Item 6. Selected Financial Data

The following table sets forth information concerning our consolidated financial condition, operating results, and key operating metrics. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 of this Report, and our consolidated financial statements and notes thereto, included in Item 8 of this Report.

SELECTED FINANCIAL DATA

(dollars in millions, except per share data)

	Sept. 1, 2019				Sept. 2, 2018				Sept. 3, 2017				Aug. 28, 2016				Aug. 30, 2015
As of and for the year ended	(52 weeks)				(52 weeks)				(53 weeks)				(52 weeks)				(52 weeks)
RESULTS OF OPERATIONS
Net sales	$	149,351			$	138,434			$	126,172			$	116,073			$	113,666
Membership fees	3,352				3,142				2,853				2,646				2,533
Gross margin(1) as a percentage of net sales	11.02		%		11.04		%		11.33		%		11.35		%		11.09		%
Selling, general and administrative expenses as a percentage of net sales	10.04		%		10.02		%		10.26		%		10.40		%		10.07		%
Operating income	$	4,737			$	4,480			$	4,111			$	3,672			$	3,624
Net income attributable to Costco	3,659				3,134				2,679				2,350				2,377
Net income per diluted common share attributable to Costco	8.26				7.09				6.08				5.33				5.37
Cash dividends declared per common share	2.44				2.14				8.90				1.70				6.51
Changes in comparable sales(2)
United States	8		%		9		%		4		%		1		%		3		%
Canada	2		%		9		%		5		%		(3		)%		(5		)%
Other International	2		%		11		%		2		%		(3		)%		(3		)%
Total Company	6		%		9		%		4		%		0		%		1		%
Changes in Total Company comparable sales excluding the impact of changes in foreign currency and gasoline prices (3)	6		%		7		%		4		%		4		%		7		%
BALANCE SHEET DATA
Net property and equipment	$	20,890			$	19,681			$	18,161			$	17,043			$	15,401
Total assets	45,400				40,830				36,347				33,163				33,017
Long-term debt, excluding current portion	5,124				6,487				6,573				4,061				4,852
Costco stockholders’ equity	15,243				12,799				10,778				12,079				10,617
WAREHOUSE INFORMATION
Warehouses in Operation
Beginning of year	762				741				715				686				663
Opened	25				25				28				33				26
Closed due to relocation	(5		)		(4		)		(2		)		(4		)		(3		)
End of year	782				762				741				715				686
MEMBERSHIP INFORMATION
Total paid members (000's)	53,900				51,600				49,400				47,600				44,600

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(1)	Net sales less merchandise costs.

(2)	Includes net sales from warehouses and websites operating for more than one year. For 2017, the prior year includes the comparable 53 weeks.

(3)	Excluding the impact of the revenue recognition standard for the year ended September 1, 2019. See Note 1 in Item 8.

Item 7—Management's Discussion and Analysis of Financial Conditions and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data)

Overview

We believe that the most important driver of our profitability is sales growth, particularly comparable sales growth. We define comparable sales as sales from warehouses open for more than one year, including remodels, relocations and expansions, and sales related to e-commerce websites operating for more than one year. Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket). Sales comparisons can also be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations); changes in the cost of gasoline and associated competitive conditions; and changes from the revenue recognition standard. The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term. Another substantial factor in sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. Sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and regional wholesalers and retailers, including those with e-commerce operations. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and to our merchandise mix, including increasing the penetration of our private-label items, and through online offerings.

Our philosophy is to provide our members with quality goods and services at competitive prices. We do not focus in the short term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our “pricing authority” on quality goods – consistently providing the most competitive values. Our investments in merchandise pricing may include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, all negatively impacting gross margin as a percentage of net sales (gross margin percentage). We believe that our gasoline business draws members but it generally has a significantly lower gross margin percentage relative to our non-gasoline business. A higher penetration of gasoline sales will generally lower our gross margin percentage. Rapidly changing gasoline prices may significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth which, given the higher sales base, negatively impacts our gross margin percentage but decreases our selling, general and administrative (SG&A) expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. Additionally, actions in various countries, particularly China and the United States, have created uncertainty with respect to how tariffs will affect the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. The impact to our net sales and gross margin will be influenced in part by our merchandising and pricing strategies in response to cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results.

We also achieve sales growth by opening new warehouses. As our warehouse base grows, available and desirable sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The negative aspects of such growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are continuing to decline in significance as they relate to the results of our total operations. Our rate of square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce business growth, domestically and internationally, has also increased our sales.

The membership format is an integral part of our business and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase the penetration of our Executive members, and sustain high renewal rates materially influences our profitability. Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing markets as compared to new markets.

Our financial performance depends heavily on controlling costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, most particularly health care and utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business is operated on very low margins, modest changes in various items in the consolidated statements of income, particularly merchandise costs and selling, general and administrative expenses, can have substantial impacts on net income.

Our operating model is generally the same across our U.S., Canada, and Other International operating segments (see Note 11 to the consolidated financial statements included in Item 8 of this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and benefits costs as a percentage of country sales, and/or less or no direct membership warehouse competition.

In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are references to the differences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies into U.S. dollars for financial reporting purposes. This impact of foreign-exchange rate changes is calculated based on the difference between the current period's currency exchange rates and that of the comparable prior period. The impact of changes in gasoline prices on net sales is calculated based on the difference between the current period's average price per gallon sold and that of the comparable prior period.

Our fiscal year ends on the Sunday closest to August 31. References to 2019 and 2018 relate to the 52-week fiscal years ended September 1, 2019, and September 2, 2018, respectively. References to 2017 relate to the 53-week fiscal year ended September 3, 2017. Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise noted, references to net income relate to net income attributable to Costco.

Highlights for 2019 included:

•	We opened 25 new warehouses, including 5 relocations: 16 net new locations in the U.S. and 4 in our Other International segment, including our first warehouse in China, compared to 25 new warehouses, including 4 relocations in 2018;

•	Net sales increased 8% to $149,351 driven by a 6% increase in comparable sales and sales at new warehouses opened in 2018 and 2019;

•	Membership fee revenue increased 7% to $3,352, primarily due to membership sign-ups at existing and new warehouses and the annual fee increase in the U.S. and Canada in June 2017.

•	Gross margin percentage decreased two basis points. Excluding the impact of the new revenue recognition standard on net sales, gross margin as a percentage of adjusted net sales increased eight basis points;

•	Selling, general & administrative (SG&A) expenses as a percentage of net sales increased two basis points. Excluding the impact of the new revenue recognition standard on net sales, SG&A as a percentage of adjusted net sales increased 11 basis points, primarily related to a $123 charge for a product tax assessment;

•	Effective March 2019, starting and supervisor wages were increased and paid bonding leave was made available for hourly employees in the U.S. and Canada. The estimated annualized pre-tax cost of these increases is approximately $50-$60;

•	The effective tax rate in 2019 was 22.3% compared to 28.4% in 2018. Both years were favorably impacted by the Tax Cuts and Jobs Act (2017 Tax Act) and other net tax benefits;

•	Net income increased 17% to $3,659, or $8.26 per diluted share compared to $3,134, or $7.09 per diluted share in 2018; and

•	In April 2019, the Board of Directors approved an increase in the quarterly cash dividend from $0.57 to $0.65 per share and authorized a new share repurchase program in the amount of $4,000.

Results of operations

Net Sales

	2019				2018				2017
Net Sales	$	149,351			$	138,434			$	126,172
Changes in net sales:
U.S.	9		%		9		%		8		%
Canada	3		%		10		%		10		%
Other International	5		%		14		%		8		%
Total Company	8		%		10		%		9		%
Changes in comparable sales:
U.S.	8		%		9		%		4		%
Canada	2		%		9		%		5		%
Other International	2		%		11		%		2		%
Total Company	6		%		9		%		4		%
Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices(1):
U.S.	6		%		7		%		4		%
Canada	5		%		4		%		4		%
Other International	6		%		7		%		4		%
Total Company	6		%		7		%		4		%

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(1)	Excluding the impact of the revenue recognition standard for the year ended September 1, 2019. See Note 1 in Item 8.

Net Sales

Net sales increased $10,917 or 8% during 2019, primarily due to a 6% increase in comparable sales and sales at new warehouses opened in 2018 and 2019.

Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $1,463, or 106 basis points, compared to 2018, attributable to our Canadian and Other International Operations. The revenue recognition standard positively impacted net sales by $1,332, or 96 basis points. Changes in gasoline prices did not have a material impact on net sales.

Comparable Sales

Comparable sales increased 6% during 2019 and were positively impacted by increases in both shopping frequency and average ticket. Comparable sales were negatively impacted by cannibalization (established warehouses losing sales to our newly opened locations).

Membership Fees

	2019				2018				2017
Membership fees	$	3,352			$	3,142			$	2,853
Membership fees increase	7		%		10		%		8		%
Membership fees as a percentage of net sales	2.24		%		2.27		%		2.26		%

The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses and the annual fee increase. Changes in foreign currencies relative to the U.S. dollar negatively impacted membership fees by approximately $30 in 2019. At the end of 2019, our member renewal rates were 91% in the U.S. and Canada and 88% worldwide.

As reported in 2017, we increased our annual membership fees in the U.S. and Canada and in certain of our Other International operations. We account for membership fee revenue on a deferred basis, recognized ratably over the one-year membership period. These fee increases had a positive impact of approximately $178 in 2018 and positively impacted 2019, primarily the first two quarters, by approximately $73.

Gross Margin

	2019				2018				2017
Net sales	$	149,351			$	138,434			$	126,172
Less merchandise costs	132,886				123,152				111,882
Gross margin	$	16,465			$	15,282			$	14,290
Gross margin percentage	11.02		%		11.04		%		11.33		%

The gross margin of our core merchandise categories (food and sundries, hardlines, softlines and fresh foods), when expressed as a percentage of core merchandise sales (rather than total net sales), increased seven basis points primarily due to increases in food and sundries and fresh foods partially offset by decreases in softlines and hardlines. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses.

Total gross margin percentage decreased two basis points compared to 2018. Excluding the impact of the revenue recognition standard on net sales, gross margin as a percentage of adjusted net sales was 11.12%, an increase of eight basis points. This increase was primarily due to a 19 basis point increase in our warehouse ancillary and other businesses, predominantly our gasoline business. This increase was partially offset by decreases of four basis points in our core merchandise categories, four basis points due to an adjustment to our estimate of breakage on rewards earned under our co-branded credit card program and three basis points due to increased spending by members under the Executive Membership 2% reward program. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $155 in 2019.

The segment gross margin percentage, when expressed as a percentage of the segment's own sales and excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage), increased in our U.S. operations, predominantly in our warehouse ancillary and other businesses, primarily our gasoline business. This increase was partially offset by decreases in our core merchandise categories and the breakage adjustment noted above. The segment gross margin percentage in our Canadian operations decreased predominantly in hardlines and softlines and certain of our warehouse ancillary and other businesses, partially offset by an increase in fresh foods. The segment gross margin percentage in our Other International operations decreased primarily in our core merchandise categories and due to the introduction of the Executive Membership 2% reward program in Korea. This decrease was partially offset by an increase in our gasoline business.

Selling, General and Administrative Expenses

	2019				2018				2017
SG&A expenses	$	14,994			$	13,876			$	12,950
SG&A expenses as a percentage of net sales	10.04		%		10.02		%		10.26		%

SG&A expenses as a percentage of net sales increased two basis points compared to 2018. Excluding the impact of the revenue recognition standard on net sales, SG&A expenses as a percentage of adjusted net sales were 10.13%, an increase of 11 basis points. This increase is largely due to a $123 charge, or eight basis points, recorded in the U.S. related to a product tax assessment. Central operating costs were higher by two basis points and stock compensation expense was higher by one basis point. Operating costs as a percent of adjusted net sales related to warehouses, ancillary, and other businesses, which includes e-commerce and travel, were flat despite the wage increases and bonding leave benefits for U.S. and Canadian hourly employees effective in March 2019. Changes in foreign currencies relative to the U.S. dollar positively impacted SG&A expenses by approximately $124 in 2019.

Preopening

	2019				2018				2017
Preopening expenses	$	86			$	68			$	82
Warehouse openings, including relocations
United States	18				17				15
Canada	3				3				6
Other International	4				5				7
Total warehouse openings, including relocations	25				25				28

Preopening expenses include costs for startup operations related to new warehouses and relocations, developments in new international markets, new manufacturing and distribution facilities, and expansions at existing warehouses. Preopening expenses vary due to the number of warehouse and facility openings, the timing of the opening relative to our year-end, whether a warehouse is owned or leased, and whether openings are in an existing, new, or international market. In 2019, we opened our first warehouse in China. Subsequent to year end, operations commenced at our new poultry processing plant.

Interest Expense

	2019				2018				2017
Interest expense	$	150			$	159			$	134

Interest expense primarily relates to Senior Notes issued by the Company. Interest expense decreased in 2019 largely due to an increase in capitalized interest associated with our new poultry processing plant.

Interest Income and Other, Net

	2019				2018				2017
Interest income	$	126			$	75			$	50
Foreign-currency transaction gains (losses), net	27				23				(5		)
Other, net	25				23				17
Interest income and other, net	$	178			$	121			$	62

The increase in interest income in 2019 was primarily due to higher interest rates earned on higher average cash and investment balances. Foreign-currency transaction gains (losses), net include the revaluation and settlement of monetary assets and liabilities and mark-to-market adjustments for forward foreign-exchange contracts by our Canadian and Other International operations. See Derivatives and Foreign Currency sections in Item 8, Note 1 of this Report.

Provision for Income Taxes

	2019				2018				2017
Provision for income taxes	$	1,061			$	1,263			$	1,325
Effective tax rate	22.3		%		28.4		%		32.8		%

Our effective tax rate for 2019 was favorably impacted by the reduction in the U.S. federal corporate tax rate in December 2017 from 35% to 21%, which was in effect for all of 2019, and compared to a higher blended rate effective for 2018. Net discrete tax benefits of $221 in 2019 included a benefit of $59 related to the stock-based compensation accounting standard adopted in the first quarter of 2018. This also included a tax benefit of $105 related to U.S. taxation of deemed foreign dividends, offset by losses of foreign tax credits, which impacted the effective tax rate. The tax rate for 2019 was 26.9%, excluding the net discrete tax benefits.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our significant sources and uses of cash and cash equivalents:

	2019				2018				2017
Net cash provided by operating activities	$	6,356			$	5,774			$	6,726
Net cash used in investing activities	(2,865		)		(2,947		)		(2,366		)
Net cash used in financing activities	(1,147		)		(1,281		)		(3,218		)

Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $9,444 and $7,259 at the end of 2019 and 2018, respectively. Of these balances, unsettled credit and debit card receivables represented approximately $1,434 and $1,348 at the end of 2019 and 2018, respectively. These receivables generally settle within four days. Cash and cash equivalents were negatively impacted by a change in exchange rates of $15 and $37 in 2019 and 2018, respectively, and positively impacted by $25 in 2017.

Management believes that our cash position and operating cash flows will be sufficient to meet our liquidity and capital requirements for the foreseeable future. We believe that our U.S. current and projected asset position is sufficient to meet our U.S. liquidity requirements. We no longer consider earnings after 2017 of our non-U.S. consolidated subsidiaries to be indefinitely reinvested.

Cash Flows from Operating Activities

Net cash provided by operating activities totaled $6,356 in 2019, compared to $5,774 in 2018. Our cash flow provided by operations is primarily derived from net sales and membership fees. Cash flow used in operations generally consists of payments to our merchandise suppliers, warehouse operating costs, including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including how fast inventory is sold, payment terms with our suppliers, and the amount of payables paid early to obtain discounts from our suppliers.

Cash Flows from Investing Activities

Net cash used in investing activities totaled $2,865 in 2019, compared to $2,947 in 2018, and primarily related to capital expenditures. Net cash flows from investing activities also includes maturities and purchases of short-term investments.

Capital Expenditures

Our primary requirement for capital is acquiring land, buildings, and equipment for new and remodeled warehouses. Capital is also required for information systems, manufacturing and distribution facilities, initial warehouse operations and working capital. In 2019, we spent $2,998 on capital expenditures, and it is our current intention to spend approximately $3,000 to $3,200 during fiscal 2020. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. We opened 25 new warehouses, including five relocations, in 2019, and plan to open approximately 22 additional new warehouses, including three relocations, in 2020. There can be no assurance that current expectations will be realized and plans are subject to change upon further review of our capital expenditure needs.

Cash Flows from Financing Activities

Net cash used in financing activities totaled $1,147 in 2019, compared to $1,281 in 2018. Cash flows used in financing activities primarily related to the payment of dividends, withholding taxes on stock-based awards, and repurchases of common stock. Dividends totaling $1,038 were paid during 2019, of which $250 related to the dividend declared in August 2018. In August 2019, approximately $200 and $100 of Guaranteed Senior Notes were issued by our Japanese subsidiary at fixed interest rates of 0.28% and 0.42%, respectively.

Stock Repurchase Programs

In April 2019, the Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in April 2023. This authorization revoked previously authorized but unused amounts, totaling $2,237. During 2019 and 2018, we repurchased 1,097,000 and 1,756,000 shares of common stock, at average prices of $225.16 and $183.13, respectively, totaling approximately $247 and $322, respectively. The remaining amount available to be purchased under our approved plan was $3,943 at the end of 2019. These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. Purchases are made from time-to-time, as conditions warrant, in the open market or in block purchases and pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation Act.

Dividends

Cash dividends declared in 2019 totaled $2.44 per share, as compared to $2.14 per share in 2018. In April 2019, the Board of Directors increased our quarterly cash dividend from $0.57 to $0.65 per share. In August 2019, the Board of Directors declared a quarterly cash dividend in the amount of $0.65 per share, which was paid subsequent to the end of 2019.

Bank Credit Facilities and Commercial Paper Programs

We maintain bank credit facilities for working capital and general corporate purposes. At September 1, 2019, we had borrowing capacity under these facilities of $865, including a $400 revolving line of credit, which expires in June 2020. The Company currently has no plans to draw upon this facility. Our international operations maintain $355 of the total borrowing capacity under bank credit facilities, of which $150 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of 2019 and 2018.

The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $219. The outstanding commitments under these facilities at the end of 2019 totaled $145, most of which were standby letters of credit with expiration dates within one year. The bank credit facilities have various expiration dates, most of which are within one year, and we generally intend to renew these facilities. The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercial letters of credit outstanding.

Contractual Obligations

At September 1, 2019, our commitments to make future payments under contractual obligations were as follows:

	Payments Due by Fiscal Year
Contractual obligations	2020				2021 to 2022				2023 to 2024				2025 and thereafter				Total
Purchase obligations (merchandise)(1)	$	8,752			$	4			$	—			$	—			$	8,756
Long-term debt(2)	1,828				2,594				1,330				1,651				7,403
Operating leases (3)	239				431				374				2,206				3,250
Construction and land obligations	606				8				—				—				614
Capital lease obligations(4)	51				91				78				544				764
Purchase obligations (equipment, services and other)(5)	538				176				33				65				812
Other(6)	18				28				23				96				165
Total	$	12,032			$	3,332			$	1,838			$	4,562			$	21,764

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(1)	Includes only open merchandise purchase orders.

(2)	Includes contractual interest payments and excludes deferred issuance costs.

(3)	Excludes common area maintenance, taxes, and insurance and have been reduced by $105 related to sub-lease income.

(4)	Includes build-to-suit lease obligations and contractual interest payments.

(5)	Excludes certain services negotiated at the individual warehouse or regional level that are not significant and generally contain clauses allowing for cancellation without significant penalty.

(6)	Includes asset retirement obligations and deferred compensation obligations. The amount excludes $27 of non-current unrecognized tax contingencies and $36 of other obligations due to uncertainty regarding the timing of future cash payments.

Off-Balance Sheet Arrangements

In the opinion of management, we have no off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition or financial statements, other than operating leases, included in the table above and discussed in Note 1 and Note 5 to the consolidated financial statements included in Item 8 of this Report.

Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires that we make estimates and assumptions 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 revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report.

Insurance/Self-insurance Liabilities

The Company is predominantly self-insured for employee health-care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability, and inventory loss. Insurance coverage is maintained in certain instances to seek to limit exposures arising from very large losses. We use different risk management mechanisms, including a wholly-owned captive insurance subsidiary, and participate in a reinsurance program. Liabilities associated with the risks that we retain are not discounted and are estimated by using historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The costs of claims are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and unforeseen developments in claims over time. While we believe our estimates are reasonable and provide for a certain degree of coverage to account for these variables, actual claims and costs could differ significantly from recorded liabilities. Historically, adjustments to our estimates have not been material.

Income Taxes

The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment also is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits associated with uncertain tax positions are recorded only after determining a more-likely-than-not probability that the positions will withstand challenge from tax authorities. When facts and circumstances change, we reassess these positions and record any changes in the consolidated financial statements as appropriate. The 2017 Tax Act includes various provisions that significantly altered U.S. tax law, many of which impact our business (see Note 8 to the consolidated financial statements for further discussion).

Recent Accounting Pronouncements

See Note 1 to the consolidated financial statements included in Item 8 of this Report for a detailed description of recent accounting pronouncements.