LOWES COMPANIES INC
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended July 30,
2010
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ______
to ______
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Commission
file number
1-7898
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LOWE'S
COMPANIES, INC.
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(Exact
name of registrant as specified in its
charter)
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NORTH
CAROLINA
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56-0578072
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1000
Lowe's Blvd., Mooresville, NC
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28117
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code
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(704)
758-1000
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Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes
o
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
x
Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer
x
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
reporting company
o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes
x
No
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
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CLASS
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OUTSTANDING
AT AUGUST 27, 2010
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Common
Stock, $.50 par value
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1,403,275,853
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LOWE’S
COMPANIES, INC.
-
INDEX -
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||||
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PART I - Financial
Information
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Page No.
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Item
1.
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Financial
Statements
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3
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4
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5
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6-13
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14
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Item
2.
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15-22
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Item
3.
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22
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Item
4.
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22
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PART II - Other Information
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||||
| Item 1. | Legal Proceedings | 22 | ||
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Item
1A.
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23
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Item
2.
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23
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Item
6.
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24
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25
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26
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2
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Lowe's
Companies, Inc.
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Consolidated
Balance Sheets
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In
Millions, Except Par Value Data
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(Unaudited)
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(Unaudited)
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July
30, 2010
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July
31, 2009
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January
29, 2010
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Assets
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Current
assets:
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Cash
and cash equivalents
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$
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1,191
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$
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1,087
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$
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632
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Short-term
investments
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816
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424
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425
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Merchandise
inventory - net
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8,653
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8,189
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8,249
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Deferred
income taxes - net
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205
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117
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208
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Other
current assets
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256
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216
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218
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Total
current assets
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11,121
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10,033
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9,732
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Property,
less accumulated depreciation
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22,274
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22,727
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22,499
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Long-term
investments
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730
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900
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277
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Other
assets
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508
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462
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497
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Total
assets
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$
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34,633
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$
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34,122
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$
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33,005
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Liabilities
and Shareholders' Equity
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Current
liabilities:
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Short-term
borrowings
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$
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-
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$
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9
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$
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-
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Current
maturities of long-term debt
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37
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552
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552
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Accounts
payable
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4,888
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4,970
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4,287
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Accrued
compensation and employee benefits
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537
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540
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577
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Deferred
revenue
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770
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716
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683
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Other
current liabilities
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1,761
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1,672
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1,256
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Total
current liabilities
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7,993
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8,459
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7,355
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Long-term
debt, excluding current maturities
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5,533
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4,515
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4,528
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Deferred
income taxes - net
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459
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504
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598
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Other
liabilities
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1,435
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1,468
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1,455
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Total
liabilities
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15,420
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14,946
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13,936
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Shareholders'
equity:
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Preferred
stock - $5 par value, none issued
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-
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-
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-
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Common
stock - $.50 par value;
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Shares
issued and outstanding
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July
30, 2010
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1,423
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July
31, 2009
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1,477
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January
29, 2010
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1,459
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711
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738
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729
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Capital
in excess of par value
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9
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367
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6
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Retained
earnings
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18,454
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18,025
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18,307
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Accumulated
other comprehensive income
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39
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46
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27
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Total
shareholders' equity
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19,213
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19,176
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19,069
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Total
liabilities and shareholders' equity
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$
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34,633
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$
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34,122
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$
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33,005
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See
accompanying notes to the consolidated financial statements
(unaudited).
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||||||||
3
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Consolidated
Statements of Current and Retained Earnings
(Unaudited)
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|||||||||||||||||
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In Millions, Except Per Share
Data
|
|||||||||||||||||
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Three
Months Ended
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Six
Months Ended
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||||||||||||||||
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July
30, 2010
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July
31, 2009
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July
30, 2010
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July
31, 2009
|
||||||||||||||
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Current
Earnings
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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|||||||||
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Net
sales
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$ | 14,361 | 100.00 | $ | 13,844 | 100.00 | $ | 26,749 | 100.00 | $ | 25,676 | 100.00 | |||||
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Cost of
sales
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9,355 | 65.14 | 9,021 | 65.16 | 17,384 | 64.99 | 16,658 | 64.88 | |||||||||
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Gross
margin
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5,006 | 34.86 | 4,823 | 34.84 | 9,365 | 35.01 | 9,018 | 35.12 | |||||||||
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Expenses:
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Selling, general and
administrative
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3,189 | 22.21 | 3,123 | 22.55 | 6,283 | 23.49 | 6,079 | 23.67 | |||||||||
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Depreciation
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398 | 2.77 | 408 | 2.95 | 795 | 2.97 | 809 | 3.15 | |||||||||
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Interest -
net
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84 | 0.59 | 76 | 0.55 | 166 | 0.62 | 154 | 0.60 | |||||||||
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Total
expenses
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3,671 | 25.57 | 3,607 | 26.05 | 7,244 | 27.08 | 7,042 | 27.42 | |||||||||
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Pre-tax
earnings
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1,335 | 9.29 | 1,216 | 8.79 | 2,121 | 7.93 | 1,976 | 7.70 | |||||||||
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Income tax provision
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503 | 3.50 | 457 | 3.31 | 800 | 2.99 | 741 | 2.89 | |||||||||
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Net
earnings
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$ | 832 | 5.79 | $ | 759 | 5.48 | $ | 1,321 | 4.94 | $ | 1,235 | 4.81 | |||||
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Weighted average common
shares
outstanding - basic
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1,417 | 1,464 | 1,427 | 1,463 | |||||||||||||
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Basic earnings
per common share
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$ | 0.58 | $ | 0.51 | $ | 0.92 | $ | 0.84 | |||||||||
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Weighted average common shares
outstanding - diluted
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1,419 | 1,466 | 1,430 | 1,465 | |||||||||||||
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Diluted
earnings per common share
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$ | 0.58 | $ | 0.51 | $ | 0.92 | $ | 0.84 | |||||||||
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Cash dividends
per share
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$ | 0.110 | $ | 0.090 | $ | 0.200 | $ | 0.175 | |||||||||
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Retained
Earnings
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Balance at beginning of
period
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$ | 18,246 | $ | 17,399 | $ | 18,307 | $ | 17,049 | |||||||||
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Net earnings
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832 | 759 | 1,321 | 1,235 | |||||||||||||
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Cash
dividends
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(157 | ) | (133 | ) | (287 | ) | (259 | ) | |||||||||
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Share
repurchases
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(467 | ) | - | (887 | ) | - | |||||||||||
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Balance at end of
period
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$ | 18,454 | $ | 18,025 | $ | 18,454 | $ | 18,025 | |||||||||
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See accompanying notes to the
consolidated financial statements (unaudited).
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4
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Consolidated
Statements of Cash Flows (Unaudited)
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In
Millions
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Six
Months Ended
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July
30, 2010
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July
31, 2009
|
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Cash
flows from operating activities:
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Net
earnings
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$ | 1,321 | $ | 1,235 | |||
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Adjustments
to reconcile net earnings to net cash provided by operating
activities:
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Depreciation
and amortization
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848 | 870 | |||||
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Deferred
income taxes
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(143 | ) | (106 | ) | |||
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Loss
on property and other assets - net
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16 | 73 | |||||
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Share-based
payment expense
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55 | 50 | |||||
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Net
changes in operating assets and liabilities:
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Merchandise
inventory - net
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(400 | ) | 32 | ||||
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Other
operating assets
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(41 | ) | 20 | ||||
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Accounts
payable
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600 | 858 | |||||
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Other
operating liabilities
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526 | 684 | |||||
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Net
cash provided by operating activities
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2,782 | 3,716 | |||||
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Cash
flows from investing activities:
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Purchases
of investments
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(1,458 | ) | (1,108 | ) | |||
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Proceeds
from sale/maturity of investments
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609 | 449 | |||||
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Increase
in other long-term assets
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(16 | ) | - | ||||
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Property
acquired
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(612 | ) | (1,022 | ) | |||
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Proceeds
from sale of property and other long-term assets
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9 | 13 | |||||
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Net
cash used in investing activities
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(1,468 | ) | (1,668 | ) | |||
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Cash
flows from financing activities:
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Net
decrease in short-term borrowings
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- | (987 | ) | ||||
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Proceeds
from issuance of long-term debt
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991 | - | |||||
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Repayment
of long-term debt
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(534 | ) | (16 | ) | |||
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Proceeds
from issuance of common stock under employee stock purchase
plan
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39 | 37 | |||||
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Proceeds
from issuance of common stock from stock options exercised
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23 | 7 | |||||
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Cash
dividend payments
|
(261 | ) | (259 | ) | |||
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Repurchase
of common stock
|
(1,015 | ) | - | ||||
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Excess
tax benefits of share-based payments
|
1 | - | |||||
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Net
cash used in financing activities
|
(756 | ) | (1,218 | ) | |||
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Effect
of exchange rate changes on cash
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1 | 12 | |||||
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|||||||
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Net
increase in cash and cash equivalents
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559 | 842 | |||||
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Cash
and cash equivalents, beginning of period
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632 | 245 | |||||
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Cash
and cash equivalents, end of period
|
$ | 1,191 | $ | 1,087 | |||
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See
accompanying notes to the consolidated financial statements
(unaudited).
|
|||||||
5
Lowe's
Companies, Inc.
Notes
to Consolidated Financial Statements (Unaudited)
Note 1:
Basis of Presentation
- The
accompanying consolidated financial statements (unaudited) and notes to
consolidated financial statements (unaudited) are presented in accordance with
the rules and regulations of the Securities and Exchange Commission and do not
include all the disclosures normally required in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America. The consolidated financial
statements (unaudited), in the opinion of management, contain all adjustments
necessary to present fairly the financial position as of July 30, 2010, and July
31, 2009, and the results of operations for the three and six months ended July
30, 2010, and July 31, 2009, and cash flows for the six months ended July 30,
2010 and July 31, 2009.
These
interim consolidated financial statements (unaudited) should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Lowe's Companies, Inc. (the Company) Annual Report on Form 10-K
for the fiscal year ended January 29, 2010 (the Annual Report). The
financial results for the interim periods may not be indicative of the financial
results for the entire fiscal year.
Certain
prior period amounts have been reclassified to conform to current
classifications. For the three and six months ended July 31, 2009,
store opening costs of $14 million and $27 million, respectively, which were
previously reported as a single line item on the consolidated statements of
current and retained earnings, have been combined with selling, general and
administrative expense. This change was not material and had no
impact on the consolidated balance sheets or statements of cash flows for any of
the periods presented.
The
long-term portion of the self-insurance liabilities, primarily for workers’
compensation, automobile, property, and general and product liability claims, of
$485 million at July 31, 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 current and
retained earnings or cash flows for any of the periods presented.
For the
six months ended July 31, 2009, purchases of short-term investments and
long-term investments, which were previously reported as separate line items on
the consolidated statements of cash flows were combined into a single line
item. Additionally, proceeds from the sale/maturity of short-term
investments and long-term investments, which were previously reported as
separate line items on the consolidated statements of cash flows were combined
into a single line item. These changes were not material and had no
impact on the consolidated balance sheets or statements of current and retained
earnings for any of the periods presented.
|
·
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Level
1
-
inputs to the
valuation techniques that are quoted prices in active markets for
identical assets or liabilities
|
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·
|
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
|
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·
|
Level
3
-
inputs to the
valuation techniques that are unobservable for the assets or
liabilities
|
6
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 July 30, 2010, July 31, 2009, and January 29, 2010,
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)
|
July 30,
2010
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||
|
Available-for-sale
securities:
|
|||||||||||
|
Municipal
floating rate obligations
|
$
|
372
|
$
|
-
|
$
|
372
|
$
|
-
|
|||
|
Municipal obligations
|
251
|
-
|
251
|
-
|
|||||||
|
Money
market funds
|
143
|
143
|
-
|
-
|
|||||||
|
Other
|
5
|
2
|
3
|
-
|
|||||||
|
Trading
securities:
|
|||||||||||
|
Mutual
funds
|
45
|
45
|
-
|
-
|
|||||||
|
Total
short-term investments
|
$
|
816
|
$
|
190
|
$
|
626
|
$
|
-
|
|||
|
Available-for-sale
securities:
|
|||||||||||
| Municipal floating rate obligations | $ | 698 | $ | - | $ | 698 | $ | - | |||
|
Municipal
obligations
|
|
32
|
|
-
|
|
32
|
|
-
|
|||
|
Total
long-term investments
|
$
|
730
|
$
|
-
|
$
|
730
|
$
|
-
|
|||
|
Fair
Value Measurements at Reporting Date Using
|
|||||||||||
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
|||||||||
|
(In
millions)
|
July
31, 2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||
|
Available-for-sale
securities:
|
|||||||||||
|
Municipal
obligations
|
$
|
320
|
$
|
-
|
$
|
320
|
$
|
-
|
|||
|
Money
market funds
|
66
|
66
|
-
|
-
|
|||||||
|
Other
|
2
|
2
|
-
|
-
|
|||||||
|
Trading
securities:
|
|||||||||||
|
Mutual
funds
|
36
|
36
|
-
|
-
|
|||||||
|
Total
short-term investments
|
$
|
424
|
$
|
104
|
$
|
320
|
$
|
-
|
|||
|
Available-for-sale
securities:
|
|||||||||||
| Municpal floating rate obligations | $ | 656 | $ | - | $ | 656 | $ | - | |||
|
Municipal
obligations
|
|
244
|
|
-
|
|
244
|
|
-
|
|||
|
Total
long-term investments
|
$
|
900
|
$
|
-
|
$
|
900
|
$
|
-
|
|||
7
|
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:
|
|||||||||||
|
Municipal obligations
|
$
|
296
|
$
|
-
|
$
|
296
|
$
|
-
|
|||
|
Money market funds
|
68
|
68
|
-
|
-
|
|||||||
| Municipal floating rate obligations | 7 | - | 7 | - | |||||||
|
Other
|
12
|
2
|
10
|
-
|
|||||||
|
Trading
securities:
|
|||||||||||
|
Mutual
funds
|
42
|
42
|
-
|
-
|
|||||||
|
Total
short-term investments
|
$
|
425
|
$
|
112
|
$
|
313
|
$
|
-
|
|||
|
Available-for-sale
securities:
|
|||||||||||
| Municipal floating rate obligations | $ | 141 | $ | - | $ | 141 | $ | - | |||
|
Municipal
obligations
|
|
136
|
|
-
|
|
136
|
|
-
|
|||
|
Total
long-term investments
|
$
|
277
|
$
|
-
|
$
|
277
|
$
|
-
|
|||
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. 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.
Assets
and Liabilities that are Measured at Fair Value on a Nonrecurring
Basis
During
the six months ended July 30, 2010 and July 31, 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 determines the
fair values of individual operating stores using an income approach to determine
the fair value of operating stores, which requires 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 discounts 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 and
held-for-sale, which consist of retail outparcels and property associated with
relocated or closed stores, the fair values were the estimated selling prices.
The Company
8
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. The Company classified these fair value measurements as Level
3.
The
following tables present the Company’s non-financial assets measured at
estimated 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
presented in the table may reflect values at earlier measurement dates and may
no longer represent the fair values at July 30, 2010.
|
Fair
Value Measurements - Non-Recurring Basis
|
|
|
|
|
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||
|
|
Three
Months Ended
|
|||||||||||||||||
|
|
July
30, 2010
|
July
31, 2009
|
||||||||||||||||
|
(In
millions)
|
Fair
Value Measurements
|
Previous
Carrying Amounts
|
Impairment
Losses
|
Fair
Value Measurements
|
Previous
Carrying Amounts
|
Impairment
Losses
|
||||||||||||
|
Operating
stores:
|
|
|
|
|
|
|
||||||||||||
|
Long-lived
assets held-for-use
|
$ | 1 | $ | 8 | $ | (7 | ) | $ | - | $ | - | $ | - | |||||
|
Excess
properties:
|
||||||||||||||||||
|
Long-lived
assets held-for-use
|
$ | 9 | 11 | (2 | ) | $ | 44 | $ | 69 | $ | (25 | ) | ||||||
|
Long-lived
assets held-for-sale
1
|
$ | 21 | $ | 22 | $ | (1 | ) | $ | - | $ | - | $ | - | |||||
|
|
||||||||||||||||||
|
|
Six
Months Ended
|
|||||||||||||||||
|
|
July
30, 2010
|
July
31, 2009
|
||||||||||||||||
|
(In
millions)
|
Fair
Value Measurements
|
Previous
Carrying Amounts
|
Impairment
Losses
|
Fair
Value Measurements
|
Previous
Carrying Amounts
|
Impairment
Losses
|
||||||||||||
|
Operating
stores:
|
||||||||||||||||||
|
Long-lived
assets held-for-use
|
$ | 1 | $ | 8 | $ | (7 | ) | $ | - | $ | - | $ | - | |||||
|
Excess
properties:
|
||||||||||||||||||
|
Long-lived
assets held-for-use
|
$ | 10 | 13 | (3 | ) | $ | 52 | $ | 82 | $ | (30 | ) | ||||||
|
Long-lived
assets held-for-sale
1
|
$ | 21 | $ | 22 | $ | (1 | ) | $ | - | $ | - | $ | - | |||||
|
|
||||||||||||||||||
|
1
Impairment losses on long-lived assets held-for-sale exclude $1 million in
estimated costs to sell for the three and six months ended July 30,
2010.
|
||||||||||||||||||
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:
9
|
|
|
July
30, 2010
|
|
July
31, 2009
|
||||
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
(In
millions)
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Long-term
debt (excluding capital leases and other)
|
$
|
5,213
|
$
|
5,972
|
$
|
4,736
|
$
|
5,133
|
The
Senior Notes 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 before six months prior to the
applicable maturity date 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 semi-annual basis at a specified
rate. The redemption price within six months prior to the applicable
maturity date is equal to 100% of the principal amount of the Senior Notes to be
redeemed plus accrued interest thereon to but excluding the date of
redemption. The indenture under which the 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 of 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.
During
the second quarter of 2010, a portion of the net proceeds from the notes was
used to repay the $500 million 8.25% Notes due June 1, 2010.
10
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|||||||
|
(In
millions)
|
July
30, 2010
|
July
31, 2009
|
|
July
30, 2010
|
July
31, 2009
|
|||||||
|
Extended
warranty deferred revenue, beginning of period
|
$
|
576
|
$
|
496
|
|
$
|
549
|
$
|
479
|
|||
|
Additions
to deferred revenue
|
|
70
|
|
62
|
|
|
138
|
|
114
|
|||
|
Deferred
revenue recognized
|
|
(41
|
) |
|
(37
|
)
|
|
(82
|
) |
|
(72
|
) |
|
Extended
warranty deferred revenue, end of period
|
$
|
605
|
$
|
521
|
|
$
|
605
|
$
|
521
|
|||
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
$167 million at July 30, 2010, $137 million at July 31, 2009, and $150 million
at January 29, 2010. 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:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|||||||
|
(In
millions)
|
July
30, 2010
|
July
31, 2009
|
|
July
30, 2010
|
July
31, 2009
|
|||||||
|
Liability
for extended warranty claims, beginning of period
|
$
|
23
|
$
|
18
|
|
$
|
23
|
$
|
17
|
|||
|
Accrual
for claims incurred
|
|
20
|
|
17
|
|
|
37
|
|
30
|
|||
|
Claim
payments
|
|
(17
|
) |
|
(14
|
)
|
|
(34
|
) |
|
(26
|
) |
|
Liability
for extended warranty claims, end of period
|
$
|
26
|
$
|
21
|
|
$
|
26
|
$
|
21
|
|||
Note 8:
Comprehensive Income
-
Comprehensive income represents changes in shareholders’ equity from non-owner
sources and is comprised of net earnings plus or minus unrealized gains or
losses on available-for-sale securities and foreign currency translation
adjustments
. The
following table reconciles net earnings to comprehensive income for the three
and six months ended July 30, 2010 and July 31, 2009.
11
|
Three
Months Ended
|
Six
Months Ended
|
||||||||||
|
(In
millions)
|
July
30, 2010
|
July
31, 2009
|
July
30, 2010
|
July
31, 2009
|
|||||||
|
Net
earnings
|
$
|
832
|
$
|
759
|
$
|
1,321
|
$
|
1,235
|
|||
|
Foreign
currency translation adjustments
|
(6
|
) |
39
|
13
|
50
|
||||||
|
Net
unrealized investment gains (losses)
|
-
|
2
|
(1
|
) |
2
|
||||||
|
Comprehensive
income
|
$
|
826
|
$
|
800
|
$
|
1,333
|
$
|
1,287
|
|||
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||
|
(In
millions, except per share data)
|
July
30, 2010
|
July
31, 2009
|
July
30, 2010
|
July
31, 2009
|
||||||||
|
Basic
earnings per common share:
|
||||||||||||
|
Net
earnings
|
$
|
832
|
$
|
759
|
$
|
1,321
|
$
|
1,235
|
||||
|
Less:
Net earnings allocable to participating securities
|
(7
|
) |
(6
|
) |
(11
|
) |
(10)
|
|||||
|
Net
earnings allocable to common shares
|
$
|
825
|
$
|
753
|
$
|
1,310
|
$
|
1,225
|
||||
|
Weighted-average
common shares outstanding
|
1,417
|
1,464
|
1,427
|
1,463
|
||||||||
|
Basic
earnings per common share
|
$
|
0.58
|
$
|
0.51
|
$
|
0.92
|
$
|
0.84
|
||||
|
Diluted
earnings per common share:
|
||||||||||||
|
Net
earnings
|
$
|
832
|
$
|
759
|
$
|
1,321
|
$
|
1,235
|
||||
|
Less:
Net earnings allocable to participating securities
|
(7
|
) |
(6
|
) |
(11
|
) |
(10)
|
|||||
|
Net
earnings allocable to common shares
|
$
|
825
|
$
|
753
|
$
|
1,310
|
$
|
1,225
|
||||
|
Weighted-average
common shares outstanding
|
1,417
|
1,464
|
1,427
|
1,463
|
||||||||
|
Dilutive
effect of non-participating share-based awards
|
2
|
2
|
3
|
2
|
||||||||
|
Weighted-average
common shares, as adjusted
|
1,419
|
1,466
|
1,430
|
1,465
|
||||||||
|
Diluted
earnings per common share
|
$
|
0.58
|
$
|
0.51
|
$
|
0.92
|
$
|
0.84
|
||||
Stock options to purchase 20.2 million
and 21.5 million shares of common stock were excluded from the computation of
diluted earnings per common share because their effect would have been
anti-dilutive for the three months ended July 30, 2010, and July 31, 2009,
respectively. Stock options to purchase 19.7 million and 24.7 million
shares of common stock were excluded from the computation of diluted earnings
per common share because their effect would have been anti-dilutive for the six
months ended July 30, 2010, and July 31, 2009, respectively.
12
|
Net
interest expense is comprised of the following:
|
||||||||||||
|
|
|
|
|
|
||||||||
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||
|
(In
millions)
|
July
30, 2010
|
July
31, 2009
|
July
30, 2010
|
July
31, 2009
|
||||||||
|
Long-term
debt
|
$ | 78 | $ | 73 | $ | 154 | $ | 146 | ||||
|
Short-term
borrowings
|
- | - | - | 2 | ||||||||
|
Capitalized
lease obligations
|
9 | 7 | 18 | 14 | ||||||||
|
Interest
income
|
(3 | ) | (5 | ) | (6 | ) | (10 | ) | ||||
|
Interest
capitalized
|
(4 | ) | (4 | ) | (7 | ) | (8 | ) | ||||
|
Interest
on tax uncertainties
|
2 | 3 | 3 | 5 | ||||||||
|
Other
|
2 | 2 | 4 | 5 | ||||||||
|
Interest
- net
|
$ | 84 | $ | 76 | $ | 166 | $ | 154 | ||||
|
Supplemental
disclosures of cash flow information:
|
|
|
||||
|
|
|
|
||||
|
|
Six
Months Ended
|
|||||
|
(In
millions)
|
July
30, 2010
|
July
31, 2009
|
||||
|
Cash
paid for interest, net of amount capitalized
|
$ | 158 | $ | 155 | ||
|
Cash
paid for income taxes
|
$ | 818 | $ | 487 | ||
|
Non-cash
investing and financing activities:
|
||||||
|
Non-cash
property acquisitions
|
$ | 34 | $ | 59 | ||
|
Change
in equity method investments
|
$ | (2 | ) | $ | (1 | ) |
|
Cash
dividends declared but not paid
|
$ | 157 | $ | - | ||
13
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville,
North Carolina
We have
reviewed the accompanying consolidated balance sheets of Lowe’s Companies, Inc.
and subsidiaries (the “Company”) as of July 30, 2010 and July 31, 2009, and the
related consolidated statements of current and retained earnings for the fiscal
three and six-month periods then ended and of cash flows for the fiscal
six-month periods ended July 30, 2010 and July 31, 2009. These consolidated
interim financial statements are the responsibility of the Company’s
management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on
our reviews, we are not aware of any material modifications that should be made
to such consolidated interim financial statements for them to be in conformity
with accounting principles generally accepted in the United States of
America.
We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of January 29, 2010, and the related consolidated statements of
earnings, shareholders’ equity, and cash flows for the fiscal year then ended
(not presented herein); and in our report dated March 30, 2010, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet of the
Company as of January 29, 2010 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
/s/
DELOITTE & TOUCHE LLP
Charlotte,
North Carolina
August
31, 2010
14
Item 2.
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This
discussion and analysis summarizes the significant factors affecting our
consolidated operating results, liquidity and capital resources during the three
and six months ended July 30, 2010, and July 31, 2009. This
discussion and analysis should be read in conjunction with the consolidated
financial statements and notes to the consolidated financial statements that are
included in our Annual Report on Form 10-K for the fiscal year ended January 29,
2010 (the Annual Report), as well as the consolidated financial statements
(unaudited) and notes to the consolidated financial statements (unaudited)
contained in this report. Unless otherwise specified, all comparisons
made are to the corresponding period of 2009. This discussion and
analysis is presented in seven sections:
|
·
|
Executive
Overview
|
|
·
|
Operations
|
|
·
|
Company
Outlook
|
|
·
|
Financial
Condition, Liquidity and Capital
Resources
|
|
·
|
Off-Balance
Sheet Arrangements
|
|
·
|
Contractual
Obligations and Commercial
Commitments
|
|
·
|
Critical
Accounting Policies and Estimates
|
EXECUTIVE
OVERVIEW
While the
economic environment has improved compared to a year ago, ongoing uncertainty in
the labor and housing markets continued to weigh on consumers and has led to a
sluggish economic recovery. We did see consumers slowly return to
more discretionary projects during the first half of 2010. However,
we do not expect strong industry growth until there are consistent improvements
in the labor and housing markets. Therefore, we remain focused on operational
efficiency and are ready to respond if demand is better or worse than
expected.
Although
sales for the quarter trended below our expectations, our flexibility and focus
on execution allowed us to quickly respond to, and capitalize on, sales
opportunities in the marketplace. One example is the cross-functional team we
assembled to execute our plans relating to the government-sponsored Cash for
Appliances program. These efforts ensured that our stores had the
information, processes and inventory to respond to this sales
opportunity. Our execution related to this program helped us gain 160
basis points in unit market share in appliances on a rolling four calendar
quarter basis, according to third party estimates. In addition, our
focus on the Commercial Business Customer, leveraging our District Commercial
Sales Specialists and store commercial sales teams, led to comparable store
sales above the company average, reflecting solid growth in both average ticket
and customer transactions.
During
the second quarter of 2010, store payroll remained flat as a percentage of
sales, which we attribute to the flexibility of our staffing
model. This flexibility allowed us to support strong seasonal sales
in the first quarter of 2010 and adjust quickly to the changing sales
environment in the second quarter. At the same time, we were able to
continue our year-over-year trend of improving customer service scores as
measured by our Customer Focused program.
We also
continue to invest in improvements to our planning tools and infrastructure so
we can more efficiently and effectively serve our customers. Our
Integrated Planning and Execution initiative, which will be tested in the back
half of 2010, will allow us to better tailor our merchandising programs to
individual stores. This system is expected to drive sales and better optimize
inventory positions. In addition, we have gained a number of
efficiencies by refining our store processes, such as our freight flow program,
product handling procedures, and new cash handling tools. In the face
of an uncertain economic environment, we will continue to focus on prudently
managing expenses, while investing in new tools and strategies to maintain our
flexibility.
15
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 period. These tables should
be read in
conjunction
with the following discussion and analysis and the consolidated financial
statements (unaudited), including the related notes to the consolidated
financial statements (unaudited).
|
|
Three
Months Ended
|
|
Basis
Point Increase / (Decrease) in Percentage of Net Sales from Prior
Period
|
|
Percentage
Increase / (Decrease) in Dollar Amounts from Prior Period
|
|
||
|
|
July
30, 2010
|
|
July
31, 2009
|
|
2010
vs. 2009
|
|
2010
vs. 2009
|
|
|
Net
sales
|
100.00
|
%
|
100.00
|
%
|
N/A
|
|
3.7
|
%
|
|
Gross
margin
|
34.86
|
|
34.84
|
|
2
|
|
3.8
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
22.21
|
|
22.55
|
|
(34
|
)
|
2.1
|
|
|
Depreciation
|
2.77
|
|
2.95
|
|
(18
|
)
|
(2.4
|
)
|
|
Interest
- net
|
0.59
|
|
0.55
|
|
4
|
|
10.9
|
|
|
Total
expenses
|
25.57
|
|
26.05
|
|
(48
|
)
|
1.8
|
|
|
Pre-tax
earnings
|
9.29
|
|
8.79
|
|
50
|
|
9.7
|
|
|
Income
tax provision
|
3.50
|
|
3.31
|
|
19
|
|
10.0
|
|
|
Net
earnings
|
5.79
|
%
|
5.48
|
%
|
31
|
|
9.6
|
%
|
|
EBIT
margin
1
|
9.88
|
%
|
9.34
|
%
|
54
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
Basis
Point Increase / (Decrease) in Percentage of Net Sales from Prior
Period
|
|
Percentage
Increase / (Decrease) in Dollar Amounts from Prior Period
|
|
||
|
|
July
30, 2010
|
|
July
31, 2009
|
|
2010
vs. 2009
|
|
2010
vs. 2009
|
|
|
Net
sales
|
100.00
|
%
|
100.00
|
%
|
N/A
|
|
4.2
|
%
|
|
Gross
margin
|
35.01
|
|
35.12
|
|
(11)
|
|
3.8
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
23.49
|
|
23.67
|
|
(18
|
)
|
3.3
|
|
|
Depreciation
|
2.97
|
|
3.15
|
|
(18
|
)
|
(1.7
|
)
|
|
Interest
- net
|
0.62
|
|
0.60
|
|
2
|
|
7.9
|
|
|
Total
expenses
|
27.08
|
|
27.42
|
|
(34
|
)
|
2.9
|
|
|
Pre-tax
earnings
|
7.93
|
|
7.70
|
|
23
|
|
7.3
|
|
|
Income
tax provision
|
2.99
|
|
2.89
|
|
10
|
|
7.9
|
|
|
Net
earnings
|
4.94
|
%
|
4.81
|
%
|
13
|
|
7.0
|
%
|
|
EBIT
margin
1
|
8.55
|
%
|
8.30
|
%
|
25
|
|
7.4
|
%
|
16
|
Three
Months Ended
|
Six
Months Ended
|
||||||||||||||
|
Other
Metrics
|
July
30, 2010
|
July
31, 2009
|
July
30, 2010
|
July
31, 2009
|
|||||||||||
|
Comparable
store sales increase (decrease)
2
|
1.6 | % | (9.5 | )% | 2.0 | % | (8.2 | )% | |||||||
|
Total
customer transactions (in millions)
|
229 | 225 | 428 | 411 | |||||||||||
|
Average
ticket
3
|
$ | 62.84 | $ | 61.43 | $ | 62.55 | $ | 62.46 | |||||||
|
At
end of period:
|
|||||||||||||||
|
Number
of stores
|
1,724 | 1,688 | |||||||||||||
|
Sales
floor square feet (in millions)
|
195 | 191 | |||||||||||||
|
Average
store size selling square feet (in thousands)
4
|
113 | 113 | |||||||||||||
|
|
(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.
|
|
|
(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.
|
Net Sales –
Net sales increased 3.7%
to $14.4 billion in the second quarter of 2010 driven by an increase in total
customer count of 1.4% and an increase in average ticket of
2.3%. Comparable store sales increased 1.6% for the
quarter. Comparable store average ticket increased 2.1%, while
comparable store customer count was down slightly for the
quarter. Average ticket for the quarter benefited from strong sales
of appliances, air conditioners and grills. Customer count was
negatively impacted by the extreme heat across much of the country, which led to
lower performance in certain product categories, such as nursery and lawn &
landscape products, which traditionally drive traffic in the second
quarter.
During
the quarter, we experienced comparable store sales increases in 9 of our 20
product categories including a double-digit increase in appliances aided by the
government-sponsored Cash for Appliances program. We estimate that
this program contributed approximately 25 basis points to total company
comparable store sales for the quarter. We also experienced above
average comparable store sales increases in home environment, rough electrical,
seasonal living, tools, lumber, rough plumbing, home organization and windows
& walls. While the extreme heat benefited the home environment
and seasonal living product categories with strong sales in air conditioning,
seasonal cooling and dehumidifier sales, our nursery and lawn & landscape
products categories were negatively impacted. In addition, the
success of our Father’s Day tool event and strong sales of grills and grill
accessories benefited our tools and seasonal living product
categories. We gained 50 basis points in unit market share for the
total store on a rolling four calendar quarter basis, with gains in 12 of our 20
product categories.
Geographic
performance was relatively balanced across our markets during the quarter, with
substantially all of our geographic markets generating positive comparable store
sales. We saw particular strength in some of the markets that first
entered the economic downturn, such as Florida, Arizona, and the
Northeast. This was the fourth consecutive quarter of comparable
store sales growth above the company average for these markets. Our
Canadian stores continued their strong positive comparable store sales
performance, contributing approximately 10 basis points to the total company
comparable store sales increase for the quarter. In contrast, the
Gulf Coast region had the lowest comparable store sales performance due to a
comparison to last year’s higher post-hurricane sales.
Gross Margin
- For the second
quarter of 2010, gross margin increased 2 basis points as a percentage of sales
compared to the second quarter of 2009 as a result of better sell-through of
seasonal inventory this year relative to last year and the cycling of markdowns
associated with prior year reset activity in windows & walls and millwork
categories. This increase was offset by a decrease associated with
the mix of products sold across categories, primarily driven by strong sales of
appliances.
17
The 11
basis point decrease in gross margin as a percentage of sales for the first six
months of 2010 compared to 2009 was attributable to the mix of products sold
across product categories, partially offset by an increase in margin rates,
primarily in seasonal living, and lower inventory shrink.
SG&A
-
For the second quarter of
2010, SG&A decreased 34 basis points as a percentage of sales compared to
the second quarter of 2009, primarily driven by leverage of 25 basis points due
to lower charges associated with asset impairments and discontinued project
write-offs. In addition, we experienced 20 basis points of leverage
associated with our private label credit card program, driven by reduced program
costs and lower anticipated defaults. Bonus expense also leveraged 10 basis
points due to lower projected attainment levels relative to plan compared to
prior year. This was partially offset by de-leverage of 10 basis points relating
to fleet expense as a result of increased deliveries due to strong sales in the
appliance
category. We also experienced five basis points of de-leverage of
bank card expense due to a combination of higher bank card volumes, which grew
faster than total sales, as well as increased interchange fees.
The 18
basis point decrease in SG&A as a percentage of sales for the first six
months of 2010 compared to 2009 was primarily attributable to leverage of 27
basis points associated with our private label credit card program and 17 basis
points due to lower charges associated with asset impairments and discontinued
project write-offs. This was partially offset by de-leverage of 19
basis points in store payroll and 9 basis points in fleet expense.
Depreciation
–
Depreciation expense
decreased slightly for both the three and six months ended July 30, 2010
compared to the prior year due to reduced capital spending. Property,
less accumulated depreciation, totaled $22.3 billion at July 30, 2010 and $22.7
billion at July 31, 2009. As of July 30, 2010 and July 31, 2009, we
owned 88% of our stores, which includes stores on leased land.
Income Tax Provision -
Our
effective income tax rate was 37.7% for both the three and six months ended July
30, 2010, respectively, and 37.6% and 37.5% for the three and six months ended
July 31, 2009, respectively. Our effective income tax rate was 36.9%
for fiscal 2009.
COMPANY
OUTLOOK
Third
Quarter
As of
August 16, 2010, the date
of
our second
quarter 2010 earnings release, we expected to open approximately 12 new stores
during the third quarter of 2010, which ends on October 29, 2010, reflecting
square footage growth of approximately 2%. We expected total sales to
increase 3% to 5% 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 approximately 120 basis
points. In addition, depreciation expense was expected to be
approximately $400 million. Diluted earnings per share of $0.28 to
$0.32 were expected for the third quarter. Our outlook for the third
quarter does not contemplate any future share repurchases. All
comparisons are with the third quarter of fiscal 2009.
Fiscal
2010
As of
August 16, 2010, the date of our second quarter 2010 earnings release, we
expected to open 40 to 45 new stores during fiscal 2010, which ends on January
28, 2011, reflecting total square footage growth of approximately
2%. We expected total sales to increase approximately 4% and
comparable store sales to increase approximately 2%. Earnings before
interest and taxes as a percentage of sales (operating margin) was expected to
increase approximately 70 basis points. In addition, depreciation
expense was expected to be approximately $1.6 billion. Diluted
earnings per share of $1.38 to $1.45 were expected for 2010. Our
outlook for 2010 does not contemplate any future share
repurchases. All comparisons are with fiscal 2009.
18
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash
Flows
Cash
flows from operating activities continue to provide the primary source of our
liquidity. The decrease in net cash flows provided by operating
activities for the six months ended July 30, 2010, versus the six months ended
July 31, 2009, was primarily driven by an increase in inventory balances and
other changes in working capital. The 5.7% increase in inventory balances was
associated with new store openings, an approximate 1% increase in comparable
store inventory, and increased distribution inventory. However, in
the second quarter we experienced a lower rate of inventory growth over the
prior year as compared to the first quarter, and we expect inventory to be up 1%
to 2% at year-end. The decrease in net cash used in investing
activities for the six months ended July 30, 2010 versus the six months ended
July 31, 2009 was driven by a 40% decline in property acquired due to a
reduction in our store expansion program. The decrease in net cash flows used in
financing activities for the six months ended July 30, 2010, versus the six
months ended July 31, 2009, was primarily attributable to proceeds from the
April 2010 issuance of long-term debt, and lower repayments of debt, offset by
share repurchases in the first half of 2010.
Sources
of Liquidity
In
addition to our cash flows from operations, liquidity is provided by our
short-term borrowing facilities and through the issuance of long-term
debt. We have a $1.75 billion senior credit facility that expires in
June 2012. The senior credit facility also supports our commercial
paper program. The senior credit facility has a $500 million letter of
credit sublimit. Amounts outstanding under letters of credit reduce
the amount available for borrowing under the senior credit
facility. Borrowings made are unsecured and are priced at fixed rates
based upon market conditions at the time of funding in accordance with the terms
of the senior credit facility. The senior credit facility contains
certain restrictive covenants, which include maintenance of a debt leverage
ratio as defined by the senior credit facility. We were in compliance
with those covenants at July 30, 2010. Seventeen banking institutions are
participating in the senior credit facility. As of July 30, 2010, there
were no outstanding borrowings or letters of credit under the senior credit
facility and no outstanding borrowings under the commercial paper
program.
We also
have a Canadian dollar (C$) denominated credit facility in the amount of C$50
million that provides revolving credit support for our Canadian
operations. This uncommitted credit facility provides us with the
ability to make unsecured borrowings which are priced at fixed rates based upon
market conditions at the time of funding in accordance with the terms of the
credit facility. As of July 30, 2010, there were no outstanding
borrowings under the C$ credit facility.
The
availability of funds for liquidity purposes through the issuance of commercial
paper or new long-term debt or the borrowing costs of these funds could be
adversely affected by a downgrade of our debt ratings or a deterioration of
certain financial ratios. The table below reflects our current debt
ratings as of July 30, 2010. Although we currently do not expect a
downgrade in our debt ratings, our commercial paper and senior debt ratings may
be subject to revision or withdrawal at any time by the assigning rating
organization, and each rating should be evaluated independently of any other
rating.
|
Current
Debt Ratings
|
S&P
|
Moody’s
|
Fitch
|
|
Commercial
Paper
|
A1
|
P1
|
F1
|
|
Senior
Debt
|
A
|
A1
|
A+
|
|
Outlook
|
Stable
|
Stable
|
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. 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.
19
Cash
Requirements
Capital
Expenditures
Our 2010
capital expenditures forecast is approximately $2.15 billion, inclusive of
approximately $350 million of lease commitments, resulting in planned net cash
outflow of $1.8 billion. Approximately 60% of the planned net cash outflow
is for store expansion. Our expansion plans for 2010 consist of 40 to 45 new
stores and are expected to increase sales floor square footage by approximately
2%. Approximately 95% of the 2010 projects will be owned, which includes
approximately 40% ground-leased properties. In addition,
approximately 15% of the planned net cash outflow is for investment in our
existing stores through resets and remerchandising. Other planned
capital expenditures include investing in our distribution and corporate
infrastructure, including enhancements in information technology.
At July
30, 2010, we owned and operated 14 regional distribution centers. We
also operated 14 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
In April
2010, we issued $1.0 billion
of unsecured senior
notes, comprised of two tranches: $500 million of 4.625% senior notes maturing
in April 2020 and $500 million of 5.800% senior notes maturing in April 2040.
Net proceeds from the 4.625% and 5.800% senior notes were $497 million and $495
million, respectively. Interest on the senior notes is payable
semiannually in arrears in April and October of each year until maturity,
beginning in October 2010. During the second quarter of 2010, we used
a portion of the net proceeds from the notes to repay the $500 million 8.25%
Notes due June 1, 2010. We are also using portions of the net proceeds for
general corporate purposes, including capital expenditures and working capital
needs, and for repurchases of shares of our common stock.
We have a
share repurchase program that is executed through purchases made from time to
time in the open market or through private transactions. Shares
purchased under the share repurchase program are retired and returned to
authorized and unissued status. As of July 30, 2010, we had a
remaining authorization of approximately $4.0 billion with no
expiration. We expect to utilize the remaining authorization by the
end of fiscal 2012.
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
In April
2010, we issued $1.0 billion of unsecured senior notes in the ordinary course of
business, which are included in the table below that summarizes long-term debt,
excluding capital leases and other, at July 30, 2010. The unsecured
senior notes are further described in Note 5 to the consolidated financial
statements (unaudited) included herein.
|
July
30, 2010
|
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)
|
$
|
10,411
|
$
|
306
|
$
|
1,146
|
$
|
556
|
$
|
8,403
|
||||||
There
have been no material changes to our contractual obligations and commercial
commitments outside the ordinary course of business since the end of
2009. Refer to the Annual Report on Form 10-K for additional
information regarding our contractual obligations and commercial
commitments.
20
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
significant accounting policies are described in Note 1 to the consolidated
financial statements presented in the Annual Report. Our critical
accounting policies and estimates are described in Management’s Discussion and
Analysis of Financial Condition and Results of Operations in the Annual
Report. Our significant and critical accounting policies have not
changed significantly since the filing of our Annual Report. However,
given the estimates made this quarter regarding the evaluation of long-lived
asset impairment for our operating stores, we have elected to provide disclosure
related to this critical accounting estimate.
We
evaluate our operating stores for triggering events relating to long-lived asset
impairment on a quarterly basis. During the six months ended July 30,
2010, nine stores experienced a triggering event and were evaluated for
recoverability. One of these stores was determined to be
impaired. Operating store impairment charges were $7 million for both
the three and six months ended July 30, 2010. No operating store
impairment charges were recorded for the three or six months ended July 31,
2009.
Eight of
the stores that experienced a triggering event during the six months ended July
30, 2010 were determined to be recoverable and therefore were not
impaired. For seven of these stores the expected undiscounted cash
flows of the store assets substantially exceeded their net book value. For these
seven stores, a 10% reduction in projected sales used to estimate future cash
flows at the time the operating stores were evaluated for impairment would have
increased recognized impairment losses by $13 million.
One of
the stores with a net book value of $21 million had expected undiscounted cash
flows that exceeded the net book value of its assets by less than a substantial
amount. A 10% reduction in projected sales used to estimate future
cash flows for this store would have increased impairment losses by $15
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.
FORWARD-LOOKING
STATEMENTS
This Form
10-Q contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 (the “Act”). All statements
other than those reciting historic fact are statements that could be
“forward-looking statements” under the Act. Such forward-looking
statements are found in, among other places, “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.” Statements containing words such as “expects,” “plans,”
“strategy,” “projects,” “believes,” “opportunity,” “anticipates,” “desires,” and
similar expressions are intended to highlight or indicate “forward-looking
statements.” Although we believe that the expectations, opinions,
projections, and comments reflected in our forward-looking statements are
reasonable, we can give no assurance that such statements will prove to be
correct. A wide variety of potential risks, uncertainties, and other
factors could materially affect our ability to achieve the results expressed or
implied by our forward-looking statements including, but not limited to, changes
in general economic conditions, such as continued high rates of unemployment,
interest rate and currency fluctuations, higher fuel and other energy costs,
slower growth in personal income, changes in consumer spending, changes in the
rate of housing turnover, the availability and increasing regulation of consumer
credit and of mortgage financing, inflation or deflation of commodity prices and
other factors which can negatively affect our customers, as well as our ability
to: (i) respond to adverse trends in the housing industry, such as
the psychological effects of falling home prices, and in the level of repairs,
remodeling, and additions to existing homes, as well as a general reduction in
commercial building activity; (ii) secure, develop, and otherwise implement new
technologies and processes designed to enhance our efficiency and
competitiveness; (iii) attract, train, and retain highly-qualified associates;
(iv) locate, secure, and successfully develop new sites for store development
particularly in major metropolitan markets; (v) respond to fluctuations in the
prices and availability of services, supplies, and products; (vi) respond to the
growth and impact of competition; (vii) address changes in existing or new laws
or regulations that affect consumer credit, employment/labor, trade, product
safety, transportation/logistics, energy costs, health care, tax or
environmental issues; and (viii) respond to
21
unanticipated
weather conditions that could adversely affect sales. In addition, we
could experience additional impairment losses 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. For more
information about these and other risks and uncertainties that we are exposed
to, you should read the “Risk Factors” and “Critical Accounting Policies and
Estimates” included in our Annual Report on Form 10-K to the United States
Securities and Exchange Commission and the description of material changes, if
any, therein included in our Quarterly Reports on Form 10-Q.
The
forward-looking statements contained in this Form 10-Q are based upon data
available as of the date of this report or other specified date and speak only
as of such date. 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 to the United States Securities and Exchange
Commission and the description of material changes, if any, therein included in
our Quarterly Reports on Form 10-Q. We expressly disclaim any
obligation to update or revise any forward-looking statement, whether as a
result of new information, change in circumstances, future events, or
otherwise.
The
Company's market risk has not changed materially from that disclosed in our
Annual Report on Form 10-K for the fiscal year ended January 29,
2010.
The
Company's management, with the participation of the Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” (as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, (the Exchange Act)). Based upon their evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of July 30, 2010, the
Company’s disclosure controls and procedures were effective for the purpose of
ensuring that the information required to be disclosed in the reports that the
Company files or submits under the Exchange Act with the Securities and Exchange
Commission (the SEC) (1) is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and (2) is
accumulated and communicated to the Company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.
In
addition, no change in the Company’s internal control over financial reporting
occurred during the quarter ended July 30, 2010, that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
The
Company is a defendant in legal proceedings considered to be in the normal
course of business, none of which, individually or collectively, including the
investigation described below, are believed to have a risk of having a material
impact on the Company’s financial statements.
Item 103
of SEC Regulation S-K requires that we disclose legal proceedings to which the
Company and a governmental authority is a party and that arise under laws
dealing with the discharge of materials into the environment or the protection
of the environment, if the proceeding reasonably involves potential monetary
sanctions of $100,000 or more. Disclosure also is required as to any such
proceedings known by us to be contemplated by governmental authorities. In
accordance with that requirement, we are disclosing that the California South
Coast Air Quality Management District ("SCAQMD") has notified one of the
Company’s subsidiaries, Lowe's HIW, Inc., that it is investigating whether
stores operated by the subsidiary that are located in the four-county SCAQMD
jurisdiction sold paints, coatings and certain other products that contained
volatile organic compounds in excess of SCAQMD limits. The subsidiary is
cooperating with the SCAQMD's investigation.
22
There
have been no material changes in our risk factors from those disclosed in our
Annual Report on Form 10-K.
Issuer
Purchases of Equity Securities
|
(In
millions, except average
price
paid per share)
|
Total
Number of Shares Purchased
(1)
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(2)
|
Dollar
Value of Shares that May Yet Be Purchased Under the Plans or Programs
(2)
|
||||||
|
May
1, 2010 – May 28, 2010
|
14.4
|
$
|
24.38
|
14.4
|
$
|
4,200
|
||||
|
May
29, 2010 – July 2, 2010
|
8.3
|
23.97
|
8.3
|
4,000
|
||||||
|
July
3, 2010 – July 30, 2010
|
-
|
-
|
-
|
4,000
|
||||||
|
As
of July 30, 2010
|
22.7
|
$
|
24.23
|
22.7
|
$
|
4,000
|
||||
(1
)
During the second quarter of fiscal 2010, the Company
repurchased an aggregate of 22,702,725 shares of its common stock pursuant to
the share repurchase program. The Company also repurchased an
insignificant number of shares from employees to satisfy either the exercise
price of stock options or the statutory withholding tax liability upon the
vesting of restricted stock awards.
(2
)
Authorization for up to $5 billion of share repurchases with no
expiration was approved on January 29, 2010 by the Company's Board of
Directors. Although the repurchase authorization has no expiration, the
Company expects to execute the program by the end of fiscal 2012 through
purchases made from time to time either in the open market or through private
transactions, in accordance with SEC regulations.
23
Exhibit
3.1 – Restated and Amended Charter of Lowe’s Companies, Inc. (filed as Exhibit
3.1 to the Company’s Quarterly Report on Form 10-Q filed September 1, 2009 and
incorporated by reference herein)
Exhibit
3.2 – Bylaws of Lowe’s Companies, Inc., as amended and restated (filed as
Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed June 2, 2010
and incorporated by reference herein)
Exhibit
4.1 – Lowe’s Companies, Inc. Amended and Restated Credit Agreement Dated June
15, 2007, including exhibits attached thereto
Exhibit
12.1 - Statement Re Computation of Ratio of Earnings to Fixed
Charges
Exhibit
15.1 - Deloitte & Touche LLP Letter Re Unaudited Interim Financial
Information
Exhibit
31.1 - Certification Pursuant to Rules 13a-14(a) and 15d-14(a) Under the
Securities Exchange Act of 1934, as Amended
Exhibit
31.2 - Certification Pursuant to Rules 13a-14(a) and 15d-14(a) Under the
Securities Exchange Act of 1934, as Amended
Exhibit
32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit
32.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit
101.INS - XBRL Instance Document
Exhibit
101.SCH - XBRL Taxonomy Extension Schema Document
Exhibit
101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit
101.LAB - XBRL Taxonomy Extension Label Linkbase Document
Exhibit
101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 101.DEF - XBRL Taxonomy Extension Definitions Linkbase
Document
24
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
LOWE'S
COMPANIES, INC.
|
||
|
August 31,
2010
Date
|
/s/ Matthew V. Hollifield
Matthew
V. Hollifield
Senior
Vice President and Chief Accounting
Officer
|
25
|
Exhibit
No.
|
Description
|
|
|
3.1
|
Restated
and Amended Charter of Lowe’s Companies, Inc. (filed as Exhibit 3.1 to the
Company’s Quarterly Report on Form 10-Q filed September 1, 2009 and
incorporated by reference herein)
|
|
|
3.2
|
Bylaws
of Lowe’s Companies, Inc., as amended and restated (filed as Exhibit 3.2
to the Company’s Quarterly Report on Form 10-Q filed June 2, 2010 and
incorporated by reference herein)
|
|
|
4.1
|
Lowe’s
Companies, Inc. Amended and Restated Credit Agreement Dated June 15, 2007,
including exhibits attached thereto
|
|
|
12.1
|
Statement
Re Computation of Ratio of Earnings to Fixed Charges
|
|
|
15.1
|
Deloitte
& Touche LLP Letter Re Unaudited Interim Financial
Information
|
|
|
31.1
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) Under the Securities Exchange
Act of 1934, as Amended
|
|
|
31.2
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) Under the Securities Exchange
Act of 1934, as Amended
|
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
101.INS
|
XBRL
Instance Document
|
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
| 101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document |
26
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial StatementsNote 2: Fair Value Measurements and Financial Instruments -Note 3: Restricted Investment Balances -Note 4: PropertyNote 5: Long-term DebtNote 6: Extended WarrantiesNote 7: Shareholders' Equity -Note 9: Earnings Per ShareNote 10: Supplemental DisclosureItem 3. - Quantitative and Qualitative Disclosures About Market RiskItem 4. - Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. - Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. - Exhibits