PriceSmart
Annual Report 2018

Plain-text annual report

B u s i n e s s M e m b e r Diamond Member 2018 Annual Repor t December 20, 2018 Dear PriceSmart Stockholders, For the fiscal year ended August 31, 2018, our Company recorded total revenues of $3.2 billion, a 5.7% increase compared to the prior year of $3.0 billion. Earnings per share for fiscal year 2018 were $2.44 per share compared to $2.98 per share a year earlier. Our fiscal year ending balance sheet included $93.5 million in cash and cash equivalents, a 0.14:1 debt to equity ratio and a Company net worth attributable to the Company’s stockholders of $758.0 million. We currently have 41 PriceSmart warehouse clubs in operation, including our newest location which opened this past May in Santo Domingo, our fourth location in the Dominican Republic. We have also announced four new locations scheduled to open in calendar year 2019, one each in Guatemala and the Dominican Republic, and two in Panama. In September we opened our first regional distribution center, a 165,000 square foot warehouse located in Costa Rica. We recently announced that Jose Luis Laparte, PriceSmart’s former Chief Executive Officer, has resigned, by mutual agreement, after 14 years of dedicated service to our Company. He began working at PriceSmart at a time when we were facing many challenges. Within a relatively short time, Jose Luis put our Company on the road to many years of successful growth. On behalf of our Board of Directors and our stockholders, I extend thanks and best wishes to Jose Luis. We also announced that Sherry Bahrambeygui has been appointed by our Board of Directors as Interim Chief Executive Officer. Sherry is a member of our Board, serving on the Executive, Real Estate and Innovation Committees and, until recently, was the Chairperson of the Compensation Committee and the Nominating/Corporate Governance Committee. In my new capacity of Executive Chairman of PriceSmart’s Board of Directors, I am working closely with Sherry, applying my experience to assist her with her new responsibilities. Sherry is capably leading our Company through this transition. She has quickly assumed a leadership role which is allowing me to conduct a thoughtful search for a permanent CEO. Our search for a permanent CEO will include candidates from both within and outside of our Company. As we reflect on this past year’s results, we understand that there are both external and internal factors that have limited our sales and earnings in fiscal year 2018 and continue to impact our results in fiscal year 2019. The external factors include significant political unrest in Nicaragua where we have two PriceSmart locations, serious macro-economic problems in Costa Rica which is our largest market, weakness in the Colombian peso against the dollar, layoffs in the energy industry in Trinidad and the socio-political problems we all are aware of in El Salvador, Honduras and Guatemala. We recognize that PriceSmart countries are subject to political and economic ups and downs, although we normally do not have so many all at once. Rather than spending management’s time on external factors we can’t control, we view our work priorities with the long term in mind and focus on what we can control. We know that we have been slow to integrate online shopping into our business model. That is why we acquired Aeropost in 2018. We believe Aeropost has the technological and logistical capabilities, along with a skilled management team, to support PriceSmart’s goal of integrating online shopping within a traditional warehouse club business model. We are hopeful that online and mobile shopping and logistics will support PriceSmart’s growth by providing a wider selection of merchandise and services for our members and will also enable us to expand our business more rapidly. Along with the priority of online and mobile shopping, we are evolving our approach to logistics. Our regional distribution center in Costa Rica is unique in the history of our Company, serving as a distribution point for imported and regional products - dry and refrigerated - and serving as a fulfillment point for a variety of online products. We are hopeful that the Costa Rica regional distribution center will be the first of other similar facilities. We recognize not only the need but also the opportunities we have to improve the “basics” in our merchandising and operations. In merchandising, we have prioritized sourcing new and exciting products and are working to reduce out of stocks at our warehouse clubs. We also continue to identify ways to reduce expenses and improve efficiencies from our back offices to our warehouse club operations. Regarding expansion, we are pursuing a number of opportunities. We are in the planning phase to open two new format PriceSmart clubs, one in Santo Domingo in a high income, densely populated market, and the other in Santiago, Panama, a smaller more regional market. Both of these warehouse clubs will combine the traditional club format with online shopping and delivery. Opening dates for these locations are still being finalized, but we anticipate that both openings will take place during calendar 2019. We have placed a high priority on securing additional sites in Bogota. We are also exploring expansion into at least one additional country in South America. We also continue to look for opportunities to upgrade and expand our current locations. We recently completed expansion of our Jamaica PriceSmart club. In summary, we have a lot of work ahead of us to realize the opportunities that we are capable of achieving. We are determined to focus on the basic warehouse club values and practices, while integrating a solid online sales capability, improving logistics and accelerating expansion. Along with our commitment to delivering great value to our members and competitive wages and safe working conditions for our employees, we are strongly committed to the communities in which we do business. Our Company partners with Price Philanthropies, a private foundation founded by my father Sol Price, to support educational and social causes throughout the markets in which we do business. We are especially proud of Aprender y Crecer, an initiative that provides school supplies to 110,000 children in our Spanish speaking markets. I am extremely grateful to our nearly 9,000 employees for their hard work and dedication to our Company. Many of our employees have been with PriceSmart for 20 or more years. Their loyalty and commitment are essential to our success. On behalf of myself, Sherry Bahrambeygui and our Board of Directors, best wishes for a wonderful holiday season and a healthy and happy new year. Sincerely, Robert E. Price PRICESMART, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION August 31, 2018 Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of August 31, 2018 and 2017 Consolidated Statements of Income for each of the three years in the period ended August 31, 2018 Consolidated Statements of Comprehensive Income for each of the three years in the period ended August 31, 2018 Consolidated Statements of Equity for each of the three years in the period ended August 31, 2018 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 2018 Notes to Consolidated Financial Statements Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Additional Information Directors & Officers of PriceSmart, Inc. Page 1 3 31 32 34 35 36 37 F-39 81 83 84 i [THIS PAGE INTENTIONALLY LEFT BLANK] PRICESMART, INC. SELECTED FINANCIAL DATA The selected consolidated financial data presented below is derived from the Company's consolidated financial statements and accompanying notes. This selected financial data should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto included elsewhere in this report. 2018 (1)(2) Years Ended August 31, 2016 (in thousands, except income per common share) 2015 2017 2014 OPERATING RESULTS DATA: Net merchandise sales Export sales Membership income Other revenue and income Total revenues Total cost of goods sold Selling, general and administrative Pre-opening expenses Asset impairment Loss/(gain) on disposal of assets Operating income Total other income (expense) Income before provision for income taxes and income (loss) of unconsolidated affiliates Provision for income taxes Income (loss) of unconsolidated affiliates Net income Less: net income (loss) attributable to noncontrolling interest Net income attributable to PriceSmart, Inc. NET INCOME ATTRIBUTABLE TO PRICESMART, INC. PER SHARE AVAILABLE FOR DISTRIBUTION: Basic Diluted Weighted average common shares - basic Weighted average common shares - diluted $ 3,053,754 $ 2,910,062 $ 2,820,740 $ 2,721,132 $ 2,444,314 31,279 38,063 3,911 2,517,567 2,113,664 262,420 3,331 — 1,445 136,707 (2,458) 33,813 45,781 4,842 2,905,176 2,449,626 316,474 1,191 — 1,162 136,723 (5,483) 40,581 50,821 21,546 3,166,702 2,656,520 379,949 913 1,929 1,339 126,052 (3,464) 34,244 47,743 4,579 2,996,628 2,519,752 338,642 44 — 1,961 136,229 (3,486) 33,279 43,673 4,519 2,802,603 2,352,839 297,656 3,737 — 2,005 146,366 (9,770) 122,588 (48,177) (8) 74,403 $ 132,743 (42,018) (1) 90,724 $ 131,240 (42,849) 332 88,723 $ 136,596 (47,566) 94 89,124 $ 134,249 (41,372) 9 92,886 (75) 74,328 $ — 90,724 $ — 88,723 $ — 89,124 $ — 92,886 2.44 $ 2.44 $ 2.98 $ 2.98 $ 2.92 $ 2.92 $ 2.95 $ 2.95 $ 30,115 30,115 30,020 30,023 29,928 29,933 29,848 29,855 3.07 3.07 29,747 29,757 $ $ $ $ (1) U.S. Tax Reform in December 2017 resulted in a reduction in the tax rate from 35% to 21% and will have a beneficial impact on the Company on a go-forward basis. However, in fiscal year 2018, we incurred charges of $12.5 million due to a one time transitional tax on unremitted foreign earnings and of $222,000 to reduce the value of deferred tax assets due to the reduction in U.S. tax rates. (2) On March 15, 2018, the Company acquired Aeropost, Inc. During fiscal year 2018 the consolidated net income attributable to PriceSmart Inc. contained approximately $9.3 million in losses, net of tax benefits, associated with our Aeropost operations and Aeropost acquisition- related expense. 1 SELECTED FINANCIAL DATA- (Continued) 2018 2017 As of August 31, 2016 (in thousands) 93,460 $ 32,304 $ 3,454 $ 199,522 $ $ — $ $ $ 3,194 $ $ 1,216,392 $ 1,177,514 $ 1,096,735 $ 88,107 $ $ 162,434 $ — $ 3,278 $ 102,575 $ 106,297 $ 2015 2014 157,072 $ — $ 1,525 $ 991,224 $ 90,534 $ 137,098 — 29,366 937,338 91,439 $ $ 758,002 $ 21,240 $ 708,767 $ 21,285 $ 638,071 $ 21,274 $ 566,584 $ 21,126 $ 548,265 21,144 BALANCE SHEET DATA: Cash and cash equivalents Short-term investments Short-term and long-term restricted cash Total Assets Long-term debt Total PriceSmart stockholders’ equity attributable to PriceSmart, Inc. stockholders Dividends paid on common stock(1) (1) On January 24, 2018, February 1, 2017, February 3, 2016, February 4, 2015, and January 23, 2014 the Company declared cash dividends on its common stock. 2 Management's Discussion and Analysis of Financial Condition and Results of Operations This annual Report on Form 10-K contains forward-looking statements concerning PriceSmart, Inc.'s ("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 risks detailed in this Annual Report on Form 10-K under the heading “Part I - Item 1A - Risk Factors”. 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. The following discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes included therein. 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 August 31, 2018 is 100%, and they are presented on a consolidated basis. The number of warehouse clubs in operation as of August 31, 2018 for each country or territory are as follows: Number of Warehouse Clubs in Operation as of August 31, 2017 Number of Warehouse Clubs in Operation as of August 31, 2018 Anticipated Additional Warehouse Club Openings In Fiscal Year 2019 7 6 5 4 3 3 3 2 2 1 1 1 1 39 7 7 5 4 4 3 3 2 2 1 1 1 1 41 — — 1 (1) — 1 (1) — — — — — — — — 2 Anticipated Additional Warehouse Club Openings In Fiscal Year 2020 — — — — — 1 — — — — — — — 1 Country/Territory Colombia Costa Rica Panama Trinidad Dominican Republic Guatemala Honduras El Salvador Nicaragua Aruba Barbados U.S. Virgin Islands Jamaica Totals (1) Small format warehouse club. We opened a new warehouse club in Santa Ana, Costa Rica, in October 2017 (fiscal year 2018), bringing the total of warehouse clubs operating in Costa Rica to seven. In May 2018, we opened a new warehouse club in the Dominican Republic. This brought the number of PriceSmart warehouse clubs operating in 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, which is a smaller city three hours west of Panama City by car and, upon completion, will be the sixth warehouse club in Panama. In the Dominican Republic, the site is in the city of Santo Domingo, a major metropolitan area, 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. These smaller format warehouse clubs represent our first developments of these format stores intended to reach into additional geographic areas and provide more convenience for our members. 3 In September 2018 (fiscal year 2019), we acquired land in San Cristobal, Guatemala, upon which the Company plans to construct a standard format warehouse club. San Cristobal is expected to open in the fall of 2019. 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. Our corporate headquarters, U.S. buying operations and regional distribution centers are located primarily in the United States. Our operating segments are the United States, Central America, the Caribbean and Colombia. We also operate a cross-border logistics and e-commerce business through our 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 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 we have operated in a particular market; and the level of retail and wholesale competition in that market. Currency fluctuations can be one of the largest variables affecting our overall sales and profit performance, as we have experienced in prior fiscal years, because many of our markets are susceptible to foreign currency exchange rate volatility. During fiscal year 2018, approximately 77.0% of our net merchandise sales were in currencies other than the U.S. dollar. Of those sales 51.0% were comprised of sales of products we purchased in U.S. dollars. A devaluation of the local currency reduces the value of sales and membership income that is generated in that country when translated to U.S. dollars for our consolidated results, and we may elect to increase the local currency price of imported merchandise to maintain our target margins, which would impact demand for a significant portion of the Company’s merchandise offering. For example, changes in the value of the Colombian peso (“COP”) relative to the U.S. dollar negatively impacted sales and margins in that market during fiscal years 2015 and 2016. A stabilization of the currency during fiscal year 2017 contributed to improving business conditions in Colombia, resulting in sales growth and a return to operating profitability in our Colombia segment that has continued into fiscal year 2018. From time to time one or more markets in which we operate may experience economic downturns, which 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 two years. 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 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 island in September 2017 and October 2017, has rebounded due to the re-construction efforts and the difficulty other retailers are having in becoming fully operational. Our capture of total retail and wholesale sales can vary from market to market due to competition and the availability of other shopping options for 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 larger upper and middle class consumer populations. Political and other factors in each of our markets may have significant effects on our business. For example, in April 2018, protests against social reforms and violent clashes with national security forces significantly impeded normal economic activity in Nicaragua, and labor strikes in Costa Rica disrupted normal commerce in September 2018. Additionally, the need for increased tax revenue in certain countries can cause changes in tax policies affecting consumers’ personal tax rates, and/or added consumption taxes, such as VAT (value-added taxes) effectively raising the prices of various products. 4 In 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 merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products, increasing our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. During fiscal year 2017 and fiscal year 2018, we experienced this situation in Trinidad (“TT”). 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 likely to continue. During part of the first half of fiscal year 2017, we limited shipments of merchandise to Trinidad from our distribution center in Miami to levels that generally aligned with our Trinidad subsidiary’s ability to source U.S. dollars to pay for that merchandise. This resulted in a reduced level of shipments, which negatively affected sales in the second quarter of fiscal year 2017, particularly in December 2016, although by less than our initial estimate. These actions did not impact the level of merchandise we obtain locally in Trinidad. Starting in the third quarter of fiscal year 2017, we were able to improve our sourcing of tradeable currencies, which, in addition to other steps we took, allowed for a more normalized flow of imported merchandise during the third and fourth fiscal quarters. Over the past twelve months we have improved our sourcing and have been able to obtain a sufficient level of tradeable currencies in Trinidad consistent with the level of merchandise we are importing. However, this sourcing activity has increased our currency losses, and we have increased our product costs to cover these increased costs. As of August 31, 2018, our Trinidad subsidiary had net U.S. dollar denominated asset position of approximately $13.0 million, an increase of $9.0 million from August 31, 2017 when our Trinidad subsidiary had net U.S. dollar denominated asset position of 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 Trinidad dollars for tradeable currencies to manage our exposure to any potential devaluation. Business Strategy Our business strategy is to operate membership warehouse clubs in the Caribbean islands, Central America and Colombia with a limited selection of high volume products at the best possible prices. PriceSmart members pay an annual membership fee. That fee, combined with volume purchasing and operating efficiencies throughout the supply chain, enable us to operate our business with lower margins and prices than conventional retail stores and wholesale suppliers. We are in the process of expanding 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 initiatives. While our traditional membership warehouse club strategy continues to work well in our markets, we recognize that technology is having an increasingly profound impact on shopping habits throughout the world. We are broadening our business strategy to respond to changes in shopping habits so our members will 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 sales, our comparable net merchandise sales and our membership income. Our investments 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 can reduce reported comparable net merchandise sales due to the transfer of sales from existing warehouse clubs. Current and Future Management Actions 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 approximately 50% of our merchandise internationally, a significant portion of which we receive 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 distribution facility has increased our ability to efficiently receive, handle and distribute merchandise. The efficiency with which we 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 of merchandise to our warehouse clubs. As we continue to refine our logistics and distribution infrastructure, we are investing in regional distribution centers. This past year we entered into a long-term lease for a 165,000 square foot distribution center in Costa Rica. We began operation in this distribution center during the fall of 2018. 5 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 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 2017 we began evaluating options to replace our existing Enterprise Resource Planning (ERP) system. However, due to the rapidly evolving retail and technological landscape, as well as our recent acquisition of Aeropost, we have delayed this evaluation project. After evaluating more holistically our overall IT landscape and strategy, we will reconsider the need, timing, scope and approach to our ERP replacement project. On March 15, 2018, the Company acquired Aeropost, Inc. (“Aeropost”). The Aeropost business includes a freight forwarding business, known as the Casillero business, an online marketplace and technology capability. The freight forwarding business annually ships goods with a value of approximately $500.0 million into Aeropost’s markets. We expect Aeropost’s capabilities will provide new online shopping options and an opportunity to accelerate the development of an omni-channel shopping experience for our members. We intend for the omni-channel experience to include efficient and low-cost cross-border ordering and delivery services, a wider assortment of products and services available to purchase online, and home delivery for our members. The net cash consideration for Aeropost was approximately $23.9 million. Our total payment for the acquisition also included contingent consideration of $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 executives remaining employed with the Company for 15 months from the date of escrow closing. Because the escrow deposit 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 August 31, 2018, this amount has been reduced by expected indemnification claims and purchase price adjustments to approximately $3.9 million. Our management is currently working to facilitate the integration of Aeropost into our business. We have aggregated our Aeropost results of operations within the United States reporting segment. We recorded approximately $4.6 million in net losses from Aeropost operations and acquisition related expenses, net of tax benefits during the fourth quarter of fiscal year 2018 and $9.3 million for the entire fiscal year 2018, related to Aeropost. We began consolidating Aeropost’s financial statements with our financial statements in the third quarter of fiscal year 2018. Consolidation of this entity will create current period to prior period variances, which we have explained below under the heading, “Comparison of Fiscal Year 2018 to 2017 and Fiscal Year 2017 to 2016.” Financial highlights for the fourth quarter of fiscal year 2018 included: (cid:120) Total revenues increased 6.0% over the comparable prior year period. 1.2% of this increase was the result of approximately $9.0 million in non-merchandise revenue from our Aeropost operations acquired in March 2018. (cid:120) Net merchandise sales increased 4.3% over the comparable prior year period. We ended the quarter with 41 warehouse clubs compared to 39 warehouse clubs at the end of the fourth quarter of fiscal year 2017. (cid:120) Comparable net merchandise sales (that is, sales in the warehouse clubs that have been open for greater than 13 1/2 calendar months) for the 13 weeks ended September 2, 2018 increased 0.2%. (cid:120) Membership income for the fourth quarter of fiscal year 2018 increased 6.0% to $12.9 million. (cid:120) Merchandise gross profits (net merchandise sales less associated cost of goods sold) in the quarter increased 5.2% over the prior-year period, and warehouse gross profits as a percent of net merchandise club sales were 14.7%, an increase of 90 basis points (0.9%) from the same period last year. (cid:120) Operating income for the fourth quarter of fiscal year 2018 was $27.2 million, a decrease of $3.6 million compared to the fourth quarter of fiscal year 2017. (cid:120) We recorded a $211,000 net currency gain from currency transactions in the current quarter compared to a $153,000 net currency gain in the same period last year. (cid:120) Our effective tax rate decreased in the fourth quarter of fiscal year 2018 to 27.5% from 33.9% in the fourth quarter of fiscal year 2017. (cid:120) Net income attributable to PriceSmart for the fourth quarter of fiscal year 2018 was $19.0 million, or $0.62 per diluted share, compared to $19.8 million, or $0.64 per diluted share, in the fourth quarter of fiscal year 2017. Financial highlights for fiscal year 2018 included: (cid:120) Total revenues increased 5.7% over the comparable prior year period. 0.6% of this increase was the result of approximately $16.9 million in non-merchandise revenue from our Aeropost operations acquired in March 2018. (cid:120) Net merchandise sales increased 4.9% over the comparable prior year period. We ended the year with 41 warehouse clubs compared to 39 warehouse clubs at the end of the fiscal year 2017. (cid:120) Comparable net merchandise sales (that is, sales in the warehouse clubs that have been open for greater than 13 1/2 calendar months) for the 52 weeks ended September 2, 2018 increased 2.3%. 6 (cid:120) Membership income for the fiscal year 2018 increased 6.4% to $50.8 million. (cid:120) Merchandise gross profits (net merchandise sales less associated cost of goods sold) increased 4.9% over the same prior year period and warehouse gross profits as a percent of net merchandise club sales were 14.5%, which is unchanged from fiscal year 2017. (cid:120) Operating income for fiscal year 2018 was $126.1 million, a decrease of $10.2 million compared to fiscal year 2017. (cid:120) Currency exchange transactions in the current year resulted in a $192,000 net currency gain compared to a $1.2 million net gain from currency exchange transactions last year. (cid:120) The effective tax rate for fiscal year 2018 was 39.3%, as compared to the effective tax rate for fiscal year 2017 of 31.7%. (cid:120) Net income attributable to PriceSmart for fiscal year 2018 was $74.3 million, or $2.44 per diluted share, compared to $90.7 million, or $2.98 per diluted share, in the prior year. Financial highlights for fiscal year 2017 included: (cid:120) Total revenues increased 3.1% over the comparable prior year period. (cid:120) Net merchandise sales increased 3.2% over the comparable prior year period. We ended the year with 39 warehouse clubs compared to 38 warehouse clubs at the end of the fiscal year 2016. (cid:120) Comparable merchandise club sales (that is, sales in the warehouse clubs that had been open for greater than 13 1/2 calendar months) for the 52 weeks ended September 3, 2017 increased 1.5%. (cid:120) Membership income for the fiscal year 2017 increased 4.3% to $47.7 million. (cid:120) Merchandise gross profits (net merchandise sales less associated cost of goods sold) increased 4.8% over the same prior year period and warehouse gross profits as a percent of net merchandise club sales were 14.5%, an increase of 23 basis points (0.23%) from the same period last year. (cid:120) Operating income for fiscal year 2017 was $136.2 million, a decrease of $494,000 compared to fiscal year 2016. (cid:120) Currency exchange transactions in fiscal year 2017 resulted in a $1.2 million net gain compared to an $899,000 net loss in the prior year. (cid:120) The effective tax rate for fiscal year 2017 was 31.7%, as compared to the effective tax rate for fiscal year 2016 of 32.6%. (cid:120) Net income attributable to PriceSmart for fiscal year 2017 was $90.7 million, or $2.98 per diluted share, compared to $88.7 million, or $2.92 per diluted share, in the prior year. Comparison of Fiscal Year 2018 to 2017 and Fiscal Year 2017 to 2016 The following discussion and analysis compares the results of operations for each of the three fiscal years ended August 31, 2018, 2017 and 2016 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 present U.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding. Our operations consist of four reportable segments: Central America, the Caribbean, Colombia and the United States. The Company’s reportable segments are based on management’s organization of these locations into operating segments by general geographic location, which are 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. Segment amounts are presented after converting to U.S. dollars and consolidating eliminations. From time to time, we revise the measurement of each segment's operating income, including certain corporate overhead allocations, and other measures as determined by the information regularly reviewed by our chief operating decision maker. When we do so, the previous period amounts and balances are reclassified to conform to the current period's presentation. Net Merchandise Sales The following tables indicate the net merchandise club sales in the reportable segments in which we operate, and the percentage growth in net merchandise sales by segment during fiscal years 2018, 2017 and 2016. Years Ended August 31, 2018 August 31, 2017 Central America Caribbean Colombia Net merchandise sales Amount 1,805,328 866,120 382,306 3,053,754 $ $ % of net sales 59.1 % $ 28.4 % 12.5 % 100.0 % $ Increase/ (decrease) from prior year 48,612 50,856 44,224 143,692 7 Change Amount 2.8 % $ 6.2 % 13.1 % 4.9 % $ 1,756,716 815,264 338,082 2,910,062 % of net sales 60.4 % 28.0 % 11.6 % 100.0 % Years Ended August 31, 2017 August 31, 2016 Central America Caribbean Colombia Net merchandise sales Amount 1,756,716 815,264 338,082 2,910,062 $ $ % of net sales 60.4 % $ 28.0 % 11.6 % 100.0 % $ Comparison of 2018 and 2017 Increase/ (decrease) from prior year 29,954 (12,842) 72,210 89,322 Change Amount 1.7 % $ (1.6) % 27.2 % 3.2 % $ 1,726,762 828,106 265,872 2,820,740 % of net sales 61.2 % 29.4 % 9.4 % 100.0 % Overall net merchandise sales grew by 4.9% for fiscal year 2018 compared to fiscal year 2017, resulting from a 4.6% increase in transactions and a 0.3% increase in average ticket. Net merchandise sales in our Central America segment increased 2.8% for fiscal year 2018 compared to fiscal year 2017. General weakness in Panama, one of our largest markets in that segment, and social unrest starting in May 2018 within our Nicaragua market, resulted in negative combined growth within those two countries of 0.7% when compared to the prior year. All other Central American markets recorded positive growth in warehouse sales for the twelve-month period, with Costa Rica, Guatemala, Honduras, and El Salvador together recording sales growth of greater than 3.5%. Our Caribbean segment merchandise sales increased 6.2% in fiscal year 2018 compared to fiscal year 2017, driven by sales increases within all of our markets in the segment, with the exception of our Barbados market. The difficult economic environment that affected fiscal year 2017 has improved, though we continue to closely monitor shipments of U.S. goods into our Trinidad market, as a result of continued currency illiquidity in that market. Trinidad net merchandise sales for fiscal year 2018 increased 2.2% when compared to the same period last year. The Company is not currently limiting shipments to Trinidad, but illiquidity concerns remain, which may again cause us to restrict shipments in the future. Our Colombia segment’s net merchandise sales increased 13.1% in fiscal year 2018 compared to fiscal year 2017. With the stabilization of the exchange rate between the Colombian peso and the U.S. dollar over the past two years, we have seen an improving sales picture in all of our warehouse clubs in Colombia. This, coupled with our efforts to source high quality merchandise from local suppliers, resulted in a 12.0% increase in transactions in the fiscal year and average ticket growth of 1.0%. Comparison of 2017 and 2016 Overall net merchandise sales grew by 3.2% for fiscal year 2017 compared to fiscal year 2016, resulting from a 2.8% increase in transactions and a 1.0% increase in average ticket. Net merchandise sales in our Central America segment increased 1.7% for fiscal year 2017 compared to fiscal year 2016. General weakness in Costa Rica, our largest market in that segment, resulted in negative growth there of 2.6%. All other Central American countries recorded positive growth in merchandise sales for the fiscal year 2017, with Panama, Guatemala, and Honduras all recording sales growth of between 4% and 5%. Our Caribbean segment’s sales declined 1.6% in fiscal year 2017 compared to fiscal year 2016, driven largely by sales decreases in Trinidad, our largest market in that segment in fiscal year 2017. The difficult economic environment there negatively impacted consumer spending, and earlier in fiscal year 2017, we restricted shipments of U.S. goods for a period of three months as a result of currency illiquidity in the market. Trinidad net merchandise sales for fiscal year 2017 declined 4.8% compared to fiscal year 2016. Net merchandise sales in our Colombia segment grew 27.2% in fiscal year 2017 compared to fiscal year 2016 with the addition of our new Chia club on September 1, 2016. With the stabilization of the exchange rate between the Colombian peso and the U.S. dollar, we saw an improving sales picture in all of our warehouse clubs in Colombia. This, coupled with our efforts to source high quality merchandise from local suppliers, resulted in a 15.2% increase in transactions in fiscal year 2017 and average ticket growth of 10.4%. 8 Net Merchandise Sales by Category The following table indicates the approximate percentage of net sales accounted for by each major category of items sold during the fiscal years ended August 31, 2018, 2017 and 2016. Sundries (including health and beauty aids, tobacco, alcoholic beverages, soft drinks, cleaning and paper products and pet supplies) Food (including candy, snack foods, dry and fresh foods) Hardlines (including major appliances, small appliances, electronics, hardware, office supplies, garden and patio, sporting goods, business machines and automotive supplies) Softlines (including apparel, domestics, cameras, jewelry, housewares, media, toys and home furnishings) Other (including food court) Comparison of 2018 to 2017 Years Ended August 31, 2017 2016 2018 27 % 54 % 27 % 53 % 27 % 53 % 10 % 11 % 11 % 7 % 2 % 100 % 7 % 2 % 100 % 7 % 2 % 100 % The mix of sales by major category changed slightly by 1% for both Food and Hardlines between fiscal year 2018 and 2017. Comparison of 2017 to 2016 The mix of sales by major category did not change between fiscal year 2017 and 2016. Comparable Merchandise Sales We report comparable merchandise club 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 merchandise club sales on the weekends. 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 Costa Rica on October 5, 2017 will not be used in the calculation of comparable sales until December 2018 and the sales related to our warehouse club in the Dominican Republic opened on May 3, 2018 will not be used in the calculation of comparable sales until July 2019. Sales transacted through our e-commerce platform are included in our calculation of comparable warehouse sales. The following tables indicate the comparable net merchandise sales in the reportable segments in which we operate, and the percentage growth in net merchandise club sales by segment during fiscal years 2018 and 2017. Central America Caribbean Colombia All segments Comparison of 2018 to 2017 52 Weeks Ended September 2, 2018 % Increase in comparable net merchandise sales September 3, 2017 % Increase in comparable net merchandise sales (0.7) % 4.4 % 13.4 % 2.3 % 1.4 % (1.2) % 10.2 % 1.5 % Comparable merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the 52-week period ended September 2, 2018 grew 2.3%. 9 The Central America segment comparable merchandise sales for fiscal year 2018 were impacted by the opening of the Company’s seventh warehouse club in Costa Rica in 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 clubs 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. We 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%). New warehouse clubs attract new members from areas not previously served by us and also create the opportunity for some existing members, particularly those who now find the new clubs closer to their homes, to shop more frequently. Additionally, general weakness in Panama, one of our largest markets in this segment, and social unrest starting in May 2018 within our Nicaragua market impacted comparable net merchandise sales by approximately 70 basis points (0.7%). The Caribbean segment experienced positive comparable merchandise sales for fiscal year 2018, on improving conditions in all markets compared to the year earlier period, particularly Trinidad, Dominican Republic, Jamaica and USVI. Colombia recorded the highest comparable merchandise club sales of 13.4%. The comparable warehouse sales growth benefitted from continued stability in the local currency relative to the U,S. dollar. Comparison of 2017 to 2016 Comparable merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the 52-week period ended September 3, 2017 grew 1.5%. Colombia recorded the highest comparable merchandise sales, despite some transfer of sales resulting from the opening of the new warehouse club in Chia, Colombia which is not included in the calculation of comparable merchandise sales for this period. The Caribbean segment experienced negative comparable net merchandise sales primarily due to the economic downturn in Trinidad. The Central America segment experienced low single digit growth in comparable merchandise sales primarily due to the general weakness in the Costa Rica market. Membership Income 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. Increase/ (decrease) from prior year Amount Years Ended August 31, 2018 % Change 4.5 % 5.8 17.6 6.4 % 1,332 683 1,063 3,078 August 31, 2017 Membership income % to net warehouse club sales Amount 1.8 % 1.5 2.1 1.7 % $ $ 29,832 11,864 6,047 47,743 Membership income - Central America Membership income - Caribbean Membership income - Colombia Membership income - Total $ $ 31,164 $ 12,547 7,110 50,821 $ Number of accounts - Central America Number of accounts - Caribbean Number of accounts - Colombia Number of accounts - Total 840,920 416,859 336,750 1,594,529 11,185 25,448 15,057 51,690 1.3 % 6.5 4.7 3.4 % 829,735 391,411 321,693 1,542,839 10 Increase (decrease) from prior year Amount Years Ended August 31, 2017 % Change 4.4 % 2.2 8.0 4.3 % 1,264 250 448 1,962 August 31, 2016 Membership income % to net warehouse club sales Amount 1.7 % 1.4 2.3 1.7 % $ $ 28,568 11,614 5,599 45,781 Membership income - Central America Membership income - Caribbean Membership income - Colombia Membership income - Total $ $ 29,832 $ 11,864 6,047 47,743 $ Number of accounts - Central America Number of accounts - Caribbean Number of accounts - Colombia Number of accounts - Total 829,735 391,411 321,693 1,542,839 29,307 (1,800) 24,908 52,415 3.7 % (0.5) 8.4 3.5 % 800,428 393,211 296,785 1,490,424 Comparison of 2018 to 2017 The number of member accounts during fiscal year 2018 was 3.4% higher than the year before. Membership income increased 6.4%. The growth in membership accounts during fiscal year 2018 within our Central America and Caribbean segments is primarily the result of the addition of a new warehouse club within each segment. We opened a new warehouse club in Santa Ana, Costa Rica in October 2017 (fiscal year 2018), bringing the total of warehouse clubs operating in Costa Rica to seven. In May 2018, we opened a new warehouse club in the Dominican Republic. This brought the number of PriceSmart warehouse clubs operating in Dominican Republic to four. The growth in membership accounts during fiscal year 2018 in our Colombia market was primarily attributable to an improving economy and the continued growth in the market’s acceptance of the warehouse club concept. The Company’s twelve-month renewal rate for the periods ended August 31, 2018 and 2017 remained steady at 85%. Additionally, during fiscal year 2018, we began to expand our Platinum membership program. We began offering Platinum memberships in Costa Rica during fiscal year 2013 and added Panama, Dominican Republic and Trinidad during fiscal year 2018. We began offering Platinum memberships in the United States Virgin Island in October 2018 (fiscal year 2019). Comparison of 2017 to 2016 The number of member accounts during fiscal year 2017 was 3.0% higher than the year before. Membership income increased by 4.3%. The income recognized per average member account increased 1.5%. In February 2017, we increased the annual membership fee in Colombia by 15.4% to the equivalent of U.S. $25 (at the year-end exchange rate of 2,937 Colombian pesos per U.S. dollar), which had the effect of increasing the membership income per average membership account in Colombia by 5.1%. The growth in membership accounts from the end of fiscal year 2016 to the end of fiscal year 2017 in Colombia was primarily attributable to the new warehouse club in Chia which opened on September 1, 2016. The Company’s twelve-month renewal rate for the period ended August 31, 2017 improved to 85% from 80% for the twelve months ended August 31, 2016. 11 Other Revenue Other revenue primarily consists of rental income from operating leases where the Company is the lessor and non- merchandise revenue from freight and handling fees generated from our Aeropost subsidiary. Years Ended August 31, 2018 Increase from prior year August 31, 2017 % Change Amount $ $ 110 16,863 (6) 16,967 3.8 % $ 100.0 % (0.4) % 370.5 % $ 2,899 — 1,680 4,579 Years Ended August 31, 2017 (Decrease) from prior year August 31, 2016 % Change Amount $ $ (154) — (109) (263) (5.0) % $ — % (6.1) % (5.4) % $ 3,053 — 1,789 4,842 Amount 3,009 16,863 1,674 21,546 $ $ Amount 2,899 — 1,680 4,579 $ $ Rental income Non-merchandise revenue Miscellaneous income Other revenue Rental income Non-merchandise revenue Miscellaneous income Other revenue Comparison of 2018 to 2017 Other revenue for fiscal year 2018 includes non-merchandise revenue generated by our Aeropost subsidiary primarily from freight and handlings charges for on-line orders placed from customers to retailers in the United States and delivered through Aeropost to locations throughout our markets and Latin America. We acquired Aeropost on March 15, 2018. Rental income and miscellaneous income had no material changes when compared to the prior year. Comparison of 2017 to 2016 Other revenue for fiscal year 2017 when compared to the prior year had no material changes. 12 Results of Operations Results of Operations Consolidated Results of Operations Consolidated (Amounts in thousands, except percentages and number of warehouse clubs) Net merchandise sales Net merchandise sales Merchandise sales gross margin Merchandise sales gross margin percentage Revenues Total revenues Percentage change from prior period Comparable merchandise sales Total comparable merchandise sales increase (decrease) Gross margin Total gross margin Gross margin percentage to total revenues August 31, 2018 August 31, 2017 August 31, 2016 Years Ended $ $ 3,053,754 443,643 $ $ 14.5 % 2,910,062 422,916 $ $ 14.5 % 2,820,740 403,374 14.3 % $ 3,166,702 $ 2,996,628 $ 2,905,176 5.7 % 3.1 % 3.7 % 2.3 % 1.5 % (0.8) % $ 510,182 $ 16.1 % 476,876 $ 15.9 % 455,550 15.7 % Selling, general and administrative Selling, general and administrative Selling, general and administrative percentage of total revenues $ 384,130 $ 340,647 $ 318,827 12.1 % 11.4 % 11.0 % Results of Operations Consolidated Operating income- by segment Central America Caribbean Colombia United States Reconciling items (1) Operating income - Total Years Ended August 31, 2018 % of Total Revenue August 31, 2017 % of Total Revenue August 31, 2016 % of Total Revenue $ $ $ $ $ $ 130,849 48,383 12,086 2,016 (67,282) 126,052 4.1 % $ 1.5 % $ 0.4 % $ 0.1 % $ (2.1) % $ 4.0 % $ 134,826 47,190 4,932 10,436 (61,155) 136,229 4.5 % $ 1.6 % $ 0.2 % $ 0.3 % $ (2.0) % $ 4.5 % $ 135,232 51,450 (5,403) 10,970 (55,526) 136,723 4.7 % 1.8 % (0.2) % 0.4 % (1.9) % 4.7 % Warehouse clubs Warehouse clubs at period end Warehouse club sales square feet at period end (2) 41 2,074 39 1,940 38 1,862 (1) The reconciling items 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. Comparison of 2018 to 2017 Of the 5.7% total revenue increase, year on year increases to net merchandise sales contributed 480 basis points (4.8%), non-merchandise revenue from Aeropost contributed 60 basis points (0.6%), increased export sales contributed 20 basis points (0.2%) and increased membership income contributed ten basis points (0.1%). 13 Gross margin on merchandise sales as a percentage of total revenue remained unchanged at 14.5% for the twelve months ended August 31, 2018 compared to the same twelve month period a year ago. Total gross margin to total revenues increased to 16.1% from 15.9% the prior year, mainly due to higher margins on non-merchandise revenues of our Aeropost subsidiary, which increased the gross margin to total revenues, by approximately 30 basis points (0.3%) for the year. Membership income, rental income and miscellaneous income gross margin remained unchanged. The following table summarizes the selling, general and administrative expense for the periods disclosed. Years Ended August 31, 2018 % of Total Revenue August 31, 2017 % of Total Revenue August 31, 2016 % of Total Revenue Selling, general and administrative detail: Warehouse club and other operations General and administrative Pre-opening expenses Loss/(gain) on disposal of assets Asset impairment Total Selling, general and administrative $ $ $ $ $ 291,488 88,461 913 9.2 % $ 2.8 % $ 0.0 % $ 268,629 70,013 44 1,339 1,929 0.0 % $ 0.1 % $ 1,961 — 9.0 % $ 2.3 % $ 0.0 % $ 0.1 % $ — % $ 252,130 64,344 1,191 1,162 — 8.7 % 2.2 % 0.0 % 0.0 % — % $ 384,130 12.1 % $ 340,647 11.4 % $ 318,827 11.0 % 14 The following table summarizes the costs recorded as part of our consolidation of Aeropost’s operations, pre-acquisition costs, asset impairment charges associated with the write off of costs for a software platform we were developing prior to the Aeropost acquisition, ongoing costs recorded by the Company as part of the post-acquisition purchase accounting, costs incurred by the Company due to ongoing support of Aeropost, and the net tax benefits recorded by the Company due to the Aeropost operations and support. The table also discloses the classification of these costs into warehouse club and other operations and general and administrative costs. (in thousands, except for per share amounts) Net loss from Aeropost's operations before amortization of intangibles, net of tax benefit Amortization of intangibles, trade name and technology, net of tax benefit Amortization of compensation expense Net loss from Aeropost's operations, net of tax benefit $ Fiscal Year 2018 Second Quarter Third Quarter Fourth Quarter YTD $ — $ (1,251) $ (3,369) $ (4,620) — — — $ 394 645 (2,290) $ 478 764 (4,611) $ 872 1,409 (6,901) Less: Asset impairment of software, net of tax benefit Liabilities recorded for software-related impairment, net of tax benefit Acquisition costs, net of tax benefit $ 1,416 $ — $ — $ 1,416 514 490 — — — — 514 490 Total net loss from Aeropost and acquisition related expenses, net of tax benefits $ (2,420) $ (2,290) $ (4,611) $ (9,321) Impact of Aeropost acquisition on earnings per share $ 0.08 $ 0.08 $ 0.15 $ 0.31 Selling, general and administrative expenses consist of warehouse club and other operations, general and administrative expenses, pre-opening expenses, asset impairment and loss/(gain) on disposal of assets. In total, selling, general and administrative expenses increased $43.5 million to 12.1% of total revenues, an increase of 70 basis points (0.7%) compared to 11.4% of total revenues in fiscal year 2017. Warehouse club and other operations contributed 20 basis points (0.2%) of this increase. This was mainly due to approximately $6.4 million (0.2% of total revenues) in additional other operational costs associated with our Aeropost subsidiary during fiscal year 2018. General and administrative expenses contributed the remaining 50 basis points (0.5%) of the year-over-year increase in selling, general and administrative expenses as a percentage of total revenue, with $9.7 million in general and administrative costs associated with Aeropost contributing 30 basis points (0.3%) of this increase. The $9.7 million was composed of $1.1 million in amortization of technology intangibles, $1.4 million in amortization of post-combination compensation costs, and $7.2 million of other general and administrative costs. We also recorded in general and administrative expense during the fiscal year $669,000 in acquisition costs, including legal, accounting and technical consulting related to the acquisition of Aeropost. Additionally, general and administrative expenses also grew as a percentage to total revenues due to increased staffing in our buying department and increased information technology costs. Asset impairment charges for approximately $1.4 million, net of tax benefit, were related to the write-off of costs for a software platform that was under development prior to the acquisition of Aeropost, because of Aeropost’s Information Technology (“IT”) platform and IT development capability. Operating income for fiscal year 2018 was $126.1 million (4.0% of total revenue) compared to $136.2 million (4.5% of total revenue) for the same period last year. Within our Central America segment, higher expenses related to the addition of a new warehouse club coupled with lower sales volumes within our Panama and Nicaragua markets accounted for forty basis points (0.4%) of the decrease in operating income to total revenues. Additionally, the increases of approximately $16.1 million in total selling, general and administrative costs due to the additional costs of our Aeropost subsidiary which are recorded within our U.S. segment, were the primary drivers in the decreasing operating income an additional thirty basis points (0.3%). These decreases were partially offset by an increase of operating income within our Colombia segment of 0.2% to total revenue, primarily due to increases in sales from the continued improved economic conditions in Colombia. 15 Comparison of 2017 to 2016 Net merchandise sales gross margin as a percent of net merchandise sales increased 23 basis points (0.23%) to 14.5% for the twelve months ended August 31, 2017 compared to the same twelve month period a year ago due to increased margins in Colombia, resulting from improving market conditions and business performance. Net merchandise sales gross margins in Colombia increased 273 basis points (2.73%). Net merchandise sales gross margins in Central America and the Caribbean were approximately equal to the same period a year ago. Selling, general, and administrative expenses consist of warehouse club and other operations, general and administrative expenses, pre-opening expenses, and loss/(gain) on disposal of assets. In total, selling, general and administrative expenses increased $21.8 million to 11.4% of sales in fiscal year 2017 compared to 11.0% of sales in fiscal year 2016. Warehouse club and other operations expense was 9.2% of sales compared 8.9% in the prior year. Low or negative comparable merchandise club sales growth, particularly in Trinidad and Costa Rica, contributed to an overall increase in warehouse expense as a percent of sales in Central America and the Caribbean. Colombia had a 50 basis point (0.50%) improvement in warehouse club and other operations expense as a percent of sales compared to fiscal year 2016. General and administrative expenses grew 8.8% to 2.4% of sales in fiscal year 2017 compared to 2.2% of sales in the prior year as a result of increased staffing in our buying department, information technology costs and costs associated with the relocation of an executive to our San Diego headquarters. Expenses incurred before a warehouse club is in operation are captured in pre-opening expenses, which in fiscal year 2016 included the preopening expenses for Chia, Colombia and Masaya, Nicaragua. Operating income of $136.2 million was $494,000 below last year. The primary components of the change are as follows: higher net merchandise sales and membership income and increased warehouse club gross margins resulted in a $10.3 million increase in operating profit in Colombia compared to a year ago. Operating income decreased $406,000 in Central America and $4.3 million in the Caribbean on the low or negative sales growth experienced in those segments. Interest Expense Interest expense on loans Interest expense related to hedging activity Less: Capitalized interest Net interest expense Interest expense on loans Interest expense related to hedging activity Less: Capitalized interest Net interest expense Years Ended August 31, 2018 August 31, 2017 Increase/ (decrease) from prior year Amount $ $ 5,224 $ 981 (1,134) 5,071 $ (412) $ (607) (687) (1,706) $ Amount 5,636 1,588 (447) 6,777 Years Ended August 31, 2017 August 31, 2016 Increase/ (decrease) from prior year 645 $ (394) 635 886 $ Amount 4,991 1,982 (1,082) 5,891 Amount $ $ 5,636 $ 1,588 (447) 6,777 $ Net 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, the capital requirements of warehouse club and other operations and ongoing working capital requirements. Comparison of 2018 to 2017 Net interest expense for the year ended August 31, 2018 decreased $1.7 million when compared to prior year. Loans decreased year-on-year primarily due to the pay-off of loans within our subsidiaries. Lower average loan balance on both long- term and short-term loans were partially offset by higher variable (“LIBOR”) interest rates. Interest expense related to hedging 16 activity decreased in fiscal year 2018 compared to 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. Additional capitalized interest in fiscal year 2018 compared to fiscal year 2017 resulted from higher levels of construction activities. Comparison of 2017 to 2016 Net interest expense for fiscal year 2017 increased from the prior year, with an increase in long-term debt, primarily to finance the acquisition of the distribution center in Miami, Florida and an additional loan within our Trinidad subsidiary as part efforts to improve liquidity. Additionally, a decrease in interest capitalized year-over-year, due to lower levels of construction activities also accounted for the increased interest expense. These increases were partially offset by the decrease in interest expense related to hedging activity due to the retirement of loans and their related cross-currency interest rate hedges for our Colombia subsidiary. Other Income (Expense), net Other income consists of currency gain or loss and proceeds from insurance reimbursements. Years Ended August 31, 2018 Increase/ (decrease) from prior year Amount August 31, 2017 %Change Amount Other income (expense), net $ 192 $ (1,290) (87.0) % $ 1,482 Years Ended August 31, 2017 Increase/ (decrease) from prior year Amount August 31, 2016 %Change Amount Other income (expense), net $ 1,482 $ 2,381 (264.8) % $ (899) 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 gain (losses), including repatriation of funds, are recorded as currency gain or losses. 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. Comparison of 2018 to 2017 For fiscal year 2018, we recorded net income associated with foreign currency transactions. During fiscal year 2018, we were able to mitigate losses associated with foreign currency transactions that were driven by the weakening of currencies within all of our major markets and high transaction costs associated with converting Trinidad dollars into available tradeable currencies such as Euros or Canadian dollars before converting them to U.S. dollars. We mitigated the higher transaction costs in Trinidad by adding additional costs into our pricing models in order to offset the higher transaction costs in Trinidad. As a result, we reported approximately $192,000 in net gains from foreign currency for fiscal year 2018. For as long as the currency sourcing situation continues in Trinidad, we plan to maintain additional cost in our pricing 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. 17 Comparison of 2017 to 2016 For fiscal year 2017, we recorded a net gain associated with foreign currency transactions of approximately $1.2 million compared to an approximate $899,000 net loss in fiscal year 2016. We incurred higher transaction costs associated with converting TT dollars into available tradeable currencies such as Euros or Canadian dollars before converting them to U.S. dollars, which partially offset the gains resulting from revaluations. We added additional cost into consideration in our pricing model during fiscal year 2017 in order to offset the higher transaction costs in Trinidad. During the fourth quarter of fiscal year 2017, we recorded income of approximately $241,000 due to an insurance recovery for losses recognized in fiscal year 2015. 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 fiscal year 2018 include the effect of these changes based on the Company’s preliminary analysis. We 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 year 2018. The Company finalized its calculation of this Transition Tax in the fourth quarter of fiscal year 2018, reducing its liability to approximately $12.5 million. The Company expects that the cash amounts due for the Transition Tax will be offset by foreign tax credits. 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 $222,000 due to related re-measurement through the fourth quarter of fiscal year 2018. These impacts to PriceSmart’s income tax provision are based on PriceSmart’s knowledge, assumptions and interpretations of the impact of U.S. Tax Reform. The table below summarizes the effect that U.S. Tax Reform had on net income and earnings per share attributable to PriceSmart available for distribution: (In thousands, except per share amounts) Income before provision for income taxes and income (loss) of unconsolidated affiliates Provision for income taxes calculated prior to U.S. tax law change U.S. Tax Reform: Current tax rate reduction U.S. Tax Reform: Re-measurement of net deferred tax assets/liabilities U.S. Tax Reform: Transition Tax Subtotal of U.S. Tax Reform Effects Total provision for income taxes Income (loss) of unconsolidated affiliates Net income Less: net income (loss) attributable to noncontrolling interest Net income attributable to PriceSmart, Inc. Net income attributable to PriceSmart, Inc. per share available for distribution: Basic net income per share Diluted net income per share Subtotal of U.S. Tax Reform Effects Impact of U.S Tax Reform on basic and diluted net income per share Years Ended August 31, 2018 August 31, 2017 $ $ $ $ $ $ $ $ 122,588 $ (38,607) 3,152 (222) (12,500) (9,570) (48,177) $ (8) 74,403 $ (75) 74,328 $ 2.44 $ 2.44 $ (9,570) $ (0.32) $ 132,743 (42,018) — — — — (42,018) (1) 90,724 — 90,724 2.98 2.98 — — 18 The tables below summarize the effective tax rate for the periods reported: Years Ended August 31, 2018 August 31, 2017 Increase/ (decrease) from prior year (3,649) $ 9,808 6,159 $ Amount 44,865 (2,847) 42,018 31.7 % Amount 41,216 6,961 48,177 $ $ $ $ 39.3 % Years Ended August 31, 2017 August 31, 2016 Increase/ (decrease) from prior year 4,891 $ (5,722) (831) $ Amount 39,974 2,875 42,849 32.6 % Amount 44,865 (2,847) 42,018 $ $ $ $ 31.7 % Current tax expense Net deferred tax provision (benefit) Provision for income taxes Effective tax rate Current tax expense Net deferred tax provision (benefit) Provision for income taxes Effective tax rate Comparison of 2018 to 2017 For fiscal year 2018, the effective tax rate was 39.3%. The increase in the effective rate versus the prior year was primarily attributable to the following factors: 1. The comparably unfavorable impact of 10.2% resulting from the U.S. Tax Reform Transition Tax in fiscal year 2018. 2. The comparably favorable net impact of 2.4%, resulting from the U.S. Tax Reform current rate reduction which favorably impacted our effective tax rate by 2.6%, partially offset by an unfavorable re-measurement of net deferred tax assets/liabilities of 0.2%. 3. The comparably favorable impact of 1.6% resulting from improved financial results in the Company’s Colombia subsidiary for which no tax attribute was recognized, net of adjustment to valuation allowance. 4. The comparatively unfavorable impact on the effective tax rate of 1.0% resulting from a decrease in fiscal year 2018 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 compared to the prior year. 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 to continue into fiscal year 2019. 5. The comparably unfavorable impact of 1.6% resulting from the Company’s Aeropost subsidiary’s overall effective tax rate and acquisition-related accounting. 19 Comparison of 2017 to 2016 For fiscal year 2017, the effective tax rate was 31.7%. The decrease in the effective rate versus the prior year was primarily attributable to the following factors: 1. The favorable impact of 1.3% due predominantly to the non-recurrence in fiscal year 2017 of the adverse impact in the prior year from setting up a valuation allowance against the deferred tax assets of the Company’s Barbados subsidiary; 2. A decrease in fiscal year 2017 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 compared to fiscal year 2016. Reduction to this intercompany transaction, year over year, resulted in a comparatively unfavorable impact on the effective tax rate of 0.9% due to less reductions to taxable income in the U.S. and less reciprocal increase in taxable income in our Colombia subsidiary in fiscal year 2017 compared to fiscal year 2016. This income 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 the decrease of the favorable impact to the consolidated Company’s effective tax rate over the next several quarters to continue; and 3. The comparably favorable impact of 1.4% resulting from improved financial results in the Company’s Colombia subsidiary for which no tax attribute was recognized, net of adjustment to valuation allowance. Other Comprehensive Income (Loss) Other comprehensive income/(loss) for fiscal years 2018 and 2017 resulted primarily from foreign currency translation adjustments related to the assets and liabilities and the translation of the statements of income related to revenue, costs and expenses of our subsidiaries whose functional currency is not the U.S. dollar. 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 gains and losses 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. Summary of Changes in Other Comprehensive Income (Loss) Years Ended August 31, 2018 (Decrease) from Amount prior year % Change Amount August 31, 2017 (Decrease) from prior year August 31, 2016 % Change Amount Foreign currency translation adjustments Defined benefit pension plan Derivative Instruments Total $ (121,429) $ (12,890) 11.9 % $ (108,539) $ (6,297) 6.2 % $ (102,242) (488) 701 $ (121,216) $ (46) 1,779 (11,157) 10.4 % 165.0 % 10.1 % $ (110,059) $ (442) (1,078) (127) 316 (6,108) 40.3 % 22.7 % (315) (1,394) 5.9 % $ (103,951) Comparison of 2018 to 2017 During fiscal year 2018, the largest translation adjustments were related to the translation of the Colombia, Dominican Republic and Jamaica subsidiaries’ balance sheets and statements of income that required us to record additional losses, when compared to the prior year, to comprehensive net income on translation of approximately $8.5 million. Comparison of 2017 to 2016 During fiscal year 2017, the largest translation adjustments were related to the translation of the Costa Rica, Dominican Republic and Nicaragua subsidiaries’ balance sheets and statements of income that required us to record additional losses, when compared to the prior year, to comprehensive net income on translation of approximately $6.8 million. 20 LIQUIDITY AND CAPITAL RESOURCES Financial Position and Cash Flow Our 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 operations while allowing us to invest in activities that support the long-term growth of our operations and to pay dividends on our common stock. We evaluate our funding requirements on a regular basis to cover any shortfall in our ability to generate sufficient cash from operations to meet our capital requirements. We may consider 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 to our domestic operations and, therefore, have not accrued taxes that would be due from repatriation. Cash and cash equivalents held by foreign subsidiaries Cash and cash equivalents held domestically Total cash and cash equivalents and restricted cash August 31, 2018 $ $ 79,454 $ 17,460 96,914 $ August 31, 2017 139,270 26,442 165,712 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 merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. During fiscal year 2017, and continuing into fiscal year 2018, we experienced this situation in Trinidad and have been unable to source a sufficient level of tradeable currencies in Trinidad. We are working with our banks in Trinidad to source tradeable currencies. We expect the illiquidity market conditions to continue. The following table summarizes our significant sources and uses of cash and cash equivalents: Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Effect of exchange rates Net increase (decrease) in cash and cash equivalents August 31, 2018 119,454 $ (153,779) (27,817) (6,656) (68,798) $ Years Ended August 31, 2017 122,856 $ (135,217) (21,805) (2,838) (37,004) $ $ $ August 31, 2016 141,531 (78,175) (16,460) (2,777) 44,119 Net cash provided by operating activities totaled $119.4 million and $122.9 million for the twelve months ended August 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 utilities), as well as payments for income taxes. The $3.5 million decrease in net cash provided by operating activities was primarily due to a reduction in net income attributable to PriceSmart for approximately $16.6 million, offset by improvements in net working capital. Net cash used in investing activities totaled $153.8 million and $135.2 million for the twelve months ended August 31, 2018 and 2017, respectively. Cash used in investing activities is primarily to fund warehouse expansion and remodeling activities. During the current period, we used cash for capital expenditures for two new warehouse clubs and expenditures for ongoing replacement of equipment, building/leasehold improvements, expansion of existing warehouse clubs, and for the acquisition of Aeropost. Additionally, during fiscal year 2018, we used approximately $32.3 million in cash to invest in certificates of deposit and other time-based deposits with financial institutions (collectively referred to as “CDs”) with maturities greater than three months and up to one year. As part of our ongoing efforts to mitigate the lack of availability of U.S. dollars in Trinidad we entered into these CDs to gain priority with the respective financial institutions for converting Trinidad dollars into U.S. dollars as well as enabling us to take advantage of higher interest rates on idle cash assets. In fiscal year 2017, we used cash for capital expenditures related to the acquisition of a distribution center in Medley, Miami-Dade County, Florida in January 2017, construction activities for a warehouse club in Santa Ana, Costa Rica that opened in October 2017, construction activities for a warehouse club in the Santa Domingo, Dominican Republic that opened in the spring of 2018 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 and the Dominican Republic and for increased warehouse club expansion activities related to warehouse expansions in Guatemala, Honduras and El Salvador. 21 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, 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): Total Amount of Facilities Short-term Borrowings Letters of Credit Facilities Available Weighted average interest rate August 31, 2018 August 31, 2017 $ $ 69,000 $ 69,000 $ — $ — $ 632 $ 966 $ 68,368 68,034 — % — % Facilities Used As of August 31, 2018 and 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 August 31, 2018 and 2017, the Company was in compliance with respect to these covenants. Each of these facilities expires annually and is normally renewed. The following table provides the changes in our long-term debt for the twelve months ended August 31, 2018: (Amounts in thousands) Balances as of August 31, 2016 Proceeds from long-term debt incurred during the period: MUFG Union Bank Trinidad subsidiary Repayments of long-term debt: Repayment of loan by Panama subsidiary Regularly scheduled loan payments Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar Balances as of August 31, 2017 Proceeds from long-term debt incurred during the period: Panama subsidiary Honduras subsidiary Repayments of long-term debt: Repayment of loan by Honduras subsidiary with Scotiabank Repayment of loan by Honduras subsidiary with Citibank Repayment of loan by Trinidad subsidiary Regularly scheduled loan payments Reclassifications of long-term debt Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar (3) Balances as of August 31, 2018 Current portion of long- term debt Long-term debt (net of current portion) Total $ 14,565 $ 73,542 $ 88,107 (1) — 6,000 (2,000) (225) 18 18,358 1,500 1,350 (600) (1,850) (3,000) (4,052) 3,005 35,700 6,000 (11,333) (15,837) (133) 87,939 13,500 12,150 (850) (6,063) (3,000) (12,673) (3,005) 35,700 12,000 (13,333) (16,062) (115) 106,297 (2) 15,000 13,500 (1,450) (7,913) (6,000) (16,725) — 144 14,855 $ (278) 87,720 $ (134) 102,575 (4) $ (1) The carrying amount on non-cash assets assigned as collateral for these loans was $102.4 million. No cash assets were assigned as collateral for these loans. (2) The carrying amount on non-cash assets assigned as collateral for this total was $128.4 million. No cash assets were assigned as collateral for this total. (3) These foreign currency translation adjustments are recorded within other comprehensive income. (4) The carrying amount on non-cash assets assigned as collateral for this total was $125.9 million. No cash assets were assigned as collateral for this total. As of August 31, 2018, the Company had approximately $93.6 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, 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, 2018, the Company was in compliance with all covenants or amended covenants. As of August 31, 2017, the Company had approximately $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. 22 Contractual Obligations $ Contractual obligations Long-term debt and interest(1) Operating leases(2) Additional capital contribution commitments to joint ventures(3) Data recovery services(4) Distribution center services(5) Warehouse club construction commitments (6) Total $ Less than 1 Year 1 to 3 Years Payments due in: 4 to 5 Years After 5 Years 14,855 $ 14,062 34,304 $ 23,831 17,272 $ 23,010 36,144 $ 137,343 884 372 166 10,633 40,972 $ — 93 166 — — — — — — — — — 58,394 $ 40,282 $ 173,487 $ Total 102,575 198,246 884 465 332 10,633 313,135 (1) Long-term debt includes debt with both fixed and variable interest rates. We have used rates as of August 31, 2018 to calculate future estimated payments related to the variable rate items. For the portion of the loans subject to interest rate swaps and cross-currency interest rate swaps, we have used the fixed interest rate as set by the interest rate swaps. (2) Operating lease obligations have been reduced by approximately $3.3 million to reflect the amounts net of expected sublease income. Operating lease obligations include $2.4 million of lease payment obligations for the prior leased Miami distribution center. For the purposes of calculating the minimum lease payments, a reduction is reflected for the actual sublease income the Company expects to receive during the remaining lease term. (3) Amounts shown are the contractual capital contribution requirements for our investment in the joint ventures that we have agreed to make; however, the parties intend to seek alternate financing for these projects. 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. (4) Amounts shown are the minimum payments under our off-site data recovery services agreement. (5) Amounts shown are the minimum payments under distribution center service agreements for Mexico City. (6) The amounts shown represent contractual obligations for construction services not yet rendered. 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. The following table summarizes the shares repurchased during fiscal years 2018, 2017 and 2016: Shares repurchased Cost of repurchase of shares (in thousands) August 31, 2018 Years Ended August 31, 2017 37,414 38,634 $ 3,183 $ 3,193 $ August 31, 2016 43,171 3,334 We have reissued treasury shares as part of our stock-based compensation programs but we did not reissue any treasury shares during fiscal years 2018, 2017 and 2016. 23 Dividends The following table summarizes the dividends declared and paid during fiscal years 2018, 2017 and 2016. Declared 1/24/2018 2/1/2017 2/4/2016 First Payment Record Date Date Paid Amount Second Payment Date Paid Record Date 0.70 2/14/2018 2/28/2018 $ 0.70 2/15/2017 2/28/2017 $ 0.70 2/15/2016 2/29/2016 $ 0.35 8/15/2018 8/31/2018 $ 0.35 8/15/2017 8/31/2017 $ 0.35 8/15/2016 8/31/2016 $ Amount $ $ $ Amount 0.35 0.35 0.35 We anticipate 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. 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 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): Derivatives designated as cash flow hedging instruments Cross-currency interest rate swaps Interest rate swaps Interest rate swaps Cross-currency interest rate swaps Net fair value of derivatives designated as hedging instruments Balance Sheet Location Other non-current assets Other non-current assets Other long-term liabilities Other long-term liabilities August 31, 2018 Net Tax Effect Fair Value Net OCI August 31, 2017 Net Tax Effect Fair Value Net OCI $ 2,405 $ (819) $ 1,586 $ 2,547 $ (950) $ 1,597 1,959 (434) 1,525 — — — (8) 2 (6) (231) 80 (151) (494) 148 (346) (451) 135 (316) $ 3,862 $ (1,103) $ 2,759 $ 1,865 $ (735) $ 1,130 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. As of August 31, 2018, the Company did not have any open non-deliverable forward foreign-exchange contracts. Critical Accounting Estimates The preparation of our consolidated financial statements requires that management 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 business acquisitions, contingencies and litigation, income taxes, value added taxes, and long-lived assets. We base our estimates on historical experience and on other assumptions that management believes to be reasonable under the present circumstances. Using different estimates could have a material impact on our financial condition and results of operations. 24 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 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 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. As of August 31, 2018, we evaluated our deferred tax assets and liabilities and determined that a valuation allowance was necessary for certain 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. The Company is 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 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 we 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 tax 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 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 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 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 August 31, 2018 and 2017. 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 year 2018. The Company finalized its calculation of this Transition Tax in the fourth quarter of fiscal year 2018, reducing it to approximately $12.5 million. The Company expects that the cash amounts due for the Transition Tax will be offset by foreign tax credits. Tax Receivables: The Company pays Value Added Tax (“VAT”) or similar taxes (“input VAT”), income taxes, and other taxes within the normal course of our business in most of the countries in which we operate related to the procurement of merchandise and/or services we 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 we sell. 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 card processors to remit a portion of sales processed via credit 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. 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 VAT refund process is defined and structured with regular refunds or offsets. However, the Company, together with our tax and legal advisers, is currently seeking clarification in court in one country without a clearly defined process and expects to prevail. The balance of the VAT receivable in the country with undefined refund mechanisms was approximately $3.1 million and $1.2 million as of August 31, 2018 and August 31, 2017, 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. As a result, we are making income tax payments substantially in excess of those we would expect to pay based on taxable income. The rules (which the Company has challenged in court) effective for fiscal years 2015 to 2018 do not clearly allow us to obtain a refund or offset this excess income tax against other taxes. As of August 31, 2018, the Company had deferred tax assets of approximately $2.1 million in this country. Also, the Company had an income tax receivable balance of $7.1 million as of August 31, 2018 related to excess payments from fiscal year 2015 to 2018. 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 we will ultimately 25 succeed in its refund requests, related appeals and/or court challenge on this matter. In the third quarter of fiscal year 2018, a revised minimum tax law was passed in this country, which beginning in fiscal year 2020 will reduce the minimum tax rate. Additionally, this law clarifies rules on a go-forward basis for reimbursement of excess minimum tax paid beginning in fiscal year 2019. The Company’s policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows: (cid:120) 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. (cid:120) 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 our 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 we do not expect to eventually prevail in its recovery of such balances. The Company does not currently have any allowances provided against VAT and income tax receivables. Long-lived Assets: We periodically evaluate our long-lived assets for indicators of impairment. Indicators that an asset may be impaired are: (cid:120) (cid:120) (cid:120) (cid:120) the asset's inability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the asset; significant changes in its strategic business objectives and utilization of the asset(s); and the impact of significant negative industry or economic trends. 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, which in turn drives estimates of future cash flows from these assets. These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair market value. Future business conditions and/or activity could differ materially from the projections made by management causing the need for additional impairment charges. Impairment charges for $2.6 million related to a write-off of internally developed software recorded during fiscal year 2018. Loss/(gain) on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance. Business Combinations: We applied the provisions of ASC 805, Business Combinations, in accounting for the acquisition of Aeropost. It required us to recognize separately from goodwill the assets acquired and the liabilities assumed at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we used our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to our consolidated statements of operations. Accounting for a business combination required our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates of the value of intangible assets, contractual obligations assumed, pre- acquisition contingencies and any contingent consideration, where applicable. Although we believe that the assumptions and estimates we have made for the acquisition of Aeropost are reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired company and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: (cid:120) (cid:120) future expected cash flows from the existing revenue streams of Aeropost, including the related estimates of amounts and timing and estimated costs to sell, market, deliver and support such revenues, among other estimates; future expected cash flows from acquired developed technology including estimated amounts to be received for such developed technology and the time period over which such cash flows are expected to be received, among other estimates; and 26 (cid:120) discount rates. Unanticipated events and circumstances 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 acquisition date and (2) the amount of the asset or liability can be reasonably estimated. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our results of operations and financial 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. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risk from changes in interest rates, foreign currency exchange rates and commodity price risk. These market risks arise in the normal course of business. We do not engage in speculative trading activities. To manage the risk arising from these exposures, we utilize interest rate swaps, cross-currency interest rate swaps, non-deliverable foreign currency forward contracts and loans denominated in foreign currencies. For a discussion of our accounting policies for derivative instruments and further disclosures, please see Notes to Consolidated Financial Statements - Note 12 - Derivative Instruments and Hedging Activities. Each market risk sensitivity analysis presented below is based on hypothetical scenarios used to calibrate potential risk and do not represent our view of future market changes. The effect of a change in a particular assumption is calculated without adjusting any other assumption. In reality, however, a change in one factor could cause a change in another factor, which may magnify or negate other sensitivities. Interest Rate Risk We are exposed to changes in interest rates as a result of our short-term borrowings and long-term debt borrowings. We have mitigated a portion of our interest rate risk by managing the mix of fixed and variable rate debt and by entering into interest rate swaps and cross-currency interest rate swaps to hedge interest rate risk. The notional amount, interest payment and maturity dates of the swap match the terms of the associated debt. 27 The table below provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table represents the principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, including cross-currency interest rate swaps, the table represents the contractual cash flows and weighted-average interest rates by the contractual maturity date, unless otherwise noted. The notional amounts are used to calculate contractual cash flows to be exchanged under the contracts. The weighted-average variable rates are based upon prevailing market interest rates and the outstanding balances as of August 31, 2018. Annual maturities of long-term debt and derivatives are as follow (in thousands): Long-Term Debt: 2019 2020 Twelve Months Ended August 31, (Amounts in thousands) 2022 2023 2021 Thereafter Total Long-term debt with fixed interest rate Weighted-average interest rate Long-term debt with variable interest rate Weighted-average interest rate Total long-term debt $ $ $ 426 $ — $ — $ — $ — $ — $ 426 (1) 4.50 % — % — % — % — % —% 4.50 % 14,429 $ 21,729 $ 12,572 $ 5,901 $ 17,449 $ 30,069 $ 102,149 5.00 % $ 14,855 5.00 % $ 21,729 4.90 % $ 12,572 4.90 % $ 5,901 4.80 % $ 17,449 3.80% $ 30,069 4.80 % 102,575 (1) Derivatives: Interest Rate Swaps: Variable to fixed interest Weighted-average pay rate Weighted-average receive rate Cross-Currency Interest Rate Swaps: Variable to fixed interest Weighted-average pay rate Weighted-average receive rate $ 7,306 $ 5.08 % 8,025 $ 5.08 % 2,775 $ 4.91 % 2,775 $ 4.91 % 9,900 $ 5.69 % 30,068 $ 3.65% 60,849 4.46 % 5.39 % 5.24 % 4.61 % 4.61 % 5.12 % 3.77% 4.46 % $ 3,600 $ 8.69 % 10,350 $ 8.40 % 5,100 $ 8.21 % 1,350 $ 9.75 % 7,425 9.75 % — $ —% 27,825 8.83 % 5.14 % 5.13 % 4.96 % 5.32 % 5.32 % —% 5.16 % (1) The Company has disclosed the future annual maturities of long-term debt, for which it has entered into cross-currency interest rate swaps, using the derivative obligation as of August 31, 2018 to estimate the future commitments. Therefore, the total annual commitments reflects these obligations, including the effect of the cross-currency interest rate swaps on the total-long term debt as disclosed on the consolidated balance sheet. Foreign Currency Risk We have foreign currency risks related to sales, operating expenses and financing transactions in currencies other than the U.S. dollar. As of August 31, 2018, we had a total of 41 consolidated warehouse clubs operating in 12 foreign countries and one U.S. territory, 31 of which operate under currencies other than the U.S. dollar. Approximately 51% of our net merchandise sales are comprised of products we purchased in U.S. dollars and were sold in countries whose currencies were other than the U.S. dollar. Approximately 77% of our net merchandise sales are in markets whose functional currency is other than the U.S. dollar. We may enter into additional foreign countries in the future or open additional locations in existing countries, which may increase the percentage of net merchandise sales denominated in foreign currencies. Currency exchange rate changes either increase or decrease the cost of imported products that we purchase in U.S. dollars and price in local currency. Price changes can impact the demand for those products in the market. Currency exchange rates also affect the reported sales of the consolidated company when local currency-denominated sales are translated to U.S. dollars. In addition, we revalue all U.S. dollar denominated assets and liabilities within those markets that do not use the U.S. dollar as the functional currency. These assets and liabilities include, but are not limited to, excess cash permanently reinvested offshore and the value of items shipped from the U.S. to our foreign markets. The gain or loss associated with this revaluation, net of reserves, is recorded in other income (expense). 28 Foreign currencies in most of the countries where we operate have historically devalued against the U.S. dollar and are expected to continue to devalue. The following tables summarize by country, for those countries with functional currencies other than the U.S. dollar, the weakening of the countries' currency against the U.S. dollar (devaluation) or the strengthening of their currencies (revaluation): Country Colombia Costa Rica Dominican Republic Guatemala Honduras Jamaica Nicaragua Trinidad Revaluation/(Devaluation) Twelve Months Ended August 31, 2018 2017 % Change % Change (3.07) % (0.25) % (4.48) % (3.73) % (2.78) % (5.48) % (5.00) % (0.12) % (0.11) % (4.19) % (3.52) % 3.47 % (2.11) % (1.59) % (5.00) % (0.58) % We seek to manage foreign exchange risk by (1) adjusting prices on goods acquired in U.S. dollars on a periodic basis to maintain our target margins after taking into account changes in exchange rates; (2) obtaining local currency loans from banks within certain markets where it is economical to do so and where management believes the risk of devaluation and the level of U.S. dollar denominated liabilities warrants this action; (3) reducing the time between the acquisition of product 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) by entering into cross-currency interest rate swaps and forward currency derivatives. We have local-currency- denominated long-term loans in Costa Rica, Trinidad and Tobago, Guatemala and Barbados; we have cross-currency interest rate swaps and forward currency derivatives in Costa Rica and Colombia; we have cross-currency interest rate swaps in Honduras and we have interest rate swaps in Panama and El Salvador. Turbulence in the currency markets can have a significant impact on the value of the foreign currencies within the countries in which we operate. 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.” Future volatility and uncertainties regarding the currencies in the countries that we operate in could have a material impact on our operations in future periods. However, there is no way to accurately forecast how currencies may trade in the future and, as a result, we cannot accurately project the impact of the change in rates on our future demand for imported products, reported sales, or financial results. We are exposed to foreign exchange risks related to U.S. dollar-denominated and other foreign-denominated cash, cash equivalents and restricted cash, to U.S. dollar-denominated intercompany debt balances and to other U.S. dollar-denominated debt/asset balances (excluding U.S. dollar-denominated debt obligations for which we hedge a portion of the currency risk inherent in the interest and principal payments), within entities whose functional currency is not the U.S. dollar. The following table discloses the net effect on other income (expense) for these U.S. dollar-denominated and other foreign-denominated accounts relative to hypothetical simultaneous currency devaluation in all the countries listed in the table above, based on balances as of August 31, 2018: Gains based on change in U.S. dollar denominated and other foreign denominated cash, cash equivalents and restricted cash balances (in thousands) (Losses) based on change in U.S. dollar denominated inter- company balances (in thousands) (Losses) based on change in U.S. dollar denominated other asset/liability balances, (in thousands) Net gain (loss) 1,348 $ 2,697 $ 5,394 $ (1,023) $ (2,046) $ (4,092) $ (658) $ (1,316) $ (2,632) $ (333) (665) (1,330) Overall weighted negative currency movement 5% 10% 20% $ $ $ 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 warehouse sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. During fiscal year 2017 and continuing into fiscal year 2018, we experienced this situation in Trinidad (“TT”). We are limited in our ability to convert TT dollars that we generated through sales of merchandise into U.S. dollars to settle U.S. dollar liabilities, increasing our foreign exchange exposure to any devaluation of the TT dollar. We are working with our banks to source other tradable currencies (such as Euros and Canadian dollars), but until the central bank in Trinidad makes more U.S. dollars available, this condition will continue and we plan to take steps to limit our exposure to a potential devaluation. Starting in the third quarter of fiscal year 2017, we were able to improve our sourcing of 29 tradeable currencies, which allowed for a more normalized flow of imported merchandise. Due to the actions taken by us, as of August 31, 2018 and 2017, our Trinidad subsidiary had net U.S. dollar denominated assets of approximately $13.0 million and $4.0 million, respectively. However, the illiquidity situation remains in the Trinidad market, and we may face similar issues in sourcing U.S. dollars during fiscal year 2019 to those we faced in fiscal year 2016. Going forward, we could again find ourselves in a net U.S. dollar denominated liability position that may require us to limit shipments from the U.S. to Trinidad in line with our ability to exchange Trinidad dollars for tradeable currencies or to reduce our exposure to a potential devaluation. If, for example, a hypothetical 20% devaluation of the Trinidad currency occurred while we held levels of net U.S. denominated liabilities similar to those at those at August 31, 2016 ($18.9 million), the net effect on other expense would be approximately $3.8 million. This may result in once again limiting shipments to our Trinidad subsidiary, causing it to run out of certain merchandise, from time to time, during fiscal year 2019. We are also exposed to foreign exchange risks related to local-currency-denominated cash and cash equivalents, to local- currency-denominated debt obligations, to local-currency-denominated current assets and liabilities and to local-currency- denominated long-term assets and liabilities within entities whose functional currency is not the U.S. dollar. The following table discloses the net effect on other comprehensive income (loss) for these local currency denominated accounts relative to hypothetical simultaneous currency devaluation in all the countries listed in the table above, based on balances as of August 31, 2018: Other comprehensive loss on the decline in local currency denominated cash and cash equivalents and restricted cash (in thousands) Other comprehensive gain on the decline in foreign currency denominated debt obligations (in thousands) Other comprehensive loss on the decline in all other foreign currency denominated current assets net of current liabilities (in thousands) Other comprehensive loss on the decline in all other foreign currency denominated long-term assets net of long-term liabilities (in thousands) $ $ $ 3,052 $ 6,103 $ 12,207 $ (1,336) $ (2,673) $ (5,345) $ 4,524 $ 9,047 $ 18,094 $ 20,103 40,205 80,411 Overall weighted negative currency movement 5% 10% 20% In addition, we are exposed to foreign currency exchange rate fluctuations associated with our U.S. dollar-denominated debt obligations that we hedge. We hedge a portion of the currency risk inherent in the interest and principal payments associated with this debt through the use of cross-currency interest rate swaps. The terms of these swap agreements are commensurate with the underlying debt obligations. The aggregate fair value of these swaps was in a net asset position of approximately $1.9 million at August 31, 2018 and approximately $1.3 million at August 31, 2017. A hypothetical 10% increase in the currency exchange rates underlying these swaps from the market rates at August 31, 2018 would have resulted in a further increase in the value of the swaps of approximately $499,000. Conversely, a hypothetical 10% decrease in the currency exchange rates underlying these swaps from the market rates at August 31, 2018 would have resulted in a net decrease in the value of the swaps of approximately of $609,000. From time to time we use non-deliverable forward foreign exchange contracts primarily to address exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The market risk related to foreign currency forward contracts would be measured by estimating the potential impact of a 10% change in the value of the U.S. dollar relative to the local currency exchange rates. The net increase or decrease in the fair value of these derivative instruments would be economically offset by the gains or losses on the underlying transactions. Commodity Price Risk The increasing price of oil and certain commodities could have a negative effect on our operating costs and sales. Higher oil prices can negatively impact the economic growth of the countries in which we operate, thereby reducing the buying power of our members. Higher oil prices can also increase our operating costs, particularly utilities and distribution expenses. Inflationary pressures on various commodities also may impact consumer spending. We do not currently seek to hedge commodity price risk. 30 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of PriceSmart, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of PriceSmart, Inc. as of August 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended August 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a), (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2018, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 25, 2018 expressed an adverse opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1997. San Diego, California October 25, 2018 31 PRICESMART, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) $ $ $ ASSETS Current Assets: Cash and cash equivalents Short-term restricted cash Short-term investments Receivables, net of allowance for doubtful accounts of $97 as of August 31, 2018 and $7 as of August 31, 2017, respectively Merchandise inventories Prepaid expenses and other current assets Total current assets Long-term restricted cash Property and equipment, net Goodwill Other intangibles, net Deferred tax assets Other non-current assets (includes $4,364 and $2,547 as of August 31, 2018 and August 31, 2017, respectively, for the fair value of derivative instruments) Investment in unconsolidated affiliates Total Assets LIABILITIES AND EQUITY Current Liabilities: Accounts payable Accrued salaries and benefits Deferred income Income taxes payable Other accrued expenses Long-term debt, current portion Total current liabilities Deferred tax liability Long-term portion of deferred rent Long-term income taxes payable, net of current portion Long-term debt, net of current portion Other long-term liabilities (includes $502 and $682 for the fair value of derivative instruments and $4,715 and $5,051 for post employment plans as of August 31, 2018 and August 31, 2017, respectively) Total Liabilities August 31, 2018 2017 93,460 $ 405 32,304 8,859 321,025 31,800 487,853 3,049 594,403 46,329 14,980 10,166 162,434 460 — 6,460 310,946 30,070 510,370 2,818 557,829 35,642 — 15,412 48,854 10,758 1,216,392 $ 44,678 10,765 1,177,514 255,739 $ 22,836 23,018 4,636 28,281 14,855 349,365 1,894 8,885 4,622 87,720 272,248 19,151 22,100 5,044 26,483 18,358 363,384 1,812 8,914 909 87,939 5,268 457,754 5,789 468,747 32 Stockholders' Equity: Common stock $0.0001 par value, 45,000,000 shares authorized; 31,372,752 and 31,275,727 shares issued and 30,460,353 and 30,400,742 shares outstanding (net of treasury shares) as of August 31, 2018 and August 31, 2017, respectively Additional paid-in capital Tax benefit from stock-based compensation Accumulated other comprehensive loss Retained earnings Less: treasury stock at cost, 912,399 and 874,985 shares as of August 31, 2018 and August 31, 2017, respectively Total stockholders' equity attributable to PriceSmart, Inc. stockholders Noncontrolling interest in consolidated subsidiaries Total stockholders' equity Total Liabilities and Equity See accompanying notes. 3 432,882 11,486 (121,216) 473,954 3 422,395 11,486 (110,059) 420,866 (39,107) 758,002 636 758,638 1,216,392 $ (35,924) 708,767 — 708,767 1,177,514 $ 33 PRICESMART, INC. CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Net merchandise sales Export sales Membership income Other revenue and income Total revenues Operating expenses: Cost of goods sold: Net merchandise sales Export sales Non-merchandise Selling, general and administrative: Warehouse club and other operations General and administrative Pre-opening expenses Asset impairment Loss/(gain) on disposal of assets Total operating expenses Operating income Other income (expense): Interest income Interest expense Other income (expense), net Total other income (expense) Income before provision for income taxes and income (loss) of unconsolidated affiliates Provision for income taxes Income (loss) of unconsolidated affiliates Net income Less: (net income) loss attributable to noncontrolling interest Net income attributable to PriceSmart, Inc. Net income attributable to PriceSmart, Inc. per share available for distribution: Basic Diluted Shares used in per share computations: Basic Diluted Dividends per share Years Ended August 31, 2017 2016 2018 $ 3,053,754 $ 40,581 50,821 21,546 3,166,702 2,910,062 $ 34,244 47,743 4,579 2,996,628 2,820,740 33,813 45,781 4,842 2,905,176 2,610,111 38,740 7,669 291,488 88,461 913 1,929 1,339 3,040,650 126,052 1,415 (5,071) 192 (3,464) 2,487,146 32,606 — 268,629 70,013 44 — 1,961 2,860,399 136,229 1,809 (6,777) 1,482 (3,486) 122,588 (48,177) (8) 74,403 $ (75) 74,328 $ 132,743 (42,018) (1) 90,724 $ — 90,724 $ 2.44 $ 2.44 $ 2.98 $ 2.98 $ $ $ $ $ 30,115 30,115 30,020 30,023 $ 0.70 $ 0.70 $ 2,417,366 32,260 — 252,130 64,344 1,191 — 1,162 2,768,453 136,723 1,307 (5,891) (899) (5,483) 131,240 (42,849) 332 88,723 — 88,723 2.92 2.92 29,928 29,933 0.70 See accompanying notes. 34 PRICESMART, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (AMOUNTS IN THOUSANDS) Years Ended August 31, 2017 2016 2018 $ $ 74,328 $ 90,724 $ (12,890) $ (6,297) $ Net income attributable to PriceSmart, Inc. Other Comprehensive Income, net of tax: Foreign currency translation adjustments (1) Defined benefit pension plan: Net gain (loss) arising during period Amortization of prior service cost and actuarial gains included in net periodic pensions cost Total defined benefit pension plan Derivative instruments: (2) Unrealized gains/(losses) on change in derivative obligations Unrealized gains/(losses) on change in fair value of interest rate swaps (3) Amounts reclassified from accumulated other comprehensive income (loss) to other income (expense), for settlement of derivatives Total derivative instruments Other comprehensive income (loss) Comprehensive income Less: (comprehensive income)/loss attributable to noncontrolling interest Comprehensive income attributable to PriceSmart, Inc. stockholders $ $ (87) 41 (46) (97) 1,882 (166) 39 (127) 81 254 (6) 1,779 (11,157) 63,171 $ (1) 63,170 $ (19) 316 (6,108) 84,616 $ — 84,616 $ 88,723 — (1,702) (182) (20) (202) 1,826 (2,361) — (535) (2,439) 86,284 — 86,284 (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 12 - Derivative Instruments and Hedging Activities. (3) Unrealized gains/(losses) on change in fair value of interest rate swaps includes $248,000 of adjustments related to the revaluation of derivative fair market value accounts. See accompanying notes. 35 ) 4 3 3 , 3 ( 4 8 5 , 6 6 5 l a t o T y t i u q E — — 0 8 — — 1 3 7 , 9 3 2 7 , 8 8 ) 9 3 4 , 2 ( ) 4 7 2 , 1 2 ( 1 7 0 , 8 3 6 ) 3 9 1 , 3 ( 4 0 7 4 5 8 , 9 4 2 7 , 0 9 ) 8 0 1 , 6 ( ) 5 8 2 , 1 2 ( 7 6 7 , 8 0 7 2 6 5 — — 9 6 2 — ) 3 8 1 , 3 ( 8 1 2 , 0 1 3 0 4 , 4 7 ) 0 4 2 , 1 2 ( ) 8 5 1 , 1 1 ( 8 3 6 , 8 5 7 l a t o T s ' r e d l o h k c o t S y t i u q E g n i l l o r t n o c n o N o t e l b a t u b i r t t A k c o t S y r u s a e r T t s e r e t n I . c n I , t r a m S e c i r P t n u o m A s e r a h S d e n i a t e R s g n i n r a E d e t a l u m u c c A r e h t O e v i s n e h e r p m o C ) s s o L ( e m o c n I t i f e n e B x a T m o r F d e s a B k c o t S n o i t a s n e p m o C l a n o i t i d d A n i - d i a P l a t i p a C k c o t S n o m m o C t n u o m A s e r a h S . C N I , T R A M S E C I R P Y T I U Q E F O S T N E M E T A T S D E T A D I L O S N O C ) S D N A S U O H T N I S T N U O M A ( $ — — — — — — — — — $ — — — — — — — — — $ — 2 6 5 — — — — — — — 5 7 ) 1 ( $ 6 3 6 $ 4 8 5 , 6 6 5 ) 4 3 3 , 3 ( $ ) 7 9 3 , 9 2 ( ) 4 3 3 , 3 ( $ 3 9 7 3 4 — — 0 8 1 3 7 , 9 3 2 7 , 8 8 ) 9 3 4 , 2 ( ) 4 7 2 , 1 2 ( $ 1 7 0 , 8 3 6 ) 3 9 1 , 3 ( — — 4 0 7 4 5 8 , 9 4 2 7 , 0 9 ) 8 0 1 , 6 ( ) 5 8 2 , 1 2 ( — — — — — — — — — — — — — — $ ) 1 3 7 , 2 3 ( ) 3 9 1 , 3 ( $ 6 3 8 9 3 — — — — — — — — — — — — — — — — $ 7 6 7 , 8 0 7 $ ) 4 2 9 , 5 3 ( $ 5 7 8 — — — 9 6 2 — ) 3 8 1 , 3 ( 8 1 2 , 0 1 8 2 3 , 4 7 ) 0 4 2 , 1 2 ( ) 7 5 1 , 1 1 ( $ 2 0 0 , 8 5 7 — — — — — — — — ) 3 8 1 , 3 ( — 7 3 — — — — — — — $ ) 7 0 1 , 9 3 ( $ 2 1 9 — — — — — — ) 4 7 2 , 1 2 ( 3 2 7 , 8 8 — — — — — — — ) 9 3 4 , 2 ( — — — — — — — 0 1 6 — — — 0 8 — — — 1 2 1 , 9 — — — — — — — — — 6 5 2 — 4 — — — — 1 1 6 , 3 8 2 $ ) 2 1 5 , 1 0 1 ( $ 1 1 7 , 0 1 $ 8 6 1 , 3 0 4 $ 3 $ 8 7 9 0 3 , 0 6 0 , 1 5 3 $ ) 1 5 9 , 3 0 1 ( $ 1 2 3 , 1 1 $ 9 6 3 , 2 1 4 $ 3 $ 8 3 2 1 3 , — — — — — — ) 5 8 2 , 1 2 ( 4 2 7 , 0 9 — — — — — — — ) 8 0 1 , 6 ( — — — — — — — 5 6 1 — — — — — — 4 0 7 9 8 6 , 9 9 9 4 , 0 2 4 $ ) 9 5 0 , 0 1 1 ( $ 6 8 4 , 1 1 $ 2 6 7 , 2 2 4 — — — — — — 7 6 3 8 2 3 , 4 7 ) 0 4 2 , 1 2 ( — 4 5 9 , 3 7 4 — — — — — — — — — ) 7 5 1 , 1 1 ( $ ) 6 1 2 , 1 2 1 ( — — — — — — — — — — — — — — ) 7 6 3 ( 9 6 2 8 1 2 , 0 1 — — — — — — — — — — — $ 3 — — — — — — — — — — — 3 6 ) 7 3 ( 2 1 — — — — — $ 6 7 2 1 3 , — — 9 0 1 ) 6 1 ( 4 — — — — $ 6 8 4 , 1 1 $ 2 8 8 , 2 3 4 $ 3 $ 3 7 3 1 3 , s d r a w a k c o t s d e t c i r t s e r f o e r u t i e f r o F s r e d l o h k c o t s o t d i a p d n e d i v i D n o i t a s n e p m o c d e s a b - k c o t S s n o i t p o k c o t s f o e s i c r e x E e m o c n i t e N ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O s d r a w a k c o t s d e t c i r t s e r f o e r u t i e f r o F d r a w a k c o t s d e t c i r t s e r f o e c n a u s s I 6 1 0 2 , 1 3 t s u g u A t a e c n a l a B k c o t s y r u s a e r t f o e s a h c r u P ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O g n i t n u o c c a f o t c e f f e e v i t a l u m u C U S A f o n o i t p o d a e h t r o f e g n a h c t s o p o r e A f o n o i t i s i u q c A 7 1 0 2 , 1 3 t s u g u A t a e c n a l a B s r e d l o h k c o t s o t d i a p d n e d i v i D n o i t a s n e p m o c d e s a b - k c o t S s n o i t p o k c o t s f o e s i c r e x E e m o c n i t e N s d r a w a k c o t s d e t c i r t s e r f o e r u t i e f r o F d r a w a k c o t s d e t c i r t s e r f o e c n a u s s I k c o t s y r u s a e r t f o e s a h c r u P ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O 8 1 0 2 , 1 3 t s u g u A t a e c n a l a B s r e d l o h k c o t s o t d i a p d n e d i v i D n o i t a s n e p m o c d e s a b - k c o t S s n o i t p o k c o t s f o e s i c r e x E e m o c n i t e N 9 0 - 6 1 0 2 5 1 0 2 , 1 3 t s u g u A t a e c n a l a B k c o t s y r u s a e r t f o e s a h c r u P k c o t s d e t c i r t s e r f o e c n a u s s I . s e t o n g n i y n a p m o c c a e e S 6 3 PRICESMART, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) Years Ended August 31, 2017 2018 2016 Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Allowance for doubtful accounts Asset impairment and closure costs (Gain)/loss on sale of property and equipment Deferred income taxes Equity in (gains)/losses of unconsolidated affiliates Stock-based compensation Change in operating assets and liabilities: Receivables, prepaid expenses and other current assets, accrued salaries and benefits, deferred membership income and other accruals Merchandise inventories Accounts payable Net cash provided by (used in) operating activities Investing Activities: Business acquisition, net of cash acquired Additions to property and equipment Short-term investments Proceeds from settlements of short-term investments Deposits for land purchase option agreements Proceeds from disposal of property and equipment Capital contributions to joint ventures Net cash provided by (used in) investing activities Financing Activities: Proceeds from long-term bank borrowings Repayment of long-term bank borrowings Proceeds from short-term bank borrowings Repayment of short-term bank borrowings Cash dividend payments Purchase of treasury stock for tax withholding on stock compensation Proceeds from exercise of stock options Apportionment attributable to noncontrolling interest Net cash provided by (used in) financing activities Effect of exchange rate changes on cash, cash equivalents, and restricted cash Net increase (decrease) in cash, cash equivalents Cash, cash equivalents, and restricted cash at beginning of period Cash, cash equivalents, and restricted cash at end of period $ 74,403 $ 90,724 $ 88,723 52,640 (369) 1,929 1,339 6,962 8 10,218 46,292 — — 1,961 (2,845) 1 9,689 (1,108) (10,079) (16,489) 119,454 1,894 (28,039) 3,344 123,021 (23,895) (98,109) (77,997) 45,693 (100) 629 — (153,779) — (135,294) — — (300) 377 — (135,217) 28,500 (32,088) 81,851 (81,851) (21,240) (3,183) 269 (75) (27,817) (6,656) (68,798) 165,712 $ 96,914 $ 47,700 (29,395) 678 (17,179) (21,285) (3,193) 704 — (21,970) (2,838) (37,004) 202,716 165,712 $ 39,794 7 — 1,162 2,875 (332) 9,121 (6,679) (15,732) 23,202 142,141 — (77,700) — — (442) 86 (119) (78,175) 14,370 (16,525) 28,927 (19,314) (21,274) (3,334) 80 — (17,070) (2,777) 44,119 158,597 202,716 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized Income taxes Dividends declared but not paid $ $ $ 4,955 $ 52,151 $ — $ 5,915 $ 48,530 $ — $ 4,903 51,238 — 37 The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same amounts shown in the statement of cash flows: 2018 Years Ended August 31, 2017 162,434 $ $ 93,460 $ 405 3,049 460 2,818 2016 199,522 518 2,676 $ 96,914 $ 165,712 $ 202,716 Cash and cash equivalents Short-term restricted cash Long-term restricted cash Total cash, cash equivalents, and restricted cash shown in the Consolidated statements of cash flows See accompanying notes. 38 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION PriceSmart, Inc.’s (“PriceSmart,” the “Company,” or "we") business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. As of August 31, 2018, the Company had 41 consolidated warehouse clubs in operation in 12 countries and one U.S. territory (seven each in Colombia and Costa Rica; five in Panama; four each in Trinidad and Dominican Republic; three each in Guatemala and 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 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, 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. In September 2018 (fiscal year 2019), the Company acquired land in San Cristobal, Guatemala, upon which the Company plans to construct a standard format warehouse club. San Cristobal is expected to open in the fall of 2019. The Company continues to explore other potential sites for future warehouse clubs in Central America, the Caribbean and Colombia. 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 consolidated financial statements have been prepared in accordance with the instructions to Form 10-K for annual 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 annual financial information. The consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation. Reclassifications to the 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 early adopted this ASU as of August 31, 2017. The adoption of this ASU impacted the presentation 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 changes to account for share-based payments to employees according to the new standard as follows: 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): Retained earnings Additional paid-in capital August 31, 2017 balance sheet line item as previously reported $ $ 420,499 $ 422,762 $ Amount reclassified August 31, 2017 balance sheet line item as currently reported 420,866 422,395 367 $ (367) $ F-39 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Presentation of excess tax benefits and employee taxes paid on the statement of cash flows (cid:120) 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 classified 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. (cid:120) 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 $165,000 and $610,000 being reclassified from a financing activity to an operating activity for the twelve months ended August 31, 2017 and 2016, respectively. Reclassifications to the consolidated statement of income – In the fourth quarter of fiscal year 2018, the Company reclassified approximately $2.0 million of expenses related to its newly acquired subsidiary Aeropost, Inc. from warehouse club and other operations expense to cost of goods sold – net merchandise sales. This reclassification was made to conform the full year statement of income presentation of the underlying expenses to their fourth quarter presentation. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation – The 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 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 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 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 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. 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 August 31, 2018 are listed below: Aeropost Store-front Joint Ventures El Salvador Guatemala Tortola Trinidad Countries EL Salvador Guatemala British Virgin Islands Trinidad Ownership Basis of Presentation 60.0 % Consolidated 60.0 % Consolidated 50.0 % Consolidated 50.0 % Consolidated F-40 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 August 31, 2018 are listed below: Real Estate Development Joint Ventures GolfPark Plaza, S.A. Price Plaza Alajuela PPA, S.A. Countries Panama Costa Rica Ownership 50.0 % 50.0 % Basis of Presentation Equity(1) 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. Cash and Cash Equivalents – The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions in the process of settlement. Short-Term Investments –The Company considers as short-term investments certificates of deposit and similar time- based deposits with financial institutions with maturities over three months and up to one year. Goodwill and Other Intangibles – Goodwill and other intangibles totaled $61.3 million as of August 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 $27.3 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 15 – 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 than not that the asset is impaired. The changes in the carrying amount of goodwill for the year ended August 31, 2018 are as follows (in thousands): Goodwill at August 31, 2017 Foreign currency exchange rate changes Aeropost acquisition - see Note 15 Goodwill at August 31, 2018 August 31, 2018 35,642 (543) 11,230 46,329 $ $ The table below summarizes our acquired other intangible assets (in thousands) arising from the Aeropost acquisition: Other intangibles at August 31, 2017 Trade name Developed technology Other intangibles at August 31, 2018 Amortization Net other intangibles at August 31, 2018 Total goodwill and other intangibles, net F-41 August 31, 2018 — 5,100 11,000 16,100 (1,120) 14,980 61,309 $ $ $ $ PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The table below shows our estimated amortization of intangibles for fiscal years 2019 through 2023 and thereafter (in thousands): Twelve Month Ended August 31 2019 2020 2021 2022 2023 Thereafter Total $ $ Amount 2,404 2,411 2,404 2,404 1,373 3,984 14,980 Tax Receivables – The Company pays Value Added Tax (“VAT”) or similar taxes (“input VAT”), income taxes, and other taxes within the normal course of the Company’s business in most of the countries in which the Company 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 card processors to remit a portion of sales processed via credit 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. 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 VAT refund process is defined and structured with regular refunds or offsets. However, the Company, together with its tax and legal advisers, is currently seeking clarification in court in one country without a clearly defined process and expects to prevail. The balance of the VAT receivable in the country with undefined refund mechanisms was approximately $3.1 million and $1.2 million as of August 31, 2018 and August 31, 2017, 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 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 rules (which the Company has challenged in court) effective for fiscal years 2015 to 2018 do not clearly allow us to obtain a refund or offset this excess income tax against other taxes. As of August 31, 2018, the Company had deferred tax assets of approximately $2.1 million in this country. Also, the Company had an income tax receivable balance of $7.1 million as of August 31, 2018 related to excess payments from fiscal years 2015 to 2018. 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. In the third quarter of fiscal year 2018, a revised minimum tax law was passed in this country, which beginning in fiscal year 2020 will reduce the minimum tax rate. Additionally, this law clarifies rules on a go-forward basis for reimbursement of excess minimum tax paid beginning in fiscal year 2019. The Company’s policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows: (cid:120) 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. (cid:120) 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. F-42 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table summarizes the VAT receivables reported by the Company (in thousands): Prepaid expenses and other current assets Other non-current assets Total amount of VAT receivable reported August 31, 2018 August 31, 2017 $ $ 5,921 $ 19,224 25,145 $ 6,650 24,904 31,554 The following table summarizes the income tax receivables reported by the Company (in thousands): Prepaid expenses and other current assets Other non-current assets Total amount of income tax receivable reported August 31, 2018 August 31, 2017 $ $ 6,344 $ 18,165 24,509 $ 6,403 10,492 16,895 Lease Accounting – Certain of the Company's operating leases where the Company is the lessee (see "Revenue Recognition Policy" for lessor accounting) provide for minimum annual payments that increase over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis beginning when the Company takes possession of the property and extending over the term of the related lease including renewal options when the exercise of the option is reasonably assured as an economic penalty may be incurred if the option is not exercised. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the leases is accrued as deferred rent and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts in its straight-line computation for the effect of any “rental holidays” and lessor-paid tenant improvements. In addition to the minimum annual payments, in certain locations, the Company pays additional contingent rent based on a contractually stipulated percentage of sales. Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or 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 utilizes three types of equity awards: restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance based restricted stock units (“PSUs”). 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 RSAs, RSUs and PSUs is based on the fair market value at the time of grant. The Company recognizes the compensation cost related to RSAs and RSUs over the requisite service period as determined by the grant, amortized ratably or on a straight line basis over the life of the grant. The Company recognizes compensation cost for PSUs, over the performance period. If the performance metric is not achieved, the recorded expense is reversed and the remaining PSUs are canceled. The Company reassess the probability of vesting at each reporting period for awards with performance conditions and adjusts compensation cost based on its probability assessment. 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. RSAs are outstanding shares of common stock and have the same cash dividend and voting rights as other 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. F-43 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) PSUs, similar to RSUs, are awarded with dividend equivalents, provided that such amounts become payable only if the performance metric is achieved. At the time the Compensation Committee confirms the performance metric has been achieved, the accrued dividend equivalents are paid on the PSUs. Exit or Disposal Cost Obligations – 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 a leased facility to the new facility during the third quarter of fiscal year 2017. As part of this transaction, the Company 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. Exit costs of approximately $1.0 million and $1.4 million were recorded to net warehouse club cost of goods sold for the twelve months ended August 31, 2018 and 2017, respectively. As of August 31, 2018 there was no remaining accrual for exit obligations as all of the vacated space has been subleased (and/or returned to the landlord), and the Company expects future additional costs to be offset by sublease income. 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 has elected not to revalue long-term debt because this debt will be settled at the carrying value and not at the fair market value. 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. Nonfinancial 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 nonfinancial assets was recorded. The disclosure of fair value of certain financial assets and liabilities recorded at cost is as follows: Cash and cash equivalents: The carrying value approximates fair value due to the short maturity of these instruments. Short-term restricted cash: The carrying value approximates fair value due to the short maturity of these instruments. Short-term investments: Short-term investments consists of certificates of deposit and similar time-based deposits with financial institutions with maturity dates over three months and up to twelve months. The carrying value approximates fair value due to the maturity of the underlying certificates of deposit within the normal operating cycle of the Company. Long-term restricted cash: Long-term restricted cash primarily consists of auto renewable 3-12 month certificates of deposit, which are held as collateral against our long-term debt. The carrying value approximates fair value due to the maturity of the underlying certificates of deposit within the normal operating cycle of the Company. Accounts receivable: The carrying value approximates fair value due to the short maturity of these accounts. Short-term VAT and Income tax receivables: The carrying value approximates fair value due to the short maturity of these accounts. F-44 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Long-term VAT and income tax receivables: The fair value of long-term receivables would normally be measured using a discounted cash flow analysis based on the current market interest rates for similar types of financial instruments, with an estimate of the time these receivables are expected to be outstanding. The Company is not able to provide an estimate as to the time these receivables, owed to the Company by various government agencies, are expected to be outstanding; therefore, the Company has not presented a fair value on the long-term VAT and income tax receivables. Short-term debt: The carrying value approximates fair value due to the short maturity of these instruments. Long-term debt: The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments. These inputs are not quoted prices in active markets but they are either directly or indirectly observable; therefore, they are classified as Level 2 inputs. The carrying value and fair value of the Company’s debt as of August 31, 2018 and August 31, 2017 is as follows (in thousands): August 31, 2018 August 31, 2017 Carrying Value Fair Value(1) Carrying Value Fair Value Long-term debt, including current portion $ 102,575 $ 96,959 $ 106,297 $ 102,911 (1) The Company has disclosed the fair value of long-term debt, including debt for which it has entered into cross-currency interest rate swaps, using the derivative obligation as of August 31, 2018 to estimate the fair value of long-term debt, which includes the effects that the cross- currency interest rate swaps have had on the fair value of long-term debt. 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 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. 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 and 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 and interest expense 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 entire 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. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. See Note 12 - Derivative Instruments and Hedging Activities for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of August 31, 2018 and August 31, 2017. 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 F-45 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) and are limited to less than one year in duration. See Note 12 - Derivative Instruments and Hedging Activities for information on the fair value of open, unsettled forward foreign-exchange contracts as of August 31, 2018 and August 31, 2017. Revenue Recognition – The Company recognizes merchandise sales revenue when title passes to the customer. Membership income represents annual membership fees paid by the Company’s warehouse club members, which are recognized ratably over the 12-month term of the membership. Membership refunds are prorated over the remaining term of the membership; accordingly, no refund reserve is required to be established for the periods presented. PriceSmart also operates a cross-border logistics and e-commerce business through its Aeropost, Inc. (“Aeropost”) subsidiary, which it purchased during March 2018. Aeropost’s primary revenue streams are Casillero (package delivery) and Marketplace (fully landed services). The Company recognizes and presents revenue-producing transactions on a net of value added/sales tax basis. The Company began offering Platinum memberships in Costa Rica during fiscal year 2013 and expanded this offering into Panama, Dominican Republic and Trinidad during fiscal year 2018. The annual fee for a Platinum membership in most markets is approximately $75. The Platinum membership provides members with a 2% rebate on most items, up to an annual maximum of $500. Platinum members can apply this rebate to future purchases at the warehouse club at the end of the annual membership period. The Company records this 2% rebate as a reduction of revenue at the time of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses. The rebate is issued annually to Platinum members on March 1 and expires August 31. The Company periodically reviews expired unused rebates outstanding, and the expired unused rebates are recognized as “Other revenue and income” on the consolidated statements of income. The Company has determined that breakage revenue is immaterial; therefore, it records 100% of the Platinum membership liability at the time of sale, rather than estimating breakage. The Company recognizes gift certificate sales revenue when the certificates are redeemed. The outstanding gift certificates are reflected as other accrued expenses in the consolidated balance sheets. These gift certificates generally have a one-year stated expiration date from the date of issuance. However, the absence of a large volume of transactions for gift certificates impairs the Company's ability to make a reasonable estimate of the redemption levels for gift certificates; therefore, the Company assumes a 100% redemption rate prior to expiration of the gift certificate. The Company periodically reviews unredeemed outstanding gift certificates, and the gift certificates that have expired are recognized as “Other revenue and income” on the consolidated statements of income. The primary revenue streams currently derived from the Company’s Aeropost business are Casillero and Marketplace. The Casillero (package delivery) and Marketplace businesses offer freight forwarding services. The Company enters into contracts with its customers to provide delivery, insurance and customs processing services for products its customers purchase online in the United States either directly from other vendors utilizing the vendor’s website or through the Company’s Marketplace site. Revenue is recognized when the Company’s performance obligations have been completed (that is when delivery of the items have been made to the destination point) and is recorded in “Other revenue and income” on the Consolidated Statements of Income. Prepayment of orders for which the Company has not fulfilled its performance obligation are recorded as unearned revenue. Additionally, the Company records revenue at the net amounts retained. For Marketplace orders this is the amount paid by the customer less amounts remitted to the respective merchandise vendors, as the Company is acting as an agent and is not the principal in the sale of those goods being purchased from the vendors by the Company’s customers. Operating leases where the Company is the lessor with lease payments that have fixed and determinable rent increases are recognized as revenue on a straight-line basis over the lease term. The Company also accounts in its straight-line computation for the effect of any "rental holidays." Contingent rental revenue is recognized as the contingent rent becomes due per the individual lease agreements. 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 U.S. 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 F-46 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 $801,000 as of August 31, 2018. Cost of Goods Sold – The Company includes the cost of merchandise, food service and bakery raw materials in cost of goods sold, net merchandise sales. The Company also includes in cost of goods sold, net merchandise sales the external and internal distribution and handling costs for supplying merchandise, raw materials and supplies to the warehouse clubs. External costs include inbound freight, duties, drayage, fees, insurance, and non-recoverable value-added tax related to inventory shrink, spoilage and damage. Internal costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense and building and equipment depreciation at the Company's distribution facilities and payroll and other direct costs for in-store demonstrations. For export sales, the Company includes the cost of merchandise and external and internal distribution and handling costs for supplying merchandise in cost of goods sold, exports. For the Aeropost operations, the Company includes the costs of external and internal shipping, handling and other direct costs incurred to provide delivery, insurance and customs processing services in cost of goods sold, non-merchandise. Vendor consideration consists primarily of volume rebates, time-limited product promotions, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates that are not threshold based are incorporated into the unit cost of merchandise reducing the inventory cost and cost of goods sold. Volume rebates that are threshold based are recorded as a reduction to cost of goods sold when the Company achieves established purchase levels that are confirmed by the vendor in writing or upon receipt of funds. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is reclassified as a reduction to inventory, if significant. Product promotions are generally linked to coupons that provide for reimbursement to the Company from vendor rebates for the product being promoted. Slotting fees are related to consideration received by the Company from vendors for preferential "end cap" placement of the vendor's products within the warehouse club. Demonstration reimbursements are related to consideration received by the Company from vendors for the in store promotion of the vendors' products. The Company records the reduction in cost of goods sold on a transactional basis for these programs. Prompt payment discounts are taken in substantially all cases, and therefore, are applied directly to reduce the acquisition cost of the related inventory, with the resulting effect recorded to cost of goods sold when the inventory is sold. Selling, General and Administrative – Selling, general and administrative costs are comprised primarily of expenses associated with operating warehouse clubs and freight forwarding operations. These operations include the operating costs of the Company’s warehouse clubs and freight forwarding activities, including payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation, bank, credit card processing fees, and amortization of intangibles. Also included in selling, general and administrative expenses are the payroll and related costs for the Company’s U.S. and regional management and purchasing centers. Pre-Opening Costs – The Company expenses pre-opening costs (the costs of start-up activities, including organization costs and rent) for new warehouse clubs as incurred. 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 twelve months ended August 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. Contingencies and Litigation – The Company records and reserves for loss contingencies if (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can be reasonably estimated. If one or both criteria for accrual are not met, but there is at least a reasonable possibility that a loss will occur, the Company does not record and reserve for a loss contingency but describes the contingency within a note and provides detail, when possible, of the estimated potential loss or range of loss. If an estimate cannot be made, a statement to that effect is made. 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 F-47 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 twelve-month periods ending August 31, 2018, 2017, and 2016 (in thousands): Currency gain (loss) Years Ended August 31, 2017 2016 2018 $ 192 $ 1,241 $ (899) We are also exposed to foreign exchange risks related to changes in exchange rates for assets and liabilities of entities whose functional currency is not the U.S. dollar. The following table discloses the net effect of translation into the reporting currency on other comprehensive income (loss) for these local currency denominated accounts for the twelve month periods ending August 31, 2018, 2017 and 2016: 2018 Years Ended August 31, 2017 2016 Effect on other comprehensive (loss) income due to foreign currency restatement $ (12,890) $ (6,297) $ (1,702) 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 income 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 federal, state and foreign 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. As of August 31, 2018, the Company has $3.7 million recorded for uncertain income tax positions related to its Aeropost subsidiary. See Note 9 – Income Taxes. 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 year 2018. The Company finalized its calculation of this Transition Tax in the fourth quarter of fiscal year 2018, reducing it to approximately $12.5 million. The Company expects that the cash amounts due for the Transition Tax will be offset by foreign tax credits. F-48 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Recent Accounting Pronouncements – Not Yet Adopted FASB ASC 810 ASU 2018-15 – Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract In August 2018, the Financial Accounting Standards Board “FASB” issued Accounting Standards Update (ASU) No. 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As such, the amendment in this ASU requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in subtopic 350-40 in order to determine which implementation costs to capitalize as an asset and which costs to expense. Additionally, the amendments in this ASU require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this ASU are effective for annual periods beginning after December 15, 2019 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 718 ASU 2018-07 - Compensation—Stock Compensation (Topic 718) — Improvements to Nonemployee Share- Based Payment Accounting In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope to include share-based payment transactions for acquiring goods and services from non-employees. The amendments in this ASU apply to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in the grantor’s own operations by issuing share-based payment awards. 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 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. 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 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. F-49 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 requires any reporting unit with a zero or negative carrying amount 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 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 842 ASU 2018-11 -Leases (Topic 842): Targeted Improvements In July 2018, the FASB issued guidance codified in ASC 842, Leases, targeted improvements, which finalizes Proposed ASU No. 2018-200, and assists stakeholders with implementation questions and issues as organizations prepare to adopt the new leases standard in ASU No. 2016-02, Leases (Topic 842). These questions and issues mainly relate to comparative reporting requirements and for lessors only, separating lease and non-lease components in a contract and allocation of the consideration to the separate components. The targeted improvements provide entities with additional and optional transition methods. The amendments in this ASU are effective for annual periods beginning after September 1, 2019 and interim periods within those annual periods. The Company does not expect the targeted improvements to have an impact on the Company’s consolidated financial statements. FASB ASC 606 ASU 2014-09 - Revenue from Contracts with Customers In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. The guidance converges the requirements for reporting revenue and requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows. 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, using the modified retrospective approach through a cumulative effect adjustment to retained earnings. The Company has substantially completed its assessment of the new standard and it does not believe the impacts to be material to the Company's consolidated financial statements. The Company continues to evaluate the disclosure requirements related to the new standard. Recent Accounting Pronouncements Adopted 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 has evaluated the impact adoption of this guidance may have on the Company’s consolidated financial statements. The Company has determined that it does not have non-inventory intra-entity transfers of intellectual property and all other non-inventory transfers of assets are recognized at the time of transfer, in accordance with the guidance within ASU 2016-16. Therefore adoption of the guidance did not have a material impact on the Company’s financial statements. F-50 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 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. The Company adopted this guidance during the third quarter of fiscal year 2018 and elected to reclassify the income tax effects of the tax reform from accumulated other comprehensive income to retained earnings. Adoption of this guidance did not have a material effect on the Company's consolidated financial statements. 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. (cid:120) 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. (cid:120) 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. (cid:120) 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 (see Note 1 – “Company Overview and Basis of Presentation”), at the beginning of the year of adoption, which was September 1, 2017, for the service periods already incurred for unvested shares. F-51 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. 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 impacted the presentation of cash flows with inclusion of restricted cash flows for each of the presented periods. 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 early adopted this guidance on December 1, 2017. Adoption of this guidance did not have an effect on the Company's consolidated financial statements. F-52 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 3 – PROPERTY AND EQUIPMENT Property and equipment are stated at historical cost. The historical cost of acquiring an asset includes the costs incurred to bring it to the condition and location necessary for its intended use. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The useful life of fixtures and equipment ranges from three to 15 years and that of certain components of building improvements and buildings from 10 to 25 years. Leasehold improvements are amortized over the shorter of the life of the improvement or the expected term of the lease. In some locations, leasehold improvements are amortized over a period longer than the initial lease term where management believes it is reasonably assured that the renewal option in the underlying lease will be exercised because an economic penalty may be incurred if the option is not exercised. The sale or purchase of property and equipment is recognized upon legal transfer of property. Property and equipment consist of the following (in thousands): Land Building and improvements Fixtures and equipment Construction in progress Total property and equipment, historical cost Less: accumulated depreciation Property and equipment, net Depreciation and amortization expense (in thousands): August 31, 2018 172,051 $ 424,736 228,891 38,495 864,173 (269,770) 594,403 $ August 31, 2017 161,579 382,236 198,147 40,224 782,186 (224,357) 557,829 $ $ Years Ended August 31, 2017 2016 2018 Depreciation and amortization expense, Property and equipment $ 51,520 $ 46,292 $ 39,794 The Company capitalizes interest on expenditures for qualifying assets over a period that covers the duration of the activities required to get the asset ready for its intended use, provided that expenditures for the asset have been made and interest cost is being incurred. Interest capitalization continues as long as those activities and the incurrence of interest cost continue. The amount capitalized in an accounting period is determined by applying the Company’s consolidated capitalization rate (average interest rate) to the average amount of accumulated expenditures for the qualifying asset, for each country, during the period. The capitalization rates are based on the interest rates applicable to borrowings outstanding during the period. Total interest capitalized (in thousands): Total interest capitalized Total interest capitalized (in thousands): Balance as of August 31, 2018 August 31, 2017 $ 9,043 $ 8,262 Interest capitalized Years Ended August 31, 2017 2016 2018 $ 1,134 $ 447 $ 1,082 F-53 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A summary of asset disposal activity for fiscal years 2018, 2017 and 2016 is as follows (in thousands): Fiscal Year 2018 Fiscal Year 2017 Fiscal Year 2016 Historical Cost Accumulated Depreciation Receivables and Proceeds from Disposal Gain/(Loss) Recognized $ $ $ 10,465 $ 19,774 $ 7,578 $ 8,388 $ 17,436 $ 6,330 $ 738 $ 377 $ 86 $ (1,339) (1,961) (1,162) The Company also recorded within accounts payable and other accrued expenses approximately $81,000 and $1.4 million, respectively, as of August 31, 2018 and $612,000 and $3.1 million, respectively, as of August 31, 2017 of liabilities related to the acquisition and/or construction of property and equipment. NOTE 4 – 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. The following table sets forth the computation of net income per share attributable to PriceSmart for the twelve months ended August 31, 2018, 2017 and 2016 (in thousands, except per share amounts): Net income attributable to PriceSmart, Inc. per share available for distribution: Less: Allocation of income to unvested stockholders Net earnings available to common stockholders Basic weighted average shares outstanding Add dilutive effect of stock options (two-class method) Diluted average shares outstanding Basic net income per share Diluted net income per share NOTE 5 – STOCKHOLDERS’ EQUITY Dividends Years Ended August 31, 2017 2018 2016 $ $ $ $ 74,328 (897) 73,431 30,115 — 30,115 2.44 2.44 $ $ $ $ 90,724 $ (1,321) 89,403 $ 30,020 3 30,023 2.98 $ 2.98 $ 88,723 (1,431) 87,292 29,928 5 29,933 2.92 2.92 The following table summarizes the dividends declared and paid during fiscal years 2018, 2017 and 2016. First Payment Second Payment Declared 1/24/2018 2/1/2017 2/4/2016 Amount $ 0.70 $ 0.70 $ 0.70 Record Date Date Paid Record Date Date Paid Amount Amount 2/14/2018 2/28/2018 $ 0.35 8/15/2018 8/31/2018 $ 0.35 2/15/2017 2/28/2017 $ 0.35 8/15/2017 8/31/2017 $ 0.35 2/15/2016 2/29/2016 $ 0.35 8/15/2016 8/31/2016 $ 0.35 F-54 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Comprehensive Income and Accumulated Other Comprehensive Loss The following table discloses the changes in each component of other comprehensive income (loss), net of tax (in thousands): Attributable to PriceSmart Noncontrolling Interests Total Beginning balance, August 31, 2015 Foreign currency translation adjustments Defined benefit pension plans (1) Derivative Instruments (2) Amounts reclassified from accumulated other comprehensive income (loss) Ending balance, August 31, 2016 Foreign currency translation adjustments Defined benefit pension plans (1) Derivative Instruments (2) Amounts reclassified from accumulated other comprehensive income (loss) Ending balance, August 31, 2017 Foreign currency translation adjustments Defined benefit pension plans (1) Derivative Instruments (2) Amounts reclassified from accumulated other comprehensive income (loss) Ending balance, August 31, 2018 $ $ $ $ $ (101,512) $ (1,702) (182) (535) (20) (103,951) $ (6,297) $ (166) 316 39 (110,059) $ (12,890) $ (87) 1,779 41 $ (121,216) $ — $ — — — — — $ — $ — — — — $ (1) $ — — — (1) $ (101,512) (1,702) (182) (535) (20) (103,951) (6,297) (166) 316 39 (110,059) (12,891) (87) 1,779 41 (121,217) (1) Amounts reclassified from accumulated other comprehensive income (loss) related to the minimum pension liability are included in warehouse club and other operations in the Company's consolidated statements of income. (2) See Note 12 – “Derivative Instruments and Hedging Activities.” 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): Retained earnings not available for distribution NOTE 6 – POST EMPLOYMENT PLANS Defined Contribution Plans August 31, 2018 August 31, 2017 $ 6,798 $ 6,459 PriceSmart offers a defined contribution 401(k) retirement plan to its U.S. employees, including warehouse club employees in the U.S. Virgin Islands, which auto-enrolls employees in the plan immediately on the first day of employment. The Company makes nondiscretionary contributions to the 401(k) plan with a 4% “Company Contribution” based on the employee’s salary regardless of the employee’s own contributions to the plan up to the IRS maximum allowed. Effective January 1, 2016, the Company also makes nondiscretionary contributions to the 401(k) plan to the non-officer employees that defer up to 2% of their salary. Employer contributions to the 401(k) plan for the Company's U.S. employees were $2.0 million, $1.8 million and $1.7 million during fiscal years 2018, 2017 and 2016, respectively. PriceSmart also offers and/or is implementing defined contribution retirement plans in most of its subsidiaries. The Company makes nondiscretionary contributions to these plans based on the employee’s salary, regardless of the employee’s own contributions to the plan, up to the maximum allowed. The expenses associated with the plans for the Company’s non-U.S. employees were $2.9 million, $3.1 million and $3.1 million during fiscal years 2018, 2017, and 2016, respectively. F-55 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Defined Benefit Plans The Company's subsidiaries located in three countries are parties to unfunded post-employment benefit plans (defined benefit plans) in which the subsidiary is required to pay a specified benefit upon retirement, voluntary departure or death of the employee. The amount of the benefit is predetermined by a formula based on the employee's earnings history, tenure of service and age. Because the obligation to provide benefits arises as employees render the services necessary to earn the benefits pursuant to the terms of the plan, the Company recognizes the cost of providing the benefits over the projected employee service periods. These payments are only due if an employee reaches certain thresholds, such as tenure and/or age. Therefore, these plans are treated as defined benefit plans. For these defined benefit plans, the Company has engaged actuaries to assist with estimating the current costs associated with these future benefits. The liabilities for these unfunded plans are recorded as non-current liabilities. The following table summarizes the amount of the funding obligation and the line items in which it is recorded on the consolidated balance sheets as of August 31, 2018 and 2017 and consolidated statements of income for the fiscal years ended August 31, 2018, 2017 and 2016 (in thousands): Other Long-Term Liability Accumulated Other Comprehensive Loss August 31, 2017 2018 2017 Operating Expenses Year Ended August 31, 2017 2018 2016 Start of period Service cost Interest cost Prior service cost (amortization) Actuarial gains/(losses) Totals $ $ 2018 (1,070) $ (17) (64) (882) $ 88 (80) — (139) (1,290) $ — (196) (1,070) $ 650 $ — — (52) 121 719 $ $ 465 — — (55) 240 650 (1) $ — $ 117 64 52 13 246 $ — $ 119 80 55 (45) 209 $ — 35 52 56 (87) 56 (1) The Company has recorded a deferred tax (liability)/asset of $231,000 and $208,000 as of August 31, 2018 and 2017, respectively, relating to the unrealized expense on defined benefit plans. The Company also recorded accumulated other comprehensive income (loss), net of tax, for $(488,000) and $(442,000) as of August 31, 2018 and 2017, respectively. The valuation assumptions used to calculate the liability for the defined benefit plans differ based on the country where the plan applies. These assumptions are summarized as follows: Valuation Assumptions: Discount rate Future salary escalation Percentage of employees assumed to withdraw from Company without a benefit (“turnover”) Percentage of employees assumed to withdraw from Company with a benefit (“disability”) Year Ended August 31, 2017 2018 3.5% to 10.8% 3.0% to 5.0% 3.5% to 10.5% 3.0% to 5.0% 9.6% to 19.5% 3.9% to 19.5% 0.5% to 4.5% 0.5% to 6.0% For the fiscal year ending August 31, 2018, the Company expects to recognize, as components of net periodic benefit cost, the following amounts currently recorded in accumulated other comprehensive income (in thousands): Prior service cost Actuarial gain/loss Expected Recognition Year Ended August 31, 2019 $ $ 55 64 119 F-56 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Other Post-Employment Benefit Plans Some of the Company’s subsidiaries are parties to funded and unfunded post-employment benefit plans based on services that the employees have rendered. These plans require the Company to pay a specified benefit on retirement, voluntary departure or death of the employee, or monthly payments to an external fund manager. The amount of these payments is predetermined by a formula based on the employee's earnings history and tenure of service. Because the obligation to provide benefits arises as employees render the services necessary to earn the benefits pursuant to the terms of the plan, the cost associated with providing the benefits is recognized as the employee provides those services. The employees' rights to receive payment on these plans are not dependent on their reaching certain thresholds like age or tenure. Therefore, these plans are not treated as defined benefit plans. For these post-employment benefit plans, the Company has accrued liabilities that are recorded as accrued salaries and benefits and other long-term liabilities. The following table summarizes the amounts recorded on the balance sheet and amounts expensed on the consolidated statements of income (in thousands): Accrued Salaries and Benefits Other Long-Term Liability Restricted Cash Held (1) Operating Expenses 2018 2017 2018 Years Ended August 31, 2018 2017 2017 2018 2017 2016 Other Post- Employment Plans $ 443 $ 425 $ 3,077 $ 2,720 $ 2,772 $ 2,493 $ 1,187 $ 1,017 $ 1,026 (1) With some locations, local statutes require the applicable Company subsidiary to deposit cash in its own name with designated fund managers. The funds earn interest which the Company recognizes as interest income. NOTE 7 – STOCK BASED COMPENSATION Stock Based Compensation – The Company utilizes three types of equity awards: restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance based restricted stock units (“PSUs”) see Note 2 – Summary of Significant Accounting Policies. 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. F-57 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company adopted the 2013 Equity Incentive Award Plan (the "2013 Plan") for the benefit of its eligible employees, consultants and non-employee directors on January 22, 2013. The 2013 Plan provides for awards covering up to (1) 600,000 shares of common stock plus (2) the number of shares that remained available for issuance as of January 22, 2013 under three equity participation plans previously maintained by the Company. The number of shares reserved for issuance under the 2013 Plan increases during the term of the plan by the number of shares relating to awards outstanding under the 2013 Plan or any of the prior plans that expire, or are forfeited, terminated, canceled or repurchased, or are settled in cash in lieu of shares. However, in no event will more than an aggregate of 951,741 shares of the Company’s common stock be issued under the 2013 Plan. The following table summarizes the shares authorized and shares available for future grants: Shares authorized for issuance as of August 31, 2018 (including shares originally authorized for issuance under prior plans) 951,741 August 31, 2018 566,324 August 31, 2017 637,822 2013 Plan Shares available to grant The following table summarizes the components of the stock-based compensation expense for the twelve-month periods ended August 31, 2018, 2017 and 2016 (in thousands), which are included in general and administrative expense and warehouse club and other operations in the consolidated statements of income: Options granted to directors Restricted stock awards Restricted stock units Stock-based compensation expense Years Ended August 31, 2017 2016 2018 $ $ — $ 7,476 2,742 10,218 $ 18 $ 7,301 2,370 9,689 $ 72 7,103 1,946 9,121 The following tables summarize other information related to stock-based compensation: Remaining unrecognized compensation cost (in thousands) Weighted average period of time over which this cost will be recognized (years) August 31, 2018 Balance as of August 31, 2017 August 31, 2016 $ 29,473 $ 26,382 $ 32,380 3 3 4 August 31, 2018 Years Ended August 31, August 31, 2017 2016 Excess tax benefit (deficiency) on stock-based compensation (in thousands) $ 530 (1) $ 165 $ 610 (1) Beginning in the first quarter of fiscal year 2018, the Company began recording the tax savings resulting from tax deductions in excess of expense for stock-based compensation and the tax deficiencies resulting from stock-based compensation in excess of the related tax deduction as income tax expense or benefit, based on the adoption of ASU 2016-09. See Note 2 – Summary of Significant Accounting Policies for the Company’s explanation of the accounting implications from the adoption of ASU 2016-09. F-58 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The restricted stock awards and units vest from a one-year to ten-year period and the unvested portion of the award is forfeited if the employee or non-employee director leaves the Company before the vesting period is completed. Restricted stock awards and units activity for the twelve-months ended August 31, 2018, 2017 and 2016 was as follows: Grants outstanding at beginning of period Granted Forfeited Vested Grants outstanding at end of period August 31, 2018 404,368 132,031 (23,119) (127,863) 385,417 Years Ended August 31, 2017 509,880 56,724 (40,023) (122,213) 404,368 August 31, 2016 366,021 276,530 (1,372) (131,299) 509,880 The following table summarizes the weighted average per share grant date fair value for restricted stock awards and units for fiscal years 2018, 2017 and 2016: Weighted Average Grant Date Fair Value Restricted stock awards and units granted Restricted stock awards and units vested Restricted stock awards and units forfeited August 31, 2018 Years Ended August 31, 2017 August 31, 2016 $ $ $ 84.83 $ 79.36 $ 73.27 $ 87.43 $ 77.85 $ 77.19 $ 84.69 71.19 — The following table summarizes the total fair market value of restricted stock awards and units vested for the period (in thousands): August 31, 2018 Years Ended August 31, 2017 August 31, 2016 Total fair market value of restricted stock awards and units vested (in thousands) $ 10,886 $ 10,135 $ 10,139 At the vesting dates for restricted stock awards to employees, the Company repurchases 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. The Company expects to continue this practice going forward. The Company does not have a stock repurchase program. Shares of common stock repurchased by the Company are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in the Company’s consolidated balance sheets. The Company may reissue these treasury shares. The following table summarizes the shares repurchased during fiscal years 2018, 2017 and 2016: Shares repurchased Cost of repurchase of shares (in thousands) August 31, 2018 Years Ended August 31, 2017 37,414 38,634 $ 3,183 $ 3,193 $ August 31, 2016 43,171 3,334 The Company reissues treasury shares as part of its stock-based compensation programs. There have not been any reissuances of treasury shares during fiscal years 2018, 2017 and 2016, respectively. Due to the shift from the use of stock options to restricted stock awards and units, the Company no longer has any outstanding stock options, no further disclosure on options is necessary. F-59 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 8 – 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 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. Taxes 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 (see Note 9 - Income Taxes for additional information). 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 August 31, 2018 and 2017, the Company has recorded within other accrued expenses a total of $3.0 million and $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. Other Commitments The Company is committed under non-cancelable operating leases for the rental of facilities and land (see Note 11 “Leases”). 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. As of August 31, 2018 all of the vacated space has been subleased (and/or returned to the landlord). As part of the subleases the Company provided the landlord of the leased facility a letter of credit (“LOC”) for the initial amount of $500,000 which entitled the landlord to draw on the LOC based on a decreasing scale over four years, 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. F-60 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company is also committed to non-cancelable construction services obligations for various warehouse club and regional distribution center developments and expansions. As of August 31, 2018 the Company had approximately $10.6 million 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 approximately $400,000. The land purchase option agreements can be canceled at the sole option of the Company. The Company does not have a timetable of when or if it will exercise these land purchase options, due to the uncertainty related to the completion of the Company's due diligence reviews. The Company's due diligence reviews include evaluations of the legal status of each 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 would be approximately $36.3 million. See Note 14 – “Unconsolidated Affiliates” for a description of additional capital contributions that may be required in connection with joint ventures to develop commercial centers adjacent to PriceSmart warehouse clubs in Panama and Costa Rica. The Company contracts for distribution center services in Mexico. The contract for this distribution center's services expires on August 31, 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 $331,000. The Company contracts for data recovery services. The contract for these data recovery services expires on November 30, 2019, with the option of an automatic one year renewal. Future minimum service commitments related to this contract through the end of the contract term are approximately $465,000. NOTE 9 – INCOME TAXES Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates includes the following components (in thousands): United States Foreign Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates Years Ended August 31, 2017 2018 $ 19,723 $ 24,773 $ 102,865 107,970 2016 25,533 105,707 $ 122,588 $ 132,743 $ 131,240 Significant components of the income tax provision are as follows (in thousands): Current: U.S. Foreign Total Deferred: U.S. Foreign Valuation allowance change Total Provision for income taxes Years Ended August 31, 2017 2018 2016 $ $ $ $ $ 10,827 $ 30,389 41,216 $ 8,225 $ 3,516 (4,780) 6,961 $ 48,177 $ 12,185 $ 32,680 44,865 $ (2,584) $ (1,750) 1,487 (2,847) $ 42,018 $ 9,269 30,705 39,974 832 (82) 2,125 2,875 42,849 F-61 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The reconciliation of income tax computed at the Federal statutory tax rate to the provision for income taxes is as follows (in percentages): Federal tax provision at statutory rates State taxes, net of federal benefit Differences in foreign tax rates Permanent items and other adjustments (Decrease)/Increase in foreign valuation allowance Provision for income taxes Years Ended August 31, 2017 35.0 % 0.3 (5.2) 1.5 0.1 31.7 % 2018 25.7 % 0.2 3.9 10.8 (1.3) 39.3 % 2016 35.0 % 0.2 (5.6) 2.0 1.0 32.6 % Significant components of the Company’s deferred tax assets as of August 31, 2018 and 2017 are shown below (in thousands): Deferred tax assets: U.S. net operating loss carryforward Foreign tax credits Deferred compensation U.S. timing differences Foreign net operating losses Foreign timing differences: Accrued expenses and other timing differences Depreciation and amortization Deferred income Gross deferred tax assets U.S. deferred tax liabilities (depreciation and other timing differences) Foreign deferred tax liabilities netted against deferred tax assets U.S. valuation allowance Foreign valuation allowance Net deferred tax assets August 31, 2018 2017 4,470 $ 126 907 1,609 5,276 5,122 10,406 3,545 31,461 (5,844) (5,722) (1,005) (8,724) 10,166 $ 1,684 3,794 1,633 3,042 10,247 3,871 9,514 4,037 37,822 (3,646) (4,744) (488) (13,532) 15,412 $ $ For fiscal year 2018, the effective tax rate was 39.3%. The increase in the effective rate versus the prior year was primarily attributable to the following factors: 1. The comparably unfavorable impact of 10.2% resulting from the U.S. Tax Reform Transition Tax in fiscal year 2018. 2. The comparably favorable net impact of 2.4%, resulting from the U.S. Tax Reform current rate reduction which favorably impacted the Company’s effective tax rate by 2.6%, partially offset by an unfavorable re-measurement of net deferred tax assets/liabilities of 0.2%. 3. The comparably favorable impact of 1.6% resulting from improved financial results in the Company’s Colombia subsidiary for which no tax attribute was recognized, net of adjustment to valuation allowance. 4. The comparatively unfavorable impact on the effective tax rate of 1.0% resulting from a decrease in fiscal year 2018 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 compared to the prior year. 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. The Company expects the decrease of the favorable impact to the consolidated Company’s effective tax rate to continue into fiscal year 2019. 5. The comparably unfavorable impact of 1.6% resulting from the Company’s Aeropost subsidiary’s overall effective tax rate and acquisition-related accounting. F-62 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) For fiscal year 2018, management concluded that a valuation allowance continues to be necessary for certain U.S. and foreign deferred tax assets, primarily because of the existence of negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, and the determination that certain net operating loss carryforward periods are not sufficient to realize the related deferred tax assets. The Company factored into its analysis the inherent risk of forecasting revenue and expenses over an extended period of time and also considered the potential risks associated with its business. The Company had net foreign deferred tax assets of $9.9 million and $9.4 million as of August 31, 2018 and 2017, respectively. The Company had U.S. federal and state tax NOLs at August 31, 2018 of approximately $18.0 million and $23.5 million, respectively. Substantially all of the federal and state NOLs expire during periods ranging from 2019 through 2036, unless previously utilized. In calculating the tax provision and assessing the likelihood that the Company will be able to utilize the deferred tax assets, the Company considered and weighed all of the evidence, both positive and negative, and both objective and subjective. The Company factored in the inherent risk of forecasting revenue and expenses over an extended period of time and considered the potential risks associated with its business. Using the Company's U.S. income from continuing operations and projections of future taxable income in the U.S., the Company was able to determine that there was sufficient positive evidence to support the conclusion that it was more likely than not that the Company would be able to realize substantially all of its U.S. NOLs by generating sufficient taxable income during the carry-forward period. However, the Company maintains a valuation allowance on substantially all of its California state NOLs ($5.5 million in gross) due to the adoption of single sales factor apportionment in California, which significantly reduces taxable income in that state. Further, based on current projections and using current apportionment factors, the Company maintains a partial valuation allowance on its Florida state NOLs ($18.0 million in gross) originating from its recently acquired Aeropost, Inc. subsidiary, as the Company expects that $9.4 million of this NOL will expire before being utilized. The Company has determined that due to a deemed change of ownership (as defined in Section 382 of the Internal Revenue Code) in October 2004, for PriceSmart, Inc., and March 2018 for Aeropost, Inc., there will be annual limitations in the amount of U.S. taxable income that may be offset by NOLs of approximately $7.5 million, through 2022. The Company expects substantially all recoverable NOLs will be recovered by 2023. The Company does not provide for income taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted to the U.S. because the Company considers these earnings to be permanently reinvested as management has no plans to repatriate undistributed earnings and profits of foreign affiliates. As of August 31, 2018 and 2017, the undistributed earnings of these foreign subsidiaries are approximately $45.2 million and $544.6 million, respectively. Undistributed earnings were substantially reduced this year by action of the transition tax imposed upon the Company by the U.S. Tax Reform. The Company accrues for the estimated additional amount of taxes for uncertain income tax positions if the likelihood of sustaining the tax position does not meet the more-likely-than-not-standard for recognition of tax benefits. These positions are recorded as unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Years Ended August 31, 2017 2018 2016 Balance at beginning of fiscal year Gross increase - tax positions in prior period Gross decrease - tax positions in prior period Additions based on tax positions related to the current year Settlements Expiration of the statute of limitations for the assessment of taxes Balance at end of fiscal year $ $ 7,694 $ 1,600 (1) (2,526) (2) 258 — (21) 7,005 $ 7,754 $ — — 36 (65) (31) 7,694 $ 8,159 — — — — (405) 7,754 (1) Aeropost related unrecognized tax benefits, with corresponding increase to Goodwill, due to current year acquisition. (2) Beneficial impact of US tax rate change, with corresponding detrimental rate change offset in deferred tax assets. As of August 31, 2018, the liability for income taxes associated with unrecognized tax benefits was $7.0 million and can be reduced by $4.5 million of tax benefits recorded as deferred tax assets and liabilities. The total $7.0 million unrecognized tax benefit includes $400,000 of associated timing adjustments. The net amount of $6.6 million would, if recognized, favorably affect the Company's financial statements and favorably affect the Company's effective income tax rate. F-63 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company recognizes interest and/or penalties related to unrecognized tax benefits in income tax expense. As of August 31, 2018 and 2017, the Company had accrued an additional $2.1 million (including $1.8 million for Aeropost) and $214,000, respectively, for the payment of interest and penalties related to the above mentioned unrecognized tax benefits. The Company expects changes in the amount of unrecognized tax benefits in the next 12 months as the result of a lapse in various statutes of limitations. The lapse of statutes of limitations in the twelve-month period ending August 31, 2018 could result in a total income tax benefit amounting up to $1.4 million. The 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 timing of audit settlements are subject to significant uncertainty. In one country in which the Company 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 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 August 31, 2018, the Company had deferred tax assets of approximately $2.1 million in this country. Also, the Company had an income tax receivable balance of $7.1 million as of August 31, 2018 related to excess payments from fiscal years 2015 and 2018. 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 succeed in its refund request and/or court challenge on this matter. In the third quarter of fiscal year 2018, a revised minimum tax law was passed in this country, which beginning in fiscal year 2020 will reduce the minimum tax rate. Additionally, this law clarifies rules on a go-forward basis for reimbursement of excess minimum tax paid beginning in fiscal year 2019. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions except for the fiscal years subject to audit as set forth in the table below: Tax Jurisdiction U.S. federal California (U.S.) (state return) Florida(U.S.) (state return) Aruba Barbados Costa Rica Colombia Dominican Republic El Salvador Guatemala Honduras Jamaica Mexico Nicaragua Panama Trinidad U.S. Virgin Islands Spain *Aeropost only Fiscal Years Subject to Audit 2001 to 2005, 2007, 2011* to 2014*, 2015 to the present 2005 and 2014 to the present 2011 to 2014*, 2015 to the present 2012 to the present 2012 to the present 2011 to 2012, 2013*, 2014 to the present 2014 to the present 2011 to 2012 and 2014 to the present 2015 to the present 2009, 2012 to the present 2013 to the present 2012 to the present 2013 to the present 2014 to the present 2015 to the present 2012 to the present 2001 to the present 2015 to the present Generally for U.S. federal and U.S. Virgin Islands tax reporting purposes, the statute of limitations is three years from the date of filing of the income tax return. If and to the extent the tax year resulted in a taxable loss, the statute is extended to three years from the filing date of the income tax return in which the carryforward tax loss was used to offset taxable income in the carryforward year. Given the historical losses in these jurisdictions and the Section 382 change in control limitations on the use of the tax loss carryforwards, there is uncertainty and significant variation as to when a tax year is no longer subject to audit. F-64 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 10 – DEBT Short-term borrowings consist of lines of credit which 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): Total Amount of Facilities Short-term Borrowings Letters of Credit Facilities Available Weighted average interest rate August 31, 2018 August 31, 2017 $ $ 69,000 $ 69,000 $ — $ — $ 632 $ 966 $ 68,368 68,034 — % — % Facilities Used As of August 31, 2018 and August 31, 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 August 31, 2018 and August 31, 2017, the Company was in compliance with respect to these covenants. Each of these facilities expires annually and are normally renewed. The following table provides the changes in long-term debt for the twelve months ended August 31, 2018: (Amounts in thousands) Balances as of August 31, 2016 Proceeds from long-term debt incurred during the period: MUFG Union Bank Trinidad subsidiary Repayments of long-term debt: Repayment of loan by Panama subsidiary Regularly scheduled loan payments Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar Balances as of August 31, 2017 Proceeds from long-term debt incurred during the period: Panama subsidiary Honduras subsidiary Repayments of long-term debt: Repayment of loan by Honduras subsidiary with Scotiabank Repayment of loan by Honduras subsidiary with Citibank Repayment of loan by Trinidad subsidiary Regularly scheduled loan payments Reclassifications of long-term debt Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar (3) Balances as of August 31, 2018 Current portion of long- term debt Long-term debt (net of current portion) Total $ 14,565 $ 73,542 $ 88,107 (1) — 6,000 (2,000) (225) 18 18,358 1,500 1,350 (600) (1,850) (3,000) (4,052) 3,005 35,700 6,000 (11,333) (15,837) (133) 87,939 13,500 12,150 (850) (6,063) (3,000) (12,673) (3,005) 35,700 12,000 (13,333) (16,062) (115) 106,297 (2) 15,000 13,500 (1,450) (7,913) (6,000) (16,725) — 144 14,855 $ (278) 87,720 $ (134) 102,575 (4) $ (1) The carrying amount on non-cash assets assigned as collateral for these loans was $102.4 million. No cash assets were assigned as collateral for these loans. (2) The carrying amount on non-cash assets assigned as collateral for these loans was $128.4 million. No cash assets were assigned as collateral for these loans. (3) These foreign currency translation adjustments are recorded within other comprehensive income. (4) The carrying amount on non-cash assets assigned as collateral for these loans was $125.9 million. No cash assets were assigned as collateral for these loans as of August 31, 2017. F-65 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table provides a summary of the long-term loans entered into by the Company: Loans entered into by the Company's subsidiaries with a balloon payment due at the end of the loan term and with non-cash assets assigned as collateral and with/without established debt covenants Loans entered into by the Company's subsidiaries for which the subsidiary has entered into an interest rate swap with non-cash assets assigned as collateral and with/without established debt covenants Loans entered into by the Company's subsidiaries with non-cash assets assigned as collateral and with/without established debt covenants Loans entered into by the Company's subsidiaries for which the subsidiary has entered into a cross-currency interest rate swap with non-cash assets assigned as collateral and with/without established debt covenants Total long-term debt Less: current portion Long-term debt, net of current portion August 31, 2018 August 31, 2017 $ 9,509 $ 18,200 60,849 49,424 4,392 17,585 27,825 102,575 14,855 87,720 $ 21,088 106,297 18,358 87,939 $ As of August 31, 2018, the Company had approximately $93.6 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, 2018, the Company was in compliance with all covenants or amended covenants. As of August 31, 2017, the Company had approximately $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. Annual maturities of long-term debt are as follows (in thousands): Years Ended August 31, 2019 2020 2021 2022 2023 Thereafter Total Amount 14,855 21,729 12,572 5,901 17,449 30,069 102,575 $ $ F-66 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 11 – LEASES The Company is committed under non-cancelable operating leases for the rental of facilities and land. These leases expire or become subject to renewal between November 30, 2018 and January 29, 2044. The following table summarizes the components of rental expense charged for operating leases of open locations for fiscal years 2018, 2017 and 2016 (in thousands): Minimum rental payments Deferred rent accruals Total straight line rent expense Contingent rental payments Common area maintenance expense Rental expense Years Ended August 31, 2018 2017 2016 12,963 $ 127 13,090 3,399 723 17,212 $ 11,223 $ (80) 11,143 3,320 1,174 15,637 $ 9,986 1,363 11,349 3,208 1,369 15,926 $ $ Future minimum lease commitments for facilities under these leases with an initial term in excess of one year are as follows (in thousands): Years Ended August 31, 2019 2020 2021 2022 2023 Thereafter Total Leased Locations(1) 14,062 $ 12,366 11,465 11,382 11,628 137,343 198,246 (2)(3) $ (1) Operating lease obligations have been reduced by approximately $3.3 million to reflect expected sub-lease income. Certain obligations under leasing arrangements are collateralized by the underlying asset being leased. (2) Future minimum lease payments include $2.4 million of lease payment obligations for the prior leased Miami distribution center. For the purposes of calculating the minimum lease payments, a reduction is reflected for the actual sub-lease income the Company expects to receive during the remaining lease term. This sub-lease income was also considered, for the purposes of calculating the exit obligation, which was immaterial as of August 31, 2018. In March 2018, the Company acquired Aeropost, Inc., which provides logistics, payment and e-commerce services in Latin America and the Caribbean. Aeropost currently serves customers in 38 countries with Costa Rica, Trinidad and Jamaica as its largest markets. Aeropost leases and operates small retail stores that enable customers to pick up and pay for merchandise. Future minimum lease payments includes amounts related to these small retail locations, Aeropost Corporate Headquarters, central offices and distribution facilities. (3) The following table summarizes the components of rental income recorded for operating leases for fiscal years 2018, 2017 and 2016 (in thousands): Minimum rental receipts Deferred rent accruals Total straight line rent income Contingent rental receipts Common maintenance area income Rental income Years Ended August 31, 2017 2016 2018 2,750 $ (26) 2,724 130 155 3,009 $ 2,654 $ (17) 2,637 121 141 2,899 $ 2,735 56 2,791 112 151 3,054 $ $ F-67 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company is the landlord for rental of land and/or building space for properties it owns. The following is a schedule of future minimum rental income on non-cancelable operating leases with an initial term in excess of one year from owned property as of August 31, 2018 (in thousands): Years Ended August 31, 2019 2020 2021 2022 2023 Thereafter Total Amount 3,304 3,089 2,743 1,237 973 3,638 14,984 $ $ NOTE 12 – 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 a non-functional currency long-term debt held by various of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposures, the Company’s subsidiaries enter into cross-currency interest rate swaps that convert its 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 hedge is 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 entire 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 income statement line item that is used to present earnings effect of the hedged item when the hedged item affects earnings. The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, including foreign-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-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 August 31, 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. F-68 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table summarizes agreements for which the Company has recorded cash flow hedge accounting transactions during the twelve months ended August 31, 2018: Subsidiary PriceSmart, Inc Date Entered into Derivative Financial Counter- party 7-Nov-16 MUFG Union Bank, N.A. ("Union Bank") Costa Rica 28-Aug-15 Citibank, N.A. ("Citi") Honduras(1) 24-Mar-15 Citibank, N.A. ("Citi") Derivative Financial Instruments Initial US$ Notional Amount Bank US$ loan Held with Interest rate swap $ 35,700,000 Union Bank Floating Leg (swap counter- party) Variable rate 1-month Libor plus 1.7% Fixed Rate for PSMT Subsidiary 3.65 % Settlement Dates 1st day of each month beginning on April 1, 2017 Effective Period of swap March 1, 2017 - March 1, 2027 Cross currency interest rate swap Cross currency interest rate swap $ 7,500,000 Citibank, Variable rate 7.65 % 28th day of August, N.A. 3-month Libor plus 2.50% November, February, and May beginning on November 30, 2015 August 28, 2015 - August 28, 2020 $ 8,500,000 Citibank, Variable rate 10.75 % 24th day of March, Refinanced on N.A. 3-month Libor plus 3.25% June, September, and December beginning on June 24, 2015 February 26, 2018 Honduras(1) 26-Feb-18 Citibank, N.A. ("Citi") Cross currency interest rate swap N.A. 3-month Libor plus 3.00% $ 13,500,000 Citibank, Variable rate 9.75 % 29th day of May, February 26, 2018 - February 24, 2024 December 1, 2014 - August 29, 2019 December 4, 2014 - December 3, 2019 August, November and February beginning May 29, 2018 29th day of each month beginning on December 29, 2014 4th day of March, June, Sept, Dec. beginning on March 4, 2015 El Salvador 16-Dec-14 Bank of Nova Interest rate $ 4,000,000 Bank of Scotia ("Scotiabank") swap Nova Scotia Variable rate 30-day Libor plus 3.5% 4.78 % Colombia 10-Dec-14 Citibank, N.A. Panama 9-Dec-14 ("Citi") Bank of Nova Scotia ("Scotiabank") Cross currency interest rate swap $ 15,000,000 Citibank, Variable rate 8.25 % N.A. 3-month Libor plus 2.8% Interest rate $ 10,000,000 Bank of swap Nova Scotia Variable rate 30-day Libor plus 3.5% 5.16 % 28th day of each month November 28, 2014 beginning December 29, 2014 - November 29, 2019 Honduras 23-Oct-14 Citibank, N.A. ("Citi") Cross currency interest rate swap $ 5,000,000 Citibank, Variable rate 11.6 % 22nd day of January, Settled on N.A. 3-month Libor plus 3.5% April, July, and October beginning on January 22, 2015 October 22, 2017 Panama 1-Aug-14 Bank of Nova Scotia ("Scotiabank") Interest rate $ 5,000,000 Bank of swap Nova Scotia Panama 22-May-14 Bank of Nova Interest rate $ 3,970,000 Bank of Scotia ("Scotiabank") swap Nova Scotia Variable rate 30-day Libor plus 3.5% Variable rate 30-day Libor plus 3.5% 4.89 % 21st day of each month beginning on September 22, 2014 August 21, 2014 - August 21, 2019 4.98 % 4th day of each month beginning on June 4, 2014 May 5, 2014 - April 4, 2019 Panama 25-Jun-18 Bank of Nova Scotia ("Scotiabank") Interest rate $ 14,625,000 Bank of Variable rate 5.99 % 23rd day of each swap Nova Scotia 3-month Libor plus 3.0% month beginning on July 23, 2018 June 25, 2018 - March 23, 2023 (1) 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 year 2015. There was approximately $7.9 million of remaining principal at the time of 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%. F-69 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) For the twelve-month periods ended August 31, 2018, 2017 and 2016 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): Income Statement Classification Interest expense for the year ended August 31, 2018 Interest expense for the year ended August 31, 2017 Interest expense for the year ended August 31, 2016 Interest expense on borrowings(1) Cost of swaps (2) $ $ $ 4,100 $ 3,605 $ 3,087 $ 981 $ 1,588 $ 1,982 $ Total 5,081 5,193 5,069 (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 interest rate swaps designated as cash flow hedging instruments. 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): Floating Rate Payer (Swap Counterparty) Union Bank Citibank N.A. Scotiabank Total Notional Amount as of August 31, 2018 August 31, 2017 $ $ 35,700 $ 27,825 25,149 88,674 $ 35,700 26,088 13,724 75,512 The following table summarizes the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting (in thousands, except footnote data): Derivatives designated as cash flow hedging instruments Cross-currency interest rate swaps Interest rate swaps Interest rate swaps Cross-currency interest rate swaps Net fair value of derivatives designated as hedging instruments Fair Value Instruments Balance Sheet Location Other non-current assets Other non-current assets Other long-term liabilities Other long-term liabilities August 31, 2018 Net Tax Effect Fair Value Net OCI August 31, 2017 Net Tax Effect Fair Value Net OCI $ 2,405 (819) 1,586 $ 2,547 (950) 1,597 1,959 (434) 1,525 — — — (8) 2 (6) (231) 80 (151) (494) 148 (346) (451) 135 (316) $ 3,862 $ (1,103) $ 2,759 $ 1,865 $ (735) $ 1,130 From time to time the Company enters into non-deliverable forward foreign-exchange 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. F-70 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) As of August 31, 2018 the Company did not have any open non-deliverable forward foreign-exchange contracts. For the twelve-month periods ended August 31, 2018, 2017 and 2016, 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): Income Statement Classification Other income (expense), net Years Ended August 31 2017 2018 2016 $ 143 $ (387) $ (166) For derivatives that do not qualify for hedge accounting, there were no significant related assets or liabilities recorded on the consolidated balance sheet at August 31, 2018 or 2017. NOTE 13 – RELATED-PARTY TRANSACTIONS Use of Private Plane: From time to time members of the Company’s management use private planes owned in part by La Jolla Aviation, Inc. to travel to business meetings in Latin America and the Caribbean. La Jolla Aviation, Inc. is solely owned by The Robert and Allison Price Trust, and Robert Price, the Company's Chairman of the Board, is a Director and Officer of La Jolla Aviation, Inc. The Company has reimbursed La Jolla Aviation for such travel at the hourly rate of the Company's private aircraft for such travel. The Company incurred expenses of approximately $225,000 for the year ended 2016. The Company did not use these services during the years ended August 31, 2018 and 2017. Relationship with Francisco Velasco: Francisco Velasco is the Executive Vice President, General Counsel, Secretary and Chief Ethics and Compliance Officer for the Company. As part of his employment agreement dated July 2016, the Company purchased his home in Chicago, IL, in July 2016 based on its appraised value for approximately $625,000. The Company sold the property in July 2018 for $485,000, net of commissions and expenses. Relationships with Edgar Zurcher: Mr. Zurcher is also a director of a company that owns 40% of Payless ShoeSource Holdings, Ltd., which rents retail space from the Company. The Company recorded approximately $1.3 million, $1.5 million and $1.4 million in rental income for this space during the year ended August 31, 2018, 2017 and 2016. Additionally, Mr. Zurcher is a director of Molinos de Costa Rica S.A. The Company paid approximately $754,000, $636,000 and $502,000 for products purchased from this entity during the years ended August 31, 2018, 2017 and 2016, respectively. Also, Mr. Zurcher is a director of Roma Prince S.A. PriceSmart purchased products from this entity for approximately $1.1 million, $1.1 million and $1.2 million for the years ended August 31, 2018, 2017 and 2016, respectively. Relationships with Price Family Charitable Organizations: During the years ended August 31, 2018, 2017 and 2016, the Company sold approximately $457,000, $393,000 and $427,000, respectively, of supplies to Price Philanthropies Foundation. Robert Price, Chairman of the Company's Board of Directors, is the Chairman of the Board and President of Price Philanthropies Foundation and Price Charities. Sherry S. Bahrambeygui, a director of the Company, serves as Executive Vice President, Secretary and Vice Chairman of the Boards of Price Charities, fka San Diego Revitalization Corp., and Price Philanthropies Foundation. Relationships with Mitchell G. Lynn: Mr. Lynn has been a director of the Company since November 2011. Mr. Lynn is the founder, limited partner and a general partner of CRI 2000, LP, dba Combined Resources International ("CRI"), which designs, develops and manufactures consumer products for domestic and international wholesale distribution, primarily through warehouse clubs. The Company paid approximately $305,000, $437,000 and $625,000 for products purchased from this entity during the years ended August 31, 2018, 2017 and 2016, respectively. Relationship with Golf Park Plaza, S.A.: Golf Park Plaza, S.A. is a real estate joint venture located in Panama entered into by the Company in 2008 (see Note 14 - Unconsolidated Affiliate). On December 12, 2013, the Company entered into a lease agreement for approximately 17,976 square feet (1,670 square meters) of land with Golf Park Plaza, S.A. upon which the Company constructed its central offices in Panama. The lease term is for 15 years with three options to renew for five years each at the Company's discretion. The monthly lease expense is approximately $8,800. The Company recognized $105,700 in rent expense for each of the fiscal years ended August 31, 2018, 2017 and 2016. Relationships with Pierre Mignault: Pierre Mignault was elected to the Board of Directors, effective August 1, 2015. Mr. Mignault has been a consultant for the Company since September 2009, serving as an independent sourcing agent with Canadian suppliers. In his role as an independent sourcing agent, Mr. Mignault received commissions of $268,000, $224,000 and $208,000 from certain vendors related to the sale of product to the Company in fiscal years 2018, 2017 and 2016, respectively. F-71 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 14 – UNCONSOLIDATED AFFILIATES 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. In 2008, the Company entered into real estate joint ventures to jointly own and operate separate commercial retail centers adjacent to warehouse clubs in Panama (Golf Park Plaza, S.A.) and Costa Rica (Plaza Alajuela, S.A.). 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. On December 12, 2013, the Company entered into a lease agreement for approximately 17,976 square feet (1,670 square meters) of land with Golf Park Plaza, S.A. upon which the Company constructed its central offices in Panama. Construction of the offices was completed in October 2014. The lease term is for 15 years with three options to renew for five years each at the Company's discretion. The Company recognized $105,700 in rent expense for each of the fiscal years ended August 31, 2018, 2017 and 2016. The table below summarizes the Company’s interest in these VIEs and the Company’s maximum exposure to loss as a result of its involvement with these VIEs as of August 31, 2018 (in thousands): % Ownership Initial Investment Additional Investments Net (Loss)/Income Inception to Date Company’s Variable Interest in Entity Commitment to Future Additional Investments(1) Company's Maximum Exposure to Loss in Entity(2) 50 % $ 50 % $ 4,616 $ 2,193 6,809 $ 2,402 $ 1,236 3,638 $ 248 $ 63 311 $ 7,266 $ 3,492 10,758 $ 99 $ 785 884 $ 7,365 4,277 11,642 Entity GolfPark Plaza, S.A. Price Plaza Alajuela, S.A. Total (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 summarized financial information of the unconsolidated affiliates is as follows (in thousands): Current assets Noncurrent assets Current liabilities Noncurrent liabilities August 31, 2018 August 31, 2017 $ $ $ $ 1,528 $ 10,883 $ 239 $ 10 $ 1,221 11,207 226 26 Years Ended August 31, 2018 2017 2016 PriceSmart's share of net income (loss) of unconsolidated affiliates $ (8) $ (1) $ 332 F-72 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 15 – ACQUISITION On March 15, 2018, the Company acquired Aeropost, Inc. The acquisition has been accounted for in conformity with ASC Topic 805, Business Combinations. The Company expects 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 total purchase price consideration (in thousands): Estimated consideration on the acquisition date Estimated assumed net liabilities at acquisition date Total cash consideration Post-combination compensation expense, net of claims Business acquisition, net assets acquired Cash acquired Business acquisition, net of cash acquired August 31, 2018 30,046 (1,093) 28,953 (3,850) 25,103 1,208 23,895 $ $ $ The Company’s purchase price allocation was updated in the fourth quarter of fiscal year 2018. The changes to the fair values assumed from the previous amounts reported as of May 31, 2018 were an increase in net deferred tax assets of $4.2 million and a decrease in goodwill and deferred tax liabilities of $4.8 million and $641,000, respectively. The net deferred tax assets recognized in the fourth quarter of fiscal year 2018 are primarily as a result of a change in estimate regarding the recoverability of Aeropost, Inc.’s U.S. net operating losses. Below summarizes the fair value of the assets acquired and liabilities assumed (in thousands): Current assets Other non-current assets Property, plant and equipment Intangible assets Goodwill Deferred tax assets, long-term Total assets acquired Current liabilities Non-current liabilities Noncontrolling interest Net assets acquired August 31, 2018 4,196 746 2,059 16,100 11,230 4,163 38,494 (5,862) (6,967) (562) 25,103 $ $ $ Goodwill represents the excess of the total purchase price over the fair value of the underlying assets. The goodwill is not expected to be deductible for tax purposes. F-73 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following sets forth the results of the amounts preliminarily assigned to the identifiable intangible assets acquired (in thousands): Trade name Developed technology Total assets acquired Amortization Period 25 years 5 years Fair value of Assets Acquired $ $ 5,100 11,000 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 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): Pro forma total revenues Pro forma net income attributable to PriceSmart, Inc. (1) Pro forma net income attributable to noncontrolling interest Twelve Months Ended 2017 2018 $ $ $ 3,197,307 $ 67,734 $ 444 $ 3,040,168 $ 82,587 $ 248 $ 2016 2,946,083 80,852 (20) (1) Includes the pro forma recognition of $3.0 million of post-combination compensation expense, which represents completion of twelve of the fifteen months of continued service required to satisfy the $3.9 million remaining purchase price contingency, and $2.1 million for the amortization of intangible assets for the twelve months ended August 31, 2018. The following financial information shows Aeropost’s results of operations since the acquisition on March 15, 2018 (in thousands): Twelve Months Ended 2017 2018 Total revenue included in the Consolidated Statement of Income since acquisition Net (Loss) from Aeropost Operations, net of tax benefit (1) $ $ 16,863 (6,901) N/A N/A (1) Does not include approximately $3.4 million of Aeropost-related costs for asset impairment and pre-acquisition costs. NOTE 16 – SEGMENTS 2016 N/A N/A The Company and its subsidiaries are principally engaged in the international operation of membership shopping in 41 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. F-74 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following tables summarize by segment certain revenues, operating costs and balance sheet items (in thousands): Years Ended August 31, 2018 Revenue from external customers Intersegment revenues Depreciation, Property and equipment Amortization, Intangibles Operating income (loss) Interest income from external sources Interest income from intersegment sources Interest expense from external sources Interest expense from intersegment sources Provision for income taxes Net income (loss) attributable to PriceSmart, Inc. Long-lived assets (other than deferred tax assets) Intangibles, net Goodwill Investment in unconsolidated affiliates Total assets Capital expenditures, net Years Ended August 31, 2017 Revenue from external customers Intersegment revenues Depreciation and amortization Operating income (loss) Interest income from external sources Interest income from intersegment sources Interest expense from external sources Interest expense from intersegment sources Provision for income taxes Net income (loss) attributable to PriceSmart, Inc. Long-lived assets (other than deferred tax assets) Goodwill Investment in unconsolidated affiliates Total assets Capital expenditures, net Years Ended August 31, 2016 Revenue from external customers Intersegment revenues Depreciation and amortization Operating income (loss) Interest income from external sources Interest income from intersegment sources Interest expense from external sources Interest expense from intersegment sources Provision for income taxes Net income (loss) attributable to PriceSmart, Inc. Long-lived assets (other than deferred tax assets) Goodwill Investment in unconsolidated affiliates Total assets Capital expenditures, net United States Operations Central American Operations Caribbean Operations Colombia Operations Reconciling Items(1) Total $ $ $ 57,445 $ 1,184,530 7,373 1,120 2,016 25 747 1,465 16 19,977 (2) (19,811) 67,650 14,980 11,230 — 186,174 2,252 34,244 $ 1,138,526 6,653 10,436 13 739 762 42 9,560 3,893 70,353 — — 147,650 56,229 33,885 $ 1,086,677 4,775 10,970 25 2,519 — 61 10,047 935 19,222 — — 100,744 8,617 1,839,810 $ — 23,391 879,423 $ 4,472 11,596 390,024 $ 993 9,160 — $ (1,189,995) — 130,849 487 1,245 3,210 1,042 20,767 107,401 320,612 30,646 10,758 536,756 50,982 1,789,889 $ — 20,252 134,826 914 882 4,127 1,106 23,368 107,797 296,915 31,118 10,765 544,683 50,977 1,758,853 $ — 18,673 135,232 802 944 4,823 2,059 23,227 107,396 271,039 31,091 10,767 515,478 29,375 48,383 767 730 (353) 1,576 5,624 12,086 136 — 750 3 1,809 44,178 150,516 9,917 118,284 4,453 — 310,411 39,379 — — 183,051 3,237 827,920 $ 4,796 10,205 47,190 740 546 548 990 7,654 38,403 122,616 4,524 — 303,234 26,586 840,648 $ 5,941 9,907 51,450 381 554 547 1,854 8,697 43,114 108,426 4,546 — 287,088 11,402 344,575 $ 110 9,182 4,932 142 — 1,340 34 1,436 1,786 126,206 — — 181,947 3,232 271,790 $ — 6,439 (5,403) 99 — 521 49 878 (7,196) 137,599 — — 193,425 30,300 (67,282) — (2,722) — (2,637) — (67,357) — — — — — — $ (1,143,432) — (61,155) — (2,167) — (2,172) — (61,155) — 0 — — — — $ (1,092,618) — (55,526) — (4,017) — (4,023) — (55,526) — — — — 3,166,702 — 51,520 1,120 126,052 1,415 — 5,072 — 48,177 74,328 657,062 14,980 46,329 10,758 1,216,392 95,850 2,996,628 — 46,292 136,229 1,809 — 6,777 — 42,018 90,724 616,090 35,642 10,765 1,177,514 137,024 2,905,176 — 39,794 136,723 1,307 — 5,891 — 42,849 88,723 536,286 35,637 10,767 1,096,735 79,694 (1) The reconciling items reflect the amount eliminated on consolidation of intersegment transactions. (2) On March 15, 2018, the Company acquired Aeropost, Inc. During fiscal year 2018, the consolidated net income attributable to PriceSmart Inc. contained approximately $9.8 million in losses associated with our Aeropost operations and acquisition-related expense. F-75 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 17 – SUBSEQUENT EVENTS The Company has evaluated all events subsequent to the balance sheet date of August 31, 2018 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 Transactions In September 2018, the Company acquired land in San Cristobal, Guatemala, upon which the Company plans to construct a standard format warehouse club. San Cristobal is expected to open in the fall of 2019. This will bring the number of PriceSmart warehouse clubs operating in Guatemala to four. NOTE 18 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for fiscal years 2018, 2017 and 2016 is as follows (in thousands, except per share data): Fiscal Year 2018 Total revenues Total cost of goods sold Net income attributable to PriceSmart, Inc. Basic net income per share Diluted net income per share Nov 30, 2017 Feb 28, 2018 839,563 $ $ 708,040 $ $ $ 767,072 $ 644,985 $ 22,490 $ 0.74 $ 0.74 $ $ $ 14,148 (1) $ $ $ 0.47 0.47 Three Months Ended, Year Ended, May 31, 2018 Aug 31, 2018 Aug 31, 2018 3,166,702 2,656,520 74,328 2.44 2.44 782,201 $ 652,694 $ 18,694 $ 0.61 $ 0.61 $ 777,866 $ 650,801 $ 18,996 $ 0.62 $ 0.62 $ Fiscal Year 2017 Total revenues Total cost of goods sold Net income attributable to PriceSmart, Inc. Basic net income per share Diluted net income per share Nov 30, 2016 Feb 28, 2017 793,296 $ 667,563 $ 27,219 $ 0.90 $ 0.90 $ 739,572 $ 618,671 $ 24,869 $ 0.82 $ 0.82 $ Three Months Ended, Year Ended, May 31, 2017 Aug 31, 2017 Aug 31, 2017 2,996,628 2,519,752 90,724 2.98 2.98 730,258 $ 617,598 $ 18,838 $ 0.62 $ 0.62 $ 733,502 $ 615,920 $ 19,798 $ 0.64 $ 0.64 $ $ $ $ $ $ Fiscal Year 2016 Total revenues Total cost of goods sold Net income attributable to PriceSmart, Inc. Basic net income per share Diluted net income per share Nov 30, 2015 Feb 29, 2016 777,931 $ 657,725 $ 25,942 $ 0.85 $ 0.85 $ 711,931 $ 598,015 $ 23,672 $ 0.78 $ 0.78 $ Three Months Ended, Year Ended, May 31, 2016 Aug 31, 2016 Aug 31, 2016 2,905,176 2,449,626 88,723 2.92 2.92 704,262 $ 597,242 $ 16,837 $ 0.55 $ 0.55 $ 711,052 $ 596,644 $ 22,272 $ 0.74 $ 0.74 $ $ $ $ $ $ (1) In the second quarter of fiscal year 2018, the Company recorded its provisional tax estimate of $13.4 million as a result of the U.S. Tax Reform Transition Tax. The Company finalized its calculation of this Transition Tax in the fourth quarter of fiscal year 2018, reducing it to approximately $12.5 million. F-76 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Restatement The Company is restating its previously issued Consolidated balance sheets and Consolidated statements of cash flows as of and for the three, six, and nine month interim periods of fiscal year 2018 ended November 30, 2017, February 28, 2018 and May 31, 2018, respectively, to reflect a revision in presentation of short-term investments within current assets. In the aforementioned financial statements, the Company presented certain Certificates of Deposit and similar time-based deposits with financial institutions (collectively referred to herein as “CDs”) with maturities greater than three months and up to one year as Cash and cash equivalents, when they should have been presented as Short-term investments. This misclassification did not impact Revenue, Operating income, Net income, Cash flows from operations, Total assets or Total current assets. In the past, the Company has disclosed in Management’s Discussion & Analysis in previously filed 1934 Act filings a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity), which impedes our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. Also, as the Company has previously disclosed in Management’s Discussion & Analysis in previously filed 1934 Act filings, during fiscal year 2017 and fiscal year 2018, the Company experienced this situation in Trinidad. Until the central bank in Trinidad makes more U.S. dollars available, this condition is likely to continue. In reaction to the situation in Trinidad, the Company began investing the excess Trinidad and Tobago (TT) dollars into Certificates of Deposit or similar time-based deposits with financial institutions (referred to collectively herein as “CDs”) with terms of three months or less, which the Company correctly presented as Cash and cash equivalents on the consolidated balance sheet. As the Company’s balance of TT dollars increased, the Company began investing in CDs with terms of four months and up to twelve months. During the first three quarters of fiscal year 2018, the Company presented these four to twelve month CDs as Cash and cash equivalents in its consolidated balance sheet. However, in accordance with generally accepted accounting principles, these four to twelve month CDs should have been presented as Short-term investments. The correction of the misclassification of these investments within the Total current assets section of the consolidated balance sheets also requires the Company to disclose in the Cash provided by (used in) investing activities section of the consolidated statements of cash flows the cash used in Investments in and Settlements of short-term investments. The following tables summarize the impacts of these misclassifications on the consolidated balance sheets and statements of cash flows for the interim periods of fiscal year 2018 (amounts in thousands): Financial Statement Captions Cash and cash equivalents Short-term and long-term restricted cash Total cash and cash equivalents, and restricted cash as shown in the statement of cash flows Short-term investments As Restated 89,844 3,359 93,203 39,339 As Previously Reported $ $ 129,183 $ 3,359 $ November 30, 2017 Adjustment (39,339) $ — $ $ $ 132,542 $ (39,339) $ — $ 39,339 $ F-77 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Statement of Cash Flows Captions Net cash provided by (used in) operating activities As Previously Reported $ (10,163) $ For the Three Months Ended November 30, 2017 Adjustment As Restated — $ (10,163) Investing Activities Additions to property and equipment Short-term investments Proceeds from settlements of short-term investments Proceeds from disposal of property and equipment $ (19,752) $ — — 20 — $ (39,339) — — Net cash provided by (used in) investing activities $ (19,732) $ (39,339) $ Net cash provided by (used in) financing activities Effect of exchange rate changes on cash, cash equivalents, and restricted cash Net increase (decrease) in cash, cash equivalents, and restricted cash Cash, cash equivalents, and restricted cash at beginning of period Cash, cash equivalents, and restricted cash at end of period $ $ $ $ $ (19,752) (39,339) — 20 (59,071) (5,296) 2,021 (5,296) $ 2,021 $ — $ — $ (33,170) $ (39,339) $ (72,509) 165,712 $ — $ 165,712 132,542 $ (39,339) $ 93,203 F-78 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Financial Statement Captions Cash and cash equivalents Short-term and long-term restricted cash Total cash and cash equivalents, and restricted cash as shown in the statement of cash flows Short-term investments Statement of Cash Flows Captions Net cash provided by (used in) operating activities As Previously Reported $ $ 152,132 $ 3,479 $ February 28, 2018 Adjustment (58,745) $ — $ $ $ 155,611 $ (58,745) $ — $ 58,745 $ As Restated 93,387 3,479 96,866 58,745 For the Six Months Ended February 28, 2018 Adjustment As Restated As Previously Reported $ 59,079 $ — $ 59,079 Investing Activities Additions to property and equipment Short-term investments Proceeds from settlements of short-term investments Proceeds from disposal of property and equipment $ (46,233) $ — — 54 — $ (66,388) 7,643 — Net cash provided by (used in) investing activities $ (46,179) $ (58,745) $ Net cash provided by (used in) financing activities Effect of exchange rate changes on cash, cash equivalents, and restricted cash Net increase (decrease) in cash, cash equivalents, and restricted cash Cash, cash equivalents, and restricted cash at beginning of period Cash, cash equivalents, and restricted cash at end of period $ $ $ $ $ (46,233) (66,388) 7,643 54 (104,924) — (21,859) (1,142) (21,859) $ (1,142) $ — $ — $ (10,101) $ (58,745) $ (68,846) 165,712 $ — $ 165,712 155,611 $ (58,745) $ 96,866 F-79 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Financial Statement Captions Cash and cash equivalents Short-term and long-term restricted cash Total cash and cash equivalents, and restricted cash as shown in the statement of cash flows Short-term investments Statement of Cash Flows Captions Net cash provided by (used in) operating activities As Previously Reported $ $ 141,164 $ 3,649 $ (53,890) $ — $ May 31, 2018 Adjustment As Restated $ $ 144,813 $ (53,890) $ — $ 53,890 $ For the Nine Months Ended May 31, 2018 Adjustment As Restated As Previously Reported $ 90,765 $ — $ 90,765 Investing Activities $ Business acquisition, net of cash acquired Additions to property and equipment Short-term investments Proceeds from settlements of short-term investments Deposits for land purchase option agreements Proceeds from disposal of property and equipment (23,895) $ (74,788) — — $ — (72,953) — 300 93 19,063 — — Net cash provided by (used in) investing activities $ (98,290) $ (53,890) $ 87,274 3,649 90,923 53,890 (23,895) (74,788) (72,953) 19,063 300 93 (152,180) (12,389) (985) Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents and restricted cash Net increase (decrease) in cash, cash equivalents, and restricted cash Cash, cash equivalents, and restricted cash at beginning of period Cash, cash equivalents, and restricted cash at end of period $ $ $ $ $ (12,389) $ (985) $ — $ — $ (20,899) $ (53,890) $ (74,789) 165,712 $ — $ 165,712 144,813 $ (53,890) $ 90,923 F-80 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock has been quoted and traded on the Nasdaq Global Select Market under the symbol “PSMT” since September 2, 1997. As of October 17, 2018, there were approximately 30,137 holders of record of the common stock. 2018 FISCAL QUARTERS First Quarter Second Quarter Third Quarter Fourth Quarter 2017 FISCAL QUARTERS First Quarter Second Quarter Third Quarter Fourth Quarter Dates Stock Price From To High Low 9/1/2017 11/30/2017 $ 12/1/2017 3/1/2018 6/1/2018 2/28/2018 5/31/2018 8/31/2018 91.10 $ 88.05 90.75 93.83 9/1/2016 11/30/2016 $ 12/1/2016 3/1/2017 6/1/2017 2/29/2017 5/31/2017 8/31/2017 92.40 $ 92.15 93.60 89.20 79.90 78.35 78.60 77.90 80.35 82.50 85.85 80.50 Recent Sales of Unregistered Securities There were no sales of unregistered securities during the year ended August 31, 2018. 81  The graph below matches PriceSmart, Inc.'s cumulative 5-Year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index and the NASDAQ Retail Trade index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from 8/31/2013 to 8/31/2018. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among PriceSmart, Inc., the NASDAQ Composite Index and the NASDAQ Retail Trade Index $400 $350 $300 $250 $200 $150 $100 $50 $0 8/13 8/14 8/15 8/16 8/17 8/18 PriceSmart, Inc. NASDAQ Composite NASDAQ Retail Trade *$100 invested on 8/31/13 in stock or index, including reinvestment of dividends. Fiscal year ending August 31. 82 Dividends Declared 1/24/2018 2/1/2017 2/4/2016 First Payment Record Date Date Paid Amount Second Payment Date Paid Record Date 0.70 2/14/2018 2/28/2018 $ 0.70 2/15/2017 2/28/2017 $ 2/29/2016 $ 0.70 2/15/2016 0.35 8/15/2018 8/31/2018 $ 0.35 8/15/2017 8/31/2017 $ 0.35 8/15/2016 8/31/2016 $ Amount $ $ $ Amount 0.35 0.35 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. Repurchase of Equity Securities 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 fiscal year 2018, the Company repurchased a total of 37,414 shares in the indicated months. These were the only repurchases of equity securities made by the Company during fiscal year 2018. The Company does not have a stock repurchase program. Period September 1, 2017 - September 30, 2017 October 1, 2017 - October 31, 2017 November 1, 2017 - November 30, 2017 December 1, 2017 - December 31, 2017 January 1, 2018 - January 31, 2018 February 1, 2018 - February 29, 2018 March 1, 2018 - March 31, 2018 April 1, 2018 - April 30, 2018 May 1, 2018 - May 31, 2018 June 1, 2018 - June 30, 2018 July 1, 2018 - July 31, 2018 August 1, 2018 - August 31, 2018 Total (a) Total Number of Shares Purchased (b) Average Price Paid Per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs — $ — — — 21,513 — 1,006 — — 1,158 2,553 11,184 37,414 $ — — — — 85.20 — 82.50 — — 84.65 80.55 86.25 85.11 — — — — — — — — — — — — — N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 83 ADDITIONAL INFORMATION Corporate Offices 9740 Scranton Road San Diego, CA 92121 (858) 404-8800 Stock Exchange Listing NASDAQ Global Select Market Stock Symbol: PSMT Annual Meeting Wednesday, January 30, 2019 at 10:00 AM PriceSmart, Inc. Corporate Headquarters 9740 Scranton Road San Diego, CA 92121 Transfer Agent Computershare Shareowner Services LLC 480 Washington Blvd. Jersey City, NJ 07310 Telephone: (888) 867-6003 TDD for Hearing Impaired: (800) 952-9245 Outside U.S.: (201) 680-6578 Independent Registered Public Accounting Firm Ernst & Young U.S. LLP 4365 Executive Drive, Suite 1600 San Diego, CA 92121 PriceSmart's annual reports to the Securities and Exchange Commission on Form 10-K and any quarterly reports on Form 10-Q, as amended, will be provided free of charge upon written request to Investor Relations, PriceSmart, Inc., 9740 Scranton Road., San Diego, CA 92121. Internet users can access PriceSmart's web site at http://www.pricesmart.com. 84 DIRECTORS & OFFICERS OF PRICESMART, INC. Executive Chairman Lead Director Director Director Director Director Director Director Director Director Interim Chief Executive Officer Executive Vice President & Chief Financial Officer Executive Vice President & Chief Operating Officer Executive Vice President - General Counsel, Chief Ethics & Compliance Officer, and Secretary Executive Vice President - Chief Merchandising Officer Executive Vice President - Real Estate Executive Vice President - Local/Regional Merchandising Executive Vice President - Logistics and Distribution Executive Vice President - Construction & Facilities Executive Vice President - Operations Executive Vice President - Information Technology Robert E. Price Leon Janks Sherry Bahrambeygui Gonzalo Barrutieta Gordon Hanson Beatriz Infante Mitch Lynn Gary Malino Pierre Mignault Edgar Zurcher Sherry Bahrambeygui Maarten Jager William J. Naylon Francisco Velasco Ana Luisa Bianchi Rodrigo Calvo Jesus Von Chong Frank Diaz Brud E. Drachman John D. Hildebrandt Laura Santana Catherine D. Alvarez-Smith Bob Coulson J. Ernesto Grijalva Paul Kovaleski Jose Luis Marin Michael L. McCleary Alberto Morales Atul Patel Chris Souhrada Pedro Vera Benjamin M. Woods Senior Vice President - International Controller Senior Vice President - Merchandising – Nonfoods Senior Vice President - Legal Affairs – Latin America/Caribbean Senior Vice President - Other Business Senior Vice President - Marketing & Member Services Senior Vice President - Corporate Controller Senior Vice President - Human Resources Senior Vice President - Treasurer Senior Vice President - Operations – ES/GT/HN/CR Senior Vice President - South America Senior Vice President - US/Caribbean Fresh Foods Alexa Bodden Linda C. Brickson Guadalupe Cefalu Eduardo Franceschi Dhanraj Mahabir Jonathan Mendoza Michelle Obediente Kelly Orme Emma Reyes Ronald Rodriquez Christina Santmyre Eric Torres Melissa Twohey Nelly Concepcion Vice President - Membership & Marketing - CAM/Colombia Vice President - U.S. Controller Vice President - Forecasting & Planning Vice President - Operations – Panama/Nicaragua Vice President - Operations - Trinidad/Barbados/Jamaica Vice President - Construction & Facilities Vice President - Merchandising – Regional Foods Vice President – Merchandising – Electronics Vice President - International Logistics & Trade Compliance Vice President - Logistics Vice President - Distribution Vice President - Facility Maintenance & Equipment Vice President – Merchandising – US Foods Vice President – Human Resources 85 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] ® 

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