Attached files
Exhibit 13
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis summarizes the significant factors affecting
our consolidated operating results, financial condition, liquidity and capital
resources during the three-year period ended January 29, 2010 (our fiscal years
2009, 2008 and 2007). Each of the fiscal years presented contains 52
weeks of operating results. Unless otherwise noted, all references
herein for the years 2009, 2008 and 2007 represent the fiscal years ended
January 29, 2010, January 30, 2009, and February 1, 2008,
respectively. This discussion should be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements included in this annual report that have been prepared in accordance
with accounting principles generally accepted in the United States of
America. This discussion and analysis is presented in seven
sections:
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Executive
Overview
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Operations
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Lowe’s
Business Outlook
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Financial
Condition, Liquidity and Capital Resources
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Off-Balance
Sheet Arrangements
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Contractual
Obligations and Commercial Commitments
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Critical
Accounting Policies and Estimates
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EXECUTIVE
OVERVIEW
External
Factors Impacting Our Business
The
external pressures facing our industry continued in 2009, as the effects of
declining home prices, rising unemployment and general economic uncertainty led
to a reduction in consumer confidence and hesitancy among consumers to spend on
discretionary projects. Unemployment increased from approximately
7.7% at the end of 2008 to 9.7% at the end of 2009, foreclosure rates increased
over 20% compared to 2008, and home prices continued to decline, though at a
slower pace. As a result, consumers have reordered their priorities and have
become more deliberate in their spending decisions, as evidenced by the
significant decline in the rate of consumer spending, and the increase in the
savings rate to more than 4.0%. Consumers have also shifted to more
Do-It-Yourself (DIY) projects; balancing the tradeoffs of convenience versus the
cost. In many cases, consumers have reduced the scope of their
projects or are trading down, while still looking for high
quality. As the consumers’ priorities have shifted, we are focused on
understanding how they are making their spending decisions. Our
surveys through secondary research indicate that the home is still very
important to consumers and it is still most consumers’ largest asset, even with
the declines in home values they have suffered over recent years. And
more importantly, the psychological attachment to the home and what it stands
for remains strong.
Highlighting
the impact of the current economic environment and consumer behavior on our
business, comparable store sales declined 6.7% in 2009. While
customer transactions were down slightly from the prior year, comparable store
average ticket declined 5.7%, and tickets greater than $500 declined 11.3%
during 2009.
During
the second half of 2009, we saw some signs of improvement, specifically
improving trends in comparable store sales, including improvements in larger
ticket sales. This resulted in a 1.6% decline in comparable store sales for the
fourth quarter of 2009, which was our best performance in over three years.
During the quarter, we also saw significant sequential improvement in bigger
ticket projects and above-average comparable store Installed and Special Order
Sales. We view this as an encouraging sign regarding consumers’ willingness to
take on larger, more discretionary projects. Our most recent
quarterly survey indicated that homeowners are less likely to delay major
product purchases than in the recent past.
Business
Strategy
Managing
through the Economic Downturn
Our goal
remains to drive profitable market share gains during these challenging times as
the economy begins to recover. In order to do so, we continue to
focus on customer service, effective management of working capital, and driving
cost efficiencies. According to third-party estimates, we gained
approximately 100 basis points of total store unit market share during calendar
year 2009, and approximately 400 basis points during the downturn over the past
four years. This is evidence of our commitment to customer service,
compelling product offering, and our ability to capitalize on the evolving
competitive landscape.
Customer
service continues to be a primary focus for driving profitable sales and market
share gains. Through the economic downturn as consumers continued to
postpone larger discretionary projects, we have seen resurgence in the DIY trend
with smaller repair and maintenance projects in such areas as outdoor and
seasonal products, paint, hardware, electrical and plumbing repair. Since some
homeowners have taken on their first DIY project in a few years, many are coming
to Lowe's not only for products, but for information on how to successfully
complete their home-improvement projects. Accordingly, we have added
informational project boards in key departments in our stores, as well as how-to
videos on Lowes.com, to provide customers information and tips needed to
successfully complete these projects. In 2009, we also made changes
to staffing plans and inventory levels to ensure we were well positioned to
serve the DIY customer. In all sales environments, we remain
committed to staffing our stores with knowledgeable employees to provide the
service that our customers have come to expect. We know that
leadership and great people are the foundation of our success. During 2009, the
average tenure of a Lowe’s store manager increased to more than eight years,
providing an experienced and knowledgeable leadership base. We
continue to refine and improve our “Customer Focused” program, which measures
each store’s performance relative to key components of customer satisfaction,
including selling skills, Installed Sales, and checkout
experience. Our customer service scores, measured by our quarterly
Customer Focused process, have never been higher.
During
the year, we planned our inventory purchases more conservatively across seasonal
categories. We maintained a competitive assortment in Trim-a-Tree and
experienced strong sell through, which resulted in fewer markdowns of these
products. In tools, we purchased more core products to minimize
markdowns. These efforts helped us to continue to increase margins
and effectively manage our working capital during the downturn. As a
result, we ended the year with 3.6% lower comparable store inventory compared to
2008.
In
addition, during 2009, in light of the current economic cycle, we re-evaluated
our future store expansion plans to ensure we were making the most effective use
of our capital, which resulted in a reduction in the number of stores we expect
to open in 2010, as well as the discontinuation of certain future store
projects. The principles that drive our store-expansion plans include a focus on
high-volume, metro-market opportunities, particularly in markets where we have
minimal coverage, projects that minimize the effects of cannibalization, and
projects that will allow us to maintain consistently strong returns on our new
store capital investments.
For the
past three years during the soft sales environment, we have made decisions to
control expenses that have allowed us to maintain profitability while continuing
to provide strong customer service. Our largest expense is payroll, and we plan
store payroll hours proportionate to sales volumes and, even more specifically,
to the sales volumes of individual departments within our stores. Our
goal is to manage our payroll expense without sacrificing customer
service. One of the efficiencies implemented in the fourth quarter is
our Facility Service Associate position. This position will help ensure we
maintain our shopping environment by having better execution of the general
maintenance of our stores, including minor store repairs. In
conjunction with this new position we identified the opportunity to centralize
and consolidate our facilities service agreements across our footprint, which
allowed us to get better pricing on these contracts. Lastly, we
continue to focus our marketing efforts on advertising effectiveness. We have reduced spending
on mass media as the Lowe’s brand gained national awareness and market
share, and increased more targeted advertising campaigns including Creative
Ideas, internet search and direct mail. We continue to focus on our value
messages combined with our Everyday Low Price strategy which continues to
resonate well with customers. These measured steps helped us leverage
our marketing expense as a percent of sales during 2009.
Preparing
for Economic Recovery
While
uncertainty remains, we are encouraged by the results we achieved in the fourth
quarter of 2009 and believe that the worst of the economic cycle is likely
behind us. We know that the path to economic recovery will occur at
different times and at different rates across all the markets in which we
compete. As a result, we have several initiatives underway to ensure
we are best positioned to drive results and gain market share throughout the
recovery.
Driven by
our commitment to manage the business for the long term, during 2009 we added a
Project Specialist-Exteriors position in 1,400 of our stores to capture a larger
share of products like roofing, siding, fencing and windows, whose
characteristics lend themselves to in-home selling. To continue to grow our
Commercial Business Customer (CBC) sales, we also added a District Commercial
Account Specialist program and launched a Lowe’s Business Rewards card with
American Express to help us better connect with, and become more relevant to,
the larger commercial customer.
Improving
customer service and inventory management have always been priorities, but have
been especially critical during the economic downturn. Our multi-year
Flexible Fulfillment initiative takes that one step further, and will enable us
to better meet customers' needs by better leveraging our entire network's
inventory. Once these systems are in place, it will allow the sale of
product in any Lowe's location or Lowes.com to be fulfilled and delivered to the
customers’ homes from the most efficient location in the network. Our
goal is to make this a seamless process for the customer and at the same time
leverage the inventory that we have throughout our network.
Looking
forward to 2010, we are positioning ourselves to capitalize as long term
economic conditions improve. However, we are also focused on shorter term
opportunities; including the U.S. Department of Energy approved Energy-Star
qualified appliance incentive programs that are currently being offered to
consumers by each U.S. state and territory through mid-2010. These
rebates are being funded with $300 million from the American Recovery and
Reinvestment Act of 2009. Under this program, eligible consumers can receive
rebates to purchase new energy-efficient appliances when they replace used
appliances. We have a cross functional team in place to ensure we
have the best execution to be able to capitalize on any opportunities provided
by the upcoming government programs.
OPERATIONS
The
following tables set forth the percentage relationship to net sales of each line
item of the consolidated statements of earnings, as well as the percentage
change in dollar amounts from the prior year. This table should be read in
conjunction with the following discussion and analysis and the consolidated
financial statements, including the related notes to the consolidated financial
statements.
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Basis
Point Increase / (Decrease) in
Percentage of
Net Sales from Prior Year
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Percentage
Increase / (Decrease) in
Dollar
Amounts
from Prior Year
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2009
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2008
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2009
vs. 2008
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2009
vs. 2008
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Net
sales
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100.00 | % | 100.00 | % | N/A | (2.1 | )% | |||||||||
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Gross
margin
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34.86 | 34.21 | 65 | (0.2 | ) | |||||||||||
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Expenses:
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Selling,
general and administrative
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24.75 | 22.96 | 179 | 5.5 | ||||||||||||
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Store
opening costs
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0.10 | 0.21 | (11 | ) | (51.7 | ) | ||||||||||
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Depreciation
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3.42 | 3.19 | 23 | 4.9 | ||||||||||||
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Interest
- net
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0.61 | 0.58 | 3 | 2.4 | ||||||||||||
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Total
expenses
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28.88 | 26.94 | 194 | 4.9 | ||||||||||||
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Pre-tax
earnings
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5.98 | 7.27 | (129 | ) | (19.4 | ) | ||||||||||
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Income
tax provision
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2.20 | 2.72 | (52 | ) | (20.5 | ) | ||||||||||
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Net
earnings
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3.78 | % | 4.55 | % | (77 | ) | (18.8 | )% | ||||||||
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EBIT margin 1
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6.59 | % | 7.85 | % | (126 | ) | (17.8 | )% | ||||||||
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Basis
Point Increase / (Decrease) in Percentage of Net Sales from Prior
Year
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Percentage
Increase / (Decrease) in Dollar Amounts from Prior Year
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2008
vs. 2007
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2008
vs. 2007
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Net
sales
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100.00 | % | 100.00 | % | N/A | (0.1 | )% | |||||||||
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Gross
margin
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34.21 | 34.64 | (43 | ) | (1.3 | ) | ||||||||||
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Expenses:
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Selling,
general and administrative
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22.96 | 21.78 | 118 | 5.3 | ||||||||||||
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Store
opening costs
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0.21 | 0.29 | (8 | ) | (27.5 | ) | ||||||||||
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Depreciation
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3.19 | 2.83 | 36 | 12.7 | ||||||||||||
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Interest
- net
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0.58 | 0.40 | 18 | 44.3 | ||||||||||||
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Total
expenses
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26.94 | 25.30 | 164 | 6.4 | ||||||||||||
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Pre-tax
earnings
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7.27 | 9.34 | (207 | ) | (22.3 | ) | ||||||||||
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Income
tax provision
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2.72 | 3.52 | (80 | ) | (23.0 | ) | ||||||||||
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Net
earnings
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4.55 | % | 5.82 | % | (127 | ) | (21.8 | )% | ||||||||
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EBIT margin 1
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7.85 | % | 9.74 | % | (189 | ) | (19.5 | )% | ||||||||
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Other
Metrics
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2009
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2008
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2007
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Comparable
store sales decrease 2
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(6.7 | )% | (7.2 | )% | (5.1 | )% | ||||||
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Total
customer transactions (in millions)
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766 | 740 | 720 | |||||||||
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Average
ticket 3
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$ | 61.66 | $ | 65.15 | $ | 67.05 | ||||||
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At
end of year:
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Number
of stores
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1,710 | 1,649 | 1,534 | |||||||||
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Sales
floor square feet (in millions)
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193 | 187 | 174 | |||||||||
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Average
store size selling square feet (in thousands) 4
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113 | 113 | 113 | |||||||||
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Return
on average assets 5
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5.3 | % | 6.8 | % | 9.5 | % | ||||||
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Return
on average shareholders' equity 6
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9.5 | % | 12.7 | % | 17.7 | % | ||||||
1
EBIT margin is defined as
earnings before interest and taxes as a percentage of sales (operating
margin).
2 A comparable store is defined as a
store that has been open longer than 13 months. A store that is identified for
relocation is no longer considered comparable one month prior to its
relocation. The relocated store must then remain open longer than 13
months to be considered comparable.
3
Average ticket is
defined as net sales divided by the total number of customer
transactions.
4
Average store size
selling square feet is defined as sales floor square feet divided by the number
of stores open at the end of the period.
5
Return on average
assets is defined as net earnings divided by average total assets for the last
five quarters.
6 Return on average shareholders’
equity is defined as net earnings divided by average shareholders’ equity for
the last five quarters.
2009
Compared to 2008
Net sales – Reflective of the
continued challenging sales environment, net sales decreased 2.1% to $47.2
billion in 2009. Comparable store sales declined 6.7% in 2009
compared to a decline of 7.2% in 2008. Total customer transactions
increased 3.4% compared to 2008, driven by our store expansion
program. However, average ticket decreased 5.4% to $61.66, primarily
as a result of fewer project sales. Comparable store customer
transactions declined 1.0%, and comparable store average ticket declined 5.7%
compared to 2008.
Customers
continued to focus on routine maintenance and repairs instead of larger
discretionary projects during 2009. We experienced solid sales
performance in paint and nursery as a result of the continued willingness of
homeowners to take on smaller DIY projects to maintain their homes and improve
their outdoor space. The paint category had positive comparable store
sales performance for each quarter during 2009. Appliances also
performed better than our average comparable store sales change driven by
attractive value and customers’ willingness to invest in products that increase
energy efficiency. However, certain of our other categories,
including windows & walls, cabinets & countertops, and millwork, which
are more discretionary in nature, experienced double-digit declines in
comparable store sales for the year. We also experienced continued weakness in
other categories, including rough electrical, lumber, and outdoor power
equipment which also experienced double-digit declines in comparable store sales
driven by comparisons to last year’s hurricane-related spending.
Due to
consumers’ continued hesitancy to take on larger discretionary projects, we
experienced higher than average declines within all specialty sales categories
during 2009. Special Order Sales had a 15.8% decline in comparable
store sales, due to weakness in cabinets & countertops, windows & walls,
lighting and millwork. Comparable store Installed Sales declined
11.4% for 2009. However, both Special Order Sales and Installed Sales
experienced sequential improvement in the third quarter of 2009, and positive
comparable store sales in the fourth quarter of 2009, as the economic pressures
lessened. Sales to Commercial Business Customers declined 9.1% in
2009 driven by continued project delays within the remodel and repair
businesses.
From a
geographic market perspective, we experienced continued pressure from the
declining housing market, with the most pronounced declines in the Mid-Atlantic
and Florida markets for the year. Many areas were impacted by several
years of housing pressure as well as the financial markets. However,
we have seen evidence of broad-based stabilization, as we experienced sequential
improvement in comparable store sales for all 50 states from the third to the
fourth quarter, and 26 states had positive comparable results in the fourth
quarter. For 2009, the northeast and north-central markets performed
above the Company average, and for the fourth quarter of 2009 these areas
delivered positive comparable store sales results. As a result, we experienced a
comparable store sales decline of 1.6% for the fourth quarter, compared to a
decline of 6.7% for the year.
Gross margin - For 2009,
gross margin of 34.86% represented a 65 basis point increase from
2008. Margin rate improvement contributed approximately 52 basis
points of this increase, primarily driven by a moderating promotional
environment and decreased seasonal markdowns. The seasonal living
category experienced strong margin increases compared to the prior year driven
by reduced markdowns as a result of rationalizing purchase levels earlier in the
year. The flooring and lighting product categories also experienced
strong improvement compared to the prior year driven by the more rational
promotional environment and our decision to not repeat certain prior year
promotions. In addition, margin was positively impacted by lower inventory
shrink, which provided 12 basis points of leverage.
For the
fourth quarter of 2009, gross margin of 34.95% represented a 122 basis point
increase from the fourth quarter of 2008. In the fourth quarter of
2008, we experienced lower margin rates as a result of our efforts to clear
seasonal inventory in our seasonal living and tools categories, as well as
markdowns associated with our decision to exit wallpaper. In
addition, there has been a more rational promotional environment in the current
year, which positively impacted the seasonal living, windows & walls and
lighting categories.
SG&A - The increase in
SG&A as a percentage of sales from 2008 to 2009 was primarily driven by
de-leverage of 61 basis points in store payroll. As sales per store declined, an
increased number of stores met the base staffing hours threshold, which
increased the proportion of fixed-to-total payroll. Although this
created pressure on earnings, in the long-term it ensures that we maintain the
high service levels that customers have come to expect from Lowe’s, and will
ensure we have a knowledgeable and engaged team in position as consumer demand
stabilizes. We also experienced de-leverage of approximately 40
basis points in bonus expense attributable to higher achievement against
performance targets in the current year. As a result of current year
performance and continued expansion rationalization, we experienced 20 basis
points of de-leverage associated with the write-off of new store projects that
we are no longer pursuing and long-lived asset impairment
charges. Employee insurance costs also de-leveraged 18 basis points
as a result of rising health care expenses, higher enrollment and higher
administrative costs. In the current year, credit programs
de-leveraged 16 basis points due to increases in aged losses and bankruptcies as
a result of higher unemployment and credit market tightening.
Additionally, we experienced de-leverage of approximately 16 basis points in
fixed expenses such as property taxes, utilities and rent during the year as a
result of sales declines. For the fourth quarter of 2009, SG&A
de-leveraged 103 basis points as compared to the fourth quarter of
2008. The de-leverage was primarily attributable to the same factors
that contributed to the de-leverage in SG&A for the full year.
Store opening costs - Store
opening costs, which include payroll and supply costs incurred prior to store
opening as well as grand opening advertising costs, totaled $49 million in 2009,
compared to $102 million in 2008. These costs are associated with the
opening of 62 stores in 2009, as compared with the opening of 115 stores in
2008. Store opening costs for stores opened during both 2009 and 2008
averaged approximately $0.8 million per store. Because store opening
costs are expensed as incurred, the timing of expense recognition fluctuates
based on the timing of store openings.
Depreciation - Depreciation
de-leveraged 23 basis points as a percentage of sales in 2009. This
de-leverage was driven by the comparable store sales declines and the addition
of 62 new stores in 2009. Property, less accumulated depreciation,
decreased to $22.5 billion at January 29, 2010, compared to $22.7 billion at
January 30, 2009. At January 29, 2010, and January 30, 2009, we owned
88% of our stores which included stores on leased land.
Interest - Net interest
expense is comprised of the following:
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(In
millions)
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2009
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2008
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Interest
expense, net of amount capitalized
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$ | 300 | $ | 314 | ||||
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Amortization
of original issue discount and loan costs
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4 | 6 | ||||||
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Interest
income
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(17 | ) | (40 | ) | ||||
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Interest
- net
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$ | 287 | $ | 280 | ||||
Net
interest expense increased primarily as a result of the lower interest income
due to lower interest rates and lower capitalized interest associated with fewer
stores under construction, partially offset by lower interest associated with
favorable tax settlements during the year.
Income tax provision - Our
effective income tax rate was 36.9% in 2009 versus 37.4% in 2008. The
decrease in the effective tax rate was primarily due to favorable state tax
settlements.
2008 Compared to 2007
Net sales – Reflective of the
challenging sales environment, net sales decreased 0.1% to $48.2 billion in
2008. Comparable store sales declined 7.2% in 2008 compared to a
decline of 5.1% in 2007. Total customer transactions increased 2.8%
compared to 2007, driven by our store expansion program. However,
average ticket decreased 2.8% to $65.15, as a result of fewer project
sales. Comparable store customer transactions declined 4.1%, and
comparable store average ticket declined 3.1% compared to 2007.
The sales weakness we experienced was most pronounced in larger discretionary projects and was the result of dramatic reductions in consumer spending. Certain of our project categories, including cabinets & countertops and millwork, had double-digit declines in comparable store sales for 2008. These two project categories together with flooring were approximately 17% of our total sales in 2008. This is comparable to 2002 levels, after having peaked at nearly 18.5% in 2006. We also experienced continued weakness in certain of our style categories, such as fashion plumbing, lighting and windows & walls. These product categories are also typically more discretionary in nature and delivered double-digit declines in comparable store sales for the year.
Due to
consumers’ hesitancy to take on larger discretionary projects, we experienced
mixed results within Specialty Sales during the year. Special Order
Sales delivered a 9.5% decline in comparable store sales, due to continued
weakness in cabinets & countertops, fashion plumbing, lighting and
millwork. Installed Sales performed above our average comparable
store sales change with a decline of 6.0% for 2008. However, we
experienced low double-digit declines in comparable store sales in the third and
fourth quarters of 2008 as the economic environment
worsened. Commercial Business Customer sales continued to deliver
above-average comparable store sales throughout this industry downturn as a
result of our targeted efforts to focus on the professional tradesperson,
property maintenance professional and the repair/remodeler.
We
experienced solid sales performance due to increased demand for
hurricane-related products, which helped drive a comparable store sales increase
in building materials and above-average comparable store sales changes in
outdoor power equipment and hardware. Favorable comparisons due to
2007’s drought conditions contributed to above-average comparable store sales
changes in our lawn & landscape products and nursery
categories. The continued willingness of homeowners to take on
smaller projects to improve their outdoor space and maintain their homes also
contributed to the above-average comparable store sales change in our nursery
category, as well as in paint and home environment. Other categories
that performed above our average comparable store sales change included
appliances and rough plumbing, while flooring and seasonal living performed at
approximately the overall corporate average.
From a
geographic market perspective, we experienced a wide range of comparable store
sales performance during the first three quarters of 2008. Markets in
the Western U.S. and Florida, which include some of the markets most pressured
by the declining housing market, experienced double-digit declines in comparable
store sales during each of the first three quarters of the
year. Contrasting those markets we saw solid sales results in our
markets in Texas, Oklahoma, certain areas of the Northeast and parts of the
upper Midwest and Ohio Valley during the same period. However, in the
fourth quarter of 2008, the economic pressures on consumers intensified as
unemployment swelled, resulting in a further decline in consumer confidence and
consumer spending. This impacted all of our geographic markets, and
resulted in a comparable store sales decline of 9.9% for the fourth quarter,
compared to a decline of 7.2% for the year.
Gross margin - For 2008,
gross margin of 34.21% represented a 43-basis-point decrease from
2007. This decrease was primarily driven by carpet installation and
other promotions, which negatively impacted gross margin by approximately 21
basis points. We also saw a decline of approximately 14 basis points
due to higher fuel prices during the first half of the year and de-leverage in
distribution fixed costs. Additionally, markdowns associated with our
decision to exit wallpaper reduced gross margin by approximately three basis
points. The de-leverage from these factors was partially offset by a
positive impact of approximately 12 basis points from lower inventory shrink and
approximately four basis points attributable to the mix of products
sold.
SG&A - The increase in
SG&A as a percentage of sales from 2007 to 2008 was primarily driven by
de-leverage of 70 basis points in store payroll. As sales per store declined,
additional stores met the base staffing hours threshold, which increased the
proportion of fixed-to-total payroll. Although this created
short-term pressure on earnings, in the long-term
it
ensured that we maintained the high service levels that customers have come to
expect from Lowe’s. The resulting de-leverage in store payroll was
partially offset by leverage of 31 basis points of in-store service expense, due
to the shifting of certain tasks from third-party, in-store service groups to
store employees. The offsetting impact of these two factors resulted
in net de-leverage of 39 basis points. We experienced
de-leverage of approximately 21 basis points in fixed expenses such as property
taxes, utilities and rent during the year as a result of softer
sales. Additionally, we experienced 11 basis points of de-leverage
associated with the write-off of new store projects that we are no longer
pursuing and a long-lived asset impairment charge for open stores. We
also experienced de-leverage of approximately nine basis points in bonus expense
attributable to higher achievement against performance targets in 2008, and
de-leverage of seven basis points in retirement plan expenses due to changes in
the 401(k) Plan that increased our matching contribution relative to the prior
year.
Store opening costs - Store
opening costs, which include payroll and supply costs incurred prior to store
opening as well as grand opening advertising costs, totaled $102 million in
2008, compared to $141 million in 2007. These costs are associated
with the opening of 115 stores in 2008, as compared with the opening of 153
stores in 2007 (149 new and four relocated). Store opening costs for
stores opened during the year averaged approximately $0.8 million and $0.9
million per store in 2008 and 2007, respectively. Because store
opening costs are expensed as incurred, the timing of expense recognition
fluctuates based on the timing of store openings.
Depreciation - Depreciation
de-leveraged 36 basis points as a percentage of sales in 2008. This
de-leverage was driven by the addition of 115 new stores in 2008 and the
comparable store sales decline. Property, less accumulated
depreciation, increased to $22.7 billion at January 30, 2009, compared to $21.4
billion at February 1, 2008. At January 30, 2009, we owned 88% of our
stores, compared to 87% at February 1, 2008, which includes stores on leased
land.
Interest - Net interest
expense is comprised of the following:
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(In
millions)
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2008
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2007
|
||||||
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Interest
expense, net of amount capitalized
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$ | 314 | $ | 230 | ||||
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Amortization
of original issue discount and loan costs
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6 | 9 | ||||||
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Interest
income
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(40 | ) | (45 | ) | ||||
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Interest
- net
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$ | 280 | $ | 194 | ||||
Interest
expense increased primarily as a result of the September 2007 $1.3 billion debt
issuance and lower capitalized interest associated with fewer stores under
construction.
Income tax provision – Our
effective tax rate was 37.4% in 2008 versus 37.7% in 2007. The
decrease in the effective tax rate was due to an increase in federal and state
tax credits as a percentage of taxable income in 2008 versus the prior
year.
LOWE’S
BUSINESS OUTLOOK
As of
February 22, 2010, the date of our fourth quarter 2009 earnings release, we
expected to open 40 to 45 stores during 2010, resulting in total square footage
growth of approximately 2%. We expected total sales in 2010 to
increase 4% to 6% and comparable store sales to increase 1% to
3%. Earnings before interest and taxes as a percentage of sales
(operating margin) was expected to increase 40 to 50 basis points. Depreciation
expense was expected to be approximately $1.62 billion. Diluted
earnings per share of $1.30 to $1.42 were expected for the year ending January
28, 2011. While we expect to make share repurchases during 2010, our
outlook for 2010 does not assume any share repurchases.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash
Flows
Cash
flows from operating activities continued to provide the primary source of our
liquidity. The decrease in net cash flows provided by operating
activities for 2009 versus 2008 was primarily driven by lower net earnings,
partially offset by working capital improvements. The decrease in net
cash used in investing activities for 2009 versus 2008 was driven by a 45%
decline in property acquired due to a reduction in our store expansion
program. The increase in cash used in financing activities for 2009
versus 2008 was attributable to approximately $1.0 billion of net repayment
activity in 2009 related to short-term borrowings and $500 million in share
repurchases under our share repurchase program in 2009, partially offset by the
redemption in June 2008 of our convertible notes.
Sources
of Liquidity
In
addition to our cash flows from operations, liquidity is provided by our
short-term borrowing facilities. We have a $1.75 billion senior
credit facility that expires in June 2012. The senior credit facility
supports our commercial paper and revolving credit programs. The
senior credit facility has a $500 million letter of credit
sublimit. Amounts outstanding under letters of credit reduce the
amount available for borrowing under the senior credit
facility. Borrowings made are unsecured and are priced at fixed rates
based upon market conditions at the time of funding in accordance with the terms
of the senior credit facility. The senior credit facility contains certain
restrictive covenants, which include maintenance of a debt leverage ratio, as
defined by the senior credit facility. We were in compliance with
those covenants at January 29, 2010. Nineteen banking institutions
are participating in the senior credit facility. As of January 29,
2010, there were no outstanding borrowings or letters of credit outstanding
under the senior credit facility and no outstanding borrowings under the
commercial paper program.
We have a
Canadian dollar (C$) denominated credit facility in the amount of C$50 million
that provides revolving credit support for our Canadian
operations. This uncommitted credit facility provides us with the
ability to make unsecured borrowings which are priced at fixed rates based upon
market conditions at the time of funding in accordance with the terms of the
credit facility. As of January 29, 2010, there were no borrowings
outstanding under this credit facility.
Our debt
ratings at January 29, 2010, were as follows:
|
Current
Debt Ratings
|
S&P
|
Moody’s
|
Fitch
|
|||||||||
|
Commercial
Paper
|
A1 | P1 | F1 | |||||||||
|
Senior
Debt
|
A+ | A1 | A+ | |||||||||
|
Outlook
|
Negative
|
Stable
|
Negative
|
|||||||||
On March
25, 2010, Fitch affirmed our commercial paper rating at F1, affirmed our senior
debt rating at A+, and changed our outlook from negative to stable.
We
believe that net cash provided by operating and financing activities will be
adequate for our expansion plans and for our other operating requirements over
the next 12 months. The availability of funds through the issuance of
commercial paper or new debt or the borrowing cost of these funds could be
adversely affected due to a debt rating downgrade, which we do not expect, or a
deterioration of certain financial ratios. There are no provisions in
any agreements that would require early cash settlement of existing debt or
leases as a result of a downgrade in our debt rating or a decrease in our stock
price.
Cash
Requirements
Capital
expenditures
Our 2010
capital budget is approximately $2.1 billion, inclusive of approximately $400
million of lease commitments, resulting in a planned net cash outflow of $1.7
billion. Approximately 62% of the planned net cash outflow is for
store
expansion
and approximately 21% is for investment in our existing stores through resets
and remerchandising. Our store expansion plans for 2010 consist of 40
to 45 new stores and are expected to increase sales floor square footage by
approximately 2%. Approximately 93% of the 2010 projects will be owned, of
which 43% will be ground-leased. Other planned capital expenditures
include investing in our distribution and corporate infrastructure, including
enhancements in information technology.
During
2009, we entered into a joint venture agreement with Australian retailer
Woolworths Limited, to develop a chain of home improvement stores in
Australia. We expect to contribute approximately $100 million per year
over four years to the joint venture, of which we are a one-third
owner.
At
January 29, 2010, we owned and operated 14 regional distribution
centers. At January 29, 2010, we also operated 15 flatbed
distribution centers for the handling of lumber, building materials and other
long-length items. We are confident that our current distribution
network has the capacity to ensure that our stores remain in stock and that
customer demand is met.
Debt
and capital
The $500
million 8.25% Notes due June 1, 2010 will be repaid with net cash provided by
operating and financing activities.
Dividends
declared during 2009 totaled $522 million. The decline in cash
dividend payments from $491 million in 2008 to $391 million in 2009 was
primarily due to a shift in the timing of dividend payments for dividends
declared in the fourth quarter of 2009. Dividends declared in the
fourth quarter of 2009 were paid in 2010 and totaled $131 million.
Our share
repurchase program is implemented through purchases made from time to time
either in the open market or through private transactions. Shares
purchased under the share repurchase program are retired and returned to
authorized and unissued status. Authorization available for
share repurchases under the program during 2009 expired as of January 29,
2010. However, on January 29, 2010, the Board of Directors authorized
an additional $5 billion in share repurchases with no expiration. We
expect to utilize the $5 billion authorization over the next three
years.
The ratio
of debt to equity plus debt was 21.0% and 25.1% as of January 29, 2010, and
January 30, 2009, respectively.
OFF-BALANCE
SHEET ARRANGEMENTS
Other
than in connection with executing operating leases, we do not have any
off-balance sheet financing that has, or is reasonably likely to have, a
material, current or future effect on our financial condition, cash flows,
results of operations, liquidity, capital expenditures or capital
resources.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
The
following table summarizes our significant contractual obligations and
commercial commitments:
|
Payments
Due by Period
|
||||||||||||||||||||
|
Contractual
Obligations
|
Less
Than
|
1-3 | 4-5 |
After
5
|
||||||||||||||||
|
(In
millions)
|
Total
|
1
Year
|
Years
|
Years
|
Years
|
|||||||||||||||
|
Long-term
debt (principal and interest
|
||||||||||||||||||||
|
amounts,
excluding discount)
|
$ | 8,974 | $ | 791 | $ | 1,057 | $ | 445 | $ | 6,681 | ||||||||||
|
Capitalized
lease obligations 1
|
587 | 66 | 131 | 124 | 266 | |||||||||||||||
|
Operating
leases 1
|
6,164 | 409 | 815 | 787 | 4,153 | |||||||||||||||
|
Purchase
obligations 2
|
673 | 418 | 193 | 60 | 2 | |||||||||||||||
|
Total
contractual obligations
|
$ | 16,398 | $ | 1,684 | $ | 2,196 | $ | 1,416 | $ | 11,102 | ||||||||||
|
Amount
of Commitment Expiration by Period
|
||||||||||||||||||||
|
Commercial
Commitments
|
Less
Than
|
1-3 | 4-5 |
After
5
|
||||||||||||||||
|
(In
millions)
|
Total
|
1
Year
|
Years
|
Years
|
Years
|
|||||||||||||||
|
Letters
of credit 3
|
$ | 327 | $ | 324 | $ | 3 | $ | - | $ | - | ||||||||||
|
Surety
bonds 4
|
$ | 286 | $ | 276 | $ | 10 | $ | - | $ | - | ||||||||||
1 Amounts do not include taxes, common
area maintenance, insurance or contingent rent because these amounts have
historically been insignificant.
2
Represents commitments related
to certain marketing and information technology programs, purchases of
merchandise inventory and construction of buildings.
3
Letters of credit are issued
for the purchase of import merchandise inventories, real estate and construction
contracts, and insurance programs.
4
Surety bonds are issued
primarily to secure payment of workers’ compensation liability claims in states
where we are self-insured.
At
January 29, 2010, approximately $9 million of the reserve for uncertain tax
positions (including penalties and interest) was classified as a current
liability and $160 million was classified as a non-current
liability. At this time, we are unable to make a reasonably reliable
estimate of the timing of payments in individual years beyond 12 months, due to
uncertainties in the timing of the effective settlement of tax
positions.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of the consolidated financial statements and notes to consolidated
financial statements presented in this annual report requires us to make
estimates that affect the reported amounts of assets, liabilities, sales and
expenses, and related disclosures of contingent assets and
liabilities. We base these estimates on historical results and
various other assumptions believed to be reasonable, all of which form the basis
for making estimates concerning the carrying values of assets and liabilities
that are not readily available from other sources. Actual results may
differ from these estimates.
Our
significant accounting policies are described in Note 1 to the consolidated
financial statements. We believe that the following accounting policies affect
the most significant estimates and management judgments used in preparing the
consolidated financial statements.
Merchandise
Inventory
Description
We record
an obsolete inventory reserve for the anticipated loss associated with selling
inventories below cost. This reserve is based on our current
knowledge with respect to inventory levels, sales trends and historical
experience. During 2009, our reserve decreased approximately $9
million to $49 million as of January 29, 2010.
We also
record an inventory reserve for the estimated shrinkage between physical
inventories. This reserve is based primarily on actual shrinkage
results from previous physical inventories. During 2009, the
inventory shrinkage reserve increased approximately $9 million to $138 million
as of January 29, 2010.
In
addition, we receive funds from vendors in the normal course of business,
principally as a result of purchase volumes, sales, early payments or promotions
of vendors’ products, which generally do not represent the reimbursement of
specific, incremental and identifiable costs that we incurred to sell the
vendor’s product. We treat these funds as a reduction in the cost of
inventory as the amounts are accrued, and recognize these funds as a reduction
of cost of sales when the inventory is sold.
Judgments
and uncertainties involved in the estimate
We do not
believe that our merchandise inventories are subject to significant risk of
obsolescence in the near term, and we have the ability to adjust purchasing
practices based on anticipated sales trends and general economic conditions.
However, changes in consumer purchasing patterns or a deterioration in product
quality could result in the need for additional reserves. Likewise,
changes in the estimated shrink reserve may be necessary, based on the timing
and results of physical inventories. We also apply judgment in the
determination of levels of non-productive inventory and assumptions about net
realizable value.
For
vendor funds, we develop accrual rates based on the provisions of the agreements
in place. Due to the complexity and diversity of the individual
vendor agreements, we perform analyses and review historical purchase trends and
volumes throughout the year, adjust accrual rates as appropriate and confirm
actual amounts with select vendors to ensure the amounts earned are
appropriately recorded. Amounts accrued throughout the year could be
impacted if actual purchase volumes differ from projected purchase volumes,
especially in the case of programs that provide for increased funding when
graduated purchase volumes are met.
Effect
if actual results differ from assumptions
We have
not made any material changes in the methodology used to establish our inventory
valuation or the related reserves for obsolete inventory or inventory shrinkage
during the past three years. We believe that we have sufficient
current and historical knowledge to record reasonable estimates for both of
these inventory reserves. However, it is possible that actual results
could differ from recorded reserves. A 10% change in the amount of
products considered obsolete and, therefore, included in the calculation of our
obsolete inventory reserve would have affected net earnings by approximately
$3 million for 2009. A 10% change in the estimated shrinkage
rate included in the calculation of our inventory shrinkage reserve would
have affected net earnings by approximately $9 million for 2009.
We have
not made any material changes in the methodology used to recognize vendor funds
during the past three years. If actual results are not consistent
with the assumptions and estimates used, we could be exposed to additional
adjustments that could positively or negatively impact gross margin and
inventory. However, substantially all receivables associated with
these activities do not require subjective long-term estimates because they are
collected within the following year. Adjustments to gross margin and
inventory in the following year have historically not been
material.
Long-Lived
Asset Impairment - Operating Stores
Description
At
January 29, 2010, $19.2 billion of our long-lived assets were associated with
stores currently in operation. We review the carrying amounts of
operating stores whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. When evaluating operating
stores for impairment, our asset group is at an individual store
level,
as that
is the lowest level for which cash flows are identifiable. Cash flows
for individual operating stores do not include an allocation of corporate
overhead.
We
evaluate operating stores on a quarterly basis to determine when store assets
may not be recoverable. Our primary indicator that operating store
assets may not be recoverable is consistently negative cash flow for a 12 month
period for those stores that have been open in the same location for a
sufficient period of time to allow for meaningful analysis of ongoing operating
results. Management also monitors other factors when evaluating
operating stores for impairment, including individual stores’ execution of their
operating plans and local market conditions, including incursion, which is the
opening of either other Lowe’s stores or direct competitors’ stores within the
same market.
For
operating stores, a potential impairment has occurred if projected future
undiscounted cash flows expected to result from the use and eventual disposition
of the store assets are less than the carrying amount of the
assets. When determining the stream of projected future cash flows
associated with an individual operating store, management makes assumptions,
incorporating local market conditions, about key store variables including sales
growth rates, gross margin and controllable expenses, such as store payroll and
occupancy expense.
An
impairment loss is recognized when the carrying amount of the operating store is
not recoverable and exceeds its fair value. We generally use an
income approach to determine the fair value of our individual operating stores,
which requires discounting projected future cash flows. This involves
making assumptions regarding both a store’s future cash flows, as described
above, and an appropriate discount rate to determine the present value of those
future cash flows. We discount our cash flow estimates at a rate
commensurate with the risk that selected market participants would assign to the
cash flows. The selected market participants represent a group of
other retailers with a store footprint similar in size to ours.
We
recorded operating store impairment losses of $53 million during 2009 compared
to $16 million during 2008.
Judgments
and uncertainties involved in the estimate
Our
impairment loss calculations require us to apply judgment in estimating expected
future cash flows, including estimated sales, margin and controllable expenses
and assumptions about market performance. We also apply judgment in
estimating asset fair values, including the selection of an appropriate discount
rate.
Effect
if actual results differ from assumptions
We have
not made any material changes in the methodology used to estimate the future
cash flows of operating stores during the past three years. If the
actual results of our operating stores are not consistent with the assumptions
and judgments we have made in estimating future cash flows and determining asset
fair values, our actual impairment losses could vary positively or negatively
from our estimated impairment losses. A 10% reduction in
projected sales used to estimate future cash flows at the time that the
operating stores were evaluated for impairment would have increased recognized
impairment losses by $31 million. A 10% increase in projected sales
used to estimate future cash flows at the time that the operating stores were
evaluated for impairment would have reduced recognized impairment losses by $3
million. We analyzed other assumptions made in estimating the future
cash flows of the operating stores evaluated for impairment, but the sensitivity
of those assumptions was not significant to the estimates.
Self-Insurance
Description
We are
self-insured for certain losses relating to workers’ compensation, automobile,
property, general and product liability, extended warranty,
and certain medical
and dental claims. Self-insurance claims filed and claims
incurred but not reported are accrued based upon our estimates of the discounted
ultimate cost for self-insured claims incurred using actuarial assumptions
followed in the insurance industry and historical experience. During
2009, our self-insurance liability increased approximately $41 million to $792
million as of January 29, 2010.
Judgments
and uncertainties involved in the estimate
These
estimates are subject to changes in the regulatory environment; utilized
discount rate; projected exposures including payroll, sales, and vehicle units;
as well as the frequency, lag and severity of claims.
Effect
if actual results differ from assumptions
We have
not made any material changes in the methodology used to establish our
self-insurance liability during the past three years. Although
we believe that we have the ability to reasonably estimate losses related to
claims, it is possible that actual results could differ from recorded
self-insurance liabilities. A 10% change in our self-insurance
liability would have affected net earnings by approximately $50 million for
2009. A 100 basis point change in our discount rate would have
affected net earnings by approximately $14 million for 2009.
Revenue
Recognition
Description
See Note
1 to the consolidated financial statements for a discussion of our revenue
recognition policies. The following accounting estimates relating to
revenue recognition require management to make assumptions and apply judgment
regarding the effects of future events that cannot be determined with
certainty.
We sell
separately-priced extended warranty contracts under a Lowe’s-branded program for
which we are ultimately self-insured. We recognize revenues from
extended warranty sales on a straight-line basis over the respective contract
term due to a lack of sufficient historical evidence indicating that costs of
performing services under the contracts are incurred on other than a
straight-line basis. Extended warranty contract terms primarily range
from one to four years from the date of purchase or the end of the
manufacturer’s warranty, as applicable. We consistently group and
evaluate extended warranty contracts based on the characteristics of the
underlying products and the coverage provided in order to monitor for expected
losses. A loss would be recognized if the expected costs of
performing services under the contracts exceeded the amount of unamortized
acquisition costs and related deferred revenue associated with the
contracts. Deferred revenues associated with the extended warranty
contracts increased $70 million to $549 million as of January 29,
2010.
We defer
revenue and cost of sales associated with transactions for which customers have
not yet taken possession of merchandise or for which installation has not yet
been completed. Revenue is deferred based on the actual amounts
received. We use historical gross margin rates to estimate the
adjustment to cost of sales for these transactions. During 2009,
deferred revenues associated with these transactions increased $26 million to
$354 million as of January 29, 2010.
Judgments
and uncertainties involved in the estimate
For
extended warranties, there is judgment inherent in our evaluation of expected
losses as a result of our methodology for grouping and evaluating extended
warranty contracts and from the actuarial determination of the estimated cost of
the contracts. There is also judgment inherent in our determination
of the recognition pattern of costs of performing services under these
contracts.
For the
deferral of revenue and cost of sales associated with transactions for which
customers have not yet taken possession of merchandise or for which installation
has not yet been completed, there is judgment inherent in our estimates of gross
margin rates.
Effect
if actual results differ from assumptions
We have
not made any material changes in the methodology used to recognize revenue on
our extended warranty contracts during the past three years. We
currently do not anticipate incurring any losses on our extended warranty
contracts. Although we believe that we have the ability to adequately
monitor and estimate expected losses under the extended warranty contracts, it
is possible that actual results could differ from our estimates. In
addition, if future evidence indicates that the costs of performing services
under these contracts are incurred on other than a straight-line basis, the
timing of revenue recognition under these contracts could change. A
10% change in the amount of revenue recognized in 2009 under these contracts
would have affected net earnings by approximately $9 million.
We have
not made any material changes in the methodology used to reverse net sales and
cost of sales related to amounts received for which customers have not yet taken
possession of merchandise or for which installation has not yet been
completed. We believe we have sufficient current and historical
knowledge to record reasonable estimates related to the impact to cost of sales
for these transactions. However, if actual results are not consistent
with our estimates or assumptions, we may incur additional income or
expense. A 10% change in the estimate of the gross margin rates
applied to these transactions would have affected net earnings by approximately
$6 million in 2009.
In
addition to the risks inherent in our operations, we are exposed to certain
market risks, including changes in interest rates, commodity prices and foreign
currency exchange rates.
Interest
Rate Risk
Fluctuations
in interest rates do not have a material impact on our financial condition and
results of operations because our long-term debt is carried at amortized cost
and primarily consists of fixed rate instruments. Therefore providing
quantitative information about interest rate risk is not meaningful for
financial instruments.
Commodity
Price Risk
We
purchase certain commodity products that are subject to price volatility caused
by factors beyond our control. We believe that the price volatility
of these products is mitigated by our selling prices and through fixed-price
supply agreements with vendors. The selling prices of these commodity
products are influenced, in part, by the market price we pay, which is
determined by industry supply and demand.
Foreign
Currency Exchange Rate Risk
Although
we have international operating entities, our exposure to foreign currency
exchange rate fluctuations is not material to our financial condition and
results of operations.
We speak
throughout this Annual Report in forward-looking statements about our future,
particularly in the “Letter to Shareholders” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” The words
“believe,” “expect,” “will,” “should,” and other similar expressions are
intended to identify those forward-looking statements. While we
believe our expectations are reasonable, they are not guarantees of future
performance. Our actual results could differ substantially from our
expectations because, for example:
• Our
sales are dependent upon the health and stability of the general economy, which
we believe is recovering slowly from a prolonged period of recession that was
made worse by the severe accompanying financial/credit
crisis. Continued high rates of unemployment, the psychological
effect of falling home prices, reduced access to credit and reduced consumer
confidence have combined to lead to sharply reduced consumer spending,
particularly on many of the discretionary, bigger-ticket products we
sell. In addition, changes in the level of repairs, remodeling and
additions to existing homes, changes in commercial building activity, and the
availability and cost of mortgage financing can impact our
business.
• Major
weather-related events and unseasonable weather may negatively impact our sales
particularly of seasonal merchandise. Prolonged and widespread
drought conditions could, for example, hurt our sales of lawn and garden and
related products.
• Our
expansion strategy is impacted by economic conditions, environmental
regulations, local zoning issues, availability and development of land, and more
stringent land-use regulations. Furthermore, our ability to secure a highly
qualified workforce is an important element to the success of our expansion
strategy.
• Our
business is highly competitive, and, as we build an increasing percentage of our
new stores in larger markets and utilize new sales channels such as the
internet, we may face new and additional forms of
competition. Promotional pricing and competitor liquidation
activities during challenging economic periods such as we are continuing to
experience may increase competition and adversely affect our
business.
• The
ability to continue our everyday low pricing strategy and provide the products
that customers want depends on our vendors providing a reliable supply of
products at competitive prices and our ability to effectively manage our
inventory. As an increasing number of the products we sell are imported, any
restrictions or limitations on importation of such products, political or
financial instability in some of the countries from which we import them, or a
failure to comply with laws and regulations of those countries from which we
import them could interrupt our supply of imported inventory. The
current global recession from which we are beginning to recover and credit
crisis that continues to some extent have adversely affected the operations and
financial stability of some of our vendors by reducing their sales and
restricting their access to capital.
• Our
goal of increasing our market share and our commitment to keeping our prices low
requires us to make substantial investments in new technology and processes
whose benefits could take longer than expected to be realized and which could be
difficult to implement and integrate.
• Changes
in existing or new laws and regulations that affect employment/labor, trade,
product safety, transportation/logistics, energy costs, health care, tax or
environmental issues, could have an adverse impact, directly or indirectly, on
our financial condition and results of operations.
For more
information about these and other risks and uncertainties that we are exposed
to, you should read the “Risk Factors” included in our Annual Report on Form
10-K to the United States Securities and Exchange Commission. All
forward-looking statements in this report speak only as of the date of this
report or, in the case of any document incorporated by reference, the date of
that document. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified by the
cautionary statements in this section and in the “Risk Factors” included in our
Annual Report on Form 10-K. We do not undertake any obligation to update or
publicly release any revisions to forward-looking statements to reflect events,
circumstances or changes in expectations after the date of this
report.
Management
of Lowe’s Companies, Inc. and its subsidiaries is responsible for establishing
and maintaining adequate internal control over financial reporting (Internal
Control) as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934,
as amended. Our Internal Control was designed to provide reasonable
assurance to our management and the Board of Directors regarding the reliability
of financial reporting and the preparation and fair presentation of
published financial statements.
All
internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention or
overriding of controls. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to the reliability
of financial reporting and financial statement preparation and
presentation. Further, because of changes in conditions, the
effectiveness may vary over time.
Our
management, with the participation of the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our Internal Control as
of January 29, 2010. In evaluating our Internal Control, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control—Integrated Framework. Based on our management's assessment, we
have concluded that, as of January 29, 2010, our Internal Control is
effective.
Deloitte
& Touche LLP, the independent registered public accounting firm that audited
the financial statements contained in this report, was engaged to audit our
Internal Control. Their report appears on page 29.
To the
Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville,
North Carolina
We have
audited the accompanying consolidated balance sheets of Lowe's Companies, Inc.
and subsidiaries (the "Company") as of January 29, 2010 and January 30, 2009,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the three fiscal years in the period ended January 29,
2010. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company at January 29, 2010 and January
30, 2009, and the results of its operations and its cash flows for each of the
three fiscal years in the period ended January 29, 2010, in conformity with
accounting principles generally accepted in the United States of
America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of January 29, 2010, based on the criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 30, 2010 expressed an unqualified opinion on the Company's
internal control over financial reporting.
/s/
Deloitte & Touche LLP
Charlotte,
North Carolina
March 30,
2010
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville,
North Carolina
We have
audited the internal control over financial reporting of Lowe's Companies, Inc.
and subsidiaries (the "Company") as of January 29, 2010, based on criteria
established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of January 29, 2010, based on the criteria
established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the fiscal year ended January 29, 2010 of the Company and our report dated
March 30, 2010 expressed an unqualified opinion on those financial
statements.
/s/
Deloitte & Touche LLP
Charlotte,
North Carolina
March 30,
2010
|
Lowe's Companies, Inc.
|
||||||||||||||||||
|
Consolidated
Statements of Earnings
|
||||||||||||||||||
|
(In
millions, except per share and percentage data)
|
January
29,
|
%
|
January
30,
|
%
|
February
1,
|
%
|
||||||||||||
|
Fiscal
years ended on
|
2010
|
Sales
|
2009
|
Sales
|
2008
|
Sales
|
||||||||||||
|
Net
sales
|
$
|
47,220
|
100.00
|
%
|
$
|
48,230
|
100.00
|
%
|
$
|
48,283
|
100.00
|
%
|
||||||
|
Cost
of sales
|
30,757
|
65.14
|
31,729
|
65.79
|
31,556
|
65.36
|
||||||||||||
|
Gross
margin
|
16,463
|
34.86
|
16,501
|
34.21
|
16,727
|
34.64
|
||||||||||||
|
Expenses:
|
||||||||||||||||||
|
Selling,
general and administrative
|
11,688
|
24.75
|
11,074
|
22.96
|
10,515
|
21.78
|
||||||||||||
|
Store
opening costs
|
49
|
0.10
|
102
|
0.21
|
141
|
0.29
|
||||||||||||
|
Depreciation
|
1,614
|
3.42
|
1,539
|
3.19
|
1,366
|
2.83
|
||||||||||||
|
Interest
- net
|
287
|
0.61
|
280
|
0.58
|
194
|
0.40
|
||||||||||||
|
Total
expenses
|
13,638
|
28.88
|
12,995
|
26.94
|
12,216
|
25.30
|
||||||||||||
|
Pre-tax
earnings
|
2,825
|
5.98
|
3,506
|
7.27
|
4,511
|
9.34
|
||||||||||||
|
Income
tax provision
|
1,042
|
2.20
|
1,311
|
2.72
|
1,702
|
3.52
|
||||||||||||
|
Net
earnings
|
$
|
1,783
|
3.78
|
%
|
$
|
2,195
|
4.55
|
%
|
$
|
2,809
|
5.82
|
%
|
||||||
|
Basic
earnings per common share
|
$
|
1.21
|
$
|
1.50
|
$
|
1.89
|
||||||||||||
|
Diluted
earnings per common share
|
$
|
1.21
|
$
|
1.49
|
$
|
1.86
|
||||||||||||
|
Cash
dividends per share
|
$
|
0.355
|
$
|
0.335
|
$
|
0.290
|
||||||||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||||||||
|
Lowe's Companies, Inc.
|
|||||||||||||||||
|
Consolidated
Balance Sheets
|
|||||||||||||||||
|
January
29,
|
%
|
January
30,
|
%
|
||||||||||||||
|
(In
millions, except par value and percentage data)
|
2010
|
Total
|
2009
|
Total
|
|||||||||||||
|
Assets
|
|||||||||||||||||
|
Current
assets:
|
|||||||||||||||||
|
Cash
and cash equivalents
|
$ | 632 | 1.9 | % | $ | 245 | 0.8 | % | |||||||||
|
Short-term
investments
|
425 | 1.3 | 416 | 1.3 | |||||||||||||
|
Merchandise
inventory - net
|
8,249 | 25.0 | 8,209 | 25.2 | |||||||||||||
|
Deferred
income taxes - net
|
208 | 0.6 | 105 | 0.3 | |||||||||||||
|
Other
current assets
|
218 | 0.7 | 215 | 0.6 | |||||||||||||
|
Total
current assets
|
9,732 | 29.5 | 9,190 | 28.2 | |||||||||||||
|
Property,
less accumulated depreciation
|
22,499 | 68.2 | 22,722 | 69.6 | |||||||||||||
|
Long-term
investments
|
277 | 0.8 | 253 | 0.8 | |||||||||||||
|
Other
assets
|
497 | 1.5 | 460 | 1.4 | |||||||||||||
|
Total
assets
|
$ | 33,005 | 100.0 | % | $ | 32,625 | 100.0 | % | |||||||||
|
Liabilities
and shareholders' equity
|
|||||||||||||||||
|
Current
liabilities:
|
|||||||||||||||||
|
Short-term
borrowings
|
$ | - | - | % | $ | 987 | 3.0 | % | |||||||||
|
Current
maturities of long-term debt
|
552 | 1.7 | 34 | 0.1 | |||||||||||||
|
Accounts
payable
|
4,287 | 13.0 | 4,109 | 12.6 | |||||||||||||
|
Accrued
compensation and employee benefits
|
577 | 1.7 | 434 | 1.3 | |||||||||||||
|
Deferred
revenue
|
683 | 2.1 | 674 | 2.1 | |||||||||||||
|
Other
current liabilities
|
1,256 | 3.8 | 1,322 | 4.1 | |||||||||||||
|
Total
current liabilities
|
7,355 | 22.3 | 7,560 | 23.2 | |||||||||||||
|
Long-term
debt, excluding current maturities
|
4,528 | 13.7 | 5,039 | 15.4 | |||||||||||||
|
Deferred
income taxes - net
|
598 | 1.8 | 599 | 1.8 | |||||||||||||
|
Other
liabilities
|
1,455 | 4.4 | 1,372 | 4.3 | |||||||||||||
|
Total
liabilities
|
13,936 | 42.2 | 14,570 | 44.7 | |||||||||||||
|
Commitments
and contingencies
|
|||||||||||||||||
|
Shareholders'
equity:
|
|||||||||||||||||
|
Preferred
stock - $5 par value, none issued
|
- | - | - | - | |||||||||||||
|
Common
stock - $.50 par value;
|
|||||||||||||||||
|
Shares
issued and outstanding
|
|||||||||||||||||
|
January
29, 2010
|
1,459
|
||||||||||||||||
|
January
30, 2009
|
1,470
|
729 | 2.2 | 735 | 2.2 | ||||||||||||
|
Capital
in excess of par value
|
6 | - | 277 | 0.8 | |||||||||||||
|
Retained
earnings
|
18,307 | 55.5 | 17,049 | 52.3 | |||||||||||||
|
Accumulated
other comprehensive income (loss)
|
27 | 0.1 | (6 | ) | - | ||||||||||||
|
Total
shareholders' equity
|
19,069 | 57.8 | 18,055 | 55.3 | |||||||||||||
|
Total
liabilities and shareholders' equity
|
$ | 33,005 | 100.0 | % | $ | 32,625 | 100.0 | % | |||||||||
|
See
accompanying notes to consolidated financial statements.
|
|||||||||||||||||
|
Lowe's Companies, Inc.
|
||||||||||||||||||||||||
|
Consolidated
Statements of Shareholders' Equity
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Capital
in
|
Other
|
Total
|
||||||||||||||||||||||
|
Common
Stock
|
Excess
of
|
Retained
|
Comprehensive
|
Shareholders'
|
||||||||||||||||||||
|
(In
millions)
|
Shares
|
Amount
|
Par
Value
|
Earnings
|
Income
(Loss)
|
Equity
|
||||||||||||||||||
|
Balance
February 2, 2007
|
1,525 | $ | 762 | $ | 102 | $ | 14,860 | $ | 1 | $ | 15,725 | |||||||||||||
|
Cumulative
effect adjustment
|
(8 | ) | (8 | ) | ||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
earnings
|
2,809 | |||||||||||||||||||||||
|
Foreign
currency translation
|
7 | |||||||||||||||||||||||
|
Total
comprehensive income
|
2,816 | |||||||||||||||||||||||
|
Tax
effect of non-qualified stock options exercised
|
||||||||||||||||||||||||
|
and
restricted stock vested
|
12 | 12 | ||||||||||||||||||||||
|
Cash
dividends declared
|
(428 | ) | (428 | ) | ||||||||||||||||||||
|
Share-based
payment expense
|
99 | 99 | ||||||||||||||||||||||
|
Repurchase
of common stock
|
(76 | ) | (38 | ) | (349 | ) | (1,888 | ) | (2,275 | ) | ||||||||||||||
|
Conversion
of debt to common stock
|
1 | - | 13 | 13 | ||||||||||||||||||||
|
Employee
stock options exercised
|
||||||||||||||||||||||||
|
and
restricted stock issued
|
5 | 3 | 61 | 64 | ||||||||||||||||||||
|
Employee
stock purchase plan
|
3 | 2 | 78 | 80 | ||||||||||||||||||||
|
Balance
February 1, 2008
|
1,458 | $ | 729 | $ | 16 | $ | 15,345 | $ | 8 | $ | 16,098 | |||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
earnings
|
2,195 | |||||||||||||||||||||||
|
Foreign
currency translation
|
(13 | ) | ||||||||||||||||||||||
|
Net
unrealized investment losses
|
(1 | ) | ||||||||||||||||||||||
|
Total
comprehensive income
|
2,181 | |||||||||||||||||||||||
|
Tax
effect of non-qualified stock options exercised
|
||||||||||||||||||||||||
|
and
restricted stock vested
|
5 | 5 | ||||||||||||||||||||||
|
Cash
dividends declared
|
(491 | ) | (491 | ) | ||||||||||||||||||||
|
Share-based
payment expense
|
95 | 95 | ||||||||||||||||||||||
|
Repurchase
of common stock
|
- | - | (8 | ) | (8 | ) | ||||||||||||||||||
|
Conversion
of debt to common stock
|
- | - | 1 | 1 | ||||||||||||||||||||
|
Employee
stock options exercised
|
||||||||||||||||||||||||
|
and
restricted stock issued
|
8 | 4 | 94 | 98 | ||||||||||||||||||||
|
Employee
stock purchase plan
|
4 | 2 | 74 | 76 | ||||||||||||||||||||
|
Balance
January 30, 2009
|
1,470 | $ | 735 | $ | 277 | $ | 17,049 | $ | (6 | ) | $ | 18,055 | ||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
earnings
|
1,783 | |||||||||||||||||||||||
|
Foreign
currency translation
|
32 | |||||||||||||||||||||||
|
Net
unrealized investment gains
|
1 | |||||||||||||||||||||||
|
Total
comprehensive income
|
1,816 | |||||||||||||||||||||||
|
Tax
effect of non-qualified stock options exercised
|
||||||||||||||||||||||||
|
and
restricted stock vested
|
(6 | ) | (6 | ) | ||||||||||||||||||||
|
Cash
dividends declared
|
(522 | ) | (522 | ) | ||||||||||||||||||||
|
Share-based
payment expense
|
102 | 102 | ||||||||||||||||||||||
|
Repurchase
of common stock
|
(22 | ) | (11 | ) | (490 | ) | (3 | ) | (504 | ) | ||||||||||||||
|
Employee
stock options exercised
|
||||||||||||||||||||||||
|
and
restricted stock issued
|
7 | 3 | 50 | 53 | ||||||||||||||||||||
|
Employee
stock purchase plan
|
4 | 2 | 73 | 75 | ||||||||||||||||||||
|
Balance
January 29, 2010
|
1,459 | $ | 729 | $ | 6 | $ | 18,307 | $ | 27 | $ | 19,069 | |||||||||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||||||||||||||
|
Lowe's Companies, Inc.
|
||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
(In
millions)
|
January
29,
|
January
30,
|
February
1,
|
|||||||||
|
Fiscal
years ended on
|
2010
|
2009
|
2008
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
earnings
|
$ | 1,783 | $ | 2,195 | $ | 2,809 | ||||||
|
Adjustments to reconcile net earnings to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
1,733 | 1,667 | 1,464 | |||||||||
|
Deferred
income taxes
|
(123 | ) | 69 | 2 | ||||||||
|
Loss
on property and other assets - net
|
193 | 89 | 51 | |||||||||
|
Loss
on redemption of long-term debt
|
- | 8 | - | |||||||||
|
Share-based
payment expense
|
102 | 95 | 99 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Merchandise
inventory - net
|
(28 | ) | (611 | ) | (464 | ) | ||||||
|
Other
operating assets
|
7 | 31 | (64 | ) | ||||||||
|
Accounts
payable
|
175 | 402 | 185 | |||||||||
|
Other
operating liabilities
|
212 | 177 | 265 | |||||||||
|
Net
cash provided by operating activities
|
4,054 | 4,122 | 4,347 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of short-term investments
|
(344 | ) | (210 | ) | (920 | ) | ||||||
|
Proceeds
from sale/maturity of short-term investments
|
624 | 431 | 1,183 | |||||||||
|
Purchases
of long-term investments
|
(1,483 | ) | (1,148 | ) | (1,588 | ) | ||||||
|
Proceeds
from sale/maturity of long-term investments
|
1,160 | 994 | 1,162 | |||||||||
|
Increase
in other long-term assets
|
(62 | ) | (56 | ) | (7 | ) | ||||||
|
Property
acquired
|
(1,799 | ) | (3,266 | ) | (4,010 | ) | ||||||
|
Proceeds
from sale of property and other long-term assets
|
18 | 29 | 57 | |||||||||
|
Net
cash used in investing activities
|
(1,886 | ) | (3,226 | ) | (4,123 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net
(decrease) increase in short-term borrowings
|
(1,007 | ) | (57 | ) | 1,041 | |||||||
|
Proceeds
from issuance of long-term debt
|
10 | 15 | 1,296 | |||||||||
|
Repayment
of long-term debt
|
(37 | ) | (573 | ) | (96 | ) | ||||||
|
Proceeds
from issuance of common stock under employee stock purchase
plan
|
75 | 76 | 80 | |||||||||
|
Proceeds
from issuance of common stock from stock options exercised
|
53 | 98 | 69 | |||||||||
|
Cash
dividend payments
|
(391 | ) | (491 | ) | (428 | ) | ||||||
|
Repurchases
of common stock
|
(504 | ) | (8 | ) | (2,275 | ) | ||||||
|
Excess
tax benefits of share-based payments
|
- | 1 | 6 | |||||||||
|
Net
cash used in financing activities
|
(1,801 | ) | (939 | ) | (307 | ) | ||||||
|
Effect
of exchange rate changes on cash
|
20 | 7 | - | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
387 | (36 | ) | (83 | ) | |||||||
|
Cash
and cash equivalents, beginning of year
|
245 | 281 | 364 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 632 | $ | 245 | $ | 281 | ||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JANUARY 29, 2010, JANUARY 30, 2009 AND FEBRUARY 1, 2008
NOTE
1: Summary of Significant Accounting Policies -
Lowe’s
Companies, Inc. and subsidiaries (the Company) is the world's second-largest
home improvement retailer and operated 1,710 stores in the United States and
Canada at January 29, 2010. Below are those accounting policies
considered by the Company to be significant.
Fiscal Year - The Company’s
fiscal year ends on the Friday nearest the end of January. Each of
the fiscal years presented contained 52 weeks. All references herein for the
years 2009, 2008 and 2007 represent the fiscal years ended January 29, 2010,
January 30, 2009, and February 1, 2008, respectively.
Principles of Consolidation -
The consolidated financial statements include the accounts of the Company and
its wholly-owned or controlled operating subsidiaries. All intercompany accounts
and transactions have been eliminated.
Foreign Currency - The
functional currencies of the Company’s international subsidiaries are primarily
the local currencies of the countries in which the subsidiaries are located.
Foreign currency denominated assets and liabilities are translated into U.S.
dollars using the exchange rates in effect at the consolidated balance sheet
date. Results of operations and cash flows are translated using the average
exchange rates throughout the period. The effect of exchange rate fluctuations
on translation of assets and liabilities is included as a component of
shareholders' equity in accumulated other comprehensive income (loss). Gains and
losses from foreign currency transactions, which are included in selling,
general and administrative (SG&A) expense, have not been
significant.
Use of Estimates - The
preparation of the Company’s financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates that affect the reported amounts of assets,
liabilities, sales and expenses, and related disclosures of contingent assets
and liabilities. The Company bases these estimates on historical
results and various other assumptions believed to be reasonable, all of which
form the basis for making estimates concerning the carrying values of assets and
liabilities that are not readily available from other sources. Actual
results may differ from these estimates.
Cash and Cash Equivalents -
Cash and cash equivalents include cash on hand, demand deposits and short-term
investments with original maturities of three months or less when
purchased. Cash and cash equivalents are carried at amortized cost on
the consolidated balance sheets. The majority of payments due from
financial institutions for the settlement of credit card and debit card
transactions process within two business days and are, therefore, classified as
cash and cash equivalents.
Investments - The Company has
a cash management program which provides for the investment of cash balances not
expected to be used in current operations in financial instruments that have
maturities of up to 10 years. Variable-rate demand notes, which have stated
maturity dates in excess of 10 years, meet this maturity requirement of the cash
management program because the maturity date of these investments is determined
based on the interest rate reset date or par value put date for the purpose of
applying this criteria.
Investments,
exclusive of cash equivalents, with a stated maturity date of one year or less
from the balance sheet date or that are expected to be used in current
operations, are classified as short-term investments. The Company’s trading
securities are also classified as short-term investments. All other
investments are classified as long-term. As of January 29, 2010, investments
consisted primarily of municipal bonds, money market funds, mutual
funds, tax-exempt commercial paper, and certificates of
deposit. Restricted balances pledged as collateral for letters of
credit for the Company’s extended warranty program and for a portion of the
Company’s casualty insurance and Installed Sales program liabilities are also
classified as investments.
The
Company maintains investment securities in conjunction with certain employee
benefit plans that are classified as trading securities. These
securities are carried at fair market value with unrealized gains and losses
included in SG&A
expense. All
other investment securities are classified as available-for-sale and are carried
at fair market value with unrealized gains and losses included in accumulated
other comprehensive income (loss) in shareholders' equity.
Merchandise Inventory -
Inventory is stated at the lower of cost or market using the first-in, first-out
method of inventory accounting. The cost of inventory also includes certain
costs associated with the preparation of inventory for resale, including
distribution center costs, and is net of vendor funds.
The
Company records an inventory reserve for the anticipated loss associated with
selling inventories below cost. This reserve is based on management’s
current knowledge with respect to inventory levels, sales trends and historical
experience. Management does not believe the Company’s merchandise inventories
are subject to significant risk of obsolescence in the near term, and management
has the ability to adjust purchasing practices based on anticipated sales trends
and general economic conditions. However, changes in consumer
purchasing patterns could result in the need for additional
reserves. The Company also records an inventory reserve for the
estimated shrinkage between physical inventories. This reserve is
based primarily on actual shrink results from previous physical
inventories. Changes in the estimated shrink reserve may be necessary
based on the timing and results of physical inventories.
The
Company receives funds from vendors in the normal course of business,
principally as a result of purchase volumes, sales, early payments or promotions
of vendors’ products, which generally do not represent the reimbursement of
specific, incremental and identifiable costs incurred by the Company to sell the
vendor’s product. These funds are treated as a reduction in the cost
of inventory as the amounts are accrued, and are recognized as a reduction of
cost of sales when the inventory is sold. The Company develops
accrual rates for vendor funds based on the provisions of the agreements in
place. Due to the complexity and diversity of the individual vendor
agreements, the Company performs analyses and reviews historical trends
throughout the year and confirms actual amounts with select vendors to ensure
the amounts earned are appropriately recorded. Amounts accrued
throughout the year could be impacted if actual purchase volumes differ from
projected annual purchase volumes, especially in the case of programs that
provide for increased funding when graduated purchase volumes are
met.
Derivative Financial Instruments - The
Company occasionally utilizes derivative financial instruments to manage certain
business risks. However, the amounts were not material to the
Company’s consolidated financial statements in any of the years
presented. The Company does not use derivative financial instruments
for trading purposes.
Credit Programs - The majority
of the Company’s accounts receivable arises from sales of goods and services to
Commercial Business Customers. The Company has an agreement with GE Money Bank
(GE) under which GE purchases at face value new commercial business accounts
receivable originated by the Company and services these
accounts. This agreement ends in December 2016, unless terminated
sooner by the parties. The Company accounts for these transfers as
sales of the accounts receivable. When the Company sells its
commercial business accounts receivable, it retains certain interests in those
receivables, including the funding of a loss reserve and its obligation related
to GE’s ongoing servicing of the receivables sold. Any gain or loss
on the sale is determined based on the previous carrying amounts of the
transferred assets allocated at fair value between the receivables sold and the
interests retained. Fair value is based on the present value of expected future
cash flows, taking into account the key assumptions of anticipated credit
losses, payment rates, late fee rates, GE’s servicing costs and the discount
rate commensurate with the uncertainty involved. Due to the
short-term nature of the receivables sold, changes to the key assumptions would
not materially impact the recorded gain or loss on the sales of receivables or
the fair value of the retained interests in the receivables.
Total
commercial business accounts receivable sold to GE were $1.6 billion in 2009,
$1.7 billion in 2008, and $1.8 billion in 2007. During 2009, 2008 and
2007, the Company recognized losses of $31 million, $38 million and $34 million,
respectively, on these receivable sales as SG&A expense, which primarily
relates to the fair value of the obligations incurred related to servicing costs
that are remitted to GE monthly. At January 29, 2010 and January 30,
2009, the fair value of the retained interests was determined based on the
present value of expected future cash flows and was insignificant.
Sales
generated through the Company’s proprietary credit cards are not reflected in
receivables. Under an agreement with GE, credit is extended directly
to customers by GE. All credit-program-related services are performed
and controlled directly by GE. The Company has the option, but no
obligation, to purchase the receivables at the end of the agreement
in
December
2016. Tender costs, including amounts associated with accepting the
Company’s proprietary credit cards, are recorded in SG&A expense in the
consolidated statements of earnings.
The total
portfolio of receivables held by GE, including both receivables originated by GE
from the Company’s proprietary credit cards and commercial business accounts
receivable originated by the Company and sold to GE, approximated $6.5 billion
at January 29, 2010, and $6.8 billion at January 30, 2009.
Property and Depreciation -
Property is recorded at cost. Costs associated with major additions are
capitalized and depreciated. Capital assets are expected to yield future
benefits and have useful lives which exceed one year. The total cost
of a capital asset generally includes all applicable sales taxes, delivery
costs, installation costs and other appropriate costs incurred by the Company
including interest in the case of self-constructed assets. Upon
disposal, the cost of properties and related accumulated depreciation are
removed from the accounts, with gains and losses reflected in SG&A expense
on the consolidated statements of earnings.
Depreciation
is provided over the estimated useful lives of the depreciable assets. Assets
are depreciated using the straight-line method. Assets under capital lease and
leasehold improvements are depreciated over the shorter of their estimated
useful lives or the term of the related lease, which may include one or more
option renewal periods where failure to exercise such options would result in an
economic penalty in such amount that renewal appears, at the inception of the
lease, to be reasonably assured. During the term of a lease, if
leasehold improvements are placed in service significantly after the inception
of the lease, the Company depreciates these leasehold improvements over the
shorter of the useful life of the leasehold assets or a term that includes lease
renewal periods deemed to be reasonably assured at the time the leasehold
improvements are placed into service. The amortization of these
assets is included in depreciation expense on the consolidated financial
statements.
Long-Lived Asset Impairment/Exit
Activities - The carrying amounts of
long-lived assets are reviewed whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable.
Long-lived
assets held-for-use includes operating stores as well as excess properties, such
as relocated stores, closed stores and other properties, which do not meet the
held-for-sale criteria. A potential impairment has occurred for long-lived
assets held-for-use if projected future undiscounted cash flows expected to
result from the use and eventual disposition of the assets are less than the
carrying amounts of the assets. An impairment loss is recorded for
long-lived assets held-for-use when the carrying amount of the asset is not
recoverable and exceeds its fair value.
Excess
properties that are expected to be sold within the next 12 months and meet the
other relevant held-for-sale criteria are classified as long-lived assets
held-for-sale. An impairment loss is recorded for long-lived assets
held-for-sale when the carrying amount of the asset exceeds its fair value less
cost to sell. A long-lived asset is not depreciated while it is
classified as held-for-sale.
For
long-lived assets to be abandoned, the Company considers the asset to be
disposed of when it ceases to be used. Until it ceases to be used,
the Company continues to classify the asset as held-for-use and tests for
potential impairment accordingly. If the Company commits to a plan to
abandon a long-lived asset before the end of its previously estimated useful
life, its depreciable life is re-evaluated.
Impairment
losses are included in SG&A expense. The Company recorded
long-lived asset impairment losses of $114 million during 2009, including $53
million for operating stores and $61 million for excess
properties. The Company recorded long-lived asset impairment losses
of $21 million during 2008, including $16 million for operating stores and $5
million for excess properties. The Company recorded long-lived asset
impairment losses of $28 million during 2007 for excess properties.
The net
carrying amount of excess properties that do not meet the held-for-sale criteria
is included in other assets (non-current) on the consolidated balance sheets and
totaled $205 million and $174 million at January 29, 2010 and January 30, 2009,
respectively.
When
operating leased locations are closed, a liability is recognized for the fair
value of future contractual obligations, including future minimum lease
payments, property taxes, utilities and common area maintenance, net of
estimated sublease income.
Leases - For lease agreements
that provide for escalating rent payments or free-rent occupancy periods, the
Company recognizes rent expense on a straight-line basis over the non-cancelable
lease term and option renewal periods where failure to exercise such options
would result in an economic penalty in such amount that renewal appears, at the
inception of the lease, to be reasonably assured. The lease term
commences on the date that the Company takes possession of or controls the
physical use of the property. Deferred rent is included in other
liabilities (non-current) on the consolidated balance sheets.
Accounts Payable - The Company
has an agreement with a third party to provide an accounts payable tracking
system which facilitates participating suppliers’ ability to finance payment
obligations from the Company with designated third-party financial
institutions. Participating suppliers may, at their sole discretion,
make offers to finance one or more payment obligations of the Company prior to
their scheduled due dates at a discounted price to participating financial
institutions. The Company’s goal in entering into this arrangement is to
capture overall supply chain savings, in the form of pricing, payment terms or
vendor funding, created by facilitating suppliers’ ability to finance payment
obligations at more favorable discount rates, while providing them with greater
working capital flexibility.
The
Company’s obligations to its suppliers, including amounts due and scheduled
payment dates, are not impacted by suppliers’ decisions to finance amounts under
this arrangement. However, the Company’s right to offset balances due from
suppliers against payment obligations is restricted by this arrangement for
those payment obligations that have been financed by suppliers. As of
January 29, 2010 and January 30, 2009, $602 million and $393 million,
respectively, of the Company’s outstanding payment obligations had been placed
on the accounts payable tracking system, and participating suppliers had
financed $253 million and $370 million, respectively, of those payment
obligations to participating financial institutions.
Self-Insurance - The Company
is self-insured for certain losses relating to workers’ compensation,
automobile, property, and general and product liability claims. The
Company has stop-loss coverage to limit the exposure arising from these
claims. The Company is also self-insured for certain losses relating
to extended warranty and medical and dental claims. Self-insurance
claims filed and claims incurred but not reported are accrued based upon
management’s estimates of the discounted ultimate cost for self-insured claims
incurred using actuarial assumptions followed in the insurance industry and
historical experience. Although management believes it has the
ability to reasonably estimate losses related to claims, it is possible that
actual results could differ from recorded self-insurance
liabilities.
Income Taxes - The Company
establishes deferred income tax assets and liabilities for temporary differences
between the tax and financial accounting bases of assets and
liabilities. The tax effects of such differences are reflected in the
balance sheet at the enacted tax rates expected to be in effect when the
differences reverse. A valuation allowance is recorded to reduce the
carrying amount of deferred tax assets if it is more likely than not that all or
a portion of the asset will not be realized. The tax balances and
income tax expense recognized by the Company are based on management’s
interpretation of the tax statutes of multiple jurisdictions.
The
Company establishes a liability for tax positions for which there is uncertainty
as to whether or not the position will be ultimately sustained. The
Company includes interest related to tax issues as part of net interest on the
consolidated financial statements. The Company records any applicable
penalties related to tax issues within the income tax provision.
Revenue Recognition - The
Company recognizes revenues, net of sales tax, when sales transactions occur and
customers take possession of the merchandise. A provision for anticipated
merchandise returns is provided through a reduction of sales and cost of sales
in the period that the related sales are recorded. Revenues from
product installation services are recognized when the installation is
completed. Deferred revenues associated with amounts received for
which customers have not yet taken possession of merchandise or for which
installation has not yet been completed were $354 million and $328 million at
January 29, 2010, and January 30, 2009, respectively.
Revenues
from stored-value cards, which include gift cards and returned merchandise
credits, are deferred and recognized when the cards are redeemed. The
liability associated with outstanding stored-value cards was $329 million and
$346 million at January 29, 2010, and January 30, 2009, respectively, and these
amounts are included in deferred revenue on the consolidated balance
sheets.The Company
recognizes income from unredeemed stored-value cards at the point at which
redemption becomes remote. The Company’s stored-value cards have no
expiration date or dormancy fees. Therefore, to determine when
redemption is remote, the Company analyzes an aging of the unredeemed cards
based on the date of last stored-value card use.
Extended Warranties - The
Company sells separately-priced extended warranty contracts under a
Lowe’s-branded program for which the Company is ultimately
self-insured. The Company recognizes revenue from extended warranty
sales on a straight-line basis over the respective contract
term. Extended warranty contract terms primarily range from one to
four years from the date of purchase or the end of the manufacturer’s warranty,
as applicable. The Company’s extended warranty deferred revenue is
included in other liabilities (non-current) on the consolidated balance
sheets. Changes in deferred revenue for extended warranty contracts
are summarized as follows:
|
(In
millions)
|
2009
|
2008
|
||||||
|
Extended
warranty deferred revenue, beginning of year
|
$ | 479 | $ | 407 | ||||
|
Additions
to deferred revenue
|
220 | 193 | ||||||
|
Deferred
revenue recognized
|
(150 | ) | (121 | ) | ||||
|
Extended
warranty deferred revenue, end of year
|
$ | 549 | $ | 479 | ||||
Incremental
direct acquisition costs associated with the sale of extended warranties are
also deferred and recognized as expense on a straight-line basis over the
respective contract term. Deferred costs associated with extended warranty
contracts were $150 million and $121 million at January 29, 2010 and January 30,
2009, respectively. The Company’s extended warranty deferred costs
are included in other assets (non-current) on the consolidated balance
sheets. All other costs, such as costs of services performed under
the contract, general and administrative expenses and advertising expenses are
expensed as incurred.
The
liability for extended warranty claims incurred is included in other current
liabilities on the consolidated balance sheets. Changes in the
liability for extended warranty claims are summarized as follows:
|
(In
millions)
|
2009
|
2008
|
||||||
|
Liability
for extended warranty claims, beginning of year
|
$ | 17 | $ | 14 | ||||
|
Accrual
for claims incurred
|
67 | 53 | ||||||
|
Claim
payments
|
(61 | ) | (50 | ) | ||||
|
Liability
for extended warranty claims, end of year
|
$ | 23 | $ | 17 | ||||
Cost of Sales and Selling, General
and Administrative Expenses - The following lists the primary costs
classified in each major expense category:
|
Cost
of Sales
|
Selling,
General and Administrative
|
|
|
§ Total
cost of products sold, including:
- Purchase
costs, net of vendor funds;
- Freight
expenses associated with moving merchandise inventories from vendors to
retail stores;
- Costs
associated with operating the Company’s distribution network, including
payroll and benefit costs and occupancy costs;
§ Costs
of installation services provided;
§ Costs
associated with delivery of products directly from vendors to customers by
third parties;
§ Costs
associated with inventory shrinkage and obsolescence.
|
§ Payroll
and benefit costs for retail and corporate employees;
§ Occupancy
costs of retail and corporate facilities;
§ Advertising;
§ Costs
associated with delivery of products from stores to
customers;
§ Third-party,
in-store service costs;
§ Tender
costs, including bank charges, costs associated with credit card
interchange fees and amounts associated with accepting the Company’s
proprietary credit cards;
§ Costs
associated with self-insured plans, and premium costs for stop-loss
coverage and fully insured plans;
§ Long-lived
asset impairment losses and gains/losses on disposal of
assets;
§ Other
administrative costs, such as supplies, and travel and
entertainment.
|
Advertising - Costs associated
with advertising are charged to expense as incurred. Advertising
expenses were $750 million, $789 million and $788 million in 2009, 2008 and
2007, respectively.
Shipping and Handling Costs -
The Company includes shipping and handling costs relating to the delivery of
products directly from vendors to customers by third parties in cost of
sales. Shipping and handling costs, which include third party
delivery costs, salaries, and vehicle operations expenses relating to the
delivery of products from stores to customers, are classified as SG&A
expense. Shipping and handling costs included in SG&A expense
were $371 million, $378 million and $361 million in 2009, 2008 and 2007,
respectively.
Store Opening Costs - Costs of
opening new or relocated retail stores, which include payroll and supply costs
incurred prior to store opening and grand opening advertising costs, are charged
to expense as incurred.
Comprehensive Income - The
Company reports comprehensive income on its consolidated statements of
shareholders’ equity. Comprehensive income represents changes in
shareholders' equity from non-owner sources and is comprised primarily of net
earnings plus or minus unrealized gains or losses on available-for-sale
securities, as well as foreign currency translation
adjustments. Unrealized gains, net of tax, on available-for-sale
securities classified in accumulated other comprehensive income (loss) on the
consolidated balance sheets were $2 million at both of January 29, 2010 and
January 30, 2009. Foreign currency translation gains, net of tax,
classified in accumulated other comprehensive income (loss) were $25 million at
January 29, 2010. Foreign currency translation losses, net of tax, classified in
accumulated other comprehensive income (loss) were $8 million at January 30,
2009. The reclassification adjustments for gains/losses included in
net earnings were not significant for any of the periods presented.
Recent Accounting
Pronouncements - In June 2009, the Financial Accounting Standards
Board (FASB) issued authoritative guidance which amends the derecognition
guidance on accounting for transfers of financial assets. The
guidance is effective for financial asset transfers occurring in fiscal years
beginning after November 15, 2009, and interim periods within those fiscal
years. The adoption of the guidance will not have a material impact
on the Company’s consolidated financial statements.
In June
2009, the FASB issued authoritative guidance which amends the consolidation
guidance for variable interest entities. The guidance is effective
for fiscal years beginning after November 15, 2009, and interim periods within
those
fiscal
years. The adoption of the guidance will not have a material impact
on the Company’s consolidated financial statements.
In
October 2009, the FASB issued authoritative guidance on multiple-deliverable
revenue arrangements, which addresses the unit of accounting for arrangements
involving multiple deliverables. The guidance also addresses how
arrangement consideration should be allocated to separate units of accounting,
when applicable, and expands the disclosure requirements for
multiple-deliverable arrangements. The guidance is effective for fiscal
years beginning after June 15, 2010. The Company does not expect the
adoption of the guidance to have a material impact on its consolidated financial
statements.
In
January 2010, the FASB issued authoritative guidance related to fair value
measurements which requires additional disclosures about transfers into and
out of Levels 1 and 2, and separate disclosures about purchases, sales,
issuances and settlements relating to Level 3 measurements. The
guidance also clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to measure fair
value. The guidance is effective for the first reporting period, to
include interim periods, beginning after December 15, 2009, except for the
portion of the guidance relating to Level 3 activity, which is effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The Company does not expect the adoption of the
guidance to have a material impact on its consolidated financial
statements.
Segment Information - The
Company’s home improvement retail stores represent a single operating segment
based on the way the Company manages its business. Operating
decisions are made at the Company level in order to maintain a consistent retail
store presentation. The Company’s home improvement retail stores sell
similar products and services, use similar processes to sell those products and
services, and sell their products and services to similar classes of
customers. The amounts of long-lived assets and net sales outside the
U.S. were not significant for any of the periods presented.
Reclassifications - Certain
prior period amounts have been reclassified to conform to current
classifications. The long-term portion of the self-insurance liabilities,
primarily for workers’ compensation, automobile, property, and general and
product liability claims, of $462 million at January 30, 2009, previously
classified as current on the consolidated balance sheets, has been reclassified
to other liabilities (non-current). The current portion of these
self-insurance liabilities, previously reported as a single line item on the
consolidated balance sheets, has been combined with other current
liabilities. The non-current portion of deferred income taxes related to
these self-insurance liabilities has also been reclassified from current to
non-current deferred income taxes in the consolidated balance
sheets. These changes were not material and had no impact on the
consolidated statements of earnings, shareholders’ equity or cash flows for any
of the periods presented.
Note 2: Fair Value Measurements and Financial Instruments -
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The authoritative guidance for fair value
measurements establishes a three-level hierarchy, which encourages an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The three levels of the hierarchy
are defined as follows:
|
·
|
Level
1 - inputs to the
valuation techniques that are quoted prices in active markets for
identical assets or liabilities
|
|
·
|
Level
2 - inputs to the
valuation techniques that are other than quoted prices but are observable
for the assets or liabilities, either directly or
indirectly
|
|
·
|
Level
3 - inputs to the
valuation techniques that are unobservable for the assets or
liabilities
|
Assets
and Liabilities that are Measured at Fair Value on a Recurring
Basis
The
following tables present the Company’s financial assets measured at fair value
on a recurring basis as of January 29, 2010, and January 30, 2009, classified by
fair value hierarchy:
|
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
||||||||||||||
|
(In
millions)
|
January
29, 2010
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
|
Available-for-sale
securities
|
$ | 383 | $ | 70 | $ | 313 | $ | - | ||||||||
|
Trading
securities
|
42 | 42 | - | - | ||||||||||||
| Total short-term investments | $ | 425 | 112 | 313 | - | |||||||||||
|
|
||||||||||||||||
|
Available-for-sale
securities
|
277 | - | 277 | - | ||||||||||||
| Total long-term investments | $ | 277 | $ | - | $ | 277 | $ | - | ||||||||
|
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
||||||||||||||
|
(In
millions)
|
January
30, 2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
|
Available-for-sale
securities
|
$ | 385 | $ | 81 | $ | 304 | $ | - | ||||||||
|
Trading
securities
|
31 | 31 | - | - | ||||||||||||
| Total short-term investments | $ | 416 | 112 | 304 | - | |||||||||||
|
|
||||||||||||||||
|
Available-for-sale
securities
|
253 | - | 253 | - | ||||||||||||
| Total long-term investments | $ | 253 | $ | - | $ | 253 | $ | - | ||||||||
When
available, quoted prices are used to determine fair value. When
quoted prices in active markets are available, investments are classified within
Level 1 of the fair value hierarchy. The Company’s Level 1 investments
primarily consist of investments in money market and mutual funds. When
quoted prices in active markets are not available, fair values are determined
using pricing models and the inputs to those pricing models are based on
observable market inputs. The inputs to the pricing models are
typically benchmark yields, reported trades, broker-dealer quotes, issuer
spreads and benchmark securities, among others. The Company’s Level 2
investments primarily consist of investments in municipal bonds.
Assets
and Liabilities that are Measured at Fair Value on a Non-recurring
Basis
Effective
January 31, 2009, the Company adopted authoritative guidance issued by the FASB
for non-financial assets and liabilities measured at fair value on a
non-recurring basis.
During
2009, the Company had no significant measurements of assets or liabilities at
fair value on a non-recurring basis subsequent to their initial recognition,
except as it relates to long-lived asset impairment.
The
Company reviews the carrying amounts of long-lived assets whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable. An impairment loss is recognized when the carrying
amount of the
long-lived
asset is not recoverable and exceeds its fair value. The Company
estimated the fair values of long-lived assets held-for-use, including operating
stores, based on the Company’s own judgments about the assumptions that market
participants would use in pricing the asset and on observable market data, when
available. The Company classified these fair value measurements as
Level 3.
In the
determination of impairment for operating stores, the Company used an income
approach to determine the fair value of individual operating stores, which
required discounting projected future cash flows. When
determining the stream of projected future cash flows associated with an
individual operating store, management made assumptions, incorporating local
market conditions, about key store variables including sales growth rates, gross
margin and controllable expenses such as store payroll and occupancy
expense. In order to calculate the present value of those future cash
flows, the Company discounted cash flow estimates at a rate commensurate with
the risk that selected market participants would assign to the cash
flows. The selected market participants represent a group of other
retailers with a store footprint similar in size to the Company’s.
In the
determination of impairment for excess properties held-for-use, the fair values
were the estimated selling prices. The Company determined the
estimated selling prices by obtaining information from brokers in the specific
markets being evaluated. The information included comparable sales of
similar assets and assumptions about demand in the market for these
assets.
In the
determination of impairment for excess properties held-for-sale, the fair values
were the estimated selling prices, as determined for excess properties
held-for-use, less cost to sell.
The
following table presents the Company’s non-financial assets required to be
measured at fair value on a non-recurring basis and any resulting realized
losses included in earnings. Because long-lived assets are not measured at fair
value on a recurring basis, certain carrying amounts and fair value measurements
included in the table may reflect values at earlier measurement dates and may no
longer represent the carrying amounts and fair values at January 29,
2010.
|
Fair
Value Measurements - Non-recurring
Basis
|
||||||||||||||||
|
Operating
Stores
|
Excess
Properties
|
|||||||||||||||
|
(In
millions)
|
Total
|
Long-lived
assets held-for-use
|
Long-lived
assets held-for-use
|
Long-lived
assets held-for-sale
|
||||||||||||
|
For
the year ended January 29, 2010:
|
||||||||||||||||
|
Fair
value measurements
|
$ | 105 | $ | 6 | $ | 74 | $ | 25 | ||||||||
|
Previous
carrying amounts
|
219 | 59 | 114 | 46 | ||||||||||||
|
Impairment
losses
|
$ | (114 | ) | $ | (53 | ) | $ | (40 | ) | $ | (21 | ) | ||||
The Company’s financial instruments not
measured at fair value on a recurring basis include cash and cash equivalents,
accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and long-term debt and are reflected in the financial statements at
cost. With the exception of long-term debt, cost approximates fair
value for these items due to their short-term nature. Estimated fair
values for long-term debt have been determined using available market
information, including reported trades, benchmark yields and broker-dealer
quotes.
Carrying
amounts and the related estimated fair value of the Company’s long-term debt,
excluding capital leases and other, are as follows:
|
January
29, 2010
|
January
30, 2009
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
(In
millions)
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
|
Long-term
debt (excluding capital leases and other)
|
$ | 4,737 | $ | 5,127 | $ | 4,726 | $ | 4,653 | ||||||||
NOTE
3: Investments -
The
amortized costs, gross unrealized holding gains and losses,
and fair values of the Company’s investment securities classified as
available-for-sale at January 29, 2010, and January 30, 2009, are as
follows:
|
January
29, 2010
|
||||||||||||||||
|
Type
|
Amortized
|
Gross
Unrealized
|
Gross
Unrealized
|
Fair
|
||||||||||||
|
(In
millions)
|
Costs
|
Gains
|
Losses
|
Values
|
||||||||||||
|
Municipal
bonds
|
$ | 301 | $ | 2 | $ | - | $ | 303 | ||||||||
|
Money
market funds
|
68 | - | - | 68 | ||||||||||||
|
Tax-exempt
commercial paper
|
10 | - | - | 10 | ||||||||||||
|
Certificates
of deposit
|
2 | - | - | 2 | ||||||||||||
|
Classified
as short-term
|
381 | 2 | - | 383 | ||||||||||||
|
Municipal
bonds
|
275 | 2 | - | 277 | ||||||||||||
|
Classified
as long-term
|
275 | 2 | - | 277 | ||||||||||||
|
Total
|
$ | 656 | $ | 4 | $ | - | $ | 660 | ||||||||
|
January
30, 2009
|
||||||||||||||||
|
Type
|
Amortized
|
Gross
Unrealized
|
Gross
Unrealized
|
Fair
|
||||||||||||
|
(In
millions)
|
Costs
|
Gains
|
Losses
|
Values
|
||||||||||||
|
Municipal
bonds
|
$ | 296 | $ | 3 | $ | - | $ | 299 | ||||||||
|
Money
market funds
|
79 | - | - | 79 | ||||||||||||
|
Tax-exempt
commercial paper
|
5 | - | - | 5 | ||||||||||||
|
Certificates
of deposit
|
2 | - | - | 2 | ||||||||||||
|
Classified
as short-term
|
382 | 3 | - | 385 | ||||||||||||
|
Municipal
bonds
|
248 | 5 | - | 253 | ||||||||||||
|
Classified
as long-term
|
248 | 5 | - | 253 | ||||||||||||
|
Total
|
$ | 630 | $ | 8 | $ | - | $ | 638 | ||||||||
The
proceeds from sales of available-for-sale securities were $1.2 billion, $1.0
billion and $1.2 billion for 2009, 2008 and 2007, respectively. Gross
realized gains and losses on the sale of available-for-sale securities were not
significant for any of the periods presented. The municipal bonds
classified as long-term at January 29, 2010, will mature in one to 38 years,
based on stated maturity dates.
Effective
February 2, 2008, the Company adopted authoritative guidance issued by the FASB
that provides entities with an option to measure many financial instruments and
certain other items at fair value. Under this guidance, unrealized
gains and losses on items for which the fair value option has been elected are
reported in earnings at each reporting period. Upon adoption, the
Company elected the fair value option for certain pre-existing investments,
which had a carrying value of $42 million and were accounted for as
available-for-sale securities included in long-term investments in the
consolidated balance sheet at February 2, 2008. Subsequent to
the election, these investments are reported as trading securities, which are
included in short-term investments, and were $42 million and $31 million at
January 29, 2010 and January 30, 2009, respectively. For the year
ended January 29, 2010, net unrealized gains for trading securities totaled $7
million. For the year ended January 30, 2009, net unrealized losses
for trading securities totaled $14 million. Unrealized gains and
losses on trading securities were included in SG&A expense. Cash
flows from purchases, sales and maturities of trading securities continue to be
included in cash flows from investing activities in the consolidated statements
of cash flows because the nature and purpose for which the securities were
acquired has not changed as a result of the adoption of this
guidance. The adoption of this guidance did not have a material
impact on the Company’s consolidated financial statements.
Short-term
and long-term investments include restricted balances pledged as collateral for
letters of credit for the Company’s extended warranty program and for a portion
of the Company’s casualty insurance and Installed Sales program
liabilities. Restricted balances included in short-term investments
were $186 million at January 29, 2010 and
$214
million at January 30, 2009. Restricted balances included in
long-term investments were $202 million at January 29, 2010 and $143 million at
January 30, 2009.
|
Note
4: Property and Accumulated Depreciation -
|
||||||||||||
|
Property
is summarized by major class in the following table:
|
||||||||||||
|
Estimated
|
||||||||||||
|
Depreciable
|
January
29,
|
January
30,
|
||||||||||
|
(In
millions)
|
Lives,
In Years
|
2010
|
2009
|
|||||||||
| Cost: | ||||||||||||
|
Land
|
N/A | $ | 6,519 | $ | 6,144 | |||||||
|
Buildings
|
7-40 | 12,069 | 11,258 | |||||||||
|
Equipment
|
3-15 | 8,826 | 8,797 | |||||||||
|
Leasehold
improvements
|
5-40 | 3,818 | 3,576 | |||||||||
|
Construction
in progress
|
N/A | 1,036 | 1,702 | |||||||||
|
Total
cost
|
32,268 | 31,477 | ||||||||||
|
Accumulated
depreciation
|
(9,769 | ) | (8,755 | ) | ||||||||
|
Property,
less accumulated depreciation
|
$ | 22,499 | $ | 22,722 | ||||||||
Included
in net property are assets under capital lease of $519 million, less accumulated
depreciation of $333 million, at January 29, 2010, and $521 million, less
accumulated depreciation of $318 million, at January 30,
2009.
Note
5: Short-Term Borrowings and Lines of Credit -
The
Company has a $1.75 billion senior credit facility that expires in June
2012. The senior credit facility supports the Company’s commercial
paper and revolving credit programs. The senior credit facility has a
$500 million letter of credit sublimit. Amounts outstanding under
letters of credit reduce the amount available for borrowing under the senior
credit facility. Borrowings made under the senior credit facility are
unsecured and are priced at fixed rates based upon market conditions at the time
of funding in accordance with the terms of the senior credit
facility. The senior credit facility contains certain restrictive
covenants, which include maintenance of a debt leverage ratio as defined by the
senior credit facility. The Company was in compliance with those
covenants at January 29, 2010. Nineteen banking institutions are
participating in the senior credit facility. As of January 29, 2010,
there were no borrowings outstanding under the commercial paper
program. As of January 30, 2009, there was $789 million outstanding
under the commercial paper program, and the weighted-average interest rate on
the outstanding commercial paper was 0.84%. There were no letters of
credit outstanding under the senior credit facility as of January 29, 2010 or
January 30, 2009.
The
Company had a Canadian dollar (C$) denominated credit facility in the amount of
C$200 million that expired on March 30, 2009. The outstanding
borrowings at expiration were repaid with net cash provided by operating
activities. As of January 30, 2009, there was C$199 million, or the
equivalent of $162 million, outstanding under the credit facility, and the
weighted-average interest rate on the short-term borrowings was
2.65%.
The
Company also has a C$ denominated credit facility in the amount of C$50 million
that provides revolving credit support for the Company’s Canadian
operations. This uncommitted credit facility provides the Company
with the ability to make unsecured borrowings, which are priced at fixed rates
based upon market conditions at the time of funding in accordance with the terms
of the credit facility. As of January 29, 2010, there were no
borrowings outstanding under the credit facility. As of January 30,
2009, there was C$44 million, or the equivalent of $36 million, outstanding
under the credit facility, and the weighted-average interest rate on the
short-term borrowings was 1.60%.
NOTE
6: Long-Term Debt -
|
Range
of
|
||||||||||||||||
|
(In
millions)
|
Years
of
|
January
29,
|
January
30,
|
|||||||||||||
|
Debt
Category
|
Interest
Rates
|
Final
Maturity
|
2010
|
2009
|
||||||||||||
|
Secured
debt: 1
|
||||||||||||||||
|
Mortgage
notes
|
1.08
to 8.25%
|
2010
to 2018
|
$ | 35 | $ | 27 | ||||||||||
|
Unsecured
debt:
|
||||||||||||||||
|
Debentures
|
6.50
to 6.88%
|
2028
to 2029
|
694 | 694 | ||||||||||||
|
Notes
|
8.25% | 2010 | 500 | 500 | ||||||||||||
|
Medium-term
notes - series A
|
8.19
to 8.20%
|
2022 | 15 | 15 | ||||||||||||
|
Medium-term
notes - series B 2
|
7.11
to 7.61%
|
2027 to 2037 | 217 | 217 | ||||||||||||
|
Senior
notes
|
5.00
to 6.65%
|
2012
to 2037
|
3,276 | 3,273 | ||||||||||||
|
Capital
leases and other
|
2011
to 2031
|
343 | 347 | |||||||||||||
|
Total
long-term debt
|
5,080 | 5,073 | ||||||||||||||
|
Less
current maturities
|
(552 | ) | (34 | ) | ||||||||||||
|
Long-term
debt, excluding current maturities
|
$ | 4,528 | $ | 5,039 | ||||||||||||
|
|
1
Real properties with an aggregate book value of $66 million were pledged
as collateral at January 29, 2010, for secured
debt.
|
|
|
2
Approximately 46% of
these medium-term notes may be put at the option of the holder on the 20th
anniversary of the issue at par value. The medium-term notes
were issued in 1997. None of these notes are currently
putable.
|
Debt
maturities, exclusive of unamortized original issue discounts, capital leases
and other, for the next five years and thereafter are as follows: 2010, $518
million; 2011, $1 million; 2012, $551 million; 2013, $1 million; 2014, $1
million; thereafter, $3.7 billion.
The
Company’s debentures, notes, medium-term notes and senior notes contain certain
restrictive covenants. The Company was in compliance with all
covenants of these agreements at January 29, 2010.
Senior
Notes
In
September 2007, the Company issued $1.3 billion of unsecured senior notes,
comprised of three tranches: $550 million of 5.60% senior notes maturing in
September 2012, $250 million of 6.10% senior notes maturing in September 2017
and $500 million of 6.65% senior notes maturing in September
2037. The 5.60%, 6.10% and 6.65% senior notes were issued at
discounts of approximately $2.7 million, $1.3 million and $6.3 million,
respectively. Interest on the senior notes is payable semiannually in
arrears in March and September of each year until maturity, beginning in March
2008. The discount associated with the issuance is included in
long-term debt and is being amortized over the respective terms of the senior
notes. The net proceeds of approximately $1.3 billion were used for
general corporate purposes, including capital expenditures and working capital
needs, and for repurchases of shares of the Company’s common stock.
The
senior notes issued in 2007 may be redeemed by the Company at any time, in whole
or in part, at a redemption price plus accrued interest to the date of
redemption. The redemption price is equal to the greater of (1) 100% of the
principal amount of the senior notes to be redeemed, or (2) the sum of the
present values of the remaining scheduled payments of principal and interest
thereon, discounted to the date of redemption on a semiannual basis at specified
rates. The indenture under which the 2007 senior notes were issued also contains
a provision that allows the holders of the notes to require the Company to
repurchase all or any part of their notes if a change-in-control triggering
event occurs. If elected under the change-in-control provisions, the
repurchase of the notes will occur at a purchase price of 101% of the principal
amount, plus accrued and unpaid interest, if any, on such notes to the date of
purchase. The indenture governing the senior notes
does not
limit the aggregate principal amount of debt securities that the Company may
issue, nor is the Company required to maintain financial ratios or specified
levels of net worth or liquidity. However, the indenture contains
various restrictive covenants, none of which is expected to impact the Company’s
liquidity or capital resources.
Upon the
issuance of the senior notes previously described, the Company evaluated the
optionality features embedded in the notes and concluded that these features do
not require bifurcation from the host contracts and separate accounting as
derivative instruments.
Convertible
Notes
On June
30, 2008, the Company redeemed for cash approximately $19 million principal
amount, $14 million carrying amount, of its convertible notes issued in February
2001, which represented all remaining notes outstanding of such issue, at a
price equal to the sum of the issuance price plus accrued original issue
discount of such notes as of the redemption date ($730.71 per note). On
June 25, 2008, the Company completed a single open-market repurchase of
approximately $187 million principal amount, $164 million carrying amount, of
its senior convertible notes issued in October 2001 at a price of $875.73 per
note. The Company subsequently redeemed for cash on June 30, 2008,
approximately $392 million principal amount, $343 million carrying amount, of
its senior convertible notes issued in October 2001, which represented all
remaining notes outstanding of such issue, at a price equal to the sum of the
issuance price plus accrued original issue discount of such notes as of the
redemption date ($875.73 per note).
NOTE
7: Shareholders' Equity -
The
Company has 5.0 million ($5 par value) authorized shares of preferred stock,
none of which have been issued. The Board of Directors may issue the preferred
stock (without action by shareholders) in one or more series, having such voting
rights, dividend and liquidation preferences, and such conversion and other
rights as may be designated by the Board of Directors at the time of
issuance.
Authorized
shares of common stock were 5.6 billion ($.50 par value) at January 29, 2010 and
January 30, 2009.
The
Company has a share repurchase program that is implemented through purchases
made from time to time either in the open market or through private
transactions. Shares purchased under the share repurchase program are
retired and returned to authorized and unissued status. The Company
repurchased 76.4 million shares at a total cost of $2.3 billion (of which $1.9
billion was recorded as a reduction in retained earnings, after capital in
excess of par value was depleted) during 2007. No common shares were
repurchased under the share repurchase program during 2008. The Company
repurchased 21.9 million shares at a total cost of $0.5 billion (of which $3
million was recorded as a reduction in retained earnings, after capital in
excess of par value was depleted) during 2009. Authorization
available for share repurchases under the program expired as of January 29,
2010. Authorization for up to $5 billion of share repurchases with no
expiration was approved by the Company’s Board of Directors on January 29,
2010.
NOTE
8: Accounting for Share-Based Payment -
Overview of Share-Based
Payment Plans
The
Company has (a) four equity incentive plans, referred to as the “2006,” “2001,”
“1997” and “1994” Incentive Plans, (b) one share-based plan to non-employee
directors, referred to as the Amended and Restated Directors’ Stock Option and
Deferred Stock Unit Plan (Directors’ Plan) and (c) an employee stock purchase
plan (ESPP) that allows employees to purchase Company shares through payroll
deductions. These plans contain a nondiscretionary antidilution
provision that is designed to equalize the value of an award as a result of an
equity restructuring. Share-based awards in the form of incentive and
non-qualified stock options, performance accelerated restricted stock (PARS),
performance-based restricted stock, restricted stock, restricted stock units,
and deferred stock units, which represent nonvested stock, may be granted to key
employees from the 2006 plan. No new awards may be granted from the
2001, 1997, 1994, and the Directors’ Plans.
Share-based
awards were authorized for grant to key employees and non-employee directors for
up to 169.0 million shares of common stock. In May 2009, the 2006
plan was amended to remove limits applicable to specific types of
awards
made under the plan and to permit grants to non-employee
directors. Up to 45.0 million shares
were authorized under the ESPP.
At
January 29, 2010, there were 29.5 million shares remaining available for grant
under the 2006 Plan and 14.5 million shares
available under the ESPP.
The
Company recognized share-based payment expense in SG&A expense on the
consolidated statements of earnings totaling $102 million, $95 million and $99
million in 2009, 2008 and 2007, respectively. The total income tax
benefit recognized was $27 million, $31 million and $32 million in 2009, 2008
and 2007, respectively.
Total
unrecognized share-based payment expense for all share-based payment plans was
$105 million at January 29, 2010, of which $64 million will be recognized in
2010, $36 million in 2011 and $5 million thereafter. This results in
these amounts being recognized over a weighted-average period of 1.7
years.
For all
share-based payment awards, the expense recognized has been adjusted for
estimated forfeitures where the requisite service is not expected to be
provided. Estimated forfeiture rates are developed based on the Company’s
analysis of historical forfeiture data for homogeneous employee
groups.
General
terms and methods of valuation for the Company’s share-based awards are as
follows:
Stock
Options
Stock
options generally have terms of seven years, with normally one-third of each
grant vesting each year for three years, and are assigned an exercise price
equal to the closing market price of a share of the Company’s common stock on
the date of grant. These options are expensed on a straight-line
basis over the grant vesting period, which is considered to be the requisite
service period.
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. When determining expected
volatility, the Company considers the historical performance of the Company’s
stock, as well as implied volatility. The risk-free interest rate is
based on the U.S. Treasury yield curve in effect at the time of grant, based on
the options’ expected term. The expected term of the options is based
on the Company’s evaluation of option holders’ exercise patterns and represents
the period of time that options are expected to remain
unexercised. The Company uses historical data to estimate the timing
and amount of forfeitures. The assumptions used in the Black-Scholes
option-pricing model for options granted in the three years ended January 29,
2010, January 30, 2009 and February 1, 2008 are as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Assumptions
used:
|
||||||||||||
|
Expected
volatility
|
36.4%-38.6% | 25.0%-32.2% | 22.6%-23.7% | |||||||||
|
Weighted-average
expected volatility
|
36.4% | 25.1% | 23.7% | |||||||||
|
Expected
dividend yield
|
0.82%-0.97% | 0.56%-0.74% | 0.37%-0.49% | |||||||||
|
Weighted-average
dividend yield
|
0.82% | 0.56% | 0.37% | |||||||||
|
Risk-free
interest rate
|
1.70%-2.08% | 2.19%-3.09% | 3.91%-4.57% | |||||||||
|
Weighted-average
risk-free interest rate
|
1.71% | 2.19% | 4.52% | |||||||||
|
Expected
term, in years
|
4 | 4 | 4 | |||||||||
|
Weighted-average
expected term, in years
|
4 | 4 | 4 | |||||||||
The
weighted-average grant-date fair value per share of options granted was $4.58,
$5.25 and $8.18 in 2009, 2008 and 2007, respectively. The total
intrinsic value of options exercised, representing the difference between the
exercise price and the market price on the date of exercise, was approximately
$8 million, $17 million and $42 million in 2009, 2008 and 2007,
respectively.
Transactions
related to stock options issued under the 2006, 2001, 1997, 1994 and Directors’
plans for the year ended January 29, 2010 are summarized as
follows:
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Shares
|
Exercise
Price
|
Term
|
Intrinsic
Value
|
|||||||||||||
|
(In
thousands)
|
Per
Share
|
(In
years)
|
(In
thousands)1
|
|||||||||||||
|
Outstanding
at January 30, 2009
|
25,161 | $ | 27.26 | |||||||||||||
|
Granted
|
5,036 | 15.94 | ||||||||||||||
|
Canceled,
forfeited or expired
|
(4,268 | ) | 23.25 | |||||||||||||
|
Exercised
|
(2,759 | ) | 19.88 | |||||||||||||
|
Outstanding
at January 29, 2010
|
23,170 | 26.42 | 3.48 | $ | 29,697 | |||||||||||
|
Vested
and expected to vest at
|
||||||||||||||||
|
January
29, 2010 2
|
23,068 | 26.46 | 3.47 | 29,174 | ||||||||||||
|
Exercisable
at January 29, 2010
|
15,616 | $ | 29.84 | 2.43 | $ | 1,360 | ||||||||||
1 Options
for which the exercise price exceeded the closing market price of a share of the
Company’s common stock
at
January 29, 2010 are excluded from the calculation of aggregate intrinsic
value.
2 Includes
outstanding vested options as well as outstanding, nonvested options after a
forfeiture rate is applied.
Performance Accelerated
Restricted Stock Awards
PARS are
valued at the market price of a share of the Company’s common stock on the date
of grant. In general, these awards vest at the end of a five-year
service period from the date of grant, unless performance acceleration goals are
achieved, in which case, awards vest 50% at the end of three years or 100% at
the end of four years. The performance acceleration goals are based
on targeted Company average return on beginning noncash assets, as defined in
the PARS agreement. PARS are expensed on a straight-line basis over
the shorter of the explicit service period related to the service condition or
the implicit service period related to the performance conditions, based on the
probability of meeting the conditions. The Company uses historical
data to estimate the timing and amount of forfeitures. No PARS were
granted in 2009, 2008 or 2007. No PARS vested in 2009 or 2007. The
total fair value of PARS vested was approximately $6 million in
2008. At January 29, 2010, there were 1.1 million nonvested PARS with
a weighted-average grant-date fair value of $32.91 outstanding, that were issued
under the 2006 and 2001 plans.
Performance-Based Restricted
Stock Awards
Performance-based
restricted stock awards are valued at the market price of a share of the
Company’s common stock on the date of grant. In general, 25% to 100% of the
awards vest at the end of a three-year service period from the date of grant
based upon the achievement of a threshold and target performance goal specified
in the performance-based restricted stock agreement. The performance
goal is based on targeted Company average return on noncash assets, as defined
in the performance-based restricted stock agreement. These awards are
expensed on a straight-line basis over the requisite service period, based on
the probability of achieving the performance goal. If the performance goal is
not met, no compensation cost is recognized and any recognized compensation cost
is reversed. The Company uses historical data to estimate the timing and amount
of forfeitures. No performance-based restricted stock awards were
granted in 2009. The weighted-average grant-date fair value per share
of performance-based restricted stock awards granted was $23.97 and $32.18 in
2008 and 2007, respectively. During 2008, the Company amended all
2007 performance-based restricted stock agreements, modifying the performance
goal to a prorated scale. No performance-based restricted stock
awards vested in 2009, 2008 or 2007. At January 29, 2010, there were
1.5 million performance-based restricted stock awards with a weighted average
grant-date fair value of $27.30 outstanding, that were issued under the 2006
plan.
Restricted Stock Awards
Restricted
stock awards are valued at the market price of a share of the Company’s common
stock on the date of grant. In general, these awards vest at the end
of a three- to five-year period from the date of grant and are expensed on a
straight-line basis over that period, which is considered to be the requisite
service period. The Company uses historical data to estimate the
timing and amount of forfeitures. The weighted-average grant-date
fair value per share of restricted stock awards granted was $16.03, $23.75 and
$31.23 in 2009, 2008 and 2007, respectively. The total fair value of restricted
stock awards vested was approximately $12 million, $18 million and $17 million
in 2009, 2008 and 2007, respectively.
Transactions
related to restricted stock awards issued under the 2006 and 2001 plans for the
year ended January 29, 2010 are summarized as follows:
|
Shares
(In
thousands)
|
Weighted-Average
Grant-Date
Fair
Value
Per
Share
|
|||||||
|
Nonvested
at January 30, 2009
|
4,597 | $ | 27.40 | |||||
|
Granted
|
4,827 | 16.03 | ||||||
|
Vested
|
(583 | ) | 31.67 | |||||
|
Canceled
or forfeited
|
(384 | ) | 21.98 | |||||
|
Nonvested
at January 29, 2010
|
8,457 | $ | 20.86 | |||||
Deferred Stock
Units
Deferred
stock units are valued at the market price of a share of the Company’s common
stock on the date of grant. For key employees, these awards generally
vested at the end of a three- to five-year period from the date of grant and
were expensed on a straight-line basis over that period, which was considered to
be the requisite service period. For non-employee directors, these
awards vest immediately and are expensed on the grant date. Each non-employee
Director was awarded a number of deferred stock units determined by dividing the
annual award amount by the fair market value of a share of the Company’s common
stock on the award date and rounding up to the next 100 units. The
annual award amount used to determine the number of deferred stock units granted
to each director was $115,000 in 2009, 2008 and 2007. During 2009,
61,000 deferred stock units were granted under the 2006 plan and immediately
vested for non-employee directors. The weighted-average grant-date
fair value per share of deferred stock units granted was $19.01, $24.00 and
$32.13 in 2009, 2008 and 2007, respectively. The total fair value of deferred
stock units vested was approximately $1 million, $10 million and $1 million in
2009, 2008 and 2007, respectively. There were 0.7 million deferred
stock units outstanding under the Directors’ and 2006 plans at January 29,
2010. There were no unvested deferred stock units at January 29,
2010.
Restricted Stock
Units
Restricted
stock units do not have dividends rights and are valued at the market price of a
share of the Company’s common stock on the date of grant less the present value
of dividends expected during the requisite service period. In
general, these awards vest at the end of a three year period from the date of
grant and are expensed on a straight-line basis over that period, which is
considered to be the requisite service period. The Company uses
historical data to estimate the timing and amount of forfeitures. The
weighted-average grant-date fair value per share of restricted stock units
granted was $15.63 and $22.80 in 2009 and 2008, respectively. No
restricted stock units were granted in 2007. No restricted stock
units vested in 2009, 2008 or 2007.
Transactions
related to restricted stock units issued under the 2006 plan for the year ended
January 29, 2010 are summarized as follows:
|
Shares
(In
thousands)
|
Weighted-Average
Grant-Date Fair
Value
Per Share
|
|||||||
|
Nonvested
at January 30, 2009
|
37 | $ | 22.79 | |||||
|
Granted
|
59 | 15.63 | ||||||
|
Canceled
or forfeited
|
(4 | ) | 19.96 | |||||
|
Nonvested
at January 29, 2010
|
92 | $ | 18.35 | |||||
ESPP
The
purchase price of the shares under the ESPP equals 85% of the closing price on
the date of purchase. The Company’s share-based payment expense is
equal to 15% of the closing price on the date of purchase. The ESPP
is considered a liability award and is measured at fair value at each reporting
date, and the share-based payment expense is recognized over the six-month
offering period. The Company issued 4,328,305 shares of common stock
pursuant to this plan during the year ended January 29, 2010.
NOTE
9: Employee Retirement Plans -
The
Company maintains a defined contribution retirement plan for its eligible
employees (the 401(k) Plan). Employees are eligible to
participate in the 401(k) Plan 180 days after their original date of
service. Effective August 2008, eligible employees are automatically
enrolled in the 401(k) Plan at a 1% contribution, unless the employee elects
otherwise. The Company makes contributions to the 401(k) Plan each
payroll period, based upon a matching formula applied to employee contributions
(company match). Depending on the amount that a Plan participant
elects to defer, the company match is a maximum of 4.25%. Plan
participants are eligible to receive the company match after completing 180 days
of service. The company match is invested identically to employee
contributions and vests immediately in the participant accounts.
The
Company maintains a Benefit Restoration Plan to supplement benefits provided
under the 401(k) Plan to 401(k) Plan participants whose benefits are restricted
as a result of certain provisions of the Internal Revenue Code of
1986. This Plan provides for employee salary deferrals and employer
contributions in the form of a company match.
The
Company maintains a non-qualified deferred compensation program called the
Lowe’s Cash Deferral Plan. This Plan is designed to permit certain employees to
defer receipt of portions of their compensation, thereby delaying taxation on
the deferral amount and on subsequent earnings until the balance is
distributed. This plan does not provide for employer
contributions.
The
Company recognized expense associated with employee retirement plans of $154
million, $112 million and $91 million in 2009, 2008, and 2007,
respectively.
NOTE
10: Income Taxes -
The
following is a reconciliation of the effective tax rate to the federal statutory
tax rate:
|
2009
|
2008
|
2007
|
||||||||||
|
Statutory
federal income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal tax benefit
|
2.2 | 2.9 | 3.0 | |||||||||
|
Other,
net
|
(0.3 | ) | (0.5 | ) | (0.3 | ) | ||||||
|
Effective
tax rate
|
36.9 | % | 37.4 | % | 37.7 | % | ||||||
|
The
components of the income tax provision are as follows:
|
||||||||||||
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 1,046 | $ | 1,070 | $ | 1,495 | ||||||
|
State
|
123 | 166 | 207 | |||||||||
|
Total
current
|
1,169 | 1,236 | 1,702 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(108 | ) | 82 | (1 | ) | |||||||
|
State
|
(19 | ) | (7 | ) | 1 | |||||||
|
Total
deferred
|
(127 | ) | 75 | - | ||||||||
|
Total
income tax provision
|
$ | 1,042 | $ | 1,311 | $ | 1,702 | ||||||
|
The
tax effects of cumulative temporary differences that gave rise to the
deferred tax assets and liabilities were as follows:
|
||||||||
|
(In
millions)
|
January
29, 2010
|
January
30, 2009
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Self-insurance
|
$ | 251 | $ | 221 | ||||
|
Share-based
payment expense
|
115 | 95 | ||||||
|
Deferred
rent
|
75 | 51 | ||||||
|
Other,
net
|
223 | 172 | ||||||
|
Total
deferred tax assets
|
$ | 664 | $ | 539 | ||||
|
Valuation
allowance
|
(65 | ) | (42 | ) | ||||
|
Net
deferred tax assets
|
$ | 599 | $ | 497 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Property
|
$ | (934 | ) | $ | (977 | ) | ||
|
Other,
net
|
(55 | ) | (14 | ) | ||||
|
Total
deferred tax liabilities
|
$ | (989 | ) | $ | (991 | ) | ||
|
Net
deferred tax liability
|
$ | (390 | ) | $ | (494 | ) | ||
The
Company operates as a branch in various foreign jurisdictions and cumulatively
has incurred net operating losses of $209 million and $130 million as of January
29, 2010, and January 30, 2009, respectively. The net operating
losses are subject to expiration in 2017 through 2029. Deferred tax
assets have been established for these net operating losses in the accompanying
consolidated balance sheets. Given the uncertainty regarding the
realization of the foreign net deferred tax assets, the Company recorded
cumulative valuation allowances of $65 million and $42 million as of January 29,
2010, and January 30, 2009, respectively.
A
reconciliation of the beginning and ending balances of unrecognized tax benefits
is as follows:
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Unrecognized
tax benefits, beginning of year
|
$ | 200 | $ | 138 | $ | 186 | ||||||
|
Additions
for tax positions of prior years
|
31 | 82 | 11 | |||||||||
|
Reductions
for tax positions of prior years
|
(45 | ) | (16 | ) | (81 | ) | ||||||
|
Net
additions based on tax positions related to the current
year
|
5 | 16 | 23 | |||||||||
|
Settlements
|
(37 | ) | (19 | ) | (1 | ) | ||||||
|
Reductions
due to a lapse in applicable statute of limitations
|
- | (1 | ) | - | ||||||||
|
Unrecognized
tax benefits, end of year
|
$ | 154 | $ | 200 | $ | 138 | ||||||
The
amounts of unrecognized tax benefits that, if recognized, would favorably impact
the effective tax rate were $7 million and $40 million as of January 29, 2010,
and January 30, 2009, respectively.
During
2009, the Company recognized $9 million of interest income and a $9 million
reduction in penalties related to uncertain tax positions. As of
January 29, 2010, the Company had $14 million of accrued interest and $1 million
of accrued penalties. During 2008, the Company recognized $10 million
of interest expense and a $3 million reduction in penalties related to uncertain
tax positions. As of January 30, 2009, the Company had $30 million of
accrued interest and $9 million of accrued penalties. During 2007,
the Company recognized $3 million of interest expense and $5 million of
penalties related to uncertain tax positions.
The
Company does not expect any changes in unrecognized tax benefits over the next
12 months to have a significant impact on the results of operations, the
financial position or the cash flows of the Company.
The
Company is subject to examination by various foreign and domestic taxing
authorities. During 2009, the IRS completed its examination of the Company’s
2004 and 2005 income tax returns, with the exception of certain issues that are
presently under appeal. In addition, the IRS began its
examination of the Company’s U.S. federal income tax returns for 2006 and
2007. The Company is subject to examination in major state tax
jurisdictions for years 2002 forward. The Company believes appropriate
provisions for all outstanding issues have been made for all jurisdictions and
all open years.
Note 11: Earnings Per Share
-
Effective
January 31, 2009, the Company adopted authoritative guidance issued by the FASB
that states that all outstanding unvested share-based payment awards that
contain rights to nonforfeitable dividends participate in undistributed earnings
with common shareholders and, therefore, need to be included in the earnings
allocation in computing earnings per share under the two-class
method. The retrospective application of the provisions of the
guidance reduced previously reported basic earnings per common share by $0.01
for the years ended January 30, 2009 and February 1, 2008.
Under the
two-class method, net earnings are reduced by the amount of dividends declared
in the period for each class of common stock and participating
security. The remaining undistributed earnings are then allocated to
common stock and participating securities as if all of the net earnings for the
period had been distributed. Basic earnings per common share excludes
dilution and is calculated by dividing net earnings allocable to common shares
by the weighted-average number of common shares outstanding for the
period. Diluted earnings per common share is calculated by dividing
net earnings allocable to common shares by the weighted-average number of common
shares as of the balance sheet date, as adjusted for the potential dilutive
effect of non-participating share-based awards and convertible
notes. The following table reconciles earnings per common share for
2009, 2008, and 2007:
|
(In
millions, except per share data)
|
2009
|
2008
|
2007
|
|||||||||
|
Basic
earnings per common share:
|
||||||||||||
|
Net
earnings
|
$ | 1,783 | $ | 2,195 | $ | 2,809 | ||||||
|
Less:
Net earnings allocable to participating securities
|
(13 | ) | (11 | ) | (10 | ) | ||||||
|
Net
earnings allocable to common shares
|
$ | 1,770 | $ | 2,184 | $ | 2,799 | ||||||
|
Weighted-average
common shares outstanding
|
1,462 | 1,457 | 1,481 | |||||||||
|
Basic
earnings per common share
|
$ | 1.21 | $ | 1.50 | $ | 1.89 | ||||||
|
Diluted
earnings per common share:
|
||||||||||||
|
Net
earnings
|
$ | 1,783 | $ | 2,195 | $ | 2,809 | ||||||
|
Net
earnings adjustment for interest on convertible notes, net of
tax
|
- | 2 | 4 | |||||||||
|
Net
earnings, as adjusted
|
1,783 | 2,197 | 2,813 | |||||||||
|
Less:
Net earnings allocable to participating securities
|
(13 | ) | (11 | ) | (10 | ) | ||||||
|
Net
earnings allocable to common shares
|
$ | 1,770 | $ | 2,186 | $ | 2,803 | ||||||
|
Weighted-average
common shares outstanding
|
1,462 | 1,457 | 1,481 | |||||||||
|
Dilutive
effect of non-participating share-based awards
|
2 | 3 | 5 | |||||||||
|
Dilutive
effect of convertible notes
|
- | 8 | 21 | |||||||||
|
Weighted-average
common shares, as adjusted
|
1,464 | 1,468 | 1,507 | |||||||||
|
Diluted
earnings per common share
|
$ | 1.21 | $ | 1.49 | $ | 1.86 | ||||||
Stock
options to purchase 21.4 million, 19.1 million, and 7.8 million shares of common
stock for 2009, 2008, and 2007, respectively, were excluded from the computation
of diluted earnings per common share because their effect would have been
anti-dilutive.
NOTE
12: Leases -
The
Company leases store facilities and land for certain store and non-store
facilities under agreements with original terms generally of 20
years. The leases generally contain provisions for four to six
renewal options of five years each. Some lease agreements also
provide for contingent rentals based on sales performance in excess of specified
minimums. Contingent rentals were not significant for any of the periods
presented. The Company subleases certain properties that are not used
in its operations. Sublease income was not significant for any of the
periods presented. Certain equipment is also leased by the Company
under agreements ranging from three to five years. These agreements typically
contain renewal options providing for a renegotiation of the lease, at the
Company's option, based on the fair market value at that time.
The future minimum rental payments required under operating leases
and capitalized lease obligations having initial or remaining non-cancelable
lease terms in excess of one year are summarized as follows:
|
Capitalized
|
||||||||||||
|
(In
millions)
|
Operating
|
Lease
|
||||||||||
|
Year
|
Leases
|
Obligations
|
Total
|
|||||||||
|
2010
|
$ | 409 | $ | 66 | $ | 475 | ||||||
|
2011
|
410 | 66 | 476 | |||||||||
|
2012
|
405 | 65 | 470 | |||||||||
|
2013
|
398 | 65 | 463 | |||||||||
|
2014
|
389 | 59 | 448 | |||||||||
|
Later
years
|
4,153 | 266 | 4,419 | |||||||||
|
Total
minimum lease payments
|
$ | 6,164 | $ | 587 | $ | 6,751 | ||||||
|
Less
amount representing interest
|
(248 | ) | ||||||||||
|
Present
value of minimum lease
|
||||||||||||
|
payments
|
339 | |||||||||||
|
Less
current maturities
|
(34 | ) | ||||||||||
|
Present
value of minimum lease payments,
|
||||||||||||
|
less current maturities
|
$ | 305 | ||||||||||
Rental
expenses under operating leases for real estate and equipment were $410 million,
$399 million and $369 million in 2009, 2008 and 2007, respectively, and were
recognized in SG&A expense.
NOTE
13: Commitments and Contingencies -
The
Company is a defendant in legal proceedings considered to be in the normal
course of business, none of which, individually or collectively, are believed to
have a risk of having a material impact on the Company’s financial
statements. In evaluating liabilities associated with its various
legal proceedings, the Company has accrued for probable liabilities associated
with these matters. The amounts accrued were not material to the Company’s
consolidated financial statements in any of the years presented.
As of
January 29, 2010, the Company had non-cancelable commitments of $673 million
related to certain marketing and information technology programs, purchases of
merchandise inventory and construction of buildings. Payments under
these commitments are scheduled to be made as follows: 2010, $418 million; 2011,
$128 million; 2012, $65 million; 2013, $58 million; 2014, $2 million;
thereafter, $2 million.
The
Company had standby and documentary letters of credit issued under banking
arrangements which totaled $327 million as of January 29, 2010. The
majority of the Company’s letters of credits are issued for the purchase of
import merchandise inventories, real estate and construction contracts, and
insurance programs. Payments under these commitments are scheduled to be made as
follows: 2010, $324 million; 2011, $2 million; 2012, $1
million. Commitment fees ranging from 0.12% to 1.00% per annum are
paid on the letters of credit amounts outstanding.
In
addition, the Company had commitments under surety bonds which totaled $286
million as of January 29, 2010. The majority of the Company’s surety
bonds are issued by insurance companies to secure payment of workers’
compensation liability claims in states where the Company is
self-insured. Commitments of $276 million are scheduled to expire in
2010 and commitments of $10 million are scheduled to expire in
2011. Premiums ranging from $3.10 to $5.50 per $1,000 of bond
coverage per annum are paid on the surety bonds amounts
outstanding.
During
2009, the Company entered into a joint venture agreement with Australian
retailer Woolworths Limited, to develop a chain of home improvement stores in
Australia. Over the next four years, the Company will contribute $400
million to the joint venture, of which it is a one-third owner. The
contributions are expected to be relatively consistent over the four year
period.
NOTE
14: Related Parties -
A
brother-in-law of the Company’s Executive Vice President of Business Development
is a senior officer of a vendor that provides millwork and other building
products to the Company. The Company purchased products from this
vendor in the amount of $86 million, $92 million and $101 million for 2009,
2008, and 2007, respectively. Amounts payable to this vendor were
insignificant at January 29, 2010 and January 30, 2009.
NOTE
15: Other Information -
Net
interest expense is comprised of the following:
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Long-term
debt
|
$ | 293 | $ | 292 | $ | 247 | ||||||
|
Short-term
borrowings
|
2 | 11 | 8 | |||||||||
|
Capitalized
lease obligations
|
32 | 31 | 32 | |||||||||
|
Interest
income
|
(17 | ) | (40 | ) | (45 | ) | ||||||
|
Interest
capitalized
|
(19 | ) | (36 | ) | (65 | ) | ||||||
|
Interest
on tax uncertainties
|
(9 | ) | 10 | 3 | ||||||||
|
Other
|
5 | 12 | 14 | |||||||||
|
Interest
- net
|
$ | 287 | $ | 280 | $ | 194 | ||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
paid for interest, net of amount capitalized
|
$ | 314 | $ | 309 | $ | 198 | ||||||
|
Cash
paid for income taxes
|
$ | 1,157 | $ | 1,138 | $ | 1,725 | ||||||
|
Non-cash
investing and financing activities:
|
||||||||||||
|
Non-cash
property acquisitions, including assets acquired under capital
lease
|
$ | 69 | $ | 124 | $ | 99 | ||||||
|
Change
in equity method investments
|
$ | (4 | ) | $ | (15 | ) | $ | - | ||||
|
Conversions
of long-term debt to equity
|
$ | - | $ | 1 | $ | 13 | ||||||
|
Cash
dividends declared but not paid
|
$ | 131 | $ | - | $ | - | ||||||
|
Sales
by Product Category:
|
||||||||||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||||||||||||||
|
Product
Category
|
Total
Sales
|
%
|
Total
Sales
|
%
|
Total
Sales
|
%
|
||||||||||||||||||
|
Appliances
|
$ | 4,541 | 10 | % | $ | 4,376 | 9 | % | $ | 4,302 | 9 | % | ||||||||||||
|
Paint
|
3,571 | 8 | 3,387 | 7 | 3,256 | 7 | ||||||||||||||||||
|
Lumber
|
3,243 | 7 | 3,507 | 7 | 3,559 | 7 | ||||||||||||||||||
|
Flooring
|
3,125 | 7 | 3,252 | 7 | 3,214 | 7 | ||||||||||||||||||
|
Building
materials
|
2,924 | 6 | 2,970 | 7 | 2,747 | 6 | ||||||||||||||||||
|
Millwork
|
2,786 | 6 | 2,965 | 6 | 3,238 | 7 | ||||||||||||||||||
|
Lawn
& landscape products
|
2,688 | 5 | 2,581 | 5 | 2,446 | 5 | ||||||||||||||||||
|
Hardware
|
2,497 | 5 | 2,514 | 5 | 2,431 | 5 | ||||||||||||||||||
|
Fashion
plumbing
|
2,475 | 5 | 2,572 | 5 | 2,762 | 6 | ||||||||||||||||||
|
Tools
|
2,439 | 5 | 2,563 | 5 | 2,671 | 5 | ||||||||||||||||||
|
Lighting
|
2,406 | 5 | 2,508 | 5 | 2,700 | 5 | ||||||||||||||||||
|
Seasonal
living
|
2,231 | 5 | 2,226 | 5 | 2,185 | 4 | ||||||||||||||||||
|
Rough
plumbing
|
2,044 | 4 | 2,008 | 4 | 1,895 | 4 | ||||||||||||||||||
|
Nursery
|
1,897 | 4 | 1,808 | 4 | 1,687 | 3 | ||||||||||||||||||
|
Outdoor
power equipment
|
1,834 | 4 | 1,963 | 4 | 1,836 | 4 | ||||||||||||||||||
|
Cabinets
& countertops
|
1,715 | 4 | 1,934 | 4 | 2,180 | 5 | ||||||||||||||||||
|
Rough
electrical
|
1,315 | 3 | 1,447 | 3 | 1,492 | 3 | ||||||||||||||||||
|
Home
environment
|
1,189 | 2 | 1,237 | 3 | 1,222 | 3 | ||||||||||||||||||
|
Home
organization
|
1,004 | 2 | 1,062 | 2 | 1,077 | 2 | ||||||||||||||||||
|
Windows
& walls
|
972 | 2 | 1,055 | 2 | 1,092 | 2 | ||||||||||||||||||
|
Other
|
324 | 1 | 295 | 1 | 291 | 1 | ||||||||||||||||||
|
Totals
|
$ | 47,220 | 100 | % | $ | 48,230 | 100 | % | $ | 48,283 | 100 | % | ||||||||||||
|
Selected
Financial Data (Unaudited)
|
||||||||||||||||||||
|
Selected
Statement of Earnings Data
|
||||||||||||||||||||
|
(In
millions, except per share data)
|
2009
|
2008
|
2007
|
2006
|
2005 | 1 | ||||||||||||||
|
Net
sales
|
$ | 47,220 | $ | 48,230 | $ | 48,283 | $ | 46,927 | $ | 43,243 | ||||||||||
|
Gross
margin
|
16,463 | 16,501 | 16,727 | 16,198 | 14,790 | |||||||||||||||
|
Net
earnings
|
1,783 | 2,195 | 2,809 | 3,105 | 2,765 | |||||||||||||||
|
Basic
earnings per common share
|
1.21 | 1.50 | 1.89 | 2.02 | 1.78 | |||||||||||||||
|
Diluted
earnings per common share
|
1.21 | 1.49 | 1.86 | 1.98 | 1.73 | |||||||||||||||
|
Dividends
per share
|
$ | 0.355 | $ | 0.335 | $ | 0.290 | $ | 0.180 | $ | 0.110 | ||||||||||
|
Selected
Balance Sheet Data
|
||||||||||||||||||||
|
Total
assets
|
$ | 33,005 | $ | 32,625 | $ | 30,816 | $ | 27,726 | $ | 24,604 | ||||||||||
|
Long-term
debt, excluding current maturities
|
$ | 4,528 | $ | 5,039 | $ | 5,576 | $ | 4,325 | $ | 3,499 | ||||||||||
|
Fiscal
year 2005 contained 53 weeks, while all other years contained 52
weeks.
|
||||||||||||||||||||
|
Selected
Quarterly Data
|
||||||||||||||||
|
(In
millions, except per share data)
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
|
2009
|
||||||||||||||||
|
Net
sales
|
$ | 11,832 | $ | 13,844 | $ | 11,375 | $ | 10,168 | ||||||||
|
Gross
margin
|
4,196 | 4,823 | 3,890 | 3,554 | ||||||||||||
|
Net
earnings
|
476 | 759 | 344 | 205 | ||||||||||||
|
Basic
earnings per common share
|
0.32 | 0.51 | 0.23 | 0.14 | ||||||||||||
|
Diluted
earnings per common share
|
$ | 0.32 | $ | 0.51 | $ | 0.23 | $ | 0.14 | ||||||||
|
(In
millions, except per share data)
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
|
2008
|
||||||||||||||||
|
Net
sales
|
$ | 12,009 | $ | 14,509 | $ | 11,728 | $ | 9,984 | ||||||||
|
Gross
margin
|
4,166 | 4,982 | 3,985 | 3,368 | ||||||||||||
|
Net
earnings
|
607 | 938 | 488 | 162 | ||||||||||||
|
Basic
earnings per common share
|
0.42 | 0.64 | 0.33 | 0.11 | ||||||||||||
|
Diluted
earnings per common share
|
$ | 0.41 | $ | 0.63 | $ | 0.33 | $ | 0.11 | ||||||||
|
Quarterly Stock Price Range and Cash Dividends
Declared
|
||||||||||||||||||||||||||||
|
Fiscal
2009
|
Fiscal
2008
|
Fiscal
2007
|
||||||||||||||||||||||||||
|
High
|
Low
|
Dividend
|
High
|
Low
|
Dividend
|
High
|
Low
|
Dividend
|
||||||||||||||||||||
|
1st
Quarter
|
$ | 22.09 | $ | 13.00 | $ | 0.085 | $ | 27.18 | $ | 20.25 | $ | 0.080 | $ | 35.74 | $ | 29.87 | $ | 0.050 | ||||||||||
|
2nd
Quarter
|
22.68 | 18.02 | 0.090 | 26.18 | 18.00 | 0.085 | 33.19 | 27.38 | 0.080 | |||||||||||||||||||
|
3rd
Quarter
|
24.09 | 19.46 | 0.090 | 28.49 | 15.76 | 0.085 | 32.53 | 25.71 | 0.080 | |||||||||||||||||||
|
4th
Quarter
|
$ | 24.50 | $ | 19.15 | $ | 0.090 | $ | 23.73 | $ | 15.85 | $ | 0.085 | $ | 26.87 | $ | 19.94 | $ | 0.080 | ||||||||||
As of March 26, 2010 there were 31,041 registered
holders of Lowe's common stock.