PSMT-10Q Q3 FY2017

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q





 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended May 31, 2017 

OR





 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from                to 



COMMISSION FILE NUMBER 0-22793

PriceSmart, Inc.

(Exact name of registrant as specified in its charter)



 

 

Delaware

 

33-0628530

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)



9740 Scranton Road, San Diego, CA 92121

(Address of principal executive offices)



(858) 404-8800

(Registrant’s telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.





 

Yes  

No  





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).





 

Yes  

No  





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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):







 

 

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).







 

Yes  

No  



The registrant had 30,397,540 shares of its common stock, par value $0.0001 per share, outstanding at June 30, 2017.

 



 

 


 

 

PRICESMART, INC.



INDEX TO FORM 10-Q





 

 



 

Page

PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

1



CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2017  (UNAUDITED) AND AUGUST 31, 2016

2



CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2017 AND 2016 - UNAUDITED

4



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2017 AND 2016 - UNAUDITED

5



CONSOLIDATED STATEMENTS OF EQUITY FOR THE NINE MONTHS ENDED MAY 31, 2017 AND 2016 - UNAUDITED

6



CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MAY 31, 2017 AND 2016 - UNAUDITED

7



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

8

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

29

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

53

ITEM 4.

CONTROLS AND PROCEDURES

54

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

55

ITEM 1A.

RISK FACTORS

55

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

55

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

56

ITEM 4.

MINE SAFETY DISCLOSURES

56

ITEM 5.

OTHER INFORMATION

56

ITEM 6.

EXHIBITS

57

 



 

i


 

Table of Contents

PART I—FINANCIAL INFORMATION



ITEM 1.  FINANCIAL STATEMENTS



PriceSmart, Inc.’s (“PriceSmart,” “we or the “Company”) unaudited consolidated balance sheet as of May 31, 2017 and the consolidated balance sheet as of August 31, 2016, the unaudited consolidated statements of income for the three and nine months ended May 31, 2017 and 2016, the unaudited consolidated statements of comprehensive income for the three and nine months ended May 31, 2017 and 2016, the unaudited consolidated statements of equity for the nine months ended May 31, 2017 and 2016, and the unaudited consolidated statements of cash flows for the nine months ended May 31, 2017 and 2016, are included hereinAlso included herein are the notes to the unaudited consolidated financial statements.

 

1


 

Table of Contents

PRICESMART, INC.

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)







 

 

 

 

 

 



 

 

 

 

 

 



 

May 31,

 

 

 



 

2017

 

August 31,



 

(Unaudited)

 

2016

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

192,106 

 

$

199,522 

Short-term restricted cash

 

 

816 

 

 

518 

Receivables, net of allowance for doubtful accounts of $7 as of May 31, 2017 and August 31, 2016, respectively

 

 

6,591 

 

 

7,464 

Merchandise inventories

 

 

279,417 

 

 

282,907 

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)

 

 

21,805 

 

 

22,143 

Total current assets

 

 

500,735 

 

 

512,554 

Long-term restricted cash

 

 

2,765 

 

 

2,676 

Property and equipment, net

 

 

533,157 

 

 

473,045 

Goodwill

 

 

35,632 

 

 

35,637 

Deferred tax assets

 

 

13,893 

 

 

12,258 

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)

 

 

46,928 

 

 

49,798 

Investment in unconsolidated affiliates

 

 

10,766 

 

 

10,767 

Total Assets

 

$

1,143,876 

 

$

1,096,735 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Short-term borrowings

 

$

 —

 

$

16,534 

Accounts payable

 

 

233,226 

 

 

267,173 

Accrued salaries and benefits

 

 

20,664 

 

 

19,606 

Deferred membership income

 

 

22,346 

 

 

20,920 

Income taxes payable

 

 

5,257 

 

 

4,226 

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 

Dividends payable

 

 

10,643 

 

 

 —

Long-term debt, current portion

 

 

20,376 

 

 

14,565 

Total current liabilities

 

 

333,300 

 

 

367,904 

Deferred tax liability

 

 

1,472 

 

 

1,760 

Long-term portion of deferred rent

 

 

8,890 

 

 

8,961 

Long-term income taxes payable, net of current portion

 

 

801 

 

 

970 

Long-term debt, net of current portion

 

 

104,338 

 

 

73,542 

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)

 

 

5,688 

 

 

5,527 

Total Liabilities

 

 

454,489 

 

 

458,664 



2


 

Table of Contents





 

 

 

 

 

 



 

 

 

 

 

 

Equity:

 

 

 

 

 

 

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

 

 

 

 

Additional paid-in capital

 

 

420,130 

 

 

412,369 

Tax benefit from stock-based compensation

 

 

11,552 

 

 

11,321 

Accumulated other comprehensive loss

 

 

(108,258)

 

 

(103,951)

Retained earnings

 

 

400,702 

 

 

351,060 

Less: treasury stock at cost, 860,513 shares and 836,351 shares as of May 31, 2017 and August 31, 2016, respectively

 

 

(34,742)

 

 

(32,731)

Total Equity

 

 

689,387 

 

 

638,071 

Total Liabilities and Equity

 

$

1,143,876 

 

$

1,096,735 



See accompanying notes.

3


 

Table of Contents

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

May 31,

 

May 31,

 

May 31,

 

May 31,



 

2017

 

2016

 

2017

 

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Net warehouse club sales

 

$

710,699 

 

$

684,547 

 

$

2,199,051 

 

$

2,134,365 

Export sales

 

 

6,475 

 

 

7,091 

 

 

25,381 

 

 

21,872 

Membership income

 

 

12,038 

 

 

11,475 

 

 

35,581 

 

 

34,226 

Other income

 

 

1,046 

 

 

1,149 

 

 

3,113 

 

 

3,661 

Total revenues

 

 

730,258 

 

 

704,262 

 

 

2,263,126 

 

 

2,194,124 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

Net warehouse club

 

 

611,455 

 

 

590,500 

 

 

1,879,747 

 

 

1,832,183 

Export

 

 

6,143 

 

 

6,742 

 

 

24,085 

 

 

20,799 

Selling, general and administrative:

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse club operations

 

 

67,754 

 

 

62,745 

 

 

200,964 

 

 

188,348 

General and administrative

 

 

16,907 

 

 

16,439 

 

 

51,921 

 

 

48,086 

Pre-opening expenses

 

 

 

 

13 

 

 

(104)

 

 

389 

Loss/(gain) on disposal of assets

 

 

364 

 

 

334 

 

 

1,106 

 

 

399 

Total operating expenses

 

 

702,632 

 

 

676,773 

 

 

2,157,719 

 

 

2,090,204 

Operating income

 

 

27,626 

 

 

27,489 

 

 

105,407 

 

 

103,920 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

392 

 

 

322 

 

 

1,443 

 

 

780 

Interest expense

 

 

(1,828)

 

 

(1,571)

 

 

(5,126)

 

 

(4,480)

Other income (expense), net

 

 

1,101 

 

 

(222)

 

 

1,088 

 

 

(1,018)

Total other income (expense)

 

 

(335)

 

 

(1,471)

 

 

(2,595)

 

 

(4,718)

Income before provision for income taxes and
income (loss) of unconsolidated affiliates

 

 

27,291 

 

 

26,018 

 

 

102,812 

 

 

99,202 

Provision for income taxes

 

 

(8,459)

 

 

(9,168)

 

 

(31,885)

 

 

(33,113)

Income (loss) of unconsolidated affiliates

 

 

 

 

(13)

 

 

(1)

 

 

362 

Net income

 

 

18,838 

 

$

16,837 

 

$

70,926 

 

 

66,451 

Net income per share available for distribution:

 

 

 

 

 

 

 

 

 

 

 

 

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 

Shares used in per share computations:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

30,043 

 

 

29,951 

 

 

30,010 

 

 

29,918 

Diluted

 

 

30,045 

 

 

29,955 

 

 

30,014 

 

 

29,923 

Dividends per share

 

$

 —

 

$

 —

 

$

0.70 

 

$

0.70 



See accompanying notes.

4


 

Table of Contents

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED—AMOUNTS IN THOUSANDS)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

May 31,

 

May 31,

 

May 31,

 

May 31,



 

2017

 

2016

 

2017

 

2016

Net income

 

$

18,838 

 

$

16,837 

 

$

70,926 

 

$

66,451 

Other Comprehensive Income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (1)

 

$

(3,074)

 

$

6,509 

 

$

(4,700)

 

$

(4,383)

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost and actuarial gains included in net periodic pensions cost

 

 

43 

 

 

(6)

 

 

29 

 

 

(14)

Total defined benefit pension plan

 

 

43 

 

 

(6)

 

 

29 

 

 

(14)

Derivative instruments: (2)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains/(losses) on change in
fair value of interest rate swaps

 

 

(416)

 

 

(191)

 

 

364 

 

 

(522)

Total derivative instruments

 

 

(416)

 

 

(191)

 

 

364 

 

 

(522)

Other comprehensive income (loss)

 

 

(3,447)

 

 

6,312 

 

 

(4,307)

 

 

(4,919)

Comprehensive income

 

$

15,391 

 

$

23,149 

 

$

66,619 

 

$

61,532 



(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


 

Table of Contents

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED—AMOUNTS IN THOUSANDS)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Tax Benefit

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Additional

 

From

 

Other

 

 

 

 

 

 

 

 

 

 

 



 

Common Stock

 

Paid-in

 

Stock Based

 

Comprehensive

 

Retained

 

Treasury Stock

 

Total



 

Shares

 

Amount

 

Capital

 

Compensation

 

Income(Loss)

 

Earnings

 

Shares

 

Amount

 

Equity

Balance at August 31, 2015

 

30,978 

 

$

 

$

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

 

 

 

 —

 

 

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 

 

$

 

$

409,979 

 

$

11,290 

 

$

(106,431)

 

$

328,804 

 

820 

 

$

(31,414)

 

$

612,231 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at August 31, 2016

 

31,238 

 

$

 

$

412,369 

 

$

11,321 

 

$

(103,951)

 

$

351,060 

 

836 

 

$

(32,731)

 

$

638,071 

Purchase of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

25 

 

 

(2,011)

 

 

(2,011)

Issuance of restricted stock award

 

48 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Forfeiture of restricted stock awards

 

(35)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Exercise of stock options

 

 

 

 —

 

 

433 

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

433 

Stock-based compensation

 

 —

 

 

 —

 

 

7,328 

 

 

231 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,559 

Dividend paid to stockholders

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,641)

 

 —

 

 

 —

 

 

(10,641)

Dividend payable to stockholders

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,643)

 

 —

 

 

 —

 

 

(10,643)

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

70,926 

 

 —

 

 

 —

 

 

70,926 

Other comprehensive income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,307)

 

 

 —

 

 —

 

 

 —

 

 

(4,307)

Balance at May 31, 2017

 

31,259 

 

$

 

$

420,130 

 

$

11,552 

 

$

(108,258)

 

$

400,702 

 

861 

 

$

(34,742)

 

$

689,387 



See accompanying notes.

6


 

Table of Contents

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED—AMOUNTS IN THOUSANDS)







 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended



 

May 31,

 

May 31,



 

2017

 

2016

Operating Activities:

 

 

 

 

 

 

Net income

 

$

70,926 

 

$

66,451 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

34,445 

 

 

29,003 

(Gain)/loss on sale of property and equipment

 

 

1,106 

 

 

399 

Deferred income taxes

 

 

3,143 

 

 

(1,222)

Excess tax benefit on stock-based compensation

 

 

(231)

 

 

(579)

Equity in (gains) losses of unconsolidated affiliates

 

 

 

 

(362)

Stock-based compensation

 

 

7,328 

 

 

6,731 

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)

Merchandise inventories

 

 

3,490 

 

 

13,397 

Accounts payable

 

 

(32,825)

 

 

631 

Net cash provided by (used in) operating activities

 

 

86,279 

 

 

112,168 

Investing Activities:

 

 

 

 

 

 

Additions to property and equipment

 

 

(99,541)

 

 

(51,462)

Deposits for land purchase option agreements

 

 

(300)

 

 

(442)

Proceeds from disposal of property and equipment

 

 

335 

 

 

96 

Investment in joint ventures

 

 

 —

 

 

(119)

Net cash provided by (used in) investing activities

 

 

(99,506)

 

 

(51,927)

Financing Activities:

 

 

 

 

 

 

Proceeds from long-term bank borrowings

 

 

47,700 

 

 

7,370 

Repayment of long-term bank borrowings

 

 

(11,009)

 

 

(10,191)

Proceeds from short-term bank borrowings

 

 

678 

 

 

18,829 

Repayment of short-term bank borrowings

 

 

(17,179)

 

 

(15,214)

Cash dividend payments

 

 

(10,641)

 

 

(10,629)

Excess tax benefit on stock-based compensation

 

 

231 

 

 

579 

Purchase of treasury stock

 

 

(2,011)

 

 

(2,017)

Proceeds from exercise of stock options

 

 

433 

 

 

80 

Net cash provided by (used in) financing activities

 

 

8,202 

 

 

(11,193)

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 



 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Dividends declared but not paid

 

$

10,643 

 

$

10,629 



See accompanying notes.



 

7


 

Table of Contents

PRICESMART, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

May 31, 2017

 

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, the Company had 39 consolidated warehouse clubs in operation in 12 countries and one U.S. territory (seven in Colombia; six in Costa Rica; five in Panama; four in Trinidad; three each in Guatemala, Honduras and the Dominican Republic;  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 which 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 PriceSmart warehouse clubs operating in Costa Rica to seven. The Company continues to explore other potential sites for future warehouse clubs in Central America, the Caribbean and Colombia.



Basis of Presentation - The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC).  These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2016 (the “2016 Form 10-K”).  The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries.  Inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation.



The Company has evaluated subsequent events through the date and time these financial statements were issued.

8


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 





NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Principles of Consolidation – The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s wholly owned subsidiaries and the Company's investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method.  All significant inter-company accounts and transactions have been eliminated in consolidation.  The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations, and cash flows for the periods presented.  The results for interim periods are not necessarily indicative of the results for the full year.  As of May 31, 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:







 

 

 

 

 

 

 



 

 

 

 

 

 

 

Real Estate Development Joint Ventures

 

Countries

 

Ownership

 

Basis of
Presentation

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.



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.



Due to the initial nature of the joint ventures and the continued commitments for additional financing, the Company determined these joint ventures are VIEs.  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.



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.

 

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

9


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

there is not a clearly defined process to allow the authorities to refund VAT receivables. As of August 31, 2016, there were three countries without a clearly defined process; however, during the third quarter of 2017, one of these countries clarified the refund mechanism, which the Company is currently pursuing. The Company, together with its tax and legal advisers, is currently seeking these clarifications in court in the two countries without a clearly defined process and expects to prevail.  The balance of the VAT receivables 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 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) do not clearly allow the Company to obtain a refund or to offset this excess income tax against other taxes.  As of May 31, 2017, the Company had deferred tax 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 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 this matter.



The Company's policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:



·

Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where the Company's subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year.  The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year.



·

Long-term VAT and Income tax receivables, recorded as Other non-current assets:  This classification is used for amounts not approved for refund or credit in countries where the Company's subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes.  An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery. The 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):







 

 

 

 

 

 



 

 

 

 

 

 



 

May 31,

 

August 31,



 

2017

 

2016

Prepaid expenses and other current assets

 

$

1,426 

 

$

1,635 

Other non-current assets

 

 

29,041 

 

 

32,502 

Total amount of VAT receivables reported

 

$

30,467 

 

$

34,137 



The following table summarizes the Income tax receivables reported by the Company (in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

May 31,

 

August 31,



 

2017

 

2016

Prepaid expenses and other current assets

 

$

5,958 

 

$

6,402 

Other non-current assets

 

 

10,026 

 

 

10,376 

Total amount of Income tax receivables reported

 

$

15,984 

 

$

16,778 



Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or market.  The Company provides for estimated inventory losses and obsolescence between physical inventory counts on the basis of a percentage of sales.  The provision is adjusted periodically to reflect the trend of actual physical inventory count results, with physical inventories occurring primarily in the second and fourth fiscal quarters.  In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.



Stock Based Compensation  The Company offers three types of equity awards: stock options (“options”), restricted stock awards (“RSAs”) and restricted stock units (“RSUs”).  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.  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

10


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

over the life 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 capital 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, 2017 is approximately $282,000.  Exit costs of approximately $751,000 were recorded to warehouse expenses for the three 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 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 2016 Form 10-K.



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

11


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 value of the derivative, calculated as the net present value of the future cash flows, is deferred on the consolidated balance sheets in accumulated other comprehensive loss.  If any portion of an interest rate swap is determined to be an ineffective hedge, the gains or losses from changes in fair value would be recorded directly in the consolidated statements of income.  Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings.  See Note 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, 2017 and August 31, 2016.



Fair Value Instruments.  The Company is exposed to foreign-currency exchange rate fluctuations in the normal course of business.  This includes exposure to foreign-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-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, 2017 and August 31, 2016.

 

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.



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.



12


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes the amounts recorded for the three and nine months ended May 31, 2017 and 2016 (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

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 Adopted



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 for 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 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 adoption of this ASU will impact 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


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 adoption of this guidance may have 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


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



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 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 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 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 under the two-class method and including all potential common shares assumed issued in the calculation of diluted net income per share under the treasury stock method.



15


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table sets forth the computation of net income per share for the three and nine months ended May 31, 2017 and 2016 (in thousands, except per share amounts):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

May 31,

 

May 31,

 

May 31,

 

May 31,



 

2017

 

2016

 

2017

 

2016

Net income

 

$

18,838 

 

$

16,837 

 

$

70,926 

 

$

66,451 

Less: Allocation of income to unvested stockholders

 

 

(272)

 

 

(288)

 

 

(1,034)

 

 

(1,041)

Net earnings available to common stockholders

 

$

18,566 

 

$

16,549 

 

$

69,892 

 

$

65,410 

Basic weighted average shares outstanding

 

 

30,043 

 

 

29,951 

 

 

30,010 

 

 

29,918 

Add dilutive effect of stock options (two-class method)

 

 

 

 

 

 

 

 

Diluted average shares outstanding

 

 

30,045 

 

 

29,955 

 

 

30,014 

 

 

29,923 

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 

 

NOTE 4 – STOCKHOLDERS’ EQUITY



Dividends



The following table summarizes the dividends declared and paid during fiscal years 2017 and 2016 (amounts are per share).







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

First Payment

 

Second Payment

Declared

 

Amount

 

Record
Date

 

Date
Paid

 

Date
Payable

 

Amount

 

Record
Date

 

Date
Paid

 

Date
Payable

 

Amount

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 

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 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):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Nine Months Ended May 31, 2017



 

Foreign
currency
translation
adjustments

 

Defined
benefit
pension
plans

 

Derivative
Instruments

 

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)

 



16


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Nine Months Ended May 31, 2016



 

Foreign
currency
translation
adjustments

 

Defined
benefit
pension
plans

 

Derivative
Instruments

 

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)

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Twelve Months Ended August 31, 2016



 

Foreign
currency
translation
adjustments

 

Defined
benefit
pension
plans

 

Derivative
Instruments

 

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)



(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 

 

 

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.



17


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 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, the Company reassesses these probabilities and records any changes in the consolidated financial statements as appropriate.  There were no material changes in the Company's uncertain income tax positions as of May 31, 2017 and August 31, 2016.



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, 2017 and August 31, 2016, the Company has recorded within other accrued expenses a total of $3.5 million and $4.0 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.



During the first quarter of fiscal year 2015, the Company received provisional tax assessments with respect to deductibility and withholdings. One of the Company’s subsidiaries received provisional 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 provisional assessments totaling $5.2 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, in another country where the Company operates, 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) do not clearly allow the Company to obtain a refund or offset this excess income tax against other taxes.  As of May 31, 2017, the Company had deferred tax 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 years 2015, 2016 and 2017.  The Company has not placed any type of allowance on the recoverability of these tax receivables or deferred income taxes, because the Company believes that it is more likely than not that it will succeed in its appeal on this matter.



The Company has not provided for U.S. deferred taxes on cumulative non-U.S. undistributed earnings as such earnings are deemed by 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. 





18


 

Table of Contents

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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):