.5 million on this loan in addition of regularly scheduled loan payments. As of May 31, 2018, the remaining balance on this loan was $3.0 million.
25
In January 2017, the Company finalized its acquisition of a distribution center in Medley, Miami-Dade County, Florida for a total purchase price of approximately $46.0 million. The Company transferred the majority of its Miami distribution center activities previously located in leased facilities to the new distribution center during the third quarter of fiscal year 2017. To finance the acquisition of this property, the Company entered into a 10-year real estate secured loan with MUFG Union Bank, N.A. (“Union Bank”) for $35.7 million in January 2017. This loan has a variable interest rate of 30-day LIBOR plus 1.7%, with monthly principal and interest payments, maturing in 2027. The monthly principal and interest payments begin in April 2019. The Company also entered into an interest rate hedge with Union Bank for $35.7 million, the notional amount. Under the hedge, the Company will receive variable interest equal to 30-day LIBOR plus 1.7% and pay fixed interest at a rate of 3.65%, with an effective date of March 1, 2017 and maturity date of March 1, 2027. The Company has terminated the lease and with respect to portions of the Miami distribution facilities intends to terminate or enter into sublease agreements for the remaining portions of the leased facilities. The Company will record costs related to the termination of the leased facilities as liabilities, with the related expenses as warehouse expenses, once the leased facility is available for subleasing.
As of May 31, 2017,2018, the Company had approximately $102.0$96.1 million of long-term loans in the U.S., Trinidad, Panama, El Salvador, Honduras, Costa Rica Barbados and Colombia that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of May 31, 2017,2018, the Company was in compliance with all covenants or amended covenants.
As of August 31, 2016,2017, the Company had approximately $76.0$85.6 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombia that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of August 31, 2016,2017, the Company was in compliance with all covenants or amended covenants.
21
Annual maturities of long-term debt are as follows (in thousands):
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Twelve Months Ended May 31, |
| Amount |
| Amount | ||
2018 |
| $ | 20,376 | |||
2019 |
| 19,972 |
| $ | 14,644 | |
2020 |
| 29,396 |
| 23,281 | ||
2021 |
| 18,816 |
| 12,881 | ||
2022 |
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| 3,182 |
| 6,621 | |
2023 |
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| 4,125 | |||
Thereafter |
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| 32,972 |
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| 44,300 |
Total |
| $ | 124,714 |
| $ | 105,852 |
NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to interest rate risk relating to its ongoing business operations. To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.
In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of three of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company’s subsidiaries entered into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.
These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the effective portion of theentire gain or loss on the derivative reported as a component of other comprehensive income (loss). Amounts are deferred in other comprehensive income (loss) and reclassified into earnings in the same period or periods during whichincome statement line item that is used to present earnings effect of the hedged transaction is determined to be ineffective. There were no such amounts recorded for ineffectiveness foritem when the periods reported herein related to the interest rate or cross-currency interest rate swapshedged item affects earnings.
26
Table of long-term debt.Contents
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company is exposed to foreign-currencyforeign currency exchange-rate fluctuations in the normal course of business, including foreign-currencyforeign 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. These 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 is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currencyforeign 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.
Cash Flow Hedges
As of May 31, 2017,2018, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting.
2227
The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the nine months ended May 31, 2017:2018:
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Subsidiary |
| Date |
| Derivative |
| Derivative |
| Initial |
| Bank |
| Floating Leg |
| Fixed Rate |
| Settlement |
| Effective |
| Date |
| Derivative |
| Derivative |
| Initial |
| Bank |
| Floating Leg |
| Fixed Rate |
| Settlement |
| Effective | ||||
PriceSmart, Inc (1) |
| 7-Nov-16 |
| MUFG Union Bank, N.A. ("Union Bank") |
| Interest rate swap |
| $ | 35,700,000 |
| Union Bank |
| Variable rate 1-month Libor plus 1.7% |
| 3.65 | % |
| 1st day of each month beginning on April 1, 2017 |
| March 1, 2017 - March 1, 2027 |
| 7-Nov-16 |
| MUFG Union Bank, N.A. ("Union Bank") |
| Interest rate swap |
| $ | 35,700,000 |
| Union Bank |
| Variable rate 1-month LIBOR plus 1.7% |
| 3.65 | % |
| 1st day of each month beginning on April 1, 2017 |
| March 1, 2017 - |
Costa Rica |
| 28-Aug-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 7,500,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 2.50% |
| 7.65 | % |
| 28th day of August, November, February, and May beginning on November 30, 2015 |
| August 28, 2015 - |
| 28-Aug-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 7,500,000 |
| Citibank, N.A. |
| Variable rate 3-month LIBOR plus 2.50% |
| 7.65 | % |
| 28th day of August, November, February, and May beginning on November 30, 2015 |
| August 28, 2015 - |
Honduras |
| 24-Mar-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 8,500,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 3.25% |
| 10.75 | % |
| 24th day of March, June, September, and December beginning on June 24, 2015 |
| March 24,2015 - | ||||||||||||||||||||
Honduras (2) |
| 24-Mar-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 8,500,000 |
| Citibank, N.A. |
| Variable rate 3-month LIBOR plus 3.25% |
| 10.75 | % |
| 24th day of March, June, September, and December beginning on June 24, 2015 |
| Refinanced on | ||||||||||||||||||||
Honduras (2) |
| 26-Feb-18 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 13,500,000 |
| Citibank, N.A. |
| Variable rate 3-month LIBOR plus 3.00% |
| 9.75 | % |
| 29th day of May, August, November and February beginning on May 29, 2018 |
| February 26,2018 - | ||||||||||||||||||||
El Salvador |
| 16-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 4,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.78 | % |
| 29th day of each month beginning on December 29, 2014 |
| December 1, 2014 - |
| 16-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 4,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day LIBOR plus 3.5% |
| 4.78 | % |
| 29th day of each month beginning on December 29, 2014 |
| December 1, 2014 - |
Colombia |
| 10-Dec-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 15,000,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 2.8% |
| 8.25 | % |
| 4th day of March, June, Sept, Dec. beginning on March 4, 2015 |
| December 4, 2014 - |
| 10-Dec-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 15,000,000 |
| Citibank, N.A. |
| Variable rate 3-month LIBOR plus 2.8% |
| 8.25 | % |
| 4th day of March, June, Sept, Dec. beginning on March 4, 2015 |
| December 4, 2014 - |
Panama |
| 9-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 10,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 5.16 | % |
| 28th day of each month beginning December 29, 2014 |
| November 28, 2014 - |
| 9-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 10,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day LIBOR plus 3.5% |
| 5.16 | % |
| 28th day of each month beginning December 29, 2014 |
| November 28, 2014 - |
Honduras |
| 23-Oct-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 5,000,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 3.5% |
| 11.6 | % |
| 22nd day of January, April, July, and October beginning on January 22, 2015 |
| October 22, 2014 - |
| 23-Oct-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 5,000,000 |
| Citibank, N.A. |
| Variable rate 3-month LIBOR plus 3.5% |
| 11.6 | % |
| 22nd day of January, April, July, and October beginning on January 22, 2015 |
| Settled on |
Panama |
| 1-Aug-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 5,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.89 | % |
| 21st day of each month beginning on September 22, 2014 |
| August 21, 2014 - |
| 1-Aug-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 5,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day LIBOR plus 3.5% |
| 4.89 | % |
| 21st day of each month beginning on September 22, 2014 |
| August 21, 2014 - |
Panama |
| 22-May-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 19,800,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.98 | % |
| 4th day of each month beginning on June 4, 2014 |
| May 5, 2014 - |
| 22-May-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 3,970,000 |
| Bank of Nova Scotia |
| Variable rate 30-day LIBOR plus 3.5% |
| 4.98 | % |
| 4th day of each month beginning on June 4, 2014 |
| May 5, 2014 - |
Panama |
| 22-May-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 3,970,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.98 | % |
| 4th day of each month beginning on June 4, 2014 |
| May 5, 2014 - |
(1) | The initial notional amount and fixed rate were modified effective January 2017. |
(2) | In February 2018, the Company’s Honduras subsidiary refinanced its portfolio of loans entered into with Citibank. The original notional amount of this portfolio of loans was $13.5 million, which the Company drew down in fiscal 2015. There was approximately $7.9 million of remaining principal at the time of the refinancing. Under the refinancing agreement, the portfolio of loans was combined into one loan and the notional amount of the loan increased back to the original $13.5 million, with the interest rate set at the 90 day LIBOR rate plus 3.0%. In conjunction with the refinancing of these loans, the Company’s Honduras subsidiary drew down the additional $5.6 million notional amount during February 2018. As part of the terms, the existing cash flow hedge related to the original loan, was de-designated and incorporated into a new hedging relationship where the Company’s Honduras subsidiary has entered into a cross-currency interest rate swap with Citibank. Under this new hedge agreement, the Company’s Honduras subsidiary will pay Honduras Lempiras, at a fixed interest rate of 9.75%. |
28
For the three and nine months ended May 31, 20172018 and 2016,2017, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):
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Income Statement Classification |
| Interest |
| Cost of |
| Total |
| Interest |
| Cost of |
| Total | ||||||
Interest expense for the three months ended May 31, 2018 |
| $ | 1,136 |
| $ | 277 |
| $ | 1,413 | |||||||||
Interest expense for the three months ended May 31, 2017 |
| $ | 1,080 |
| $ | 425 |
| $ | 1,505 |
| $ | 1,080 |
| $ | 425 |
| $ | 1,505 |
Interest expense for the three months ended May 31, 2016 |
| $ | 812 |
| $ | 461 |
| $ | 1,273 | |||||||||
Interest expense for the nine months ended May 31, 2018 |
| $ | 2,859 |
| $ | 774 |
| $ | 3,633 | |||||||||
Interest expense for the nine months ended May 31, 2017 |
| $ | 2,584 |
| $ | 1,206 |
| $ | 3,790 |
| $ | 2,584 |
| $ | 1,206 |
| $ | 3,790 |
Interest expense for the nine months ended May 31, 2016 |
| $ | 2,377 |
| $ | 1,478 |
| $ | 3,855 |
(1) | This amount is representative of the interest expense recognized on the underlying hedged transactions. |
(2) | This amount is representative of the interest expense recognized on the cross-currency interest rate swaps designated as cash flow hedging instruments. |
23
The total notional balance of the Company’s pay-fixed/receive-variable interest rate swaps and cross-currency interest rate swaps was as follows (in thousands):
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| Notional Amount as of | ||||||||
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| May 31, |
| August 31, |
| May 31, |
| August 31, | ||||
Floating Rate Payer (Swap Counterparty) |
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Scotiabank |
| $ | 28,358 |
| $ | 30,188 | ||||||
Union Bank |
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| 35,700 |
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| — |
| $ | 35,700 |
| $ | 35,700 |
Citibank N.A. |
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| 27,113 |
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| 32,258 |
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| 28,725 |
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| 26,088 |
Scotiabank |
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| 11,324 |
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| 13,724 | ||||||
Total |
| $ | 91,171 |
| $ | 62,446 |
| $ | 75,749 |
| $ | 75,512 |
Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income)/loss (in thousands):
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| May 31, 2017 |
| August 31, 2016 | ||||||||||||||
Derivatives designated as cash flow hedging instruments |
| Balance Sheet |
| Fair |
| Net Tax |
| Net |
| Fair |
| Net Tax |
| Net | ||||||
Cross-currency interest rate swaps |
| Other non-current assets |
| $ | 2,596 |
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| (943) |
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| 1,653 |
| $ | 3,224 |
| $ | (1,248) |
| $ | 1,976 |
Interest rate swaps |
| Other non-current assets |
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| 83 |
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| (30) |
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| 53 |
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| — |
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Interest rate swaps |
| Other long-term liabilities |
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| (60) |
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| 17 |
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| (43) |
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| (448) |
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| 115 |
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| (333) |
Cross-currency interest rate swaps |
| Other long-term liabilities |
|
| (540) |
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| 162 |
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| (378) |
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| (1,066) |
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| 320 |
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| (746) |
Net fair value of derivatives designated as hedging instruments |
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| $ | 2,079 |
| $ | (794) |
| $ | 1,285 |
| $ | 1,710 |
| $ | (813) |
| $ | 897 |
24
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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| May 31, 2018 |
| August 31, 2017 | ||||||||||||||
Derivatives designated as cash flow hedging instruments |
| Balance Sheet |
| Fair |
| Net Tax |
| Net |
| Fair |
| Net Tax |
| Net | ||||||
Cross-currency interest rate swaps |
| Other non-current assets |
| $ | 2,046 |
| $ | (618) |
| $ | 1,428 |
| $ | 2,547 |
| $ | (950) |
| $ | 1,597 |
Interest rate swaps |
| Other non-current assets |
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| 2,035 |
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| (456) |
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| 1,579 |
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| — |
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| — |
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| — |
Interest rate swaps |
| Other long-term liabilities |
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| — |
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| — |
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| — |
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| (231) |
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| 80 |
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| (151) |
Cross-currency interest rate swaps |
| Other long-term liabilities |
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| (537) |
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| 161 |
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| (376) |
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| (451) |
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| 135 |
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| (316) |
Net fair value of derivatives designated as hedging instruments |
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| $ | 3,544 |
| $ | (913) |
| $ | 2,631 |
| $ | 1,865 |
| $ | (735) |
| $ | 1,130 |
Fair Value Instruments
TheFrom time to time the Company enteredenters into non-deliverable forward foreign-exchange contracts during fiscal year 2016.contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. The Company entered into additional non-deliverable forward foreign exchange contracts during the nine months ended May 31, 2017.
29
The following table summarizes the non-deliverable forward foreign exchange contracts that are open as of May 31, 2017:
2018.
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| Derivative |
| Notional |
| Settlement |
| Effective | |
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PSMT, Inc. |
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| Forward foreign
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For the three and nine months ended May 31, 2017,2018, the Company included in its consolidated statements of income the forward derivative gain or (loss) on the non-deliverable forward foreign-exchange contracts as follows (in thousands):
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| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||
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| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||||||
Income Statement Classification |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Other income (expense), net |
| $ | (177) |
| $ | 23 |
| $ | 106 |
| $ | (128) |
| $ | 20 |
| $ | (177) |
| $ | (141) |
| $ | 106 |
NOTE 8 – ACQUISITION
On March 15, 2018, the Company acquired Aeropost, Inc. The followingacquisition has been accounted for in conformity with ASC Topic 805, Business Combinations. The acquisition of Aeropost, Inc. will allow PriceSmart to offer new online shopping options and provides an opportunity to accelerate the development of an omni-channel shopping experience for the Company’s members. The Company paid $29.0 million in cash. Under the merger agreement, $5.0 million of the total consideration has been placed in escrow and its release to the sellers is contingent upon certain key Aeropost, Inc. executives remaining employed with the Company for 15 months from the date of closing. The amount placed in escrow also can be used to satisfy any indemnification claims and post-closing adjustments in favor of the Company. This contingent consideration is accounted for as post-combination compensation expense, reduces the total consideration and will be recorded over this 15 month period. The post-acquisition compensation expense is recorded as prepaid expenses and other current assets on the consolidated balance sheet, and has been treated as use of cash from operating activities on the consolidated statement of cash flows.
Below is the table that summarizes the fair value of foreign currency forward contracts that do not qualify for derivative hedge accountingtotal purchase price consideration (in thousands):
May 31, | |||
2018 | |||
Estimated consideration on the acquisition date | $ | 30,046 | |
Estimated assumed net debt at acquisition date | (1,093) | ||
Total cash consideration | 28,953 | ||
Post-combination compensation expense, net of claims | (3,850) | ||
Business acquisition, net assets acquired | $ | 25,103 | |
Cash acquired | 1,208 | ||
Business acquisition, net of cash acquired | $ | 23,895 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| May 31, 2017 |
| August 31, 2016 |
| ||||||
Non-deliverable forward foreign exchange contracts |
| Balance Sheet |
| Fair Value |
| Balance Sheet |
| Fair Value |
| ||
Foreign currency forward contracts |
| Other current assets |
| $ | 3 |
| Other current assets |
| $ | 34 |
|
Foreign currency forward contracts |
| Other accrued expenses |
|
| (400) |
| Other accrued expenses |
|
| (144) |
|
Net fair value of non-deliverable forward foreign exchange contracts designated as hedging instruments that do not qualify for hedge accounting |
|
|
| $ | (397) |
|
|
| $ | (110) |
|
The Company is still finalizing the allocation of the purchase price, therefore, the purchase price allocation or the provisional measurements of intangible assets, goodwill and deferred income tax assets or liabilities may be adjusted if the Company recognizes additional assets or liabilities to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. The Company expects to complete the allocation of purchase price during fiscal year 2019.
2530
The following table summarizescomponents of the non-deliverable forward assets and liabilitiespreliminary purchase price allocation at the Company holds with the same counterparty, and that have been netted against each other in accordance with offsetting guidanceacquisition date are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| May 31, 2017 |
| ||||||||||
|
| Counterparty |
| Balance Sheet Location |
| Fair Value |
| Counterparty |
| Balance Sheet Location |
| Fair Value |
|
Derivative Asset |
| Trinidad, Citibank |
|
| $ | 5,038 |
| PSMT, Inc., MUFG |
|
| $ | 5,060 |
|
Derivative Liability |
| Trinidad, Citibank |
|
|
| (5,346) |
| PSMT, Inc., MUFG |
|
|
| (5,058) |
|
|
| Net Derivative Liability |
| Other accrued expenses | $ | (308) | (1) | Net Derivative Asset |
| Other current assets | $ | 2 | (1) |
|
|
|
|
|
|
| May 31, |
| |
|
| 2018 |
| |
Current assets |
| $ | 4,196 |
|
Other non-current assets |
|
| 746 |
|
Property, plant and equipment |
|
| 2,059 |
|
Intangible assets |
|
| 16,100 |
|
Goodwill |
|
| 16,033 |
|
Total assets acquired |
| $ | 39,134 |
|
Current liabilities |
|
| (5,862) |
|
Non-current liabilities |
|
| (7,607) | (1) |
Noncontrolling interest |
|
| (562) |
|
Net assets acquired |
| $ | 25,103 |
|
(1) |
|
Goodwill represents the excess of the total purchase price over the fair value of the underlying assets. The goodwill is expected not to be deductible for tax purposes.
The following sets forth the results of the amounts preliminarily assigned to the identifiable intangible assets acquired (in thousands):
Amortization | Fair value of | |||||
Period | Assets Acquired | |||||
Trade name | 25 years | $ | 5,100 | |||
Developed technology | 5 years | 11,000 | ||||
Total assets acquired | $ | 16,100 |
The fair value of the intangible assets is measured based on assumptions and estimations with regards to variable factors such as the amount and timing of future cash flows, appropriate risk-adjusted discount rates, nonperformance risk or other factors that market participants would consider. The trade name and developed technology were valued using the income-based approach and royalty income method, respectively. Intangible assets are amortized on a straight-line basis over the amortization periods noted above, which is included in general and administrative expenses on the accompanying interim unaudited consolidated statements of income.
The following unaudited pro forma financial information shows the combined results of operations of the Company, including Aeropost, as if the acquisition had occurred as of the beginning of the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
| Nine Months Ended | |||
|
|
| 2018 |
|
| 2017 |
Pro forma total revenues |
| $ | 2,410,581 |
| $ | 2,296,135 |
Pro forma net income attributable to PriceSmart, Inc. (1) |
| $ | 46,202 |
| $ | 64,163 |
Pro forma net income attributable to noncontrolling interest |
| $ | 415 |
| $ | 187 |
Total revenue included in the Consolidated Statement of Income since acquisition |
| $ | 7,835 |
|
| N/A |
Net income/(loss) included in the Consolidated Statement of Income since acquisition |
| $ | (2,290) |
|
| N/A |
(1) | Includes the pro forma recognition of $2.2 million of post-combination compensation expense, which represents completion of nine of the fifteen months of continued service required to satisfy the $3.8 million remaining purchase price contingency, and $1.3 million for the amortization of intangible assets for the nine months ended May 31, 2018. |
2631
NOTE 89 – SEGMENTS
The Company and its subsidiaries are principally engaged in the international operation of membership shopping in 3941 warehouse clubs located in 13 countries/territories that are located in Central America, the Caribbean and Colombia. The Company also acquired a cross-border logistics and e-commerce provider whose central offices and primary distribution facility are located in Miami, which provides service in 38 countries in Latin America and the Caribbean. In addition, the Company operates distribution centers and corporate offices in the United States. The Company has aggregated its warehouse clubs, cross-border logistics, and e-commerce, distribution centers and corporate offices into reportable segments. The Company’s reportable segments are based on management’s organization of these locations into operating segments by general geographic location, used by management and the Company's chief operating decision maker in setting up management lines of responsibility, providing support services, and making operational decisions and assessments of financial performance. The Company has aggregated its cross-border logistics and e-commerce operations within the United States reporting segment. Segment amounts are presented after converting to U.S. dollars and consolidating eliminations. Certain revenues, operating costs and inter-company charges included in the United States segment are not allocated to the segments within this presentation, as it is impractical to do so, and they appear as reconciling items to reflect the amount eliminated on consolidation of intersegment transactions. From time to time, the Company revises the measurement of each segment's operating income and net income, including certain corporate overhead allocations, and other measures as determined by the information regularly reviewed by the Company's chief operating decision maker. When the Company does so, the previous period amounts and balances are reclassified to conform to the current period's presentation.
32
The following tables summarize by segment certain revenues, operating costs and balance sheet items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| United |
| Central |
| Caribbean |
| Colombia Operations |
| Reconciling |
| Total | ||||||||||||||||||||||||
Three Months Ended May 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Revenue from external customers |
| $ | 17,802 |
| $ | 451,597 |
| $ | 214,506 |
| $ | 98,296 |
| $ | — |
| $ | 782,201 | ||||||||||||||||||
Intersegment revenues |
|
| 291,925 |
|
| — |
|
| 1,087 |
|
| 376 |
|
| (293,388) |
|
| — | ||||||||||||||||||
Depreciation and amortization |
|
| 2,245 |
|
| 6,050 |
|
| 2,934 |
|
| 2,337 |
|
| — |
|
| 13,566 | ||||||||||||||||||
Operating income |
|
| (883) |
|
| 31,257 |
|
| 11,538 |
|
| 2,989 |
|
| (16,472) |
|
| 28,429 | ||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. |
|
| (2,792) |
|
| 25,485 |
|
| 10,074 |
|
| 2,377 |
|
| (16,450) |
|
| 18,694 | ||||||||||||||||||
Capital expenditures, net |
|
| 3,024 |
|
| 12,803 |
|
| 14,368 |
|
| 873 |
|
| — |
|
| 31,068 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Nine Months Ended May 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Revenue from external customers |
| $ | 35,087 |
| $ | 1,397,668 |
| $ | 663,317 |
| $ | 292,764 |
| $ | — |
| $ | 2,388,836 | ||||||||||||||||||
Intersegment revenues |
|
| 906,114 |
|
| — |
|
| 3,265 |
|
| 693 |
|
| (910,072) |
|
| — | ||||||||||||||||||
Depreciation and amortization |
|
| 5,680 |
|
| 17,459 |
|
| 8,343 |
|
| 6,896 |
|
| — |
|
| 38,378 | ||||||||||||||||||
Operating income |
|
| 3,354 |
|
| 100,463 |
|
| 36,763 |
|
| 8,198 |
|
| (49,919) |
|
| 98,859 | ||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. |
|
| (17,182) |
|
| 82,997 |
|
| 33,000 |
|
| 6,414 |
|
| (49,897) |
|
| 55,332 | ||||||||||||||||||
Capital expenditures, net |
|
| 4,612 |
|
| 35,364 |
|
| 33,997 |
|
| 2,729 |
|
| — |
|
| 76,702 | ||||||||||||||||||
Long-lived assets (other than deferred tax assets) |
|
| 72,343 |
|
| 312,468 |
|
| 148,789 |
|
| 125,699 |
|
| — |
|
| 659,299 | ||||||||||||||||||
Goodwill and intangibles, net |
|
| 31,626 |
|
| 30,770 |
|
| 4,548 |
|
| — |
|
| — |
|
| 66,944 | ||||||||||||||||||
Total assets |
|
| 160,793 |
|
| 562,401 |
|
| 333,985 |
|
| 189,291 |
|
| — |
|
| 1,246,470 | ||||||||||||||||||
|
| United |
| Central |
| Caribbean |
| Colombia Operations |
| Reconciling |
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Three Months Ended May 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
| $ | 6,455 |
| $ | 438,871 |
| $ | 201,007 |
| $ | 83,925 |
| $ | — |
| $ | 730,258 |
| $ | 6,455 |
| $ | 438,871 |
| $ | 201,007 |
| $ | 83,925 |
| $ | — |
| $ | 730,258 |
Intersegment revenues |
|
| 259,337 |
|
| — |
|
| 853 |
|
| 31 |
|
| (260,221) |
|
| — |
|
| 259,337 |
|
| — |
|
| 853 |
|
| 31 |
|
| (260,221) |
|
| — |
Depreciation and amortization |
|
| 1,788 |
|
| 5,142 |
|
| 2,594 |
|
| 2,359 |
|
| — |
|
| 11,883 |
|
| 1,788 |
|
| 5,142 |
|
| 2,594 |
|
| 2,359 |
|
| — |
|
| 11,883 |
Operating income |
|
| (959) |
|
| 32,018 |
|
| 9,993 |
|
| 1,753 |
|
| (15,179) |
|
| 27,626 |
|
| 245 |
|
| 31,444 |
|
| 9,706 |
|
| 1,410 |
|
| (15,179) |
|
| 27,626 |
Net income |
|
| (2,999) |
|
| 26,475 |
|
| 9,538 |
|
| 1,003 |
|
| (15,179) |
|
| 18,838 | ||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. |
|
| (1,795) |
|
| 25,901 |
|
| 9,251 |
|
| 660 |
|
| (15,179) |
|
| 18,838 | ||||||||||||||||||
Capital expenditures, net |
|
| 2,336 |
|
| 6,895 |
|
| 2,015 |
|
| 770 |
|
| — |
|
| 12,016 |
|
| 2,336 |
|
| 6,895 |
|
| 2,015 |
|
| 770 |
|
| — |
|
| 12,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
| $ | 25,381 |
| $ | 1,351,099 |
| $ | 627,544 |
| $ | 259,102 |
| $ | — |
| $ | 2,263,126 |
| $ | 25,381 |
| $ | 1,351,099 |
| $ | 627,544 |
| $ | 259,102 |
| $ | — |
| $ | 2,263,126 |
Intersegment revenues |
|
| 847,368 |
|
| — |
|
| 3,726 |
|
| 53 |
|
| (851,147) |
|
| — |
|
| 847,368 |
|
| — |
|
| 3,726 |
|
| 53 |
|
| (851,147) |
|
| — |
Depreciation and amortization |
|
| 4,837 |
|
| 15,146 |
|
| 7,583 |
|
| 6,879 |
|
| — |
|
| 34,445 |
|
| 4,837 |
|
| 15,146 |
|
| 7,583 |
|
| 6,879 |
|
| — |
|
| 34,445 |
Operating income |
|
| 6,129 |
|
| 104,726 |
|
| 36,477 |
|
| 4,013 |
|
| (45,938) |
|
| 105,407 |
|
| 10,166 |
|
| 102,410 |
|
| 35,531 |
|
| 3,238 |
|
| (45,938) |
|
| 105,407 |
Net income |
|
| 1,961 |
|
| 84,080 |
|
| 29,279 |
|
| 1,544 |
|
| (45,938) |
|
| 70,926 | ||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. |
|
| 5,998 |
|
| 81,764 |
|
| 28,333 |
|
| 769 |
|
| (45,938) |
|
| 70,926 | ||||||||||||||||||
Capital expenditures, net |
|
| 54,465 |
|
| 33,112 |
|
| 8,554 |
|
| 2,288 |
|
| — |
|
| 98,419 |
|
| 54,465 |
|
| 33,112 |
|
| 8,554 |
|
| 2,288 |
|
| — |
|
| 98,419 |
Long-lived assets (other than deferred tax assets) |
|
| 69,141 |
|
| 289,405 |
|
| 107,542 |
|
| 127,528 |
|
| — |
|
| 593,616 |
|
| 69,141 |
|
| 289,405 |
|
| 107,542 |
|
| 127,528 |
|
| — |
|
| 593,616 |
Goodwill |
|
| — |
|
| 31,113 |
|
| 4,519 |
|
| — |
|
| — |
|
| 35,632 | ||||||||||||||||||
Goodwill and intangibles, net |
|
| — |
|
| 31,113 |
|
| 4,519 |
|
| — |
|
| — |
|
| 35,632 | ||||||||||||||||||
Total assets |
|
| 142,643 |
|
| 524,806 |
|
| 295,431 |
|
| 180,996 |
|
| — |
|
| 1,143,876 |
|
| 142,643 |
|
| 524,806 |
|
| 295,431 |
|
| 180,996 |
|
| — |
|
| 1,143,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Revenue from external customers |
| $ | 7,108 |
| $ | 431,001 |
| $ | 200,041 |
| $ | 66,112 |
| $ | — |
| $ | 704,262 | ||||||||||||||||||
Intersegment revenues |
|
| 249,639 |
|
| — |
|
| 1,665 |
|
| — |
|
| (251,304) |
|
| — | ||||||||||||||||||
Depreciation and amortization |
|
| 1,391 |
|
| 4,823 |
|
| 2,436 |
|
| 1,621 |
|
| — |
|
| 10,271 | ||||||||||||||||||
Operating income/(loss) |
|
| 3,479 |
|
| 30,898 |
|
| 11,484 |
|
| (1,642) |
|
| (16,730) |
|
| 27,489 | ||||||||||||||||||
Net income/(loss) |
|
| 714 |
|
| 24,999 |
|
| 9,886 |
|
| (2,032) |
|
| (16,730) |
|
| 16,837 | ||||||||||||||||||
Capital expenditures, net |
|
| 831 |
|
| 6,760 |
|
| 2,631 |
|
| 9,976 |
|
| — |
|
| 20,198 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Nine Months Ended May 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Revenue from external customers |
| $ | 21,924 |
| $ | 1,329,485 |
| $ | 641,739 |
| $ | 200,976 |
| $ | — |
| $ | 2,194,124 | ||||||||||||||||||
Intersegment revenues |
|
| 809,301 |
|
| — |
|
| 4,429 |
|
| — |
|
| (813,730) |
|
| — | ||||||||||||||||||
Depreciation and amortization |
|
| 3,352 |
|
| 13,634 |
|
| 7,285 |
|
| 4,732 |
|
| — |
|
| 29,003 | ||||||||||||||||||
Operating income |
|
| 14,141 |
|
| 103,587 |
|
| 39,732 |
|
| (3,674) |
|
| (49,866) |
|
| 103,920 | ||||||||||||||||||
Net income |
|
| 4,032 |
|
| 82,634 |
|
| 34,789 |
|
| (5,138) |
|
| (49,866) |
|
| 66,451 | ||||||||||||||||||
Capital expenditures, net |
|
| 4,158 |
|
| 22,438 |
|
| 8,381 |
|
| 18,972 |
|
| — |
|
| 53,949 | ||||||||||||||||||
As of August 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Long-lived assets (other than deferred tax assets) |
|
| 16,242 |
|
| 269,383 |
|
| 109,145 |
|
| 123,501 |
|
| — |
|
| 518,271 |
| $ | 70,353 |
| $ | 296,915 |
| $ | 122,616 |
| $ | 126,206 |
| $ | — |
| $ | 616,090 |
Goodwill |
|
| — |
|
| 31,082 |
|
| 4,570 |
|
| — |
|
| — |
|
| 35,652 | ||||||||||||||||||
Goodwill and intangibles, net |
|
| — |
|
| 31,118 |
|
| 4,524 |
|
| — |
|
| — |
|
| 35,642 | ||||||||||||||||||
Total assets |
|
| 85,933 |
|
| 511,530 |
|
| 286,477 |
|
| 165,883 |
|
| — |
|
| 1,049,823 |
|
| 147,650 |
|
| 544,683 |
|
| 303,234 |
|
| 181,947 |
|
| — |
|
| 1,177,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Long-lived assets (other than deferred tax assets) |
| $ | 19,222 |
| $ | 271,039 |
| $ | 108,426 |
| $ | 137,599 |
| $ | — |
| $ | 536,286 | ||||||||||||||||||
Goodwill |
|
| — |
|
| 31,091 |
|
| 4,546 |
|
| — |
|
| — |
|
| 35,637 | ||||||||||||||||||
Total assets |
|
| 100,744 |
|
| 515,478 |
|
| 287,088 |
|
| 193,425 |
|
| — |
|
| 1,096,735 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
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(1) | The reconciling items reflect the amount eliminated on consolidation of intersegment transactions. |
(2) | The reconciling items contain a $22,000 adjustment for net income attributable to non-controlling interest. |
2733
NOTE 910 – SUBSEQUENT EVENTS
The Company has evaluated all events subsequent to the balance sheet date of May 31, 20172018, through the date of issuance of these consolidated financial statements and has determined that, except as set forth below, there are no subsequent events that require disclosure.
Real Estate TransactionsOther Commitments
In June 2017,2018, the Company acquired landentered into a lease extension contract in Santo Domingo, Dominican Republic.Honduras, which will increase its future minimum lease commitments by approximately $31.6 million. The Company plansoriginal lease was due to construct a warehouse clubexpire on this site, which it expects to open in the spring of calendar year 2018. This will bring the number of PriceSmart warehouse clubs operating in Dominican Republic to four. May 30, 2020.
In
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|
Years Ended May 31, |
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|
|
2019 |
| $ | — |
2020 |
|
| — |
2021 |
|
| 1,250 |
2022 |
|
| 1,250 |
2023 |
|
| 1,250 |
Thereafter |
|
| 27,813 |
Total |
| $ | 31,563 |
Financing Transactions
On June 2017,15, 2018, the Company acquired landentered into a five-year interest rate swap with Scotiabank in Santa Elena, El Salvador.which the Company will receive interest based on the three-month LIBOR rate plus 3.00% on a quarterly amortizing initial notional value of U.S. $14.6 million and pay fixed interest of approximately 6.0% on a quarterly amortizing initial notional value of $14.6 million. The Company plans to construct a parking lot on this site for trucking and employee parking.
derivative instrument requires 57 monthly net settlements of interest.
2834
PRICESMART, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements concerning PriceSmart, Inc.'s ("PriceSmart,"PriceSmart", the "Company" or "we") anticipated future revenues and earnings, adequacy of future cash flows, proposed warehouse club openings, the Company's performance relative to competitors and related matters. These forward-looking statements include, but are not limited to, statements containing the words “expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “anticipated,” “scheduled,” and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially including, but not limited to, the following risks: our financial performance is dependent on international operations, which exposes us to various risks; any failure by us to manage our widely dispersed operations could adversely affect our business; we face significant competition; future sales growth depends, in part, on our ability to successfully open new warehouse clubsexternal and grow sales in our existing locations; we might not identify in a timely manner or effectively respond to changes in consumer preferences for merchandise, which could adversely affect our relationship with members, demand for our products and market share; although we have begun to offer limited online shopping to our members, our sales could be adversely affected if one or more major international online retailers were to enter our markets or if other competitors were to offer a superior online experience; our profitability is vulnerable to cost increases; we face difficulties in the shipment of and risks inherent in the importation of, merchandise to our warehouse clubs; we are exposed to weather and other natural disaster risks that might not be adequately compensated by insurance; general economic conditions could adversely impact our business in various respects; our failure to maintain our brand and reputation could adversely affect our results of operations; we are subject to risks associated with possible changes in our relationships with third parties with which we do business, as well as the performance of such third parties; we rely extensively on computer systems to process transactions, summarize results and manage our business, and failure to adequately maintain our systems and disruptions in our systems could harm our business and adversely affect our results of operations; we could be subject to additional tax liabilities or subject to reserves on the recoverability of tax receivables; a few of our stockholders own approximately 25.3% of our voting stock as of May 31, 2017, which may make it difficult to complete some corporate transactions without their support and may impede a change in control; failure to attract and retain qualified employees, increases in wage and benefit costs, changes in laws and other labor issues could materially adversely affect our financial performance; we face the possibility of operational interruptions related to union work stoppages; we are subject to volatility in foreign currency exchange rates and limits on our ability to convert foreign currencies into U.S. dollars; we face the risk of exposure to product liability claims, a product recall and adverse publicity; any failure to maintain the security of the information relating to our company, members, employees and vendors that we hold, whether as a result of cybersecurity attacks on our information systems, failure of internal controls, employee negligence or malfeasance or otherwise, could damage our reputation with members, employees, vendors and others, could disrupt our operations, could cause us to incur substantial additional costs and to become subject to litigation and could materially adversely affect our operating results; we are subject to payment related risks; changes in accounting standards and assumptions, projections, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations; we face compliance risks related to our international operations; if remediation costs or hazardous substance contamination levels at certain properties for which we maintain financial responsibility exceed management's current expectations, our financial condition and results of operations could be adversely impacted.risks:
External Risks:
· | Natural disasters that might cause damages not covered by insurance; |
· | Negative macroeconomic conditions; |
· | Volatility in foreign currency exchange rates and limitations on our ability to convert foreign currency to U.S. dollars; |
· | Changes in, and inconsistent enforcement of, laws and regulations in countries where we operate, including those related to tariffs and taxes; |
· | Compliance risks; |
· | Crime and security concerns, which can adversely affect the economies of the countries in which we operate and which require us to incur additional costs to provide additional security at our warehouse clubs; |
· | Recoverability of moneys owed to PriceSmart from governments in countries where we do business; |
· | The possibility of operational interruptions related to union work stoppages; and |
· | Political instability, such as recent unrest in Honduras and the ongoing anti-government protests in Nicaragua, which have disrupted our operations there. |
Internal Risks:
· | Timely identification or effectively responding to changes in consumer shopping preferences with resulting negative effects on our sales and market share; |
· | Significant competition, including from international online retailers; |
· | Limitations on the availability of appropriate sites for new warehouse clubs could adversely affect growth; |
· | Increased costs due to delays or failure in our efforts to integrate our online commerce with our traditional brick and mortar business; |
· | Acquisitions, such as our acquisition of Aeropost, Inc. in March 2018, may expose us to additional risks; |
· | Cost increases from product and service providers; |
· | Interruption of supply chains, which might adversely impact on our ability to import merchandise; |
· | Failure to maintain our brand’s reputation; |
· | Exposure to product liability claims and product recalls; |
· | Failure to maintain our computer systems and/or disruption in those systems; |
· | Delays or cost overruns implementing our anticipated new Enterprise Resource Planning system; |
· | Any failure to maintain the security of the information we hold relating to our company, our members, employees and suppliers; |
· | Failure to attract and retain qualified employees, significant increases in wage and benefit expenses, or changes in labor laws with consequent material adverse effect on our financial performance; |
· | Changes in accounting standards affecting management's financial assumptions, projections, estimates and judgments; and |
· | A few of our stockholders own approximately 25.3% of our voting stock as of May 31, 2018, which may make it difficult to complete some corporate transactions without their support and may impede a change in control. |
The risks described above as well as the other risks detailed in the Company'sCompany’s U.S. Securities and Exchange Commission (“SEC”) reports, including those set forth in Part II – Item 1A – “Risk Factors” in the Company'sCompany’s Annual Report on Form 10-K filed for the fiscal year ended August 31, 20162017 filed on October 27, 2016 pursuant to the Securities Exchange Act of 1934, as amended,26, 2017 (see “Part I - Item 1A - Risk Factors”) could materially and adversely affect our business, financial condition and results of operations. These risks are not the only risks that the Company faces. The Company could also be affected by additional factors that apply to all companies operating globally and in the U.S., as well as other risks that are not presently known to the Company or that the Company currently considers to be immaterial.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.
The following discussion and analysis compares the results of operations for the three and nine months ended May 31, 20172018 and 20162017 and should be read in conjunction with the consolidated financial statements and the accompanying notes included therein.
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Our business consists primarily of operating international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. We operate in 13 countries/territories that are located in Latin America and the Caribbean. Our ownership in all operating warehouse club subsidiaries as of May 31, 20172018 is 100%, and they are presented on a consolidated basis. The number of warehouse clubs in operation as of May 31, 20172018 for each country or territory are as follows:
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| Anticipated | |
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| Number of |
| Number of |
| Anticipated Additional |
| Anticipated |
| Number of |
| Number of |
| Additional | |||||||
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| Warehouse Clubs |
| Warehouse Clubs |
| Warehouse |
| Warehouse |
| Warehouse Clubs |
| Warehouse Clubs |
| Warehouse | |||||||
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| in Operation as of |
| in Operation as of |
| Club Openings |
| Club Openings |
| in Operation as of |
| in Operation as of |
| Club Openings | |||||||
Country/Territory |
| August 31, 2016 |
| May 31, 2017 |
| In Fiscal Year 2017 |
| In Fiscal Year 2018 |
| August 31, 2017 |
| May 31, 2018 |
| In Fiscal Year 2019 | |||||||
Colombia |
|
| 6 |
|
| 7 |
|
| — |
|
| — |
|
| 7 |
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| 7 |
|
| — |
Costa Rica |
|
| 6 |
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| 6 |
|
| — |
|
| 1 |
|
| 6 |
|
| 7 |
|
| — |
Panama |
|
| 5 |
|
| 5 |
|
| — |
|
| — |
|
| 5 |
|
| 5 |
|
| 1 |
Trinidad |
|
| 4 |
|
| 4 |
|
| — |
|
| — |
|
| 4 |
|
| 4 |
|
| — |
Dominican Republic |
|
| 3 |
|
| 3 |
|
| — |
|
| 1 |
|
| 3 |
|
| 4 |
|
| 1 |
Guatemala |
|
| 3 |
|
| 3 |
|
| — |
|
| — |
|
| 3 |
|
| 3 |
|
| — |
Honduras |
|
| 3 |
|
| 3 |
|
| — |
|
| — |
|
| 3 |
|
| 3 |
|
| — |
El Salvador |
|
| 2 |
|
| 2 |
|
| — |
|
| — |
|
| 2 |
|
| 2 |
|
| — |
Nicaragua |
|
| 2 |
|
| 2 |
|
| — |
|
| — |
|
| 2 |
|
| 2 |
|
| — |
Aruba |
|
| 1 |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
|
| — |
Barbados |
|
| 1 |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
|
| — |
U.S. Virgin Islands |
|
| 1 |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
|
| — |
Jamaica |
|
| 1 |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
|
| — |
Totals |
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| 38 |
|
| 39 |
|
| — |
|
| 2 |
|
| 39 |
|
| 41 |
|
| 2 |
We opened a new warehouse club in Chia, Colombia, in September 2016, fiscal year 2017, that we constructed on land we acquired in May 2015, bringing the total of warehouse clubs operating in Colombia to seven. We are not planning any more warehouse club openings for fiscal year 2017. In April 2015, we acquired land in Managua, Nicaragua. We constructed and then opened a warehouse club on this site in November 2015 of fiscal year 2016.
On February 1, 2017, the Company acquired land in Santa Ana, Costa Rica upon which the Company is currently building a new warehouse club. We currently plan to open this new warehouse club in the fall of 2017, fiscal year 2018. With the six warehouse clubs currently operating in Costa Rica, this new warehouse club will bring the number of PriceSmart warehouse clubs operating in Costa Rica to seven. In June 2017, the Company acquired land in Santo Domingo, Dominican Republic. The Company plans to construct a warehouse club on this site, which it expects to open in the spring of calendar year 2018. This will bring the number of PriceSmart warehouse clubs operating in Dominican Republic to four. We continue to explore other potential sites for future warehouse clubs in Central America, the Caribbean and Colombia.
Our warehouse clubs and local distribution centers are located in Latin America and the Caribbean, and our corporate headquarters, U.S. buying operations and regional distribution centers are located primarily in the United States. The Company’sOur operating segments are the United States, Central America, the Caribbean and Colombia.
We opened a new warehouse club in Santa Ana, Costa Rica in October 2017, bringing the total warehouse clubs operating in Costa Rica to seven. The Company opened a new warehouse club in Santo Domingo, Dominican Republic in May 2018, bringing the total number of warehouse clubs operating in the Dominican Republic to four. In May 2018, we acquired land in Panama and the Dominican Republic upon which we plan to construct new warehouse clubs. In Panama, the site is in the city of Santiago and, upon completion, will be the sixth warehouse club in Panama. In the Dominican Republic, the site is in the city of Santo Domingo and, upon completion, will be the fifth warehouse club in the Dominican Republic. Both warehouse clubs are currently expected to open in the spring of 2019. Both of these warehouse clubs will be designed using our new small warehouse club format with sales floor square footage between 30,000 to 40,000 square feet, compared to 50,000 to 60,000 sales floor square footage within our most recent standard format warehouse club openings. The Company continues to explore other potential sites for future warehouse clubs in Central America, the Caribbean and South America.
PriceSmart also operates a cross-border logistics and e-commerce business through its Aeropost, Inc. subsidiary which we purchased in March 2018. Aeropost operates in 38 countries directly or via agency relationships in Latin America and the Caribbean and has distribution and administration facilities in Miami, Florida.
General Market Factors
Our sales and profits vary from market to market depending on general economic factors, including Gross Domestic Product (“GDP”)GDP growth; consumer spending patterns; foreign currency exchange rates; political policies and social conditions; local demographic characteristics (such as population growth); the number of years PriceSmart has operated in a particular market; and the level of retail and wholesale competition in that market.
Currency fluctuations can be one of the largest variablevariables affecting our overall sales and profit performance, as we have experienced in prior fiscal year 2015 and 2016, asyears, because many of our markets are susceptible to foreign currency exchange rate volatility. In the first nine months of fiscal year 2018 and during fiscal year 2017, approximately 78% and 77%, respectively, of our net warehousemerchandise sales were in currencies other than the U.S. dollar. Of those sales that were currencies other than the U.S. dollar, approximately 52% were comprised of sales of products we purchased in U.S. dollars.
Currency exchange rate fluctuations affect our consolidated sales and membership income as local-currency-denominated sales are translated to U.S. dollars, which can impact year-over-year growth when measured in U.S. dollars compared to local currency growth rates. In addition, we revalue on a monthly basis all U.S. dollar-denominated monetary assets and liabilities within our markets that do not use the U.S. dollar as their functional currency. These monetary assets and liabilities include, but are not limited to, excess cash permanently reinvested offshore, U.S. dollar-denominated long-term debt used to finance land acquisitions and the construction of warehouse clubs, and U.S. dollar-denominated accounts payable related to the
30
purchase of merchandise. We report the gains or losses associated with the revaluation of these monetary assets and liabilities on our Consolidated Statements of Income under the heading “Other income (expense), net.”
Our consolidated results of operations in fiscal years 2015 and 2016 were adversely affected by a major decline in the value of the Colombian peso (COP) relative to the U.S. dollar beginning in August 2014, which negatively impacted sales and margins in that market. Over the course of fiscal year 2016, the devaluation of the Colombian peso against the U.S. dollar resulted in decreased U.S. dollar reported warehouse clubs sales and membership income, after translation, by approximately 26% when compared to fiscal year 2015. A significant devaluation of the local currency relative to the U.S. dollar in a country in which we do business not only reduces the value of sales and membership income that is generated in that country when translated to U.S. dollars for our consolidated results, but also increases the local currency price of imported merchandise, and thus the prices we charge our members, which impacts demand for a significant portion of the Company’s merchandise offering. In Colombia,For example, changes in the exchange rate betweenvalue of the Colombian peso and(“COP”) relative to the U.S. dollar has stabilized overnegatively impacted sales and margins in that market during fiscal years 2015 and 2016. A stabilization of the past twelve months, with average monthly rates between 2,900 and 3,100 pesos
36
currency during fiscal year 2017 contributed to the dollar from June 2016 to May 2017. As a result, ourimproving business performanceconditions in Colombia, resulting in sales growth and a return to operating profitability in our Colombia segment that has seen steady improvement incontinued into the first three quartersnine months of fiscal year 2017.2018.
Where possible, we seek to minimize the impact of negative foreign exchange fluctuations on our results by utilizing fromFrom time to time one or morethe markets in which we operate experience cycles of economic activity that can negatively impact our business. For example, Trinidad, which depends on oil and gas exports as a major source of income, has been experiencing overall difficult economic conditions for the past 18 months. These adverse economic conditions, combined with government policies intended to manage foreign currency reserves, have adversely affected consumer spending. Other countries where recent general market conditions have provided a difficult operating environment during the first nine months of fiscal year 2018 include Panama and Barbados. Our business in USVI, where Hurricanes Irma and Maria had a severe impact on the infrastructure of the following strategies: (1) adjusting prices on goods acquiredisland in U.S. dollars on a periodic basisSeptember and October, has rebounded due to maintain our target margins after taking into account changes in exchange rates and our competition; (2) obtaining local currency loans from banks within certain markets where it is economical to do so and where management believes the risk of devaluationre-construction efforts and the level of U.S. dollar denominated liabilities warrants this action; (3) reducing the time between the acquisition of productdifficulty other retailers are having in U.S. dollars and the settlement of that purchase in local currency; (4) maintaining a balance between assets held in local currency and in U.S. dollars; and (5) entering into cross-currency interest rate swaps and non-deliverable forward contracts. We have local-currency-denominated long-term loans in Honduras and Guatemala and have employed cross-currency interest rate swaps in Colombia, Costa Rica and Honduras and non-deliverable forward contracts with respect to the currencies of Costa Rica, Colombia, Trinidad and the Euro. Future volatility regarding currencies could have a material impact on our operations in future periods; however, there is no way to accurately forecast the impact of the change in rates on our future demand for imported products, reported sales or financial results.becoming fully operational.
Our capture of retail and wholesale sales can vary from market to market due to competition and the availability of other retailshopping options for the consumer.our members. In larger, more developed countries, such as Costa Rica, Panama and Colombia, customers have many alternatives available to them to satisfy their shopping needs, and therefore, our market share is less than in other smaller countries, such as Jamaica and Nicaragua, where consumers have a limited number of shopping options.
Demographic characteristics within each of our markets can also affect both the overall level of sales and also future sales growth opportunities. Island countries such as Aruba, Barbados and the U.S. Virgin Islands offer us limited upside for sales growth given their overall market size. Countries with a smaller upper and middle class consumer population, such as Honduras, El Salvador, Jamaica and Nicaragua, also have a more limited potential opportunity for sales growth as compared to more developed countries with a larger upper and middle class consumer population.populations.
Political and other factors in each of our markets may have significant effects on our business. For example, when national elections are being held, the political situation can introduce uncertainty about how the leadership change may impact the economy which adversely affectsand affect near-term consumer spending. Similarly,As has been the case during the first nine months of fiscal year 2018 in Honduras and Nicaragua, political turmoil can result in local unrest, resulting in curfews and reduced operating hours, and interrupt the normal flow of merchandise to our warehouse clubs. The need for increased tax revenue in certain countries can cause changes in tax policies that affectaffecting consumers’ personal tax rates and/or added consumption taxes, such as VAT (value-added taxes), which effectively raiseraising the prices of various products. In addition, if a major employer in a market reduces its work force, as has happened in the past in Arubaproducts and Costa Rica, overall consumer spending can suffer.impacting demand.
From time to timeIn the past we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through warehousemerchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. Inproducts, increasing our foreign exchange exposure to any devaluation of the second halflocal currency relative to the U.S. dollar. During fiscal year 2017 and continuing into the first nine months of fiscal year 2016 and continuing into fiscal year 2017,2018, we have been experiencingexperienced this situation in Trinidad (“TT”). We are limited in our ability to convert TT dollars that we generate through sales of merchandise into U.S. dollars to settle U.S. dollar liabilities, increasing the amounts owed to PriceSmart, Inc. from our Trinidad subsidiary. We are working with our banks in Trinidad to source other tradeable currencies (such as(including Euros and Canadian dollars), but until the central bank in Trinidad makes more U.S. dollars available, this illiquidity condition willis likely to continue. As of May 31, 2017, the imbalance of shipments made to Trinidad compared to the availability of U.S. dollars that we could obtain in Trinidad to pay for those shipments resulted in U.S. dollar-denominated liabilities of approximately $3.0 million. These liabilities are exposed to a potential devaluationDuring part of the Trinidad dollar compared to the U.S. dollar which, according to a report issued by the International Monetary Fund in 2016, could be overvalued by 20% or more. If, for example, a hypothetical 20% devaluationfirst half of the TT currency occurred, the net effect on other expense would be approximately $600,000 given that level of dollar-denominated liabilities. In addition, to the extentfiscal year 2017, we are unable to exchange TT dollars for U.S. dollars, this causes delays in payments owed to us by our Trinidad subsidiary which, in turn, reduces our ability to deploy that cash for other corporate purposes. In response to the uncertain state of tradable currency in Trinidad, we took steps to limit our exposure. Beginning in November we reduced newlimited shipments of merchandise to Trinidad from our distribution center in Miami to levels that generally
31
aligned with our Trinidad subsidiary’s ability to source U.S. dollars to pay for the merchandisethat merchandise. This resulted in U.S. dollars. Thisa reduced level of shipments, adverselywhich negatively affected sales in the secondthird quarter, particularly December 2016, although by less than our initial estimate of $8.0 million to $12.0 million.estimate. These actions did not impact the level of merchandise we obtain locally in Trinidad. Most recently,Starting in the third quarter of fiscal year 2017, we have beenwere able to improve our sourcing of tradeable currencies, which, hasin addition to other steps we took, allowed for a more normalized flow of imported merchandise during the third and fourth fiscal quarter. However,quarters. Over the illiquidity situation remains in that market, andpast nine months, however, we have not been ableunable to fully addresssource a sufficient level of tradeable currencies in Trinidad consistent with the level of dollar-denominated liabilities. Going forward,merchandise we could again find ourselves in aare importing. As of May 31, 2018, our Trinidad subsidiary had net U.S. dollar denominated liability exposures of approximately $6.3 million, an increase of $10.3 million from August 31, 2017 when our Trinidad subsidiary had net U.S. dollar denominated assets position that requiresof approximately $4.0 million. We are carefully monitoring the situation, which may require us to limit future shipments from the U.S. to Trinidad in line with our ability to exchange TTTrinidad dollars for tradeable currencies or to reducemanage our exposure to aany potential devaluation. This may result in our Trinidad subsidiary running out of certain merchandise, from time to time during the remainder of the year, which could negatively impact sales in Trinidad.
In some of our Central American and Caribbean markets, overall economic activity during the first nine months of fiscal year 2017 has been sluggish, which has adversely affected the level of consumer spending during the period. For example, Trinidad’s economy, which has been significantly harmed by declining oil and gas exports and which has been further slowed by government policies intended to manage its foreign exchange reserves, has been experiencing overall difficult economic conditions with a corresponding impact on consumer spending.
Business Strategy
Our business strategy is to offer for sale to businessesoperate membership warehouse clubs in Latin America and familiesthe Caribbean islands with a limited numberselection of stock keeping units (SKU's) covering a wide range ofhigh volume products in high volumes and at the lowestbest possible prices. We chargePriceSmart members pay an annual membership fee. That fee, to our customers. These fees, combined with warehousevolume purchasing and distribution operating efficiencies and volume purchasing,throughout the supply chain, enable us to operate our business onwith lower merchandise margins and prices than conventional retail stores and wholesale suppliers. The combinationWe are in the process of annualexpanding our strategy to include online shopping and the strategic placement of regional distribution centers to support both our traditional warehouse club business and our new online shopping initiative.
37
While our traditional membership fees, operating efficiencies and low margins enable uswarehouse club strategy continues to offerwork well in our markets, we recognize that technology is having an increasingly profound impact on shopping habits throughout the world. We believe our business strategy needs to be broadened to respond to changes in shopping habits so our members high qualitywill have the shopping experience they desire. Our longer range strategic objective is to combine the traditional membership warehouse club “brick and mortar” business with online shopping to provide the best shopping experience possible for our members.
Growth
We measure our growth primarily by the amount of the period-over-period activity in our net merchandise at very competitive pricessales, our comparable net merchandise sales and our membership income. At times, we make strategic investments that are focused on the long-term growth of the Company. These investments can impact near-term results, such as when we incur fixed costs in advance of achieving full projected sales, negatively impacting near-term operating profit and net income, or when we open a new warehouse club in an existing market, which in turn, enhancescan reduce reported comparable net merchandise sales due to the membership proposition.transfer of sales from existing warehouse clubs.
Current and Future Management Actions
Generally, our operating efficiencies, earnings and cash flow improve as sales increase. Higher sales provide greater purchasing power which often translates into lower cost of merchandise from our suppliers and lower prices for our members. Higher sales, coupled with continuous efforts to improve efficiencies through our distribution network and within our warehouse clubs, also give us the opportunity to leverage our operating costs and reduce prices for our members.
We seek to grow sales by increasing transaction size and shopping frequency of our members by providing high quality, differentiated merchandise at a good value. We also grow sales by attracting new members and improving the capacity of our existing warehouse clubs to serve the growing membership base and level of sales in those locations. Finally, sales growth is also achieved when we add new warehouse clubs with a corresponding increase in members in those markets that can support that growth. Sales during fiscal year 2016 were positively impacted by the three new warehouse clubs that opened in Colombia in the fall of 2014, another new warehouse club in Panama that opened in June 2015 and a new warehouse club in Nicaragua that opened in November 2015. In the current fiscal year, we opened a new warehouse club in Chia, Colombia in September. Although we recognize that opening new warehouse club locations in certain existing markets can have adverse short-term implications for comparable store growth, as the new warehouse club will often attract sales from existing locations, each decision to add a location in an existing market is based on a long-term outlook. Overall, for the third quarter of fiscal year 2017, net warehouse sales increased 3.8% when compared to the same period a year ago.
One of the distinguishing features of the warehouse club format is the role membership plays both in terms of pricing and member loyalty. Membership fees are considered a component of overall gross margin and therefore allow us to reduce merchandise prices. In most of our markets, the annual membership fee is the equivalent of U.S. $35 for both business members and non-business “Diamond” members. In Colombia, the membership fee has been 65,000 (COP) (including VAT) since our initial entrance into the Colombian market. The Colombian peso (COP) was trading at approximately 2,000 COP to $1.00 US dollar at that time. More recently, the Colombian peso has been trading at approximately 3,000 COP to $1.00 US dollar so that the converted membership price in U.S. dollars decreased from approximately U.S. $30 to approximately U.S. $20. In February, we raised the membership fee in Colombia to 75,000 COP moving the converted membership price to approximately U.S. $25. In addition to the standard warehouse club membership, we offer in Costa Rica what we call Platinum membership for $75. A Platinum membership earns a 2% rebate on annual purchases up to a maximum $500 rebate per year. We expect to offer this type of membership in at least one other country early in the next fiscal year.
Logistics and distribution efficiencies are an important part of what allows us to deliver high quality merchandise at low prices to our members. We acquire a significant amount of merchandise internationally, a significant portion of which we receive primarily at our Miami distribution centers. In January 2017, we purchased a distribution center in Medley, Miami-Dade County, Florida, into which we transferred our Miami dry distribution center activities from a leased facility during the third quarter of fiscal year 2017. This new distribution facility has increased our ability to efficiently receive, handle and distribute merchandise. We then ship the merchandise either directly to our warehouse clubs or to regional distribution centers located in some of our larger markets. Our ability to efficiently receive, handle and distribute merchandise to the point where our members put that merchandise into their shopping carts has a significant impact on our level of operating expenses and ultimately how low we can price our merchandise. We continue to explore ways to improve efficiency, reduce costs and ensure a good flow
32
of merchandise to our warehouse clubs. We have added localAs we continue to refine our logistics and distribution infrastructure, we are investing in regional distribution centers. We recently entered into a long-term lease for a 107,640 square foot distribution center in Costa Rica. We expect to begin operating this distribution center during the fall of 2018. In August 2017, we entered into a long-term lease for a 52,463 square foot distribution center in Panama that we occupied in September 2017. We expect that both these new distribution centers in several of our markets towill improve the merchandise flow and in-stock conditions in our warehouse clubs, reduce merchandise costs and reduce operating costs, the benefit of which can be passed onfacilitate online sales to our members in the form of lower merchandise prices. These locations are generally leased, and the addition of new locations or expansion of current capacity will not require significant investment. Additionally, in January 2017 we purchased a distribution center in Medley, Miami-Dade County, Florida, into which we transferred the majority of our Miami dry distribution center activities from a leased facility during the third quarter of fiscal year 2017. This new distribution facility will increase our ability to efficiently receive, handle and distribute merchandise.
We offer our members alternatives to in-club shopping through our e-commerce platform which enables on-line access to purchase merchandise in different ways. Members have the ability to purchase certain merchandise that is not stocked in their local warehouse clubs by placing an order that we fulfill by shipping the merchandise from our U.S. distribution warehouse for pick-up at the member's local warehouse club location. In Colombia, members also can purchase in-club merchandise on-line from warehouse clubs located within the market and have it delivered to their home or office via a third-party delivery service. We have been expanding our online offerings, and while the percentage of sales through these channels relative to our overall sales is small, we believe it is an important and growing way to serve our current members and attract new members.
Purchasing land and constructing warehouse clubs is generally our largest ongoing capital investment. Securing land for warehouse club locations is challenging within our markets, especially in Colombia, because suitable sites at economically feasible prices are difficult to find. While our preference is to own rather than lease real estate, we have entered into real estate leases in certain cases (most recently our Bogota, Colombia site) and will likely do so in the future. Real estate ownership provides a number of advantages as compared to leasing, including lower operating expenses, flexibility to expand or otherwise enhance our buildings, long-term control over the use of the property and the residual value that the real estate may have in future years. In order to secure warehouse club locations, we occasionally have purchased more land than is actually needed for the warehouse club facility. To the extent that we acquire property in excess of what is needed for a particular warehouse club, we generally have looked to either sell or develop the excess property. Excess land at Alajuela (Costa Rica) and Brisas (Panama) is being developed by joint ventures formed by us and the sellers of the property. We are employing a similar development strategy for the excess land at the San Fernando, Trinidad and Arroyo Hondo, Dominican Republic locations where the properties are fully owned by us. The profitable sale or development of excess real estate not required to operate a warehouse club is highly dependent on real estate market conditions.
We are currently engaged in the selection and planning and estimating the resources required for the implementation of a new Enterprise Resource Planning (ERP) system. The ERP system is software technology that serves virtually the entire core activities of our business by providing data management systems and a continuous flow of information for business operations. Our company has made the decision to replace our outdated technology that was no longer capable of serving our future requirements. Our new ERP will be “cloud” based and will provide a technology platform to support the future growth of our business. The new ERP system will be expensive, will require time to implement, and will place demands on our management team as they adapt to the new systems.
38
This past year our company created an Innovation Committee of the Board of Directors and an Innovation Management Team. The Innovation Committee and Team have focused most of their attention on the topics of online shopping technology, delivery services alternatives for online orders and alternative methods of payment for our members. On March 15, 2018, the Company acquired Aeropost, Inc. The acquisition of Aeropost will allow us to offer new online shopping options and provide an opportunity to accelerate the development of an omni-channel shopping experience for our members providing them with efficient and low-cost cross-border delivery services, a wider assortment of products and services available to purchase online, and a more user friendly ordering system and delivery service. The Company used cash on hand to pay for the consideration for Aeropost and for the fees and expenses incurred in connection with the acquisition of Aeropost. The net cash consideration given was approximately $23.9 million. Our total payment for the acquisition also included $5.0 million that we have recorded as a post- combination compensation expense. Under the merger agreement, this amount has been placed in escrow and its release to the sellers is contingent upon certain key Aeropost, Inc. executives remaining employed with the Company for 15 months from the date of closing. Because the escrow also may be used to satisfy claims by us for post-closing purchase price adjustments or indemnification claims, the amount we recorded as compensation expense may be reduced by the amount of these adjustments and claims. As of May 31, 2018, this amount has been reduced by expected indemnification claims and purchase price adjustments to approximately $3.9 million. The Innovation Team is working with PriceSmart management to facilitate the integration of Aeropost into the operating systems of PriceSmart, Inc. During the third quarter, we consolidated Aeropost’s financial statements with our financial statements. Consolidation of this entity will create current period to prior period variances, which we have explained below.
Financial highlights for the third quarter of fiscal year 20172018 included:
· | Net |
· | Comparable |
· | Membership income for the third quarter of fiscal year |
· | Warehouse gross profits (net |
· | Operating income for the third quarter of fiscal year |
· | We recorded a |
· | The effective tax rate for the third quarter of fiscal year |
· | Net income attributable to PriceSmart for the third quarter of fiscal year |
Financial highlights for the nine months endingended May 31, 20172018 included:
· | Net |
· | Comparable |
· | Membership income for the first nine months of fiscal year |
· | Warehouse gross profits (net |
· | Operating income for the first nine months of fiscal year |
33
· |
|
· | The effective tax rate for the first nine months of fiscal year |
· | Net income attributable to PriceSmart for the first nine months of fiscal year |
39
COMPARISON OF THE THREE AND NINE MONTHS ENDED MAY 31, 20172018 AND 20162017
The following discussion and analysis compares the results of operations for the three-month and nine-month periods ended on May 31, 20172018 with the three-month and nine-month periods ended on May 31, 20162017 and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. Unless otherwise noted, all tables on the following pages present U.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding.
Net Warehouse ClubMerchandise Sales
The following tables indicate the net warehouse clubmerchandise sales in the segments in which we operate and the percentage growth in net warehouse clubmerchandise sales by segment during the three and nine months ended May 31, 20172018 and 2016.
2017.
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| May 31, 2018 |
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| May 31, 2017 |
| May 31, 2016 |
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| Amount |
| % of net |
| Increase/ |
| Change |
| Amount |
| % of net |
| Amount |
| % of net |
| Increase/ |
| Change |
| Amount |
| % of net | ||||||||||||
Central America |
| $ | 430,532 |
| 60.6 | % |
| $ | 7,431 |
| 1.8 | % |
| $ | 423,101 |
| 61.8 | % |
| $ | 442,980 |
| 59.0 | % |
| $ | 12,448 |
| 2.9 | % |
| $ | 430,532 |
| 60.6 | % |
Caribbean |
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| 197,881 |
| 27.8 | % |
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| 1,131 |
| 0.6 | % |
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| 196,750 |
| 28.7 | % |
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| 211,189 |
| 28.1 | % |
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| 13,308 |
| 6.7 | % |
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| 197,881 |
| 27.8 | % |
Colombia |
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| 82,286 |
| 11.6 | % |
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| 17,590 |
| 27.2 | % |
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| 64,696 |
| 9.5 | % |
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| 96,304 |
| 12.8 | % |
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| 14,018 |
| 17.0 | % |
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| 82,286 |
| 11.6 | % |
Net warehouse club sales |
| $ | 710,699 |
| 100.0 | % |
| $ | 26,152 |
| 3.8 | % |
| $ | 684,547 |
| 100.0 | % | ||||||||||||||||||
Net merchandise sales |
| $ | 750,473 |
| 100.0 | % |
| $ | 39,774 |
| 5.6 | % |
| $ | 710,699 |
| 100.0 | % |
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| Nine Months Ended |
| May 31, 2018 |
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| May 31, 2017 |
| May 31, 2016 |
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| Amount |
| % of net |
| Increase/ |
| Change |
| Amount |
| % of net |
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| % of net |
| Increase/ |
| Change |
| Amount |
| % of net | ||||||||||||
Central America |
| $ | 1,326,517 |
| 60.3 | % |
| $ | 20,978 |
| 1.6 | % |
| $ | 1,305,539 |
| 61.2 | % |
| $ | 1,371,926 |
| 59.3 | % |
| $ | 45,409 |
| 3.4 | % |
| $ | 1,326,517 |
| 60.3 | % |
Caribbean |
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| 618,184 |
| 28.1 | % |
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| (14,121) |
| (2.2) | % |
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| 632,305 |
| 29.6 | % |
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| 653,459 |
| 28.3 | % |
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| 35,275 |
| 5.7 | % |
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| 618,184 |
| 28.1 | % |
Colombia |
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| 254,350 |
| 11.6 | % |
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| 57,829 |
| 29.4 | % |
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| 196,521 |
| 9.2 | % |
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| 287,062 |
| 12.4 | % |
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| 32,712 |
| 12.9 | % |
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| 254,350 |
| 11.6 | % |
Net warehouse club sales |
| $ | 2,199,051 |
| 100.0 | % |
| $ | 64,686 |
| 3.0 | % |
| $ | 2,134,365 |
| 100.0 | % | ||||||||||||||||||
Net merchandise sales |
| $ | 2,312,447 |
| 100.0 | % |
| $ | 113,396 |
| 5.2 | % |
| $ | 2,199,051 |
| 100.0 | % |
Comparison of Three Months and Nine Months Ended May 31, 20172018 and 20162017
Overall net warehousemerchandise sales growth of 3.8%5.6% for the third quarter resulted from a 2.5%4.6% increase in transactions and a 1.2%0.9% increase in average ticket. For the nine months ended May 31, 2018, sales growth of 5.2% resulted from a 4.7% increase in transactions and a 0.4% increase in average ticket.
Net warehousemerchandise sales in our Central America segment increased 1.8%2.9% and 3.4% for the third quarter and the first nine months of fiscal year 2017. Continued weakness2018, respectively, primarily due to the addition of the Santa Ana, Costa Rica warehouse club that opened in October 2017 and overall positive sales growth in Costa Rica, our largest market inRica. Panama continues to experience lower sales, reporting lower quarterly and year to date sales when compared to the prior year. Nicaragua reported lower quarterly sales when compared to the prior year, due to recent political unrest within that segment, resulted in negative growth of 3.4%. The Costa Rican colones has devalued approximately 5% from the year-ago period, contributing to that decline when measured in U.S. dollars.market. All other Central American countries recorded positive growth in warehousemerchandise sales for the three-month and nine-month period. For the nine-month period, Central America sales grew 1.6%. Costa Rica had a nine-month sales decline of 3.1%. For the nine-month period, the Central American segment benefitted from an additional club which opened at the end of November 2016 in Nicaragua.
The Caribbean segment continued to show improvement in sales growth over the past few quarters. Trinidad, our largest market in the segment, experienced positive sales growth of 1.2% for the third quarter. This growth demonstrates steady improvement from the flat or negative sales growth experienced in each of the five quarters prior to the second quarter of fiscal year 2018. All other countries in the segment recorded positive sales growth for both the three-month and nine-month periods, with the exception of Barbados. Sales in the Company’s USVI warehouse club grew 43.8% and 33.6%, respectively, for the third quarter and for the first nine months of fiscal year 2018. Despite significant business interruption in September due to the hurricanes that hit the island, the return to normal operations in October and November have resulted in strong sales through May 31, 2018, as some other retailers in the market have not fully recovered or remain closed.
3440
Our Caribbean segment improved from the sales decline of 4.6% reported in the second fiscal quarter to a positive 0.6% for the current quarter, with the Dominican Republic, Aruba, Jamaica and USVI recording year-on-year growth for the third quarter. Trinidad is our largest market in that segment, and the difficult economic environment there continues to negatively impact consumer spending. Trinidad net warehouse club sales for the third quarter declined 1.5% compared to the third quarter of fiscal year 2016. The Company is not currently limiting shipments to Trinidad, although it did so in the second fiscal quarter, which contributed to a sales decline of 5.6% for the nine-month period compared to a year ago.
Net warehousemerchandise sales in our Colombia segment reported growth withcontinued to record the additionhighest rate of our new Chia club on September 1, contributing to an overall net warehouse club sales growth of 27.2% in17.0% and 12.9% for the third quarterthree-month and 29.4% for the nine-month period. With the stabilization of the exchange rate between the Colombian peso and the U.S. dollar over the past twelve months, we have seen an improving sales picture in all of our warehouse clubs in Colombia. This, coupled with our effortsperiods, respectively, compared to source high quality merchandise from local suppliers, resulted in a 16.4% increase in transactions this quarter. The third quarter growth in average ticket of 9.3% was aidedyear ago, primarily driven by an improved exchange rate between the Colombian peso and the U.S. dollar. In the third quarter of fiscal year 2016, the average exchange rate was 3,035 pesos to the dollar, in the current period the rate was 2,917. Measured in local currency, the average ticket during the third fiscal quarter grew 5.0%.
transaction growth.
Comparable Sales
We report comparable warehouse clubnet merchandise sales on a “same week” basis with 13 weeks in each quarter beginning on a Monday and ending on a Sunday. The periods are established at the beginning of the fiscal year to provide as close a match as possible to the calendar month and quarter that is used for financial reporting purposes. This approach equalizes the number of weekend days and weekdays in each period for improved sales comparison, as we experience higher warehouse clubnet merchandise sales on the weekends. Further, each of the warehouse clubs used in the calculations was open for at least 13 ½ calendar months before its results for the current period were compared with its results for the prior period. For example, sales related to the warehouse club opened in ColombiaCosta Rica in September 2016October 2017 will not be used in the calculation of comparable sales until November 2017.
As part of the expansion of our e-commerce program, we began direct home delivery of products not carried in our warehouse clubs to members in Colombia in August 2015. 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.December 2018. Sales related to these e-commerce salesthe warehouse club opened in Colombia werethe Dominican Republic in May 2018 will not be used in the calculation of comparable sales until October 2016. E-commerceJuly 2019.
The following tables indicate comparable net merchandise sales of products where the product is sourced from one of our warehouse clubs and delivered to the member’s home and sales of products that are not carried in our clubs, but are delivered to clubs and picked up by our members, are reflected in the comparablereportable segments in which we operate, and the percentage growth in net merchandise sales for the warehouse club from which the inventory was sourced or picked up.by segment during fiscal years 2018 and 2017.
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| June 3, 2018 |
| June 4, 2017 | ||
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| % Increase/(decrease) in comparable net merchandise sales |
| % Increase/(decrease) in comparable net merchandise sales | ||
Central America |
| (1.0) | % |
| 1.5 | % |
Caribbean |
| 4.5 | % |
| 0.4 | % |
Colombia |
| 17.9 | % |
| 9.8 | % |
Consolidated segments |
| 2.7 | % |
| 2.2 | % |
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| Thirty-Nine Weeks Ended | ||||
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| June 3, 2018 |
| June 4, 2017 | ||
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| % Increase in comparable net merchandise sales |
| % Increase in comparable net merchandise sales | ||
Central America |
| 0.1 | % |
| 1.2 | % |
Caribbean |
| 5.1 | % |
| (1.8) | % |
Colombia |
| 13.6 | % |
| 12.3 | % |
Consolidated segments |
| 3.0 | % |
| 1.4 | % |
Comparison of Three and Nine Months Ended May 31, 2018 and 2017
Comparable warehouse clubmerchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the 13-week period ended June 4, 20173, 2018 grew 2.2%,2.7%. Comparable merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the 39-week period ended June 3, 2018 grew 3.0%.
Central America comparable merchandise sales for the 13-week period and for the 39-week period grew 1.4%. All three segments recorded positive comparable sales growth for the 13-week period, despite some cannibalized sales resulting fromwere impacted by the opening of the newCompany’s seventh warehouse club in Chia, Colombia which is not yet includedCosta Rica in the calculation of comparable sales.an area called Santa Ana. Often times, new warehouse clubs that we open are not far from existing warehouse clubs that are included in the calculation for comparable net merchandise sales, resulting in a transfer of some sales from an existing club (in this case Escazu) to the new club. This transfer of sales from existing warehouse clubclubs that are included in the calculation of comparable net merchandise sales to new warehouse clubs that are not included in the calculation can have an adverse impact on reported comparable net merchandise sales. The newWe estimate that the transfer of sales associated with the Santa Ana opening negatively impacted the comparable net merchandise sales for the Central America segment by 180 basis points (1.8%) and by 190 basis points (1.9%) for the 13- and 39-week periods, respectively. New warehouse clubs attract new members from areas not previously served by us but theyand also create the opportunity for some existing members, particularly those who now find the new clubs closer to their homes, to shop at the new locations. This transfer of sales from existing warehouse clubs that are included in the calculation of comparable warehouse club sales to new warehouse clubs that are not included in the calculation can have an adverse impact on reported comparable warehouse club sales.more frequently.
Export Sales
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| May 31, 2017 |
| May 31, 2016 | ||||||||||||||
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| % of net |
| (Decrease) from prior year |
| Change |
| Amount |
| % of net | ||||||
Export sales |
| $ | 6,475 |
| 0.9 | % |
| $ | (616) |
| (8.7) | % |
| $ | 7,091 |
| 1.0 | % |
The Caribbean segment experienced positive comparable merchandise sales for both the 13- and 39-week periods, for fiscal year 2018, on improving conditions in all markets compared to the year earlier period, particularly Trinidad, Dominican Republic and USVI.
3541
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| May 31, 2017 |
| May 31, 2016 | ||||||||||||||
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| Amount |
| % of net |
| Increase from prior year |
| Change |
| Amount |
| % of net | ||||||
Export sales |
| $ | 25,381 |
| 1.2 | % |
| $ | 3,509 |
| 16.0 | % |
| $ | 21,872 |
| 1.0 | % |
ExportComparable merchandise sales are directin Colombia for the 13-week and 39-week periods increased 17.9% and 13.6%, respectively. The comparable warehouse sales togrowth benefitted from the positive effect of a single institutional customer (retailer) in the Philippines for which we earn an approximately 5% margin. Changes in the activity in the nine months ended May 31, 2017much stronger local currency compared to the prior year periods reflects changes in the merchandise needs of that retailer’s business.year.
Membership Income
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| Three Months Ended | ||||||||||||
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| May 31, |
| May 31, | ||||||||||
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| 2017 |
| 2016 | ||||||||||
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| Amount |
| Increase from prior year |
| % Change |
| Amount | ||||||
Membership income |
| $ | 12,038 |
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| $ | 563 |
| 4.9 | % |
| $ | 11,475 |
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Membership income % to net warehouse club sales |
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| 1.7 | % |
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| 1.7 | % |
Number of total accounts |
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| 1,531,473 |
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| 54,170 |
| 3.7 | % |
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| 1,477,303 |
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| May 31, | |||||||||||
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| 2018 |
| 2017 | |||||||||||
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| Amount |
| Increase/ |
| % Change |
| Membership income % to net warehouse club sales |
| Amount | |||||
Membership income - Central America | �� | $ | 7,870 |
| $ | 353 |
| 4.7 | % |
| 1.8 | % |
| $ | 7,517 |
Membership income - Caribbean |
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| 3,126 |
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| 156 |
| 5.3 |
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| 1.5 |
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| 2,970 |
Membership income - Colombia |
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| 1,856 |
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| 305 |
| 19.7 |
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| 1.9 |
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| 1,551 |
Membership income - Total |
| $ | 12,852 |
| $ | 814 |
| 6.8 | % |
| 1.7 | % |
| $ | 12,038 |
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| Nine Months Ended | ||||||||||||
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| May 31, |
| May 31, | ||||||||||
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| 2017 |
| 2016 | ||||||||||
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| Amount |
| Increase from prior year |
| % Change |
| Amount | ||||||
Membership income |
| $ | 35,581 |
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| $ | 1,355 |
| 4.0 | % |
| $ | 34,226 |
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Membership income % to net warehouse club sales |
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| 1.6 | % |
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| 1.6 | % |
Number of total accounts |
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| 1,531,473 |
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| 54,170 |
| 3.7 | % |
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| 1,477,303 |
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| May 31, |
| May 31, | |||||||||||
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| 2018 |
| 2017 | |||||||||||
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| Amount |
| Increase |
| % Change |
| Membership income % to net warehouse club sales |
| Amount | |||||
Membership income - Central America |
| $ | 23,364 |
| $ | 1,114 |
| 5.0 | % |
| 1.7 | % |
| $ | 22,250 |
Membership income - Caribbean |
|
| 9,290 |
|
| 417 |
| 4.7 |
|
| 1.4 |
|
|
| 8,873 |
Membership income - Colombia |
|
| 5,276 |
|
| 818 |
| 18.3 |
|
| 1.8 |
|
|
| 4,458 |
Membership income - Total |
| $ | 37,930 |
| $ | 2,349 |
| 6.6 | % |
| 1.6 | % |
| $ | 35,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of accounts - Central America |
|
| 841,656 |
|
| 15,678 |
| 1.9 | % |
|
|
|
|
| 825,978 |
Number of accounts - Caribbean |
|
| 409,090 |
|
| 16,567 |
| 4.2 |
|
|
|
|
|
| 392,523 |
Number of accounts - Colombia |
|
| 330,089 |
|
| 17,117 |
| 5.5 |
|
|
|
|
|
| 312,972 |
Number of accounts - Total |
|
| 1,580,835 |
|
| 49,362 |
| 3.2 | % |
|
|
|
|
| 1,531,473 |
Comparison of Three and Nine Months Ended May 31, 20172018 and 20162017
Membership income is recognized ratably over the one-year life of the membership. The increase in membership income primarily reflects a growth in membership accounts for which income is recognized. The average number of member accounts during the third quarter of fiscal year 20172018 was 3.6%3.2% higher than during the same period a year before.ago. The income recognized per average member account increased 1.1%3.2%. In February 2017, we increased the annual membership fee in Colombia by 15.4% to COP 75,000, which had the effect of increasing the membership income per average membership account in Colombia by 13.3% in the current fiscal quarter largely attributablecompared to the improved exchange rate forthird quarter of last year. In addition, we introduced the Platinum membership in Panama and Dominican Republic, which contributed to an increase in the membership income in Colombia when converted to U.S. dollars and the membership fee increase in Colombia during the third quarter. For the nine-month period, the average number of accounts for which membership income was recognized increased 3.6% and the income recognized per average member increased 0.3%membership account by 3.8% (excluding Colombia). We plan to introduce the Platinum membership within our Trinidad market during July 2018.
The Company had a net increase of 17,29049,362 membership accounts inover the quarter.past twelve months. Membership accounts in Colombia increased 6,20817,117 on improving renewal rates and continued new membership sign-ups. Forsign-ups, mostly associated with the nine-month period, membership accounts for the Company (including Colombia) and Colombia increased 41,049 and 16,187, respectively.Chia warehouse club. The Company’s twelve-month renewal rate for the period ended May 31, 2017 improved to 84% from2018 was 85%, which is the same as the rate for the twelve-month period endingended August 31, 2016 rate of 80%.2017. Excluding Colombia, the twelve-month renewal rate was 87% as of May 31, 2017. While improving, the renewal rate of current members in Colombia is below that which we experience in other markets.2018.
3642
Other Revenue and Income
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| Three Months Ended | ||||||||||||
|
| May 31, 2017 |
| May 31, 2016 | ||||||||||
|
| Amount |
| (Decrease) |
| % Change |
| Amount | ||||||
Other income |
| $ | 1,046 |
|
| $ | (103) |
| (9.0) | % |
| $ | 1,149 |
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| Nine Months Ended | ||||||||||||
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|
|
| May 31, 2017 |
| May 31, 2016 | ||||||||||
|
| Amount |
| (Decrease) |
| % Change |
| Amount | ||||||
Other income |
| $ | 3,113 |
|
| $ | (548) |
| (15.0) | % |
| $ | 3,661 |
|
|
|
|
|
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|
| Three Months Ended | ||||||||||
|
| May 31, 2018 |
| May 31, 2017 | ||||||||
|
| Amount |
| Increase |
| % Change |
| Amount | ||||
Other revenue and income |
| $ | 8,909 |
| $ | 7,863 |
| 751.7 | % |
| $ | 1,046 |
|
|
|
|
|
|
|
| �� |
|
|
|
|
|
| Nine Months Ended | ||||||||||
|
| May 31, 2018 |
| May 31, 2017 | ||||||||
|
| Amount |
| Increase |
| % Change |
| Amount | ||||
Other revenue and income |
| $ | 11,207 |
| $ | 8,094 |
| 260.0 | % |
| $ | 3,113 |
Comparison of Three and Nine Months Ended May 31, 20172018 and 20162017
Other revenue and income consists of rental income and miscellaneous income. On March 15, 2018 the Company acquired Aeropost, Inc. Aeropost is a cross-border logistics and e-commerce provider whose sales are primarily generated from freight and delivery services. These freight and delivery services will be recorded as part of other income going forward. We recorded during the quarter approximately $7.8 million in other income related to these activities accounting for the quarter was approximately equalthree-month and nine-month periods when compared to the same periods the prior year. For the nine-month period, the period-over-period decrease was primarily attributable to a $202,000 gain recorded in the first quarter of fiscal year 2016 associated with an insurance recovery for the fire in the Pradera, Guatemala warehouse club in June 2015.
Gross Margin
43
Warehouse Gross Profit MarginResults of Operations
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| Three Months Ended | |||||||||||||
|
| May 31, 2017 |
| May 31, 2016 | |||||||||||
|
| Amount |
| Increase/ (decrease) from prior year |
| % to sales |
| Amount |
| % to sales | |||||
Warehouse club sales |
| $ | 710,699 |
| $ | 26,152 |
| 100.0 | % |
| $ | 684,547 |
| 100.0 | % |
Less associated cost of goods |
|
| 611,455 |
|
| 20,955 |
| 86.0 | % |
|
| 590,500 |
| 86.3 | % |
Warehouse gross profit margin |
| $ | 99,244 |
| $ | 5,197 |
| 14.0 | % |
| $ | 94,047 |
| 13.7 | % |
|
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| Three Months Ended | ||||||||||
Results of Operations Consolidated |
|
| May 31, 2018 |
|
|
| May 31, 2017 |
|
|
| Increase/(Decrease) |
|
(Amounts in thousands, except percentages and number of warehouse clubs) |
|
|
|
|
|
|
|
|
|
|
|
|
Net merchandise sales |
|
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|
|
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|
|
|
|
|
Net merchandise sales |
| $ | 750,473 |
|
| $ | 710,699 |
|
| $ | 39,774 |
|
Merchandise sales gross margin |
| $ | 109,224 |
|
| $ | 99,244 |
|
| $ | 9,980 |
|
Merchandise gross margin percentage |
|
| 14.6 | % |
|
| 14.0 | % |
|
| 0.6 | % |
|
|
|
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|
|
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|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 782,201 |
|
| $ | 730,258 |
|
| $ | 51,943 |
|
Percentage change from comparable period |
|
|
|
|
|
|
|
|
|
| 7.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable merchandise sales |
|
|
|
|
|
|
|
|
|
|
|
|
Total comparable merchandise sales increase (decrease) |
|
| 2.7 | % |
|
| 2.2 | % |
|
| 0.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin |
| $ | 129,507 |
|
| $ | 112,660 |
|
| $ | 16,847 |
|
Gross margin percentage to total revenues |
|
| 16.6 | % |
|
| 15.4 | % |
|
| 1.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
| $ | 101,078 |
|
| $ | 85,034 |
|
| $ | 16,044 |
|
Selling, general and administrative percentage of total revenues |
|
| 12.9 | % |
|
| 11.6 | % |
|
| 1.3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income- by segment |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income - Central America |
| $ | 31,257 |
|
| $ | 31,444 |
|
| $ | (187) |
|
Operating income - Caribbean |
| $ | 11,538 |
|
| $ | 9,706 |
|
| $ | 1,832 |
|
Operating income - Colombia |
| $ | 2,989 |
|
| $ | 1,410 |
|
| $ | 1,579 |
|
Operating Income - United States |
| $ | (883) |
|
| $ | 245 |
|
| $ | (1,128) |
|
Reconciling Items (1) |
| $ | (16,472) |
|
| $ | (15,179) |
|
| $ | (1,293) |
|
Operating income - Total |
| $ | 28,429 |
|
| $ | 27,626 |
|
| $ | 803 |
|
Operating income as a percentage of total revenues |
|
| 3.6 | % |
|
| 3.8 | % |
|
| (0.2) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse clubs |
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse clubs at period end |
|
| 41 |
|
|
| 39 |
|
|
| 2 |
|
Warehouse club square feet at period end (2) |
|
| 2,074 |
|
|
| 1,940 |
|
|
| 134 |
|
(1) | Certain revenues, operating costs and inter-company charges included in the United States segment are not allocated to the segments within this presentation, as it is impractical to do so, and they appear as reconciling items to reflect the amount eliminated on consolidation of intersegment transactions. |
(2) | Warehouse club square feet at period end has been updated to reflect sales floor square feet vs. total building square feet to align with industry standards. |
|
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|
|
| Nine Months Ended | |||||||||||||
|
| May 31, 2017 |
| May 31, 2016 | |||||||||||
|
| Amount |
| Increase/ |
| % to sales |
| Amount |
| % to sales | |||||
Warehouse club sales |
| $ | 2,199,051 |
| $ | 64,686 |
| 100.0 | % |
| $ | 2,134,365 |
| 100.0 | % |
Less associated cost of goods |
|
| 1,879,747 |
|
| 47,564 |
| 85.5 | % |
|
| 1,832,183 |
| 85.8 | % |
Warehouse gross profit margin |
| $ | 319,304 |
| $ | 17,122 |
| 14.5 | % |
| $ | 302,182 |
| 14.2 | % |
44
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||||||||
Results of Operations Consolidated |
|
| May 31, 2018 |
|
|
| May 31, 2017 |
|
|
| Increase/(Decrease) |
|
(Amounts in thousands, except percentages |
|
|
|
|
|
|
|
|
|
|
|
|
Net merchandise sales |
|
|
|
|
|
|
|
|
|
|
|
|
Net merchandise sales |
| $ | 2,312,447 |
|
| $ | 2,199,051 |
|
| $ | 113,396 |
|
Merchandise sales gross margin |
| $ | 334,607 |
|
| $ | 319,304 |
|
| $ | 15,303 |
|
Merchandise gross margin percentage |
|
| 14.5 | % |
|
| 14.5 | % |
|
| (0.1) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 2,388,836 |
|
| $ | 2,263,126 |
|
| $ | 125,710 |
|
Percentage change from comparable period |
|
|
|
|
|
|
|
|
|
| 5.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable merchandise sales |
|
|
|
|
|
|
|
|
|
|
|
|
Total comparable merchandise sales increase (decrease) |
|
| 3.0 | % |
|
| 1.4 | % |
|
| 1.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin |
| $ | 383,117 |
|
| $ | 359,294 |
|
| $ | 23,823 |
|
Gross Margin percentage to total revenues |
|
| 16.0 | % |
|
| 15.9 | % |
|
| 0.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
| $ | 284,258 |
|
| $ | 253,887 |
|
| $ | 30,371 |
|
Selling, general and administrative percentage of total revenues |
|
| 11.9 | % |
|
| 11.2 | % |
|
| 0.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income - by segment |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income - Central America |
| $ | 100,463 |
|
| $ | 102,410 |
|
| $ | (1,947) |
|
Operating income - Caribbean |
| $ | 36,763 |
|
| $ | 35,531 |
|
| $ | 1,232 |
|
Operating income - Colombia |
| $ | 8,198 |
|
| $ | 3,238 |
|
| $ | 4,960 |
|
Operating Income - United States |
| $ | 3,354 |
|
| $ | 10,166 |
|
| $ | (6,812) |
|
Reconciling Items (1) |
| $ | (49,919) |
|
| $ | (45,938) |
|
| $ | (3,981) |
|
Operating income - Total |
| $ | 98,859 |
|
| $ | 105,407 |
|
| $ | (6,548) |
|
Operating income as a percentage of total revenues |
|
| 4.1 | % |
|
| 4.7 | % |
|
| (0.5) | % |
(1) | Certain revenues, operating costs and inter-company charges included in the United States segment are not allocated to the segments within this presentation, as it is impractical to do so, and they appear as reconciling items to reflect the amount eliminated on consolidation of intersegment transactions. |
Comparison of Three and Nine Months Ended May 31, 20172018 and 20162017
For the three-month and nine-month periods ended May 31, 2017, warehouseOn a consolidated basis, merchandise sales gross profit marginmargins as a percent of net merchandise sales was 23were 14.6%, 60 basis points (0.23%(0.60%) higher than the three monthsthird quarter of fiscal year 2017. Warehouse club margins were 13.9% for the three-months ended May 2018 and 2017 within our Central America segment, reflecting the impact that price increases had on offsetting the effect of currency devaluations relative to the Unites States dollar in some of our markets within the segment. Warehouse club margins increased in our Caribbean segments by 40 basis points (0.40%), largely as a result of improved warehouse cost of goods sold variances. Colombia’s margins increased 70 basis points (0.70%), largely a result of the improved peso to U.S. dollar conversion rate.
Merchandise sales gross margins were substantially unchanged at 14.5% for the nine-months ended May 31, 20162018 and 36 basis points (0.36%) higher for the nine- month period. In both comparisons, the increase was largely attributable to higher warehouse gross profit margins in Colombia, which increased 414 basis points (4.14%) in the third quarter compared to the year ago period, resulting from the improving conditions in that market, including reduced markdowns from a year ago. For the nine-month period, Colombia’s warehouse gross profit margins increased 316 basis points (3.16%). The Company incurred a $751,000 charge in the quarter related to the leased space vacated by the U.S. distribution operation in its move to the newly acquired distribution center in Miami. Some portions of the vacated space have been subleased (and subsequently returned to the landlord) while the remainder remains2017.
3745
available for sublease. The Company’s monthly contractual minimum payment for the current unused space is approximately $140,000.
Export Sales Gross Profit Margin
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|
| Three Months Ended | |||||||||||||
|
| May 31, 2017 |
| May 31, 2016 | |||||||||||
|
| Amount |
| Increase/ |
| % to sales |
| Amount |
| % to sales | |||||
Export sales |
| $ | 6,475 |
| $ | (616) |
| 100.0 | % |
| $ | 7,091 |
| 100.0 | % |
Less associated cost of goods sold |
|
| 6,143 |
|
| (599) |
| 94.9 | % |
|
| 6,742 |
| 95.1 | % |
Export sales gross profit margin |
| $ | 332 |
| $ | (17) |
| 5.1 | % |
| $ | 349 |
| 4.9 | % |
|
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|
| Nine Months Ended | |||||||||||||
|
| May 31, 2017 |
| May 31, 2016 | |||||||||||
|
| Amount |
| Increase/ |
| % to sales |
| Amount |
| % to sales | |||||
Export sales |
| $ | 25,381 |
| $ | 3,509 |
| 100.0 | % |
| $ | 21,872 |
| 100.0 | % |
Less associated cost of goods sold |
|
| 24,085 |
|
| 3,286 |
| 94.9 | % |
|
| 20,799 |
| 95.1 | % |
Export sales gross profit margin |
| $ | 1,296 |
| $ | 223 |
| 5.1 | % |
| $ | 1,073 |
| 4.9 | % |
ComparisonSelling, general and administrative expenses consist of Threewarehouse club operations, general and Nine Months Ended May 31, 2017administrative expenses, pre-opening expenses, asset impairment, and 2016
The decrease in export sales gross margin dollars for the three months ended May 31, 2017loss/(gain) on disposal of assets. In total, selling, general and the increase in export sales gross margin for the nine months ended May 31, 2017administrative expenses increased $16.0 million to 12.9% of total revenues compared to the same periods a year ago was due to changes11.6% of total revenues in direct sales to an institutional customer (retailer) in the Philippines for which we generally earn lower margins than those obtained through our warehouse club sales.
Selling, General and Administrative Expenses
Warehouse Club Operations
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| Three Months Ended | ||||||||||||||||
|
| May 31, 2017 |
|
| May 31, 2016 | |||||||||||||
|
| Amount |
| % to |
| Increase from |
| % Change |
| Amount |
| % to | ||||||
Warehouse club operations expense |
| $ | 67,754 |
| 9.5 | % |
| $ | 5,009 |
| 8.0 | % |
| $ | 62,745 |
| 9.2 | % |
|
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| Nine Months Ended | ||||||||||||||||
|
| May 31, 2017 |
| May 31, 2016 | ||||||||||||||
|
| Amount |
| % to |
| Increase from |
| % Change |
| Amount |
| % to | ||||||
Warehouse club operations expense |
| $ | 200,964 |
| 9.1 | % |
| $ | 12,616 |
| 6.7 | % |
| $ | 188,348 |
| 8.8 | % |
38
Comparison of Three and Nine Months Ended May 31, 2017 and 2016
Warehouse club operations expense for the third quarter of fiscal year 2017 was 9.5%2017. Costs associated with the consolidation of Aeropost were recorded for approximately $4.2 million related to warehouse club sales. This reflectsand other operations costs and approximately $3.8 million related to general and administrative costs for a 37 basis point (0.37%)combined total of $8.0 million, or 1.0% of the increase, fromduring the same quarter last year. For the nine months ended May 31, 2017, warehouse club operating expenses were 9.1% of warehouse club sales, a 31 basis point (0.31%) increase fromcurrent three-month period compared to the same period last year. Low or negative comparable sales growth, particularly Trinidad and Costa Rica, contributed to an overall increase in warehouse expense as a percent of sales. ColombiaWe also had a reduction in warehouse club operations expense as a percent of sales for the quarter and nine month period of 34 basis points (0.34%) and 67 basis points (0.67%), respectively, due to the higher sales compared to the year-ago periods.
General and Administrative Expenses
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| Three Months Ended | ||||||||||||||||
|
| May 31, 2017 |
| May 31, 2016 | ||||||||||||||
|
| Amount |
| % to |
| Increase from prior year |
| % Change |
| Amount |
| % to | ||||||
General and administrative expenses |
| $ | 16,907 |
| 2.4 | % |
| $ | 468 |
| 2.8 | % |
| $ | 16,439 |
| 2.4 | % |
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| Nine Months Ended | ||||||||||||||||
|
| May 31, 2017 |
| May 31, 2016 | ||||||||||||||
|
| Amount |
| % to |
| Increase from prior year |
| % Change |
| Amount |
| % to | ||||||
General and administrative expenses |
| $ | 51,921 |
| 2.4 | % |
| $ | 3,835 |
| 8.0 | % |
| $ | 48,086 |
| 2.3 | % |
Comparison of Three and Nine Months Ended May 31, 2017 and 2016
For the three- and nine-month periods ended May 31, 2017,increased corporate-level general and administrative expenses grew 2.8%period-to-period.
Selling, general and 8.0%, respectively, comparedadministrative expenses increased $30.4 million to the year ago quarter. For11.9% of total revenues for the nine-month period increased spending resulted primarily from increased staffing in our buying department, information technology costsended May 31, 2018 compared to 11.2% for the same period during fiscal year 2017. The $8.0 million of increases to warehouse club and other operations and general and administrative costs associated with the relocationAeropost acquisition, as discussed above, apply to the nine-month period as well. Additionally, we recorded a $2.6 million charge taken during the second quarter ($1.9 million of which is recorded as asset impairment and the remainder as an executiveexpense in general and administrative expenses) for the write-off of costs for an e-commerce platform that was under development. We also recorded during the nine-months ended May 31, 2018 $669,000 in deal related costs, including legal, accounting and technical consulting related to our San Diego headquarters.
Pre-Opening Expensesthe acquisition of Aeropost. This $10.6 million of increased costs represents 0.4% of total revenue. In addition we had increased corporate-level general and administrative expenses period-to-period.
Expenses incurred before a warehouse club is in operation are captured in pre-opening expenses. During the first nine months of fiscal year 2018, we incurred preopening expenses in the first quarter for the new warehouse club opened in Santa Ana, Costa Rica in October 2017 and in the third quarter we incurred expenses for the new warehouse club in Santa Domingo, Dominican Republic that opened in May 2018. Preopening expenses for the same nine months of fiscal year 2017 included the preopening expenses for Chia, Colombia.
The following tables summarize selling, general and administrative cost and the percentage to total revenues during fiscal years 2018 and 2017.
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| Three Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
|
| Amount |
| (Decrease) from prior year |
| % Change |
| Amount | ||||
Pre-opening expenses |
| $ | 9 |
| $ | (4) |
| (30.8) | % |
| $ | 13 |
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| Three Months Ended |
| |||||||||
|
|
| May 31, 2018 |
|
|
| May 31, 2017 |
|
|
| Increase/(Decrease) |
|
Warehouse club operations |
| $ | 76,259 |
|
| $ | 67,754 |
|
| $ | 8,505 |
|
General and administrative |
|
| 24,079 |
|
|
| 16,907 |
|
|
| 7,172 |
|
Pre-opening expenses |
|
| 352 |
|
|
| 9 |
|
|
| 343 |
|
Loss/(gain) on disposal of assets |
|
| 388 |
|
|
| 364 |
|
|
| 24 |
|
Total Selling, General and Administrative |
| $ | 101,078 |
|
| $ | 85,034 |
|
| $ | 16,044 |
|
Percent of total revenue |
|
| 12.9 | % |
|
| 11.6 | % |
|
| 1.3 | % |
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| Nine Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
|
| Amount |
| (Decrease) |
| % Change |
| Amount | ||||
Pre-opening expenses |
| $ | (104) |
| $ | (493) |
| (126.7) | % |
| $ | 389 |
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|
|
|
| Nine Months Ended |
| |||||||||
|
|
| May 31, 2018 |
|
|
| May 31, 2017 |
|
|
| Increase/(Decrease) |
|
Warehouse club operations |
| $ | 217,712 |
|
| $ | 200,964 |
|
| $ | 16,748 |
|
General and administrative |
|
| 63,167 |
|
|
| 51,921 |
|
|
| 11,246 |
|
Pre-opening expenses |
|
| 863 |
|
|
| (104) |
|
|
| 967 |
|
Asset Impairment |
|
| 1,929 |
|
|
| — |
|
|
| 1,929 |
|
Loss/(gain) on disposal of assets |
|
| 587 |
|
|
| 1,106 |
|
|
| (519) |
|
Total Selling, General and Administrative |
| $ | 284,258 |
|
| $ | 253,887 |
|
| $ | 30,371 |
|
Percent of total revenue |
|
| 11.9 | % |
|
| 11.2 | % |
|
| 0.7 | % |
Operating income in the third quarter of fiscal year 2018 was $28.4 million (3.6% of total revenue) compared to $27.6 million (3.8% of total revenue) for the same period last year, which reflects the increase in gross margins on merchandise sales increase when compared to the same period a year ago offset by the increases in total selling, general and administrative costs discussed above.
Operating income for the nine months ended May 31, 2018 was $98.9 million (4.1% of total revenue) compared to $105.4 million (4.7% of total revenue) for the same period last year. Higher expenses, particularly those related to the addition of two warehouse clubs, one in the Central American and the other in the Caribbean segment, and increased corporate-level general and administrative expenses, as discussed above, led to the overall decrease in operating income.
3946
Comparison of Three and Nine Months Ended May 31, 2017 and 2016
The Company did not incur any significant pre-opening expenses in the current quarter. However, the nine-months ended May 31, 2017, included a credit to pre-opening expenses resulting from a credit recorded during the second quarter of fiscal year 2017. The credit reflected corrections to the amount recorded for the fourth quarter of fiscal year 2016 following the opening of the Chia, Colombia club. Pre-opening expenses in fiscal year 2016 were primarily related to the Managua, Nicaragua warehouse club which opened in November 2016.
Loss/(Gain) on Disposal of Assets
Asset disposal activity consisted mainly of normally scheduled asset replacement and upgrades.Interest Expense
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| Three Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
|
| Amount |
| Increase from prior year |
| % Change |
| Amount | ||||
Loss/(gain) on disposal of assets |
| $ | 364 |
| $ | 30 |
| 9.0 | % |
| $ | 334 |
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| Nine Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
|
| Amount |
| Increase from prior year |
| % Change |
| Amount | ||||
Loss/(gain) on disposal of assets |
| $ | 1,106 |
| $ | 707 |
| 177.2 | % |
| $ | 399 |
Interest Expense
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| ||||||
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| ||||||
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| Three Months Ended |
| Three Months Ended | ||||||||||||||
|
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||||||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||||||
|
| Amount |
| Increase/ |
| Amount |
| Amount |
| Increase/ |
| Amount | ||||||
Interest expense on loans |
| $ | 1,455 |
| $ | 199 |
| $ | 1,256 |
| $ | 1,447 |
| $ | (8) |
| $ | 1,455 |
Interest expense related to hedging activity |
|
| 425 |
|
| (36) |
|
| 461 |
|
| 277 |
|
| (148) |
|
| 425 |
Capitalized interest |
|
| (52) |
|
| 94 |
|
| (146) | |||||||||
Less: Capitalized interest |
|
| (362) |
|
| (310) |
|
| (52) | |||||||||
Net interest expense |
| $ | 1,828 |
| $ | 257 |
| $ | 1,571 |
| $ | 1,362 |
| $ | (466) |
| $ | 1,828 |
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| ||||||
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| ||||||
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| Nine Months Ended |
| Nine Months Ended | ||||||||||||||
|
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||||||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||||||
|
| Amount |
| Increase/ |
| Amount |
| Amount |
| Increase/ |
| Amount | ||||||
Interest expense on loans |
| $ | 4,216 |
| $ | 634 |
| $ | 3,582 |
| $ | 3,784 |
| $ | (432) |
| $ | 4,216 |
Interest expense related to hedging activity |
|
| 1,206 |
|
| (272) |
|
| 1,478 |
|
| 774 |
|
| (432) |
|
| 1,206 |
Capitalized interest |
|
| (296) |
|
| 284 |
|
| (580) | |||||||||
Less: Capitalized interest |
|
| (949) |
|
| (653) |
|
| (296) | |||||||||
Net interest expense |
| $ | 5,126 |
| $ | 646 |
| $ | 4,480 |
| $ | 3,609 |
| $ | (1,517) |
| $ | 5,126 |
40
Comparison of Three and Nine Months Ended May 31, 20172018 and 20162017
Interest expense reflects borrowings by PriceSmart, Inc. and our wholly owned foreign subsidiaries to finance new land acquisition and construction for new warehouse clubs warehouse club expansions, and distribution centers, warehouse club and distribution center expansions, the capital requirements of warehouse club operations and ongoing working capital requirements.
NetInterest expense on loans decreased approximately $8,000 in the third quarter of fiscal year 2018 when compared to the third quarter of fiscal year 2017. Lower average loan balance on both long-term and short-term loans, were offset by higher variable (“LIBOR”) interest rates. Interest expense related to hedging activity decreased in the third quarter of fiscal year 2018 compared to the third quarter of fiscal year 2017 due to the pay-off of the various loans held by our subsidiaries that were hedged and the remaining hedged loans having positive (“in the money”) positions.
Interest expense for the three and nine months ended May 31, 2017 increased from a2018, decreased when compared to the same period in fiscal year ago, with an increase2017. Loans decreased year-on-year primarily due to the pay-off of loans within our subsidiaries. Increases year-on-year in long-term debt of approximately $18.9 million, related primarily to finance the acquisition offinancing and liquidity needs in the distribution center in Miami, FloridaU.S. and an additional loan within our Trinidad subsidiary as part efforts to improve liquidity. Additionally, a decrease in interest capitalized year-on year,mentioned above, were offset by reductions, due to lower levelsthe pay-offs of construction activities, also accounted for the increased interest expense. For the nine-month period there was a decrease in interestvarious loans held by our other subsidiaries. Interest expense related to hedging activity is a resultdecreased during the first nine months of fiscal year 2018 compared to the same period in fiscal year 2017 due to the pay-off of the retirementvarious loans held by our subsidiaries that were hedged. Additional capitalized interest in the first nine months of loans and their related cross-currency interest rate hedges for our Colombia subsidiary.fiscal year 2018 compared to the same period in fiscal year 2017 resulted from higher levels of construction activities.
47
Other Income (Expense), net
Other income consists of currency gain or loss.
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|
|
| Three Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
|
| Amount |
| Increase from prior year |
| %Change |
| Amount | ||||
Other income (expense), net |
| $ | 1,101 |
| $ | 1,323 |
| 595.9 | % |
| $ | (222) |
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|
| Nine Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
|
| Amount |
| Increase from prior year |
| %Change |
| Amount | ||||
Other income (expense), net |
| $ | 1,088 |
| $ | 2,106 |
| 206.9 | % |
| $ | (1,018) |
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), are recorded as currency gains or losses.
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|
|
| Three Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2018 |
| 2017 | ||||||||
|
| Amount |
| (Decrease) |
| %Change |
| Amount | ||||
Other income (expense), net |
| $ | (575) |
| $ | (1,676) |
| 152.2 | % |
| $ | 1,101 |
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|
|
| Nine Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2018 |
| 2017 | ||||||||
|
| Amount |
| (Decrease) from prior year |
| %Change |
| Amount | ||||
Other income (expense), net |
| $ | (87) |
| $ | (1,175) |
| 108.0 | % |
| $ | 1,088 |
Comparison of Three and Nine Months Ended May 31, 20172018 and 20162017
For the three-month period,three and nine month periods ended May 31, 2018, we had a net gainloss associated with foreign currency transactions. These gainslosses resulted from the revaluation of net U.S. dollar assetsnet positions in certain markets where the local functional currency devaluedweakened against the U.S. dollar and from exchange transactions, net of any exchange reserve movements. The gains in the current quarter and in the second quarter offset the losses in the first fiscal quarter where we experienced exchange losses in many of our foreign subsidiaries dueCosta Rican currency continued to the strength ofstrengthen against the U.S. dollar during a period when certain of our countries had net U.S dollar liabilities. In particular, Hondurasthe third quarter, but the Dominican Republic and Colombian currency both experienced a larger than usual decline in its currency at a time when it had a foreign exchange exposure second only to Trinidad.devaluation against the U.S. dollar. We also incurred higherexperienced continued high transaction costs associated with converting TTTrinidad dollars into available tradeable currencies such as Euros or Canadian dollars before converting them to U.S. dollars. WhileFor so long as that situation continues in Trinidad, we have takenplan to take that additional cost into consideration in our pricing model.model and will limit our shipments from the U.S. to Trinidad to levels that generally align with our Trinidad subsidiary’s ability to pay for the merchandise in U.S. dollars.
Provision for Income Taxes
U.S. Tax Reform in December 2017 lowered the federal corporate tax rate from 35% to 21% and made numerous other law changes. The Company's results for the nine months ended May 31, 2018 include the effect of these changes based on the Company’s preliminary analysis. We have made a provisional estimate of the one-time transitional repatriation tax on unremitted foreign earnings (“Transition Tax”) of approximately $13.4 million that was recorded as an income tax expense in the second quarter of fiscal 2018. The cash amounts due for the Transition Tax will be offset by foreign tax credits expected to exceed $10.0 million, with the remainder to be paid over eight years. Additionally, as a result of U.S. Tax Reform, PriceSmart re-measured certain U.S. deferred tax assets and liabilities based on the reduction in the U.S. corporate income tax rate from 35% to 21% and recorded a non-cash income tax charge of approximately $333,000 due to related re-measurement through the third quarter of fiscal 2018. These estimated impacts to PriceSmart’s income tax provision are based on PriceSmart’s current knowledge, assumptions and interpretations of the impact of U.S. Tax Reform. The actual impact could be different from estimated provisions based upon a number of additional considerations, including, but not limited to, the issuance of final regulations, refinements in interpretation of U.S. Tax Reform provisions, and the extent that future results differ from currently available projections.
4148
ProvisionThe table below summarizes the effect that U.S. Tax Reform had on net income and earnings per share attributable to PriceSmart available for Income Taxesdistribution:
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|
|
| Three Months Ended | |||||||||
|
| May 31, |
| May 31, | |||||||
|
| 2017 |
| 2016 | |||||||
|
| Amount |
| Increase/ (decrease) from prior year |
| Amount | |||||
Current tax expense |
| $ | 10,190 |
|
| $ | (215) |
| $ | 10,405 |
|
Net deferred tax provision (benefit) |
|
| (1,731) |
|
|
| (494) |
|
| (1,237) |
|
Provision for income taxes |
| $ | 8,459 |
|
| $ | (709) |
| $ | 9,168 |
|
Effective tax rate |
|
| 31.0 | % |
|
|
|
|
| 35.2 | % |
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
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|
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|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
(In thousands, except per share amounts) |
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and |
| $ | 26,862 |
| $ | 27,291 |
| $ | 96,301 |
| $ | 102,812 |
Provision for income taxes calculated prior to U.S. tax law change |
|
| (9,204) |
|
| (8,459) |
|
| (29,231) |
|
| (31,885) |
U.S. Tax Reform: Current tax rate reduction |
|
| 587 |
|
| — |
|
| 2,014 |
|
| — |
U.S. Tax Reform: Re-measurement of net deferred |
|
| 489 |
|
| — |
|
| (333) |
|
| — |
U.S. Tax Reform: Transition Tax |
|
| — |
|
| — |
|
| (13,400) |
|
| — |
Subtotal of U.S. Tax Reform Effects |
|
| 1,076 |
|
| — |
|
| (11,719) |
|
| — |
Total provision for income taxes |
| $ | (8,128) |
| $ | (8,459) |
| $ | (40,950) |
| $ | (31,885) |
Income (loss) of unconsolidated affiliates |
|
| (18) |
|
| 6 |
|
| 3 |
|
| (1) |
Net income |
| $ | 18,716 |
| $ | 18,838 |
| $ | 55,354 |
| $ | 70,926 |
Less: net income (loss) attributable to noncontrolling interest |
|
| 22 |
|
| — |
|
| 22 |
|
| — |
Net income attributable to PriceSmart, Inc. |
| $ | 18,694 |
| $ | 18,838 |
| $ | 55,332 |
| $ | 70,926 |
Net income attributable to PriceSmart, Inc. per share available for distribution: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
| $ | 0.61 |
| $ | 0.62 |
| $ | 1.82 |
| $ | 2.34 |
Diluted net income per share |
| $ | 0.61 |
| $ | 0.62 |
| $ | 1.82 |
| $ | 2.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal of U.S. Tax Reform Effects |
| $ | 1,076 |
| $ | — |
| $ | (11,719) |
| $ | — |
Impact of U.S Tax Reform on basic and diluted net income per share |
| $ | 0.03 |
| $ | — |
| $ | (0.38) |
| $ | — |
The tables below summarize the effective tax rate for the periods reported:
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|
| ||||||
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|
|
|
|
|
|
| ||||||
|
| Nine Months Ended |
| Three Months Ended | ||||||||||||||||||
|
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||||||||||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||||||||||
|
| Amount |
| Increase/ |
| Amount |
| Amount |
| Increase/ |
| Amount | ||||||||||
Current tax expense |
| $ | 35,028 |
|
| $ | 693 |
| $ | 34,335 |
|
| $ | 8,259 |
|
| $ | (1,931) |
| $ | 10,190 |
|
Net deferred tax provision (benefit) |
|
| (3,143) |
|
|
| (1,921) |
|
| (1,222) |
|
|
| (131) |
|
|
| 1,600 |
|
| (1,731) |
|
Provision for income taxes |
| $ | 31,885 |
|
| $ | (1,228) |
| $ | 33,113 |
|
| $ | 8,128 |
|
| $ | (331) |
| $ | 8,459 |
|
Effective tax rate |
|
| 31.0 | % |
|
|
|
|
| 33.4 | % |
|
| 30.3 | % |
|
|
|
|
| 31.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended | |||||||||
|
| May 31, |
| May 31, | |||||||
|
| 2018 |
| 2017 | |||||||
|
| Amount |
| Increase/ |
| Amount | |||||
Current tax expense |
| $ | 34,413 |
|
| $ | (615) |
| $ | 35,028 |
|
Net deferred tax provision (benefit) |
|
| 6,537 |
|
|
| 9,680 |
|
| (3,143) |
|
Provision for income taxes |
| $ | 40,950 |
|
| $ | 9,065 |
| $ | 31,885 |
|
Effective tax rate |
|
| 42.5 | % |
|
|
|
|
| 31.0 | % |
49
Comparison of Three and Nine Months Ended May 31, 20172018 and 20162017
For the three months ended May 31, 2017,2018, the effective tax rate was 31.0%30.3%. The decrease in the effective tax rate versus the prior year was primarily attributable to the following factors: (i) an intercompany transaction between PriceSmart, Inc. and our Colombian subsidiary in support of PriceSmart’s ongoing market development and growth in Colombia. This intercompany transaction resulted in a favorable impact on the effective tax rate of 2.8% due to the reductions to taxable income in the U.S. and a resulting increase in taxable income in our Colombia subsidiary, which did not generate income tax expense in Colombia because the additional taxable income in Colombia was fully offset by the reversal of valuation allowances on accumulated net losses in that subsidiary. We expect a favorable impact to the consolidated Company’s effective tax rate over the next several quarters, however the percentage will likely decrease gradually; (ii) the favorable impact of 2.7% resulting from improved financial results in the Company’s Colombia subsidiary for which no tax benefit was recognized, net of adjustment to valuation allowance; (iii) the unfavorable impact of 0.8% in the current period from the effect of changes in foreign currency value; (iv) the unfavorable impact of 0.4% primarily resulting from the change in the statutory income tax rates in foreign jurisdictions.
· | The comparably favorable total impact of 4.0%, resulting from the U.S. Tax Reform current rate reduction which favorably impacted our effective tax rate by 2.2% and a favorable re-measurement of net deferred tax assets/liabilities of 1.8%. |
· | The comparably favorable impact of 1.6% resulting from improved financial results in the Company’s Colombia subsidiary for which no tax benefit was recognized, net of adjustment to valuation allowance; |
· | A decrease in the magnitude of an intercompany transaction between PriceSmart, Inc. and our Colombian subsidiary in support of PriceSmart’s ongoing market development and growth in Colombia. A decrease in the amount of this intercompany transaction, year over year, resulted in a comparatively unfavorable impact on the effective tax rate of 2.0%. The intercompany transaction reduces taxable income in the U.S. and increases taxable income in our Colombia subsidiary where the additional taxable income is fully offset by the reversal of valuation allowances on accumulated net losses in that subsidiary. We expect the decrease of the favorable impact to the consolidated Company’s effective tax rate over the next several quarters to continue. |
· | The comparably unfavorable impact of 2.4% resulting from Aeropost financial results for which no tax benefit was recognized. |
For the nine months ended May 31, 2017,2018, the effective tax rate was 31.0%42.5%. The decreaseincrease in the effective tax rate versus the prior year was primarily attributable to the following factors: (i) an intercompany transaction between PriceSmart, Inc. and our Colombian subsidiary in support of PriceSmart’s ongoing market development and growth in Colombia. This intercompany transaction resulted in a favorable impact on the effective tax rate of 2.0% due to the reductions to taxable income in the U.S. and a resulting increase in taxable income in our Colombia subsidiary, which did not generate income tax expense in Colombia because the additional taxable income in Colombia was fully offset by the reversal of valuation allowances on accumulated net losses in that subsidiary. We expect a favorable impact to the consolidated Company’s effective tax rate over the next several quarters, however the percentage will likely decrease gradually; (ii) the favorable impact of 1.4% resulting from improved financial results in the Company’s Colombia subsidiary for which no tax benefit was recognized, net of adjustment to valuation allowance; (iii) the unfavorable impact of 0.5% primarily resulting from the change in the statutory income tax rates in foreign jurisdictions.
· | The comparably unfavorable impact of 13.9% resulting from the U.S. Tax Reform Transition Tax in the third quarter of fiscal 2018. |
· | The comparably favorable net impact of 1.7%, resulting from the U.S. Tax Reform current rate reduction which favorably impacted our effective tax rate 2.1%, partially offset by an unfavorable re-measurement of net deferred tax assets/liabilities of 0.4%. |
· | The comparably favorable impact of 1.2% resulting from improved financial results in the Company’s Colombia subsidiary for which no tax benefit was recognized, net of adjustment to valuation allowance; |
· | A decrease in the magnitude of an intercompany transaction between PriceSmart, Inc. and our Colombian subsidiary in support of PriceSmart’s ongoing market development and growth in Colombia. A decrease in the amount of this intercompany transaction, year over year, resulted in a comparatively unfavorable impact on the effective tax rate of 0.8%. The intercompany transaction reduces taxable income in the U.S. and increases taxable income in our Colombia subsidiary where the additional taxable income is fully offset by the reversal of valuation allowances on accumulated net losses in that subsidiary. We expect the decrease of the favorable impact to the consolidated Company’s effective tax rate over the next several quarters to continue. |
· | The comparably unfavorable impact of 0.6% resulting from Aeropost financial results for which no tax benefit was recognized. |
Other Comprehensive Income (Loss)
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| Three Months Ended | ||||||||||
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| May 31, |
| May 31, | ||||||||
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| 2018 |
| 2017 | ||||||||
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| Amount |
| Increase from prior year |
| % Change |
| Amount | ||||
Other comprehensive income (loss) |
| $ | (2,340) |
| $ | 1,107 |
| (32.1) | % |
| $ | (3,447) |
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| Nine Months Ended | ||||||||||
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| May 31, |
| May 31, | ||||||||
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| 2018 |
| 2017 | ||||||||
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| Amount |
| Increase |
| % Change |
| Amount | ||||
Other comprehensive income (loss) |
| $ | 1,491 |
| $ | 5,798 |
| 134.6 | % |
| $ | (4,307) |
4250
Other Comprehensive Income (Loss)
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| Three Months Ended | ||||||||||
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| May 31, |
| May 31, | ||||||||
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| 2017 |
| 2016 | ||||||||
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| Amount |
| (Decrease) from prior year |
| % Change |
| Amount | ||||
Other comprehensive income (loss) |
| $ | (3,447) |
| $ | (9,759) |
| (154.6) | % |
| $ | 6,312 |
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| Nine Months Ended | ||||||||||
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| May 31, |
| May 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
|
| Amount |
| Increase from prior year |
| % Change |
| Amount | ||||
Other comprehensive income (loss) |
| $ | (4,307) |
| $ | 612 |
| (12.4) | % |
| $ | (4,919) |
Comparison of Three and Nine Months Ended May 31, 20172018 and 20162017
Our other comprehensive loss of approximately $3.4$2.3 million for the third quarter of fiscal year 20172018 resulted primarily from comprehensive loss of approximately $3.1$2.5 million from foreign currency translation adjustments related to assets and liabilities and the translation of the statement of income related to revenue, costs and expenses on the statements of income of our subsidiaries whose functional currency is not the U.S. dollar, andoffset by comprehensive lossincome of approximately $416,000$121,000 related to unrealized gains on changes in derivative obligations.obligations and the amortization of prior service costs and actuarial gains within defined benefit plans. When the functional currency in our international subsidiaries is the local currency and not U.S. dollars, the assets and liabilities of such 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 differences are recorded as a component of accumulated other comprehensive income or loss. These adjustments will not affect net income until the sale or liquidation of the underlying investment. The reported other comprehensive income or loss reflects the unrealized increase or decrease in the value in U.S. dollars of the net assets of the subsidiaries as of the date of the balance sheet, which will vary from period to period as exchange rates fluctuate. During
For the nine months ended May 31, 2017, other comprehensive loss resulted primarily from approximately $4.7 million in comprehensive losses related to the translation adjustments related to assets and liabilities and the translation of the statement of income related to revenue, costs and expenses of our subsidiaries whose functional currency is not the U.S. dollar offset by2018 comprehensive income of approximately $364,000 related to$1.5 million resulted from approximately $1.5 million in unrealized gains on changes in derivative obligations.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position and Cash Flow
We requireOur operations have historically supplied us with a significant source of liquidity. Our cash flows provided by operating activities, supplemented with our long-term debt and short-term borrowings, have generally been sufficient to fund our operating expenses and working capital requirements, including investmentsoperations while allowing us to invest in merchandise inventories, acquisitionactivities that support the long-term growth of land and construction of new warehouse clubs and distribution centers, expansion of existing warehouse clubs and distribution centers, acquisitions of fixtures and equipment, routine upgrades and maintenance of fixtures and equipment within existing warehouse clubs, investments in joint ventures in Panama and Costa Rica to own and operate commercial retail centers located adjacent to the new warehouse clubs, the purchase of treasury stock upon the vesting of restricted stock awards and payment of dividends to stockholders. Our primary sources for funding these requirements are cash and cash equivalents on hand, cash generated fromour operations and bank borrowings.to pay dividends on our common stock. We evaluate our funding requirements on a regular basis whether we may need to borrow additional funds to cover any shortfall in our ability to generate sufficient cash from operations to meet our operating and capital requirements. As such, weWe may enter into or obtain additional loans and/or credit facilitiesconsider funding alternatives to provide additional liquidity when necessary.
The following table summarizes the cash and cash equivalents held by our foreign subsidiaries and domestically (in thousands). Repatriation of cash and cash equivalents held by foreign subsidiaries may require us to accrue and pay taxes. We have no plans at this time to repatriate cash through the payment of cash dividends by our foreign subsidiaries tosubsidiaries. However, this could change based on our domestic operations and, therefore, have not accrued taxes that would be due from repatriation.
43
Tableevaluation of Contentsthe recent changes in tax law.
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| ||||
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| May 31, |
| August 31, |
| May 31, |
| August 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Cash and cash equivalents held by foreign subsidiaries |
| $ | 154,073 |
| $ | 160,053 |
| $ | 132,634 |
| $ | 139,270 |
Cash and cash equivalents held domestically |
|
| 38,033 |
|
| 39,469 |
|
| 12,179 |
|
| 26,442 |
Total cash and cash equivalents |
| $ | 192,106 |
| $ | 199,522 |
| $ | 144,813 |
| $ | 165,712 |
From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through warehousemerchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. InDuring fiscal year 2017, and continuing into the second halffirst nine months of fiscal year 2016 and continuing into fiscal year 2017,2018, we are experiencingexperienced this situation in Trinidad (“TT”). We are limited in our abilityand have been unable to convert TT dollars that we generate through sales of merchandise into U.S. dollars, which limits our ability to deploy that cash for corporate purposes. We will continue to seek to maximize thesource a sufficient level of tradeable currency our Trinidad subsidiary can obtain (such as Euros and Canadian dollars) from our relationship banks. However, until such time that the uncertain state of tradable currency is resolved, we plan to take steps to limit our exposure. In November 2016, we began limiting our shipments of merchandise to Trinidad from our distribution centercurrencies in Miami to levels that generally alignTrinidad. We are working with our banks in Trinidad subsidiary’s ability to pay for the merchandise in U.S. dollars. This reduced level of shipments adversely affected sales in the second quarter, particularly December, although by less than our initial estimate of $8.0 million to $12.0 million. These actions did not impact the level of merchandise we obtain locally in Trinidad. Most recently, we have been able to improve our sourcing ofsource tradeable currencies which has allowed for a more normalized flow of imported merchandise during the third fiscal quarter. However,currencies. We expect the illiquidity situation remains in that market and we have not been ableconditions to fully address the level of dollar-denominated liabilities. Going forward, we could again find ourselves in a position that requires us to limit shipments from the U.S. to Trinidad in line with our ability to exchange TT dollars for tradeable currencies or to reduce our exposure to a potential devaluation. This may result in our Trinidad subsidiary running out of certain merchandise from time to time during the remainder of the year, which could negatively impact sales in Trinidad.
Our cash flows are summarized as follows (in thousands):
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| Nine Months Ended | ||||
|
| May 31, |
| May 31, | ||
|
| 2017 |
| 2016 | ||
Net cash provided by (used in) operating activities |
| $ | 86,279 |
| $ | 112,168 |
Net cash provided by (used in) investing activities |
|
| (99,506) |
|
| (51,927) |
Net cash provided by (used in) financing activities |
|
| 8,202 |
|
| (11,193) |
Effect of exchange rates |
|
| (2,391) |
|
| (3,504) |
Net increase (decrease) in cash and cash equivalents |
| $ | (7,416) |
| $ | 45,544 |
continue.
4451
Our net
The following table summarizes our significant sources and uses of cash and cash equivalents:
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| Nine Months Ended | |||||||
|
| May 31, |
| May 31, |
|
| Increase/ | ||
|
| 2018 |
| 2017 |
|
| (Decrease) | ||
Net cash provided by (used in) operating activities |
| $ | 90,765 |
| $ | 86,897 |
| $ | 3,868 |
Net cash provided by (used in) investing activities |
|
| (98,290) |
|
| (99,506) |
|
| 1,216 |
Net cash provided by (used in) financing activities |
|
| (12,389) |
|
| 7,971 |
|
| (20,360) |
Effect of exchange rates |
|
| (985) |
|
| (2,391) |
|
| 1,406 |
Net increase (decrease) in cash and cash equivalents |
| $ | (20,899) |
| $ | (7,029) |
| $ | (13,870) |
Net cash provided by (used in) operating activities totaled $90.8 million and $86.9 million for the nine months ended May 31, 2018 and 2017, respectively. Cash used in operations generally consists of payments to our merchandise vendors, warehouse operating costs (including payroll, employee benefits and 2016 is summarized below:
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|
| Nine Months Ended |
| Increase/ | |||||
|
| May 31, |
| May 31, |
| (Decrease) | |||
|
| 2017 |
| 2016 |
| 2017 to 2016 | |||
Net income |
| $ | 70,926 |
| $ | 66,451 |
| $ | 4,475 |
Adjustments to reconcile net income to net cash provided from (used in) operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 34,445 |
|
| 29,003 |
|
| 5,442 |
(Gain) loss on sale of property and equipment |
|
| 1,106 |
|
| 399 |
|
| 707 |
Deferred income taxes |
|
| 3,143 |
|
| (1,222) |
|
| 4,365 |
Stock-based compensation expenses |
|
| 7,097 |
|
| 6,152 |
|
| 945 |
Other non-cash operating activities |
|
| 1 |
|
| (362) |
|
| 363 |
Net non-cash related expenses |
| $ | 45,792 |
| $ | 33,970 |
| $ | 11,822 |
Net income from operating activities reconciled for non-cash operating activities |
|
| 116,718 |
|
| 100,421 |
|
| 16,297 |
Changes in operating assets and liabilities not including merchandise inventories |
|
| (1,104) |
|
| (2,281) |
|
| 1,177 |
Changes in merchandise inventories |
|
| 3,490 |
|
| 13,397 |
|
| (9,907) |
Changes in accounts payable |
|
| (32,825) |
|
| 631 |
|
| (33,456) |
Net cash provided by (used in) operating activities |
| $ | 86,279 |
| $ | 112,168 |
| $ | (25,889) |
Netutilities), as well as payments for income from operating activities reconciled for non-cash operating activities increased approximately $16.3taxes. The $3.8 million for the nine-months ended May 31, 2017 over the same period last year. This was primarily a result of a year-on-year increase in net income of approximately $4.5 million, a year-on-year increase in depreciation expense of approximately $5.4 million due to new warehouse club construction and the continued ongoing capital improvements to existing warehouse clubs and a year-on-year increase in deferred income taxes for $4.4 million,cash provided by operating activities was primarily due to the reduction of taxable incomean improvement in the U.S. as a result of the intercompany transaction between PriceSmart, Inc. and its Colombia subsidiary, which resulted in an increased utilization of U.S. deferred tax benefits. The increase in net income from operating activities reconciled for non-cash operating activities was offset by cash use related to operating activities for approximately $42.2 million. This was primarily related to a year-on year decrease in the inventory reduction. The Company did not reduce inventory to the same extent in the nine months ended May 31, 2017 compared to the prior-year period primarily due to the addition of a warehouse club opened during September 2016 in Chia, Colombia and increased in inventory to support increased sales within the Company’s Colombia segment. Additionally, the Company reduced accounts payable year-on-year for approximately $33.5 million due mainly to the timing of inventory builds and payment terms.working capital.
Our use of cash in investing activities for the nine months ended May 31, 2017 and 2016 is summarized below:
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|
| Nine Months Ended |
| Increase/ | |||||
|
| May 31, |
| May 31, |
| (Decrease) | |||
|
| 2017 |
| 2016 |
| 2017 to 2016 | |||
Cash used for additions of property and equipment: |
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|
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|
|
|
|
Land acquisitions |
| $ | 20,258 |
| $ | 3,151 |
| $ | 17,107 |
Deposits for land purchase option agreements |
|
| 300 |
|
| 442 |
|
| (142) |
Warehouse club and distribution center expansion, construction and land improvements |
|
| 50,709 |
|
| 34,226 |
|
| 16,483 |
Acquisition of fixtures and equipment |
|
| 28,574 |
|
| 14,085 |
|
| 14,489 |
Proceeds from disposals of property and equipment |
|
| (335) |
|
| (96) |
|
| (239) |
Capital contribution to joint ventures |
|
| — |
|
| 119 |
|
| (119) |
Net cash flows used by (provided in) investing activities |
| $ | 99,506 |
| $ | 51,927 |
| $ | 47,579 |
Net cash used in investing activities increasedwas essentially the same in the first nine months of fiscal year 2017 comparedyears 2018 and 2017. Cash used in investing activities is primarily to the first nine months of fiscal year 2016 by approximately $47.6 million. This was primarily due to an increase in cash expenditures forfund warehouse club expansions related to the acquisition of a distribution center in Medley, Miami-Dade County, Florida in January, construction activities for a warehouse club in Santa Ana, Costa Rica that we plan to open in the fall of 2017,expansion and construction activities for a warehouse club in Chia, Colombia that opened in September 2016. The Company also used cash for the acquisition of land in Costa Rica.remodeling activities. During the third quarter of fiscal year 2017, the Company re-classifiedcurrent period, we used cash used in warehouse club and distribution center expansion to land acquisitions for approximately $11.7 million, as part of the determination and segregation of the land value for the distribution center acquisition. An increase in overall warehouse club expansion activities, related to
45
warehouse expansions in Guatemala, Honduras and El Salvador during the first nine months of fiscal year 2017 also increased year-on-year investing activities.
As of May 31, 2017, we had commitments for capital expenditures for new two new warehouse club construction for approximately $5.6 million. We expect to spend approximately $28.0 million in other capitalclubs and expenditures for ongoing replacement of equipment, building/leasehold improvements, expansion projects onof existing warehouse clubs, and land acquisitions during the remainder of fiscal year 2017. We entered into a lease extension during November 2016 for an existing lease within the Company’s Guatemala subsidiary for its Pradera location. The subsidiary signed an extension on November 24, 2016, extending the lease termination date from May 31, 2021 to November 30, 2043. The lease extension covers the real property at this location currently used by the Company plus additional square footage in the same shopping center, which has been added to the lease. This has effectively provided the Company with possession of substantially all of the real property available at that location. The Company plans to expand and upgrade the current warehouse club and parking areas and to improve access into and out from the location. The costs associated with this planned expansion and these improvements is included within our projected spend during the fiscal year. Future capital expenditures will be dependent on the timing of future land purchases and/or warehouse club construction activity.
We have entered into land purchase option agreements within our subsidiaries that have not been recorded as a commitments, for which we have recorded deposits of approximately $1.1 million. The land purchase option agreements can generally be canceled at our sole option with the deposits being fully refundable up and until all permits are issued. However, the deposit on one piece of land totaling approximately $50,000 would be forfeited if one pending permit is not received and we were to decide not to proceed with the acquisition. The Company also entered into a land lease option within one of our markets, for which no deposits have been made. We do not have a timetable of when or if we will exercise these land purchase/lease options, due to the uncertainty related to the completion of our due diligence reviews. Our due diligence reviews include evaluations of the legal status of the property, the zoning and permitting issues related to acquiring approval for the construction and operation of a warehouse club and any other issues related to the property itself that could render the property unsuitable or limit the property's economic viability as a warehouse club site. If all of these purchase option agreements are exercised, the cash use for the acquisition of land would be approximately $24.5 million. We may enter into additional land purchase option agreements in the future.
In January 2017, the Company finalized its acquisition of a distribution center in Medley, Miami-Dade County, Florida, for a total purchase price of approximately $46.0 million. The Company transferred the majority of its Miami dry distribution center activities previously located in its leased facilities. This was completed during the third quarter of fiscal year 2017. The Company has and intends to terminate leases with respect to portions of the existing leased Miami distribution facilities or enter into sublease agreements for portions of the leased facilities. The Company recorded approximately $751,000 in costs related to our exit cost obligation for this leased facility as warehouse expenses during the third quarter.Aeropost.
Net cash provided by (used in) financing activities generally consists of transactions related to our short-term and long-term debt, cash dividend payments and the purchase of treasury stock related to vesting of restricted stock. Net cash provided by financing activities forin 2017 shifted to a net use in 2018 by a total of $20.4 million, primarily due to net debt re-financing and loan pay-off actions in 2018 compared to net additional financing taken out in 2017. Dividend payments remained consistent over the nine months ended May 31, 2017 and 2016 is summarized below:two periods.
Short-Term Borrowings and Long-Term Debt
Short-term borrowings consist of lines of credit that are secured by certain assets of the Company and its subsidiaries, which, in some cases, are guaranteed by the Company. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands):
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| Nine Months Ended |
| Increase/ | |||||
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| May 31, |
| May 31, |
| (Decrease) | |||
|
| 2017 |
| 2016 |
| 2017 to 2016 | |||
New bank loans offset by regularly scheduled payments on existing bank loans (loan activities) |
| $ | 20,190 |
| $ | 794 |
| $ | 19,396 |
Cash dividend payments |
|
| (10,641) |
|
| (10,629) |
|
| (12) |
Proceeds from exercise of stock options and the tax benefit related to stock options |
|
| 231 |
|
| 579 |
|
| (348) |
Purchase of treasury stock related to vesting of restricted stock |
|
| (1,578) |
|
| (1,937) |
|
| 359 |
Net cash provided by (used in) financing activities |
| $ | 8,202 |
| $ | (11,193) |
| $ | 19,395 |
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| Facilities Outstanding |
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| ||||
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| Total Amount |
| Short-term |
| Letters of |
| Facilities |
| Weighted average |
| ||||
|
| of Facilities |
| Borrowings |
| Credit |
| Available |
| interest rate |
| ||||
May 31, 2018 |
| $ | 72,750 |
| $ | 334 |
| $ | 2,610 |
| $ | 69,806 |
| 4.0 | % |
August 31, 2017 |
| $ | 69,000 |
| $ | — |
| $ | 966 |
| $ | 68,034 |
| — | % |
Net cash from long-termAs of May 31, 2018, the Company had short-term facilities in the U.S. that require compliance with certain quarterly financial covenants. As of May 31, 2018, the Company is in compliance with these covenants. The facilities expire annually or bi-annually and short-term loan activities increased approximately $19.4 million during the first nine months of fiscal year 2017 over the first nine months of fiscal year 2016. This increase in cash primarily resulted from the new loan for approximately $35.7 million related to the acquisition of the Miami distribution center and a new loan within our Trinidad subsidiary for approximately $12.0 million. These loans were offset by regularly scheduled long-term loan payments of $11.0 million and additional net payments of approximately $16.5 million on short-term loans.are normally renewed.
4652
The following table provides the changes in our long-term debt for the nine months ended May 31, 2018:
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(Amounts in thousands) |
| Current |
| Long-term |
| Total |
| |||
Balances as of August 31, 2017 |
| $ | 18,358 |
| $ | 87,939 |
| $ | 106,297 | (1) |
Proceeds from long-term debt incurred during the period: |
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|
|
|
|
|
|
|
|
Panama subsidiary |
|
| 1,500 |
|
| 13,500 |
|
| 15,000 |
|
Honduras subsidiary |
|
| 1,350 |
|
| 12,150 |
|
| 13,500 |
|
Repayments of long-term debt: |
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|
|
|
|
|
|
|
|
|
Repayment of loan by Honduras subsidiary with Scotiabank |
|
| (600) |
|
| (850) |
|
| (1,450) |
|
Repayment of loans by Honduras subsidiary with Citibank |
|
| (1,850) |
|
| (6,063) |
|
| (7,913) |
|
Repayment of loan by Trinidad subsidiary |
|
| (3,000) |
|
| (3,000) |
|
| (6,000) |
|
Regularly scheduled loan payments |
|
| (3,739) |
|
| (9,829) |
|
| (13,568) |
|
Reclassifications of long-term debt |
|
| 2,479 |
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| (2,479) |
|
| — |
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Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) |
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| 146 |
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| (160) |
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| (14) |
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Balances as of May 31, 2018 |
| $ | 14,644 |
| $ | 91,208 |
| $ | 105,852 | (3) |
(1) | The carrying amount of non-cash assets assigned as collateral for these loans was $128.4 million. No cash assets were assigned as collateral for these loans. |
(2) | Foreign currency translation adjustments associated with loans held in foreign currencies restated into the U.S. dollar reporting currency with the resulting gain or loss recorded with other comprehensive income. |
(3) | The carrying amount of non-cash assets assigned as collateral for these loans was $129.5 million. No cash assets were assigned as collateral for these loans. |
As of May 31, 2018, the Company had approximately $105.9 million in total debt outstanding. Certain loans require compliance with financial covenants. As of May 31, 2018, the Company is in compliance with all covenants associated with the loans.
Derivatives
We are exposed to certain risks relating to our ongoing business operations. We manage the exposure associated with interest rate and foreign currency exchange rate risks by us using derivative financial instruments. The objective of entering into derivatives is to eliminate the variability of cash flows resulting from changes in interest rates and foreign currency exchange rates associated with servicing our debt and our subsidiaries’ merchandise-related foreign currency commitments. We measure the fair value for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis during the reporting period.
The following table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that we have designated and qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income) / loss (in thousands):
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| May 31, 2018 |
| August 31, 2017 | ||||||||||||||
Derivatives designated as cash flow hedging instruments |
| Balance Sheet |
| Fair |
| Net Tax |
| Net |
| Fair |
| Net Tax |
| Net | ||||||
Cross-currency interest rate swaps |
| Other non-current assets |
| $ | 2,046 |
| $ | (618) |
|
| 1,428 |
| $ | 2,547 |
| $ | (950) |
| $ | 1,597 |
Interest rate swaps |
| Other non-current assets |
|
| 2,035 |
|
| (456) |
|
| 1,579 |
|
| — |
|
| — |
|
| — |
Interest rate swaps |
| Other long-term liabilities |
|
| — |
|
| — |
|
| — |
|
| (231) |
|
| 80 |
|
| (151) |
Cross-currency interest rate swaps |
| Other long-term liabilities |
|
| (537) |
|
| 161 |
|
| (376) |
|
| (451) |
|
| 135 |
|
| (316) |
Net fair value of derivatives designated as hedging instruments |
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| $ | 3,544 |
| $ | (913) |
| $ | 2,631 |
| $ | 1,865 |
| $ | (735) |
| $ | 1,130 |
53
From time to time, we enter into non-deliverable forward and forward currency exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. As of May 31, 2018, the Company did not have any open non-deliverable forward and forward currency exchange contracts.
Dividends
The following table summarizes the dividends declared and paid during fiscal year 2017 and 2016 (amounts are per share). 2018.
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Declared |
| Amount |
| Record |
| Date |
| Date |
| Amount |
| Record |
| Date |
| Date |
| Amount |
| Amount |
| Record |
| Date |
| Date |
| Amount |
| Record |
| Date |
| Date |
| Amount | ||||||
1/24/2018 |
| $ | 0.70 |
| 2/14/2018 |
| 2/28/2018 |
| N/A |
| $ | 0.35 |
| 8/15/2018 |
| N/A |
| 8/31/2018 |
| $ | 0.35 | |||||||||||||||||||||
2/1/2017 |
| $ | 0.70 |
| 2/15/2017 |
| 2/28/2017 |
| N/A |
| $ | 0.35 |
| 8/15/2017 |
| N/A |
| 8/31/2017 |
| $ | 0.35 |
| $ | 0.70 |
| 2/15/2017 |
| 2/28/2017 |
| N/A |
| $ | 0.35 |
| 8/15/2017 |
| 8/31/2017 |
| N/A |
| $ | 0.35 |
2/3/2016 |
| $ | 0.70 |
| 2/15/2016 |
| 2/29/2016 |
| N/A |
| $ | 0.35 |
| 8/15/2016 |
| 8/31/2016 |
| N/A |
| $ | 0.35 |
We anticipate the ongoing semi-annual payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, the amount of such dividends and the establishment of record and payment dates is subject to final determination by the Board of Directors at its discretion after its review of the Company’s financial performance and anticipated capital requirements.
Financing Activities
On March 31, 2017, the Company's Trinidad subsidiary entered into a loan agreement with Citibank, N.A. The agreement provides for a US $12.0 million loan to be repaid in eight quarterly principal payments plus interest. The interest rate is set at the 90 day LIBOR rate plus 3%. The loan was funded on March 31, 2017.
On January 27, 2017 the Company entered into a 10-year real estate secured loan with MUFG Union Bank, N.A. (“Union Bank”). The loan establishes a credit facility of up to 75% LTV of the acquired property at a variable interest rate of 30-day LIBOR plus 1.7% for a ten-year term, with monthly principal and interest payments, maturing in 2027. The monthly principal and interest payments begin in April 2019. An initial loan amount of $35.7 million loan was funded on January 27, 2017. The Company entered into an interest rate hedge on November 7, 2016 with Union Bank for $35.7 million, the notional amount. The Company will receive variable 30-day LIBOR plus 1.7% and pay fixed (3.65%), with an effective date of March 1, 2017 and maturity date of March 1, 2027.
Derivatives
We are exposed to certain risks relating to our ongoing business operations. One risk managed by us using derivative instruments is interest rate risk. To manage interest rate exposure, we enter into hedging transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the interest payments associated with variable-rate LIBOR loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.
In addition, we are exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of two of our wholly owned subsidiaries. To manage foreign currency and interest rate cash flow exposure, these subsidiaries enter into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash lows attributable to interest rate and foreign exchange movements.
We are also exposed to foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within our international subsidiaries whose functional currency is other than the U.S. dollar. We manage 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 our international subsidiaries whose functional currency is other than the U.S. dollar. We seek to mitigate foreign-currency exchange-rate risk with the use of these contracts and do not intend to engage in speculative transactions. Currently, these contracts do not contain any credit-risk-related contingent features. These contracts do not qualify for derivative hedge accounting. The forward currency hedges are not effective cash flow hedges because the notional amount and maturity date of the forward contract does not coincide with the accounts payable balance and due dates. The hedge ineffectiveness is measured by use of the “hypothetical derivative method,” and we record the changes in the fair value of the forward contract related to the re-measurement of the payable at spot exchange rates as exchange rate gains or losses. The implied interest rate included within the forward contract is reflected in earnings as interest expense.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is determined to be ineffective. There were no such amounts for the periods reported herein.
47
The following table summarizes agreements for which the Company has recorded cash flow hedge accounting transactions during the nine months ended May 31, 2017:
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Subsidiary |
| Date |
| Derivative |
| Derivative |
| Initial |
| Bank |
| Floating Leg |
| Fixed Rate |
| Settlement |
| Effective | ||
PriceSmart, Inc (1) |
| 7-Nov-16 |
| MUFG Union Bank, N.A. ("Union Bank") |
| Interest rate swap |
| $ | 35,700,000 |
| Union Bank |
| Variable rate 1-month Libor plus 1.7% |
| 3.65 | % |
| 1st day of each month beginning on April 1, 2017 |
| March 1, 2017 - March 1, 2027 |
Costa Rica |
| 28-Aug-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 7,500,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 2.50% |
| 7.65 | % |
| 28th day of August, November, February, and May beginning on November 30, 2015 |
| August 28, 2015 - |
Honduras |
| 24-Mar-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 8,500,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 3.25% |
| 10.75 | % |
| 24th day of March, June, September, and December beginning on June 24, 2015 |
| March 24,2015 - |
El Salvador |
| 16-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 4,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.78 | % |
| 29th day of each month beginning on December 29, 2014 |
| December 1, 2014 - |
Colombia |
| 10-Dec-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 15,000,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 2.8% |
| 8.25 | % |
| 4th day of March, June, Sept, Dec. beginning on March 4, 2015 |
| December 4, 2014 - |
Panama |
| 9-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 10,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 5.16 | % |
| 28th day of each month beginning December 29, 2014 |
| November 28, 2014 - |
Honduras |
| 23-Oct-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 5,000,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 3.5% |
| 11.6 | % |
| 22nd day of January, April, July, and October beginning on January 22, 2015 |
| October 22, 2014 - |
Panama |
| 1-Aug-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 5,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.89 | % |
| 21st day of each month beginning on September 22, 2014 |
| August 21, 2014 - |
Panama |
| 22-May-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 19,800,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.98 | % |
| 4th day of each month beginning on June 4, 2014 |
| May 5, 2014 - |
Panama |
| 22-May-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 3,970,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.98 | % |
| 4th day of each month beginning on June 4, 2014 |
| May 5, 2014 - |
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We measure the fair value for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis during the reporting period. We have designated the interest rate swaps and cross-currency interest rate swap agreements as hedging instruments and have accounted for them under hedge accounting rules. Derivatives listed on the table below were designated as cash flow hedging instruments. The following table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income) / loss (in thousands):
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| May 31, 2017 |
| August 31, 2016 | ||||||||||||||
Derivatives designated as cash flow hedging instruments |
| Balance Sheet |
| Fair |
| Net Tax |
| Net |
| Fair |
| Net Tax |
| Net | ||||||
Cross-currency interest rate swaps |
| Other non-current assets |
| $ | 2,596 |
|
| (943) |
|
| 1,653 |
| $ | 3,224 |
| $ | (1,248) |
| $ | 1,976 |
Interest rate swaps |
| Other non-current assets |
|
| 83 |
|
| (30) |
|
| 53 |
|
| — |
|
| — |
|
| — |
Interest rate swaps |
| Other long-term liabilities |
|
| (60) |
|
| 17 |
|
| (43) |
|
| (448) |
|
| 115 |
|
| (333) |
Cross-currency interest rate swaps |
| Other long-term liabilities |
|
| (540) |
|
| 162 |
|
| (378) |
|
| (1,066) |
|
| 320 |
|
| (746) |
Net fair value of derivatives designated as hedging instruments |
|
|
| $ | 2,079 |
| $ | (794) |
| $ | 1,285 |
| $ | 1,710 |
| $ | (813) |
| $ | 897 |
From time to time, we enter into non-deliverable forward exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting.
48
The following table summarizes these agreements as of May 31, 2017:
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The following table summarizes the fair value of foreign currency forward contracts that do not qualify for derivative hedge accounting (in thousands):
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| May 31, 2017 |
| August 31, 2016 |
| ||||||
Non-deliverable forward foreign exchange contracts |
| Balance Sheet |
| Fair Value |
| Balance Sheet |
| Fair Value |
| ||
Foreign currency forward contracts |
| Other current assets |
| $ | 3 |
| Other current assets |
| $ | 34 |
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Foreign currency forward contracts |
| Other accrued expenses |
|
| (400) |
| Other accrued expenses |
|
| (144) |
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Net fair value of non-deliverable forward foreign exchange contracts designated as hedging instruments that do not qualify for hedge accounting |
|
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| $ | (397) |
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| $ | (110) |
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Short-Term Borrowings and Long-Term Debt
Short-term borrowings consist of lines of credit which are secured by certain assets of the Company and its subsidiaries and which in some cases are guaranteed by the Company. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands):
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| Facilities Used |
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| Total Amount |
| Short-term |
| Letters of |
| Facilities |
| Weighted average |
| ||||
|
| of Facilities |
| Borrowings |
| Credit |
| Available |
| interest rate |
| ||||
May 31, 2017 |
| $ | 69,000 |
| $ | — |
| $ | 220 |
| $ | 68,780 |
| — | % |
August 31, 2016 |
| $ | 65,000 |
| $ | 16,534 |
| $ | 9,224 |
| $ | 39,242 |
| 10.1 | % |
As of May 31, 2017 and August 31, 2016, the Company had approximately $40.0 million of short-term facilities in the U.S. that require compliance with certain quarterly financial covenants. As of May 31, 2017 and August 31, 2016, the Company was in compliance with respect to these covenants. Each of the facilities expires annually and is normally renewed.
49
The following table provides the changes in our long-term debt for the nine months ended May 31, 2017:
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(Amounts in thousands) |
| Current |
| Long-term |
| Total |
| |||
Balances as of August 31, 2016 |
| $ | 14,565 |
| $ | 73,542 |
| $ | 88,107 | (1) |
Proceeds from long-term debt incurred during the period: |
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MUFG Union Bank |
|
| — |
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| 35,700 |
|
| 35,700 |
|
Trinidad subsidiary |
|
| 6,000 |
|
| 6,000 |
|
| 12,000 |
|
Repayments of long-term debt: |
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|
|
|
|
|
|
|
|
|
Regularly scheduled loan payments |
|
| (225) |
|
| (10,784) |
|
| (11,009) |
|
Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) |
|
| 36 |
|
| (120) |
|
| (84) |
|
Balances as of May 31, 2017 |
| $ | 20,376 |
| $ | 104,338 |
| $ | 124,714 | (3) |
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As of May 31, 2017, the Company had approximately $102.0 million of long-term loans in the U.S., Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombia that require compliance with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of May 31, 2017, the Company was in compliance with all covenants or amended covenants.
As of August 31, 2016, the Company had approximately $76.0 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombia that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of August 31, 2016, the Company was in compliance with all covenants or amended covenants.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on its financial condition or consolidated financial statements.
Repurchase of Equity Securities and Reissuance of Treasury Shares
At the vesting dates for restricted stock awards to our employees, we repurchase a portion of the shares that have vested at the prior day's closing price per share, with the funds used to pay the employees' minimum statutory tax withholding requirements related to the vesting of restricted stock awards. We do not have a stock repurchase program.
Shares of common stock repurchased by us are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in our Consolidated Balance Sheets. We may reissue these treasury shares. When treasury shares are reissued, we use the first in/first out (“FIFO”) cost method for determining cost of the reissued shares. If the issuance price is higher than the cost, the excess of the issuance price over the cost is credited to additional paid-in capital (“APIC”). If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings.
At the vesting dates of restricted stock awards, the Company repurchases shares at the prior day’s closing price per share, with the funds used to pay the employees’ minimum statutory tax withholding requirements. The Company expects to continue this practice going forward.
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| Nine Months Ended | ||||
|
| May 31, |
| May 31, | ||
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| 2017 |
| 2016 | ||
Shares repurchased |
|
| 23,391 |
|
| 27,360 |
Cost of repurchase of shares (in thousands) |
| $ | 1,941 |
| $ | 2,017 |
50
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| Nine Months Ended | ||||
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| May 31, |
| May 31, | ||
|
| 2018 |
| 2017 | ||
Shares repurchased |
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| 22,519 |
|
| 23,391 |
Cost of repurchase of shares (in thousands) |
| $ | 1,916 |
| $ | 1,941 |
We have reissued treasury shares as part of our stock-based compensation programs. However, we did not reissue any treasury shares during the first nine months of fiscal years 20172018 and 2016.2017.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires that managementwe make estimates and judgments 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 revenue and expenses during the reporting period. Some of our accounting policies require management to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Management continues to review its accounting policies and evaluate its estimates, including those related to contingencies and litigation, income taxes, value added taxes, and long-lived assets.judgments. We base our estimatesthese on historical experience and on other assumptions that management believeswe believe to be reasonable underreasonable. Our critical accounting policies are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the present circumstances. Using differentfiscal year ended August 31, 2017. Except for the estimates coulddisclosed below, there have abeen no material impact on our financial condition and results of operations.
Contingencies and Litigation: In the ordinary course of business, we are periodically named as a defendant in various lawsuits, claims and pending actions and are exposed to tax risks (other than income tax). The principal risks that we insure against are workers’ compensation, general liability, vehicle liability, property damage, employment practices, errors and omissions, fiduciary liability and fidelity losses. If a potential loss arising from these lawsuits, claims, actions and non-income tax issues is probable and reasonably estimable, we record the estimated liability based on circumstances and assumptions existing at the time. The estimates affecting our litigation reserves can be affected by new claims filed after the balance sheet date with respect to events occurring priorchanges to the balance sheet date and developments in pending litigation that may affect the outcome of the litigation. While we believe the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of litigation and in evaluating the probable additional tax associated with various non-income tax filing positions. As such, we are unable to make a reasonable estimate of the sensitivity to change of estimates affecting our recorded liabilities. As additional information becomes available, we assess the potential liability and revise our estimates as appropriate.
Income Taxes: We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable incomecritical accounting policies previously disclosed in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. As of May 31, 2017, we evaluated our deferred tax assets and liabilities and determined that a valuation allowance was necessary for certain foreign deferred tax asset balances, primarily because of the existence of significant negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, indicating that certain net operating loss carry-forward periods are not sufficient to realize the related deferred tax assets.Annual Report.
We and our subsidiaries areapplied the provisions of ASC 805, Business Combinations, in accounting for the acquisition of Aeropost. It required to file federal and state income tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires us to interpretrecognize separately from goodwill the applicable tax lawsassets acquired and regulations in effect in such jurisdictions, which could affect the amount of tax we pay. In consultation with our tax advisors, we base our tax returns on interpretations that we believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal, state and foreign taxing authorities in the jurisdictions in which we or one of our subsidiaries file tax returns. As part of these reviews, a taxing authority may disagree with respect to the income tax positions we have taken (“uncertain tax positions”) and, therefore, require us or one of our subsidiaries to pay additional taxes.
We accrue an amount for our estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognizedliabilities assumed at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. There were no material changes in our uncertain income tax positions for the periods ended on May 31, 2017 and August 31, 2016. During the first quarter of fiscal year 2015, one of the Company’s subsidiaries received assessments claiming $2.6 million of taxes, penalties and interest related to withholding taxes on certain charges for services rendered by the Company. In addition, this subsidiary received assessments totaling $5.2 million for lack of deductibility of the underlying service charges due to the lack of withholding. Based on the Company's interpretation of local law, rulings and jurisprudence (including Supreme Court precedents with respect to the deductibility assessment), the Company expects to prevail in both instances and has not recorded a provision for these assessments.
acquisition date fair values.
5154
We have not provided for U.S. deferred taxes on cumulative non-U.S. undistributed earningsGoodwill as we deem such earnings to be indefinitely reinvested. It is not practicable to determine the U.S. federal income tax liability that would be associated with the repatriation earnings because of the complexityacquisition date is measured as the excess of consideration transferred over the net of the computation.
Tax Receivables: We pay Value Added Tax (“VAT”) or similar taxes (“input VAT”), income taxes, and other taxes within the normal course of our business in mostacquisition date fair values of the countries in whichassets acquired and the liabilities assumed. While we operate relatedused our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the procurement of merchandise and/or services we acquires and/or on salesacquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and taxable income. We also collect VAT or similar taxes on behalf of the government (“output VAT”) for merchandise and/or services we sell. If the output VAT exceeds the input VAT, then the difference is remittedsubject 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 we operate, the governments have implemented additional collection procedures, such as requiring credit and debit card processors to remit a portion of sales processed via credit and debit 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 us with a net VAT receivable, forcing us 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. We either request a refund of these tax receivables or apply 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 we operate, the tax refund process is defined and structured with regular refunds or offsets. However, as of May 31, 2017, in two countries there is either not a clearly defined process or the governments have alleged there is not a clearly defined process to allow the authorities to refund VAT receivables. As of August 31, 2016, there were three countries that lacked a clearly defined process; however, during the third quarter of 2017, one of these countries clarified the refund mechanism, which we are currently pursuing. We, together with our tax and legal advisers, are currently seeking these clarifications in court in the two countries without a clearly defined process and expect to prevail. The balance of the VAT receivable in the two countries with undefined refund mechanisms was $3.0 million and $1.6 million as of May 31, 2017 and August 31, 2016, 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 us to pay taxes based on a percentage of sales rather than income.refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we are making income tax payments substantially in excessmay record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of those we would expectthe measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to pay based on taxable income. The current rules (which we have challenged in court) do not clearly allow usour consolidated statements of operations.
Accounting for a business combination required our management to obtain a refund or offset this excess income tax against other taxes. Asmake significant estimates and assumptions, especially at the acquisition date, including our estimates of May 31, 2017, the Company had deferred taxvalue of intangible assets, of approximately $2.0 million in this country. Also, the Company had an income tax receivable balance of $3.9 million as of May 31, 2017 related to excess payments from fiscal year 2015 to 2017. We have not placedcontractual obligations assumed, pre-acquisition contingencies and any type of allowance on the recoverability of these tax receivables or deferred tax assets becausecontingent consideration, where applicable. Although we believe that it is more likely than not thatthe assumptions and estimates we will ultimately succeedhave made for the acquisition of Aeropost are reasonable and appropriate, they are based in our refund requests, related appeals and/or court challengepart on this matter.historical experience and information obtained from the management of the acquired company and are inherently uncertain.
Our policy for classification and presentationExamples of VAT receivables, income tax receivables and other tax receivables is as follows:critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to:
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Long-lived Assets: We periodically evaluate our long-lived assets for indicators of impairment. Some of the key indicators that an asset may be impaired are:
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Management's judgments are based on marketUnanticipated events and operational conditionscircumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
We may identify certain pre-acquisition contingencies as of the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we should include these contingencies as a part of the fair value estimates of assets acquired and liabilities assumed and, if so, determine their estimated amounts.
If we cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, which is generally the case given the nature of such matters, we will recognize an asset or a liability for such pre-acquisition contingency if: (1) it is probable that an asset existed or a liability had been incurred at the timeacquisition date and (2) the amount of the evaluation andasset or liability can include management's best estimate of future business activity, whichbe reasonably estimated.
Subsequent to the measurement period, changes in turn drivesour estimates of future cash flows from these assets. These periodic evaluationssuch contingencies will affect earnings and could cause management to conclude that impairment factors exist, requiring an adjustmenthave a material effect on our results of these assets to their then-current fair market value. Loss/(gain) on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance.
52
Table of Contentsfinancial position.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.
Seasonality
Historically, our merchandising businesses have experienced holiday retail seasonality in their markets. In addition to seasonal fluctuations, our operating results fluctuate quarter-to-quarter as a result of economic and political events in markets that we serve, the timing of holidays, weather, the timing of shipments, product mix and currency effects on the cost of U.S.-sourced products which may make these products more or less expensive in local currencies and therefore more or less affordable. Because of such fluctuations, the results of operations of any quarter are not indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, there can be no assurance that our future results will be consistent with past results or the projections of securities analysts.
55
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates and changes in currency exchange rates. There have been no material changes in our market risk factors at May 31, 20172018 compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016.2017. The gross fair value of our derivative financial instruments designated as cash flow hedges has increased by $369,000$1.7 million since August 31, 2016,2017, primarily due to the addition of anfluctuations in interest rate swap related to a $35.7 million loan entered by the Company,rates, fluctuations in exchange rates for the currencies that are being hedged and changes in the scheduled maturities of the underlying instruments during the nine months ended May 31, 2017.2018. Movements in currency exchange rates and the related impact on the translation of the balance sheets of the Company's subsidiaries whose functional currency is not the U.S. dollar were the primary cause of the $4.7 million net loss$126,000 gain for the nine months ended May 31, 20172018 in the foreign currency translation adjustments category of accumulated other comprehensive income (loss).
In addition, the Company's subsidiaries whose functional currency is not the U.S. dollar carry monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) which 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 currency gain (loss) within Other income (expense) in the consolidated statements of income.
The following table summarizes the amounts recorded for the three and nine month periods endingmonths ended May 31, 20172018 and 20162017 (in thousands):
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| May 31, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Currency gain (loss) |
| $ | 1,101 |
| $ | (222) |
| $ | 1,088 |
| $ | (1,018) |
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||
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| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Currency gain (loss) |
| $ | (575) |
| $ | 1,101 |
| $ | (87) |
| $ | 1,088 |
From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through warehousemerchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. In the second half of fiscal year 2016 and continuing into fiscal year 2017, we are experiencing this situation in Trinidad (“TT”). We are limited in our ability to convert TT dollars that we generate through sales of merchandise into U.S. dollars to settle U.S. dollar liabilities,products, increasing our foreign exchange exposure to any devaluation of the TT dollar. The June 2016 International Monetary Fund Country Report for Trinidad and Tobago suggests that the TT dollar could be overvalued, in the range of 20%-50% comparedlocal currency relative to the U.S. dollar. Until such time thatDuring fiscal year 2017 and continuing into the uncertain statefirst nine months of tradable currencyfiscal year 2018, we experienced this situation in Trinidad. We are working with our banks in Trinidad to source tradeable currencies (including Euros and Canadian dollars), but until the central bank in Trinidad makes more U.S. dollars available, this illiquidity condition is resolved,likely to continue. During part of the first half of fiscal year 2017, we plan to take steps to limit our exposure. We have reduced newlimited shipments of merchandise to Trinidad from our distribution center in Miami to levels that generally alignaligned with our Trinidad subsidiary’s ability to source U.S. dollars to pay for the merchandisethat merchandise. This resulted in U.S. dollars. Thisa reduced level of shipments, had some negative affect onwhich negatively affected sales in the secondthird quarter, particularly December 2016, although by less than our initial estimate of $8.0 million to $12.0 million.estimate. These actions did not impact the level of merchandise we obtain locally in Trinidad. Most recentlyStarting in the third quarter of fiscal year 2017, we have beenwere able to improve our sourcing of tradeable currencies, which, hasin addition to other steps we took, allowed for a more normalized flow of imported merchandise during the third and fourth fiscal quarter. However,quarters. Over the illiquidity situation remains in that market andpast nine months, however, we have not been ableunable to fully addresssource a sufficient level of tradeable currencies in Trinidad to support the level of dollar-denominated liabilities. Going forward,merchandise we could again find ourselves inwere importing. As of May 31, 2018, our Trinidad subsidiary had net U.S. dollar denominated liability exposures of approximately $6.3 million, an increase of $10.3 million from August 31, 2017 when our Trinidad subsidiary had a net U.S. dollar denominated asset position that requiresof approximately $4.0 million. We are carefully monitoring the situation, which may require us to limit future shipments from the U.S. to Trinidad in line with our ability to exchange TTTrinidad dollars for tradeable currencies or to reducemanage our exposure to aany potential devaluation. This may result in our Trinidad subsidiary running out of certain merchandise, from time to time during the remainder of the year, which could negatively impact sales in Trinidad. As of May 31, 2017, we have net U.S. dollar denominated liabilities of approximately $3.0 million that would be exposed to a potential devaluation of Trinidad dollars. If for example, a hypothetical 20% devaluation of the TT currency occurred, the net effect on other expense would be approximately $600,000.
5356
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decision regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have investments in certain unconsolidated entities. Because we do not control or manage those entities, our control procedures with respect to those entities were substantially more limited than those we maintain with respect to our consolidated subsidiaries.
As required by SEC Rules 13a-15(e) or 15d-15(e), we carried out an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
In the ordinary course of business, we review our system of internal control over financial reporting and make changes to our systems and processes to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, and automating manual processes.processes and business acquisitions. In March 2018, we acquired Aeropost and are in the process of integrating the systems, processes and internal controls. We expect the integration to be sufficiently completed by the end of our second quarter of fiscal year 2019. We will continue to review our internal control practices for the combined company in consideration of future integration and post-merger activities. There hashave been no changechanges 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 hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibit 31.1 and 31.2 to this report.
5457
None.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2016. There2017. We further supplement the risk factor in such Form 10-K under the heading “Our financial performance is dependent on international operations, which exposes us to various risks” to reflect that anti-government protests in Nicaragua have been noled to deadly clashes and a 24-hour nationwide strike. We elected to reduce the hours of our Nicaragua warehouse club during May and June 2018 and to close it during strikes in order to insure the safety of our employees and members. Further strikes or other continued political turmoil could require further warehouse club closures, disrupt our supply chain and have a material changesadverse effect on our operations in Nicaragua. Additionally, we further supplement the risk factors in such Form 10-K by adding the following additional risk factor related business acquisitions:
Acquisitions may expose us to additional risks.
From time to time, we may consider acquisition and strategic investment opportunities. On March 15, 2018, we acquired Aeropost, Inc., a cross-border logistics and e-commerce provider with presence throughout Latin America and the Caribbean. Acquisitions involve risks: we may overpay for a business or fail to realize the synergies and other benefits we expect from the acquisition; we may experience difficulty in integrating new employees, business systems, and technology; we may be unable to retain key personnel; future developments may impair the value of our purchased goodwill or intangible assets; or we may encounter unforeseen accounting, internal control, regulatory or compliance issues.
No other material change in the Company's risk factors from those disclosedRisk Factors discussed in Part I, Item 1A of the Company's Annual Report on Form 10-K, for the fiscal year ended August 31, 2016.as supplemented by this Form 10-Q, has occurred.
Available Information
The PriceSmart, Inc. website or internet address is www.pricesmart.com. On this website the Company makes available, free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, and the annual report to the security holders, as soon as reasonably practicable after electronically filing such material with or furnishing it to the U.S. Securities and Exchange Commission (SEC). The Company’s SEC reports can be accessed through the investor relations section of its website under “SEC Filings.” All of the Company’s filings with the SEC may also be obtained at the SEC’s Public Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549. For information regarding the operation of the SEC’s Public Reference Room, please contact the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company made available its annual report on Form 10-K and its annual Proxy Statement for the fiscal year 2016 at the internet address http://materials.proxyvote.com/741511.
58
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) Purchase of Equity Securities by the Issuer and Affiliated Purchasers.
Upon vesting of restricted stock awarded by the Company to employees, the Company repurchases shares and withholds the amount of the repurchase payment to cover employees’ tax withholding obligations. As set forth in the table below, during the quarter ended May 31, 2017,2018, the Company repurchased a total of 7711,006 shares in the indicated months. These were the only repurchases of equity securities made by the Company during the third quarter of fiscal year 2017.2018. The Company does not have a stock repurchase program.
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| (d) | ||||
March 1, 2017 - March 31, 2017 |
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| 771 |
| $ | 91.30 |
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| N/A |
April 1, 2017 - April 30 2017 |
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| — |
| $ | — |
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| — |
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May 1, 2017 - May 31, 2017 |
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| $ | — |
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Total |
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| 771 |
| $ | 91.30 |
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March 1, 2018 - March 31, 2018 |
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| 1,006 |
| $ | 82.50 |
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April 1, 2018 - April 30, 2018 |
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| — |
| $ | — |
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| — |
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| N/A |
May 1, 2018 - May 31, 2018 |
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| — |
| $ | — |
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| — |
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| N/A |
Total |
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| 1,006 |
| $ | 82.50 |
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| — |
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55
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
(a)None.
(b)None.
5659
(a) Exhibits:
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** | Indicates management contract or compensatory plan or arrangement. |
| These certifications are being furnished solely to accompany this Report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of PriceSmart, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
(1) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1997 filed with the Commission on November 26, 1997. |
(2) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 filed with the Commission on April 14, 2004. |
(3) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2004 filed with the Commission on November 24, 2004. |
(4) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on April 6, 2018. |
5760
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.
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| PRICESMART, INC. | |
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Date: | July 5, |
| By: | /s/ JOSE LUIS LAPARTE |
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| Jose Luis Laparte |
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| Director, Chief Executive Officer and President |
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| (Principal Executive Officer) |
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Date: | July 5, |
| By: | /s/ |
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| Executive Vice President and Chief Financial Officer |
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| (Principal Financial Officer and Principal Accounting Officer) |
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5861