(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2003 | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to _________ |
Commission file number 1-7898 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended May 2, 2003or[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from toCommission file number 1-7898LOWE'S COMPANIES, INC.(Exact name of registrant as specified in its charter)
LOWE'SCOMPANIES, INC. |
(Exact name of registrant as specified in its charter) |
NORTH CAROLINA | 56-0578072 |
(State or other jurisdiction of incorporation or organization) |
|
1605 CURTIS BRIDGE ROAD, WILKESBORO, N.C. 28697
(Address of principal executive offices) (Zip Code)
(336) 658-4000
(Registrant's telephone number, including area code)
1000 Lowe's Blvd., Mooresville, NC | 28117 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code | 704-758-1000 |
NONE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No.
x | Yes | o | No |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No.
x | Yes | o | No |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
|
|
24
22
TOTAL PAGES
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LOWE'S COMPANIES, INC.
- INDEX - | |||||
Page No. | |||||
PART 1 - Financial Information | |||||
Item 1. Financial Statements | |||||
Consolidated Balance Sheets - | |||||
November 1, 2002 (Unaudited) and January 31, 2003 | 3 | ||||
Consolidated Statements of Current and | |||||
Retained Earnings (Unaudited) - three and nine months | |||||
ended | 4 | ||||
Consolidated Statements of Cash Flows (Unaudited) - | |||||
nine months ended | 5 | ||||
| |||||
Notes to Consolidated Financial Statements (Unaudited) | 6-10 | ||||
Independent Accountants' Report | 11 | ||||
Item 2. Management's Discussion and Analysis of Financial Condition and | |||||
Results of Operations | |||||
| |||||
Item | 19 | ||||
Item 4. Controls and Procedures | |||||
PART II - Other Information | |||||
Item | 20 | ||||
Item | 20 | ||||
Signature | 21 | ||||
22 | |||||
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Lowe's Companies, Inc. | ||||||||
(Unaudited) 2003 | (Unaudited) | January 31, 2003 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents |
$ 1,6001,196
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| |||||
| |||||
|
May 3, 2002
Amount
Percent
Amount
Percent
Lowe's Companies, Inc.
| ||||||||||
| Three Months Ended | Nine Months Ended | ||||||||
October 31, 2003 | November 1, 2002 | October 31, 2003 | November 1, 2002 | |||||||
Current Earnings | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||
Net Sales | $ 7,924 | 100.00 | $ 6,415 | 100.00 | $ 23,909 | 100.00 | $ 20,373 | 100.00 | ||
Cost of Sales | 5,460 | 68.90 | 4,450 | 69.36 | 16,560 | 69.26 | 14,283 | 70.11 | ||
Gross Margin | 2,464 | 31.10 | 1,965 | 30.64 | 7,349 | 30.74 | 6,090 | 29.89 | ||
Expenses: | ||||||||||
Selling, general and administrative | 1,466 | 18.50 | 1,192 | 18.59 | 4,212 | 17.62 | 3,567 | 17.51 | ||
Store opening costs | 37 | 0.47 | 28 | 0.43 | 82 | 0.34 | 88 | 0.43 | ||
Depreciation | 193 | 2.44 | 159 | 2.48 | 557 | 2.33 | 458 | 2.25 | ||
Interest | 42 | 0.53 | 44 | 0.69 | 136 | 0.57 | 137 | 0.67 | ||
Total expenses | 1,738 | 21.94 | 1,423 | 22.19 | 4,987 | 20.86 | 4,250 | 20.86 | ||
Pre-tax earnings | 726 | 9.16 | 542 | 8.45 | 2,362 | 9.88 | 1,840 | 9.03 | ||
Income tax provision | 274 | 3.46 | 203 | 3.16 | 893 | 3.74 | 688 | 3.38 | ||
Net earnings | $ 452 | 5.70 | $ 339 | 5.29 | $ 1,469 | 6.14 | $ 1,152 | 5.65 | ||
Weighted average shares outstanding - Basic | 786 | 781 | 784 | 779 | ||||||
Basic earnings per share | $ 0.58 | $ 0.44 | $ 1.87 | $ 1.48 | ||||||
Weighted average shares outstanding - Diluted | 808 | 801 | 805 | 800 | ||||||
Diluted earnings per share | $ 0.56 | $ 0.43 | $ 1.84 | $ 1.45 | ||||||
Retained Earnings | ||||||||||
Balance at beginning of period | $ 6,865 | $ 5,263 | $ 5,887 | $ 4,482 | ||||||
Net earnings | 452 | 339 | 1,469 | 1,152 | ||||||
Cash dividends | (24) | (15) | (63) | (47) | ||||||
Balance at end of period | $ 7,293 | $ 5,587 | $ 7,293 | $ 5,587 | ||||||
See accompanying notes to unaudited consolidated financial statements. | ||||||||||
9.39
3.55
5.34
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Lowe's Companies, Inc. | Lowe's Companies, Inc. | Lowe's Companies, Inc.
| ||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
May 2, 2003 | May 3, 2002 | October 31, 2003 | November 1, 2002 | |||||||||||||
Cash Flows from Operating Activities: | Cash Flows from Operating Activities: | Cash Flows from Operating Activities: | ||||||||||||||
Net Earnings | $ 421 | $ 346 | Net Earnings | $ 1,469 | $ 1,152 | |||||||||||
Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: | Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: | |||||||||||||||
Depreciation and Amortization | 184 | 150 | Depreciation and Amortization | 571 | 472 | |||||||||||
Deferred Income Taxes | 7 | 4 | Deferred Income Taxes | 87 | (4) | |||||||||||
Loss on Disposition/Writedown of Fixed and Other Assets | 7 | 9 | Loss on Disposition/Writedown of Fixed and Other Assets | 23 | 17 | |||||||||||
Stock-based Compensation Expense | 5 | - | Stock-based Compensation Expense | 28 | - | |||||||||||
Tax Effect of Stock Options Exercised | 4 | 6 | Tax Effect of Stock Options Exercised | 21 | 20 | |||||||||||
Changes in Operating Assets and Liabilities: | Changes in Operating Assets and Liabilities: | |||||||||||||||
Accounts Receivable - Net | (17) | (27) | Accounts Receivable - Net | (36) | (21) | |||||||||||
Merchandise Inventory | (896) | (749) | Merchandise Inventory | (1,038) | (540) | |||||||||||
Other Operating Assets | (8) | (69) | Other Operating Assets | (41) | 19 | |||||||||||
Accounts Payable | 1,126 | 1,026 | Accounts Payable | 599 | 331 | |||||||||||
Employee Retirement Plans | (61) | 33 | Employee Retirement Plans | (35) | 16 | |||||||||||
Other Operating Liabilities | 274 | 445 | Other Operating Liabilities | 389 | 573 | |||||||||||
Net Cash Provided by Operating Activities | 1,046 | 1,174 | Net Cash Provided by Operating Activities | 2,037 | 2,035 | |||||||||||
Cash Flows from Investing Activities: | Cash Flows from Investing Activities: | Cash Flows from Investing Activities: | ||||||||||||||
Decrease (Increase) in Investment Assets: | Decrease (Increase) in Investment Assets: | |||||||||||||||
Short-Term Investments | 206 | 10 | Short-Term Investments | 144 | (24) | |||||||||||
Purchase of Long-Term Investments | (164) | (2) | Purchase of Long-Term Investments | (282) | (2) | |||||||||||
Proceeds from Sale/Maturity of Long-Term Investments | 47 | - | Proceeds from Sale/Maturity of Long-Term Investments | 189 | - | |||||||||||
Increase in Other Long-Term Assets | (16) | (9) | Increase in Other Long-Term Assets | (87) | (22) | |||||||||||
Fixed Assets Acquired | (392) | (501) | Fixed Assets Acquired | (1,685) | (1,449) | |||||||||||
Proceeds from the Sale of Fixed and Other Long-Term Assets | 19 | 4 | Proceeds from the Sale of Fixed and Other Long-Term Assets | 50 | 29 | |||||||||||
Net Cash Provided by Investing Activities | (300) | (498) | Net Cash Used in Investing Activities | (1,671) | (1,468) | |||||||||||
Cash Flows from Financing Activities: | Cash Flows from Financing Activities: | Cash Flows from Financing Activities: | ||||||||||||||
Repayment of Long-Term Debt | (7) | (7) | Net Decrease in Short-Term Borrowings | (50) | (50) | |||||||||||
Proceeds from Stock Options Exercised | 28 | 24 | Repayment of Long-Term Debt | (21) | (45) | |||||||||||
Cash Dividend Payments | (20) | (16) | Proceeds from Stock Options Exercised | 111 | 81 | |||||||||||
Net Cash Provided by Financing Activities | 1 | 1 | Cash Dividend Payments | (63) | (47) | |||||||||||
Net Cash Used in Financing Activities | (23) | (61) | ||||||||||||||
Net Increase in Cash and Cash Equivalents | Net Increase in Cash and Cash Equivalents | 747 | 677 | Net Increase in Cash and Cash Equivalents | 343 | 506 | ||||||||||
Cash and Cash Equivalents, Beginning of Period | Cash and Cash Equivalents, Beginning of Period | 853 | 799 | Cash and Cash Equivalents, Beginning of Period | 853 | 799 | ||||||||||
Cash and Cash Equivalents, End of Period | Cash and Cash Equivalents, End of Period | $ 1,600 | $ 1,476 | Cash and Cash Equivalents, End of Period | $ 1,196 | $ 1,305 | ||||||||||
See accompanying notes to unaudited consolidated financial statements. | See accompanying notes to unaudited consolidated financial statements. | See accompanying notes to unaudited consolidated financial statements. |
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Lowe's Companies, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Note 1: Basis of Presentation - The accompanying Consolidated Financial Statements (unaudited) have been reviewed by independent certified public accountants and, in the opinion of management, they contain all adjustments necessary to present fairly the financial position as of May 2,October 31, 2003, and November 1, 2002, the results of operations for the three and thenine months ended October 31, 2003 and November 1, 2002, and cash flows for the threenine months ended May 2,October 31, 2003 and May 3, 2002.November 1, 2002.
These interim financial statements should be read in conjunction with the 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 31, 2003. The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.
Note 2: Earnings Per Share (EPS) - Basic earnings per share (EPS)("EPS") excludes dilution and is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated based on the weighted average shares of common stock as adjusted for the potential dilutive effect of stock options and convertible notes at the balance sheet date. The dilutive effect of the assumed conversion of the $580.7 million Senior Convertible Notes, issued in October 2001, has been excluded from diluted earnings per share for the three and nine months ended May 2,October 31, 2003 and November 1, 2002 because none of the conditions that would permit conversion had been satisfied during the period. The calculation is detailed below (in millions, except per share data):
Three Months Ended | |||||||
May 2, 2003 | May 3, 2002 | ||||||
Net earnings | $ 421 | $ 346 | |||||
Weighted average shares outstanding | 783 | 777 | |||||
Basic earnings per share | $ 0.54 | $ 0.45 | |||||
Net earnings | $ 421 | $ 346 | |||||
Tax-effected interest expense attributable to 2.5% convertible notes | 3 | 3 | |||||
Net earnings assuming dilution | $ 424 | $ 349 | |||||
Weighted average shares outstanding | 783 | 777 | |||||
Effect of potentially dilutive securities: | |||||||
2.5% convertible notes | 16 | 16 | |||||
Employee stock option plans | 3 | 5 | |||||
Weighted average number of common shares assuming dilution | 802 | 798 | |||||
Diluted Earnings Per Share | $ 0.53 | $ 0.44 | |||||
Three Months Ended | Nine Months Ended | ||||||
October 31, 2003 | November 1, 2002 |
| October 31, 2003 | November 1, 2002 | |||
Net earnings | $ 452 | $ 339 | $ 1,469 | $ 1,152 | |||
Weighted average common shares outstanding | 786 | 781 | 784 | 779 | |||
Basic earnings per share | $ 0.58 | $ 0.44 | $ 1.87 | $ 1.48 | |||
Net earnings | $ 452 | $ 339 | $ 1,469 | $ 1,152 | |||
Tax-effected interest expense attributable to 2.5% convertible notes | 3 | 3 | 8 | 8 | |||
Net earnings assuming dilution | $ 455 | $ 342 | $ 1,477 | $ 1,160 | |||
Weighted average common shares outstanding | 786 | 781 | 784 | 779 | |||
Effect of potentially dilutive securities: | |||||||
2.5% convertible notes | 17 | 16 | 17 | 17 | |||
Employee stock option plans | 5 | 4 | 4 | 4 | |||
Weighted average common shares assuming dilution | 808 | 801 | 805 | 800 | |||
Diluted earnings per share | $ 0.56 | $ 0.43 | $ 1.84 | $ 1.45 | |||
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Note 3: Property - Property is shown net of accumulated depreciation of $2.6$3.0 billion at May 2,October 31, 2003, $2.1$2.4 billion at May 3,November 1, 2002 and $2.5 billion at January 31, 2003.
Note 4: Supplemental Disclosure
Supplemental disclosures of cash flow information (in millions):
Three Months Ended | |||||
May 2, 2003 | May 3, 2002 | ||||
Cash paid for interest (net of amount capitalized) | $ 55 | $ 56 | |||
Cash paid for income taxes | 20 | 7,030 | |||
Non-cash investing and financing activities: | |||||
Common stock issued to ESOP | - | 23 | |||
Fixed assets acquired under capital lease | - | 4 |
Nine Months Ended | |||
October 31, 2003 | November 1, 2002 | ||
Cash paid for interest (net of amount capitalized) | $ 168 | $ 172 | |
Cash paid for income taxes | 726 | 512 | |
Non-cash investing and financing activities: | |||
Common stock issued to ESOP | - | 79 | |
Fixed assets acquired under capital lease | - | 15 |
Note 5: Credit Arrangements - The Company has an $800 million senior credit facility. The facility is split into a $400 million five-year tranche, expiring in August 2006, and a $400 million 364-day tranche, expiring in July 2003,2004, which is renewable annually. The Company intends to renew this facility in July 2003. The facility is used to support the Company's $800 million commercial paper program and for short-term borrowings. Borrowings made are priced 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 includeincluding maintenance of a specific ratio, among others.financial ratio. The Company was in compliance with these covenants at May 2,October 31, 2003. SixteenFifteen banking institutions are participating in the $800 million senior credit facility and as of May 2,October 31, 2003, there were no outstanding loans under the facility.
The
In July 2003, the Company also hasterminated a $100 million revolving credit and security agreement with a financial institution, expiringwhich was scheduled to expire in November 2003 which is renewable for successive periods not to exceed 364 days each. Interest rates under this agreement are determined. The remaining outstanding balance of $50 million was repaid at the time of borrowing based on market conditions in accordance with the terms of the agreement. The Company had $50 million outstanding under this agreement at May 2, 2003, and $163.9 million in accounts receivable pledged as collateral.termination.
Note 6: Comprehensive Income - Total comprehensive income, comprised of net earnings and unrealized holding gains (losses) on available-for-sale securities, was $420.6$451.9 and $345.7$339.1 million compared to net earnings of $420.6$451.7 and $345.8$339.2 million for the three months ended May 2,October 31, 2003 and May 3,November 1, 2002, respectively. Total comprehensive income was $1,468.7 and $1,151.9 million compared to net earnings of $1,469.0 and $1,152.1 million for the nine months ended October 31, 2003 and November 1, 2002, respectively.
Note 7: Accounting for Stock-Based Compensation - The Company has three stock incentive plans which are described more fully in Note 9 to the consolidated financial statements presented in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003. Prior to fiscal 2003, the Company accounted for these plans under the recognition and measurement provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Therefore, no stock-based employee compensation is reflected in fiscal 2002 net income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant.
Effective February 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
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prospectively for all employee awards granted, modified or settled after January 31, 2003. Therefore, in accordance with the requirements of SFAS No. 148, "Accounting for Stock-Based Compensation- TransitionCompensation-Transition and Disclosure," the cost related to stock-based employee compensation included in the determination of net income for the three and nine months ended May 2,October 31, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. During the three and nine months ended May 2,October 31, 2003, the Company recognized compensation expense totaling $5$13.0 million and $27.9 million, respectively, relating to stock options and awards granted in that period, which generally vest over three years.
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The fair value of each option grant is estimated using the Black-Scholes option pricing model. The assumptions used to determine the fair value of options granted during the nine months ended October 31, 2003 have not changed significantly from those disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2003. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.
(In millions, except per share data) | (In millions, except per share data) | (In millions, except per share data) | |||||||||
Three Months Ended | Three Months Ended | Nine Months Ended | |||||||||
May 2, 2003 | May 3, 2002 | October 31, 2003 | November 1, 2002 | October 31, 2003 | November 1, 2002 | ||||||
Net income, as reported | $ 421 | $ 346 | $ 452 | $ 339 | $ 1,469 | $ 1,152 | |||||
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards net of related tax effects not reported in net income | (16) | (21) | (15) | (21) | (46) | (63) | |||||
Pro forma net income | 405 | 325 | 437 | 318 | 1,423 | 1,089 | |||||
Earnings per share: | |||||||||||
Basic - as reported | $ 0.54 | $ 0.45 | $ 0.58 | $ 0.44 | $ 1.87 | $ 1.48 | |||||
Basic - pro forma | $ 0.52 | $ 0.42 | $ 0.56 | $ 0.41 | $ 1.81 | $ 1.40 | |||||
Diluted - as reported | $ 0.53 | $ 0.44 | $ 0.56 | $ 0.43 | $ 1.84 | $ 1.45 | |||||
Diluted - pro forma | $ 0.51 | $ 0.41 | $ 0.54 | $ 0.40 | $ 1.78 | $ 1.37 |
Note
8:8: Recent Accounting Pronouncements - In November 2002, the Emerging Issues Task Force ("EITF") issued EITF 02-16,"Accounting
"Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor." EITF 02-16 provides guidance
for classification in the reseller's income statement for various circumstances under which cash consideration is received from a vendor by a
reseller. In addition, the issue also provides guidance concerning how cash consideration relating to rebates or refunds should be recognized
and measured. This standard became effective for the Company for all vendor reimbursement agreements entered into or modified after
December 31, 2002.
The Company has historically treated volume related discounts or rebates as a reduction of inventory cost and reimbursements of operating
expenses received from vendors as a reduction of those specific expenses. The Company's historical accounting treatment for these vendor
provided funds is consistent with EITF 02-16 with the exception of certain cooperative advertisingallowances.allowances and in-store service funds
provided by third parties for which the costs are ultimately funded by vendors. The Company previously treatedthesethe cooperative advertising
allowances and in-store service funds as a reduction of theoverall advertisingrelated expense. Under EITF 02-16, cooperative
-9-advertising allowances and
in-store service funds should be treated as a reduction of inventory cost unless they represent a reimbursement of specific, incremental, and
identifiable costs incurred by the customer to sell the vendor's product.
-9-
The Company reviewed its cooperative advertising agreements in order to determine if any of these funds would meet the specific, incremental
and identifiable criteria in EITF 02-16 and would therefore qualify for direct offset against the related expense. These agreements do not
include proof of performance or specific substantiation requirements. The agreements with the Company's vendors provide funds for general
Company advertising to drive customer traffic, which in turn, increases sales of the vendors' products. Based on this analysis of our vendor
agreements and the guidance set forth in EITF 02-16, the Company believes that treating cooperative advertising funds as a reduction in the
cost of inventory and recognizing these costs as a reduction of cost of sales when the inventory is sold complies with EITF 02-16.
The Company reviewed its third party in-store service agreements in order to determine if any of these funds would meet the specific,
incremental and identifiable criteria in EITF 02-16 and would therefore qualify for direct offset against the related expense. These agreements
with the Company's vendors provide funds for third parties to provide general merchandising functions within the Company's retail stores.
In analyzing third party in-store service funds, the Company determined that third party vendors providing these in-store services were
servicing multiple areas and products within the Company's retail stores. Neither we, nor the third party service providers have the ability
to specifically identify time spent on a merchandise vendor's products in multiple locations and match them to specific funds from merchandise
vendors. Based on this analysis and the guidance set forth in EITF 02-16, the Company believes that treating third party in-store service funds
as a reduction in the cost of inventory and recognizing these costs as a reduction of cost of sales when the inventory is sold complies with
EITF 02-16.
The Company does not expect thisissueaccounting change to have a material impact on the fiscal 2003 financial statements since substantially all
of the cooperative advertising allowance agreements and in-store service reimbursement agreements for fiscal 2003 were entered into prior
to December 31, 2002.The Company has assessed the historic volume of cooperative advertising reimbursements that have been received in order to determine which of these reimbursements would meet the specific, identifiable and incremental criteria outlined under this issue and accordingly, qualify as a direct offset to advertising expense. Based on the Company's analysis of the impact on net income, and the administrative cost to identify and track reimbursements between those qualifying for expense offset and those requiring inventory cost reduction, the Company has elected to treat all cooperative advertising funds received from vendors as a reduction in the cost of inventory and recognize them as a reduction to cost of goods sold when the inventory is sold.The Company estimates that this one time change in accounting will reduce fiscal 2004 EPS by approximately
$0.12
$0.12 per share and fiscal 2005 EPS by approximately $0.01 per share. The $0.01 per share impact in fiscal 2005 represents the estimated
growth in cooperative advertising allowances and in-store service funds from fiscal 2004 to fiscal 2005. This reflects the cooperative
advertising allowances and in-store service funds capitalized into inventory in 2005 less the $0.12 impact from 2004 that will be recognized
in 2005 as the inventory is sold. There will be no impact on the Company's cash flows or the expected amount of funds to be received from
vendors. The earnings impact of EITF 02-16 recognized in fiscal 2004the fiscal year of the initial implementation of EITF 02-16,will not be recurring in subsequent years. Earnings in these
subsequent years would be impacted only by future net changes in cooperative advertisingprograms.programs and in-store service funds.
InAprilJanuary 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of
Variable Interest Entities, an interpretation of ARB 51." FIN 46 provides guidance on the identification and consolidation of variable interest
entities, or VIEs, which are entities for which control is achieved through means other than through voting rights. The provisions of FIN 46
are required to be applied to VIEs created or in which the Company obtains an interest after January 31, 2003. For VIEs in which the
Company holds a variable interest that it acquired before February 1, 2003, the provisions of FIN 46 are effective for the fourth quarter of
2003. Due to the ongoing deliberations and clarifications by the FASB, we are still assessing the provisions of FIN 46. However, the
Company does not expect the adoption of FIN 46 in the fourth quarter of 2003 to have a material impact on its financial position, results of
operations or cash flows.
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In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS
No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and
for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003, except in
certain instances stated within SFAS No. 149 and for hedging relationships designated after June 30, 2003.Management does not believe theThe initial adoption of this standardwill
did not have a material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as
equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial instruments of non public entities.Management does not believe theThe initial adoption of this
standardwilldid not have a material impact on the Company's financial statements.
Note 9: Subsequent Event- On November 20, 2003, the Company entered into a definitive agreement to sell 26 commodity-focused locations
operating under The Contractor Yard banner (the "Contractor Yards"). The sale is expected to close in the fourth quarter of fiscal 2003.
Total assets included in the balance sheets relating to the Contractor Yards at October 31, 2003, November 1, 2002 and January 31, 2003
were approximately $122 million, $103 million and $98 million, respectively. Total liabilities included in the balance sheets relating to the
Contractor Yards at October 31, 2003, November 1, 2002 and January 31, 2003 were approximately $25 million, $23 million and $21
million, respectively. The gain or loss associated with the Contractor Yard transaction is not expected to exceed $0.01 in diluted earnings
per share. The Company expects to account for this disposition as a discontinued operation in the fourth quarter of 2003.
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INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of Lowe's Companies, Inc.
We have reviewed the accompanying consolidated balance sheets of Lowe's Companies, Inc. and subsidiaries (the "Company") as of
October 31, 2003 and November 1, 2002, and the related consolidated statements of current and retained earnings for the three-month and
nine-month periods then ended, and cash flows for the nine-month periods ended October 31, 2003 and November 1, 2002. These interim
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally
accepted in the United States of America, 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 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 auditing standards generally accepted in the United States of America, the consolidated balance
sheet of Lowe's Companies, Inc. and subsidiaries as of January 31, 2003, and the related consolidated statements of earnings, shareholders'
equity, and cash flows for the year then ended (not presented herein); and in our report dated February 19, 2003, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as
of January 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
As discussed in Note 7 to the consolidated interim financial statements, the Company has changed its method of accounting for stock-based
compensation effective February 1, 2003.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina November 24, 2003
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion summarizes the significant factors affecting the Company's consolidated operating results, liquidity and capital resources during
thequarterthree and nine months endedMay 2,October 31, 2003. This discussion should be read in conjunction with the financial statements and financial
statement footnotes that are included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31,2003.2003.
FORWARD-LOOKING STATEMENTS
The Company's quarterly report on Form 10-Q to be filed with the Securities and Exchange Commission talks about the future, particularly in
the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations." While the Company believes these
expectations are reasonable, the Company cannot guarantee them and this should be considered when thinking about statements made that are
not historical facts. Some of the things that could cause actual results to differ substantially from expectations are:
(1) The Company's sales are dependent upon the general geopolitical environment and economic health of the country, variations in the number
of new housing starts and existing home sales, the level of repairs, remodeling and additions to existing homes, commercial building activity, and
the availability and cost of financing. An economic downturn affecting consumer confidence in making housing and home improvement
expenditures could affect sales because a portion of the Company's inventory is purchased for discretionary projects, which can be delayed.
(2) The Company's expansion strategy may be impacted by environmental regulations, local zoning issues and delays, availability and
development of land, and more stringent land use regulations than traditionally experienced as well as the availability of sufficient labor to facilitate
growth.
(3) Many of the Company's products are commodities whose prices fluctuate within an economic cycle, a condition especially true of lumber
and plywood.
(4) The Company's business is highly competitive, and as it expands into new markets the Company may face new forms of competition, which
do not exist in some of the markets traditionally served.
(5) The ability to continue the everyday competitive pricing strategy and provide the products that customers want depends on the Company's
vendors providing a reliable supply of inventory at competitive prices.
(6) On a short-term basis, weather may affect sales of product groups like nursery, lumber, building materials and seasonal products.
(7) The risk that the Company does not close The Contractor Yard transaction.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis of the results of operations and financial condition are based on the Company's financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets, liabilities, revenues 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, the results 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.
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The Company's significant accounting polices are described in Note 1 to the consolidated financial statements presented in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003. Management believes that the following accounting policies affect the more significant estimates used in preparing the consolidated financial statements.
Merchandise Inventory
The Company records an inventory reserve for the loss associated with selling discontinued inventories below cost. This reserve is based on management's current knowledge with respect to inventory levels, sales trends and historical experience relating to the liquidation of discontinued inventory. 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 primarily based on actual shrinkage from previous physical inventories. Changes in actual shrinkage from completed physical inventories could result in revisions to previously estimated shrinkage accruals. Management believes it has sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves.
Vendor Funds
The Company receives funds from vendors in the normal course of business for a variety of reasons including purchase volume rebates,
cooperative advertising allowances, and third party in-store service related costs. Volume related rebates are recorded based on estimated
purchase volumes and historical experience and are treated as a reduction of inventory costs at the time of purchase. Vendor funds receivedfor third party in-store service related costs and other vendor funds received
as a reimbursement of specific, incremental and identifiable costs are recognized as a reduction of the related expense. Cooperative advertising
allowances and in-store service reimbursements provided by vendors have historically been used to offset the Company'soverall advertisingrelated expense.
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Under
However, under the guidance set forth in Emerging Issues Task Force (EITF) 02-16, "Accounting by a Customer (Including a Reseller) for
Certain Consideration Received From a Vendor," cooperative advertising allowances and in-store service funds should be treated as a reduction
of inventory cost unless they represent a reimbursement of specific, incremental, and identifiable costs incurred by the customer to sell the
vendor's product.Under
The Company reviewed its cooperative advertising agreements in order to determine if any of these funds would meet thetransition rulesspecific, incremental
and identifiable criteria in EITF 02-16 and would therefore qualify for direct offset against the related expense. These agreements do not include
proof of performance or specific substantiation requirements. The agreements with the Company's vendors provide funds for general Company
advertising to drive customer traffic, which in turn, increases sales of the vendors' products. Based on this analysis of our vendor agreements
and the guidance set forth in EITF 02-16, the Company believes that treating cooperative advertising funds as a reduction in the cost of inventory
and recognizing these costs as a reduction of cost of sales when the inventory is sold complies with EITF 02-16.
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The Company reviewed its third party in-store service agreements in order to determine if any of these funds would meet the specific,
incremental and identifiable criteria in EITF 02-16 and would therefore qualify for direct offset against the related expense. These agreements
with the Company's vendors provide funds for third parties to provide general merchandising functions within the Company's retail stores. In
analyzing third party in-store service funds, the Company determined that third party vendors providing these in-store services were servicing
multiple areas and products within the Company's retail stores. Neither we, nor the third party service providers have the ability to specifically
identify time spent on a merchandise vendor's products in multiple locations and match them to specific funds from merchandise vendors. Based
on thistreatmentanalysis and the guidance set forth in EITF 02-16, the Company believes that treating third party in-store service funds as a reduction in
the cost of inventory and recognizing these costs as a reduction of cost of sales when the inventory isrequired for all agreements entered into or modified after December 31, 2002.sold complies with EITF 02-16.
The Company does not expect thisissueaccounting change to have a material impact on the fiscal 2003 financial statements since substantially all of
the cooperative advertising allowance agreements and in-store service reimbursement agreements for fiscal 2003 were entered into prior to
December 31, 2002.The Company has assessed the historic volume of cooperative advertising reimbursements that have been received in order to determine which of these reimbursements would meet the specific, identifiable and incremental criteria outlined under this issue and accordingly, qualify as a direct offset to advertising expense. Based on the Company's analysis of the impact on net income, and the administrative cost to identify and track reimbursements between those qualifying for expense offset and those requiring inventory cost reduction, the Company has elected to treat all cooperative advertising funds received from vendors as a reduction in the cost of inventory and recognize them as a reduction to cost of goods sold when the inventory is sold.
The Company estimates that this one time change in accounting will reduce fiscal 2004 EPS by approximately $0.12 per share and fiscal 2005 EPS by approximately $0.01 per share. The $0.01 per share impact in fiscal 2005 represents the estimated growth in cooperative advertising allowances from fiscal 2004 to fiscal 2005. This reflects the cooperative advertising allowances capitalized into inventory in 2005 less the $0.12 impact from 2004 that will be recognized in 2005 as the inventory is sold. There will be no impact on the Company's cash flows or the expected amount of funds to be received from vendors. The earnings impact recognized in fiscal 2004, the fiscal year of the initial implementation of EITF 02-16, will not be recurring in subsequent years. Earnings in these subsequent years would be impacted only by future net changes in cooperative advertising programs.
Self-Insurance
The Company is self-insured for certain losses relating to worker's compensation, automobile, general and product liability claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management's estimates of the aggregate liability for uninsured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Although management believes it has the ability to adequately record estimated losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities.
Stock-Based Compensation
The Company has three stock incentive plans which are described more fully in Note 9 to the consolidated financial statements presented in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003. Prior to fiscal 2003, the Company accounted for these plans under the recognition and measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation is reflected in 2002 net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective February 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," prospectively for all employee awards granted, modified or settled after January 31, 2003. Therefore, in accordance with the requirements of SFAS No. 148, "Accounting for Stock-Based Compensation- TransitionCompensation-Transition and Disclosure," the cost related to stock-based employee compensation included in the determination of net income for the three and nine months ended May 2,October 31, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. See Note 7 to the Consolidated Financial Statements in this Form 10-Q for further description and disclosures in accordance with the requirements of SFAS No. 148.
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OPERATIONS
For thefirstthird quarter of fiscal 2003, sales increased11.4%23.5% to$7.2$7.9 billion, comparable store sales for the quarter increased0.1%12.4%, and net
earnings rose21.7%33.3% to$421$451.7 million compared to last year'sfirstthird quarter results. Diluted earnings per share were$0.53$0.56 compared to$0.44$0.43
for the comparable quarter of last year.For the nine months ended October 31, 2003, sales increased 17.4% to $23.9 billion, comparable
store sales increased 6.5%, and net earnings rose 27.5% to $1.5 billion compared to the first nine months of fiscal 2002. Diluted earnings per
share increased 26.9% to $1.84 per share over the same period a year ago.
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The sales increase during the third quarter and firstquarternine months of 2003 was primarily attributable to the addition of11.212.9 million square feet of
retail selling space relating to new and relocated stores since last year'sfirst quarter. The Company's total sales andthird quarter, as well as the increase in comparable storesales were lower than expectedsales. Sales in
the third quarter benefited from favorable weather that allowed the continuation of outdoor projects through the late summer and into the fall. In
addition, increases in the wholesale prices of lumber and plywood during thefirstquarterprimarilyhad a positive impact on sales in the quarter. Consumer
disposable income increased due toadverse weather conditions experienced throughout a large portion oflower Federal individual tax withholding rates and theCompany's marketsFederal tax rebates distributed during July and August.
Further, purchases to prepare for and to repair damages caused by Hurricane Isabel in thelate wintermid-Atlantic region contributed to increased third
quarter sales. Both customer traffic andearly spring seasons. In addition, deflationaverage ticket improved significantly inlumber and building materials prices resulted in an unfavorable impact on comparable store sales of approximately 50 basis points.the third quarter.
Several product categories generated above average performance during thefirstthird quarter, includingrough plumbing,lumber, building materials,hardware, nursery,seasonal living,paint, windows and walls, cabinets, flooring
outdoor power equipment and home organization.AppliancesMillwork, cabinets and appliances performed at approximately the overall corporate average.
Gross margin was31.04%31.1% of sales for the quarter endedMay 2,October 31, 2003 compared to29.71%30.6% for last year's comparable quarter. Gross margin
for the nine months ended October 31, 2003 was 30.7% versus 29.9% for the first nine months of 2002. The increase in the margin rate for the
third quarter is primarily due to better margin rates driven by lower inventory costs and lower inventory shrinkage, partially offset by negative
product mix. The increase in the margin rate for the firstquarternine months of 2003 is primarily due toa reduction in inventory costs, product mix improvements andlower inventoryshrinkage.shrinkage and better margin
rates driven by lower inventory costs.
Selling, general and administrative expenses(SG&A)("SG&A") were18.22%18.5% of sales versus17.64%18.6% in last year'sfirstthird quarter. SG&A increased by15.2%
23.0% compared to the11.4%23.5% increase in sales for the quarter. Thede-leverageleveraging during thefirstthird quarter was primarily due to lower payroll and
occupancy costs as a percentage of sales for fiscal 2003 as compared to fiscal 2002, partially offset by increasedstore salaries resulting from planned staffing in anticipation of a normal spring season. In addition, higher energy and snow removalbonus estimates, insurance
costs and compensation expense relating to stock options recognized in the currentyearquarter. During the first nine months ofapproximately $5 million also contributed2003, SG&A was
17.6% of sales, versus 17.5% for the same period in the prior year. This de-leveraging was primarily caused by compensation expense relating
tothe de-leverage in SG&Astock options recognized in the firstquarternine months offiscal 2003.2003 of approximately $28 million, which resulted from the adoption of the fair value
recognition provisions of SFAS No. 123 prospectively for all employee awards granted or modified after January 31, 2003, as previously
discussed in Note 7 to the Consolidated Financial Statements.
Store opening costs were$19$37 million for the quarter endedMay 2,October 31, 2003 compared to$37$28 million last year. This represents costs
associated with the opening of2138 stores during the current year'sfirstthird quarter(21(36 new and02 relocated) compared to4618 new stores for the
comparable period lastyear (42 new and 4 relocated).year. Charges inthisthe third quarter of 2003 and 2002 for future and prior openings were $5 million and $7 million,
respectively. Store opening costs for the nine months ended October 31, 2003 were $82 million, compared to $88 million last year. These
costs were associated with the opening of 83 stores duringboththe firstquarternine months of 2003 (79 new and2002.4 relocated), compared to 86 stores
during the first nine months of 2002 (81 new and 5 relocated). The Company's 2003 expansion plans are discussed under "Liquidity and
Capital Resources" below.
Depreciation was$180$193 million and $557 million for the quarter and nine months endedMay 2, 2003.October 31, 2003, respectively. This represents an
increase of24%21.4% and 21.6% over comparable periods lastyear's first quarter.year. The increase is primarily due to the addition of buildings, fixtures, displays
and computer equipment relating to the Company's ongoing expansion program, the purchase of all the Company'sshort-termfinancing leases and the
increase in the percentage of owned locations since last year'sfirstthird quarter. At the end of the current year'sfirstthird quarter, the Company owned76%
78% of total locations compared to73%74% in the prior year'sfirstthird quarter.
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Interest expenseincreased from $47 million to $48was $42 million for the quarter endedMay 2, 2003.October 31, 2003, compared to $44 million last year. For the nine months ended
October 31, 2003 and November 1, 2002, interest expense totaled $136 million and $137 million, respectively.
The Company's effective income tax rate was 37.8% for the quarter and nine months endedMay 2,October 31, 2003, respectively, compared to
37.5% and 37.4% for last year's comparableperiod.periods, respectively. The higher rate during 2003 is primarily related to expansion into states with
higher income tax rates.
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LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's significant contractual obligations as of May 2,October 31, 2003.
Contractual obligations (In millions) | Payments Due by Period | |||||||
Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||
Short-term debt | $ 50 | $ 50 | $ - | $ - | $ - | |||
Long-term debt (net of discount) | 3,781 | 8 | 664 | 67 | 3,042 | |||
Capital lease obligations | 811 | 58 | 118 | 117 | 518 | |||
Operating leases | 3,195 | 210 | 413 | 406 | 2,166 | |||
Total contractual cash obligations | $ 7,837 | $ 326 | $ 1,195 | $ 590 | $ 5,726 |
Contractual Obligations | Payments Due by Period | ||||
(In millions) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years |
Long-term debt (net of discount) | $ 3,775 | $ 55 | $ 616 | $ 68 | $ 3,036 |
Capital lease obligations | 785 | 61 | 119 | 118 | 487 |
Operating leases | 3,296 | 215 | 424 | 418 | 2,239 |
Total contractual cash obligations | $ 7,856 | $ 331 | $ 1,159 | $ 604 | $ 5,762 |
The primary sources of liquidity are cash flows from operating activities and various lines of credit currently available to the Company. Net cash
provided by operating activities was$1.0$2.0 billion for thethreenine months endedMay 2,October 31, 2003 and$1.2 billion for the three months ended May 3,November 1, 2002. The primarysourcessource of
cash provided by operating activities in the current yearwere increasedwas netearnings and an increase in accounts payable.earnings. Working capital atMay 2,October 31, 2003 was$2.1$2.4 billion compared to$1.9
$2.2 billion atMay 3,November 1, 2002 and $2.0 billion at January 31, 2003.
The primary component of net cash used in investing activities continues to be new store facilities in connection with the Company's expansion
plan. Cash acquisitions of fixed assets were$392 million$1.7 billion and$501 million$1.4 billion for thethreenine months endedMay 2,October 31, 2003 andMay 3,November 1, 2002,
respectively. AtMay 2,October 31, 2003, the Company operated875932 stores in 45 states with97.2103.7 million square feet of retail selling space, a12.9%14.2%
increase over the selling space as ofMay 3,November 1, 2002.
Cash flowsprovided byused in financing activities were$1$23 million and $61 million for thethreenine months endedMay 2,October 31, 2003 andMay 3, 2002.November 1, 2002,
respectively. Cashprovided byused in financing activities duringboththe first nine months of the current and prioryear's first quartersyear primarily resulted fromproceeds generated by stock option exercises offset bycash dividend
payments, short-term debt repayments, and scheduled long-term debtrepayments.repayments offset by proceeds generated from stock option exercises.
The ratio of long-term debt to equity plus long-term debt was30%27.2%,35%32.0% and31%31.0% as ofMay 2,October 31, 2003,May 3,November 1, 2002 and
January 31, 2003, respectively.
The Company has an $800 million senior credit facility. The facility is split into a $400 million five-year tranche, expiring in August 2006 and a$400
$400 million 364-day tranche, expiring in July2003,2004, which is renewable annually.The Company plans to renew this facility in July 2003.The facility is used to support the Company's $800 million
commercial paper program and for short-term borrowings. Any loans made are priced 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,
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which includeincluding maintenance of a
specific financialratio, among others.ratio. The Company was in compliance with these covenants atMay 2,October 31, 2003.SixteenFifteen banking institutions are participating
in the $800 million senior credit facility and, as ofMay 2,October 31, 2003, there were no outstanding loans under the facility.
The
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In July 2003, the Companyalso hasterminated a $100 million revolving credit and security agreement with a financial institution,expiringwhich was scheduled to
expire in November2003, which is renewable for successive periods not to exceed 364 days each. Interest rates under this agreement are determined2003. The remaining outstanding balance of $50 million was repaid at the time ofborrowing based on market conditions in accordance with the terms of the agreement. The Company had $50 million outstanding at May 2, 2003 under this agreement, and $163.9 million in accounts receivable pledged as collateral.termination.
The Company's 2003 capital budget is $2.9 billion, inclusive of approximately $181 million of operating or capital leases. Approximately 80% of
this planned commitment is for store expansion and new distribution centers. Expansion plans for 2003 consist ofapproximately130 stores, includingapproximately5
relocations of older stores. This planned expansion is expected to increase sales floor square footage by approximately 15%- 16%. Approximately1%
18% of the 2003 projects will bebuild-to-suit leases, 19% will beground leased properties and80%82% will be owned. AtMay 2,October 31, 2003, the Company operatednine9 regional
distribution centers.DuringIn February 2003, the Companyexpects to beginbegan construction on an additional regional distribution center located in Poinciana,
Florida, which is expected to be operational in the third quarter of 2004. The Company plans to begin construction on an additional regional
distribution center in Plainfield, Connecticut in fiscal 2004. The Company also expects to openapproximately3to 5additional flatbed network facilities in 2003
for the handling of lumber, building materials and long-length items.
The Company believes that funds from operations, leases and existing short-term lines of credit will be adequate to finance the 2003 expansion
plan and other operating requirements. However, general economic downturns, fluctuations in the prices of products, unanticipated impact
arising from competition and adverse weather conditions could have an effect on funds generated from operations and our expansion plans.
In addition, the availability of funds through the issuance of commercial paper and new debt could be adversely affected due to a debt rating
downgrade or a deterioration of certain financial ratios. There are no provisions in any agreements that would require early cash settlement of
existing long-term debt or leases as a result of a downgrade in the Company's debt rating or a decrease in the Company's stock price. Holders
of the Company's $580.7 million Senior Convertible notes may convert their notes into the Company's common stock during any period that the
credit rating assigned to the notes is Baa3 or lower by Moody's, BBB or lower by Standard & Poor's or BBB or lower by Fitch.
Current Debt Ratings | S&P | Moody's | Fitch | |||
Commercial paper | A1 | P2 | F1 | |||
Senior debt | A | A3 | A | |||
Outlook | Positive | Stable |
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RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the EITF issued EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received
from a Vendor." EITF 02-16 provides guidance for classification in the reseller's income statement for various circumstances under which
cash consideration is received from a vendor by a reseller. In addition, the issue also provides guidance concerning how cash consideration
relating to rebates or refunds should be recognized and measured. This standard became effective for the Company for all vendor
reimbursement agreements entered into or modified after December 31, 2002. See Note 8 to the Consolidated Financial Statements for
further description of the estimated impact of EITF 02-16.
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In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB 51." FIN 46 provides
guidance on the identification and consolidation of variable interest entities, or VIEs, which are entities for which control is achieved through
means other than through voting rights. The provisions of FIN 46 are required to be applied to VIEs created or in which the Company obtains
an interest after January 31, 2003. For VIEs in which the Company holds a variable interest that it acquired before February 1, 2003, the
provisions of FIN 46 are effective for the fourth quarter of 2003. Due to the ongoing deliberations and clarifications by the FASB, we are still
assessing the provisions of FIN 46. However, the Company does not expect the adoption of FIN 46 in the fourth quarter of 2003 to have a
material impact on its financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS
No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and
for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003, except in
certain instances stated within SFAS No. 149 and for hedging relationships designated after June 30, 2003.Management does not believe theThe initial adoption of this standardwill
did not have a material impact on the Company's financialstatements.statements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 improves the accounting for certain financial instruments that,,under previous guidance, issuers could account for as
equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial instruments of non public entities.Management does not believe theThe initial adoption of this standardwill
did not have a material impact on the Company's financialstatements.statements
MARKET RISK-19-
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
As discussed in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003, the Company's major market risk exposure is the potential loss arising from the impact of changing interest rates on long-term debt. The Company's policy is to monitor the interest rate risks associated with this debt, and the Company believes any significant risks could be offset by variable rate instruments available through the Company's lines of credit. The Company's market risk has not changed materially since January 31, 2003. Please see the tables titled "Long-term Debt Maturities by Fiscal Year" on page 23 of the Annual Report on Form 10-K for the fiscal year ended January 31, 2003.
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FORWARD-LOOKING STATEMENTS
Our quarterly report on Form 10-Q to be filed with the Securities and Exchange Commission talks about our future, particularly in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations." While we believe our expectations are reasonable, we can't guarantee them and you should consider this when thinking about statements we make that aren't historical facts. Some of the things that could cause our actual results to differ substantially from our expectations are:
(1) Our sales are dependent upon the general geopolitical environment and economic health of the country, variations in the number of new housing starts and existing home sales, the level of repairs, remodeling and additions to existing homes, commercial building activity, and the availability and cost of financing. An economic downturn affecting consumer confidence in making housing and home improvement expenditures could affect sales because a portion of our inventory is purchased for discretionary projects, which can be delayed.
(2) Our expansion strategy may be impacted by environmental regulations, local zoning issues and delays, availability and development of land, and more stringent land use regulations than we have traditionally experienced as well as the availability of sufficient labor to facilitate our growth.
(3) Many of our products are commodities whose prices fluctuate within an economic cycle, a condition especially true of lumber and plywood.
(4) Our business is highly competitive, and as we expand into new markets we may face new forms of competition, which do not exist in some of the markets we have traditionally served.
(5) The ability to continue our everyday competitive pricing strategy and provide the products that customers want depends on our vendors providing a reliable supply of inventory at competitive prices.
(6) On a short-term basis, weather may affect sales of product groups like nursery, lumber, and building materials.
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INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of Lowe's Companies, Inc.:
We have reviewed the accompanying consolidated balance sheets of Lowe's Companies, Inc. and subsidiaries (the "Company") as of May 2, 2003 and May 3, 2002, and the related consolidated statements of current and retained earnings, and of cash flows for the three-month periods ended May 2, 2003 and May 3, 2002. These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, 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 review, we are not aware of any material modifications that should be made to such consolidated 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 auditing standards generally accepted in the United States of America, the consolidated balance sheet of Lowe's Companies, Inc. and subsidiaries as of January 31, 2003, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 19, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for stock based compensation.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
May 29, 2003
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Item 4 - Controls and Procedures
The Company has designed and maintains disclosure controls and procedures to ensure that information required to be disclosed in its reports
filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Commission's rules and forms. These controls and procedures are also designed to ensure that such information is communicated to the
Company's management, including its Chief Executive and Chief Financial Officers as appropriate, to allow them to make timely decisions
about required disclosures.
The Company's management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness
of disclosure controls and procedures pursuant to Exchange Act Rule13a-14.13a-15(e). Based on that evaluation, which was conductedwithin 90 daysas of thefilingend
of the period covered by thisquarterlyreport on Form 10-Q, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls
and procedures areeffective.effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries)
required to be included in its periodic SEC filings.
Therehavehas been nosignificant changeschange in the Company's internalcontrolscontrol over financial reporting during the quarter ended October 31, 2003 that has
materially affected, orin other factors that could significantlyis reasonably likely to materially affect, internalcontrols subsequent to the date of the Chief Executive Officer's and Chief Financial Officer's most recent evaluation.control over financial reporting.
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Part II - OTHER INFORMATION
Item 6 (a) - Exhibits
Exhibit99.13(ii) - Bylaws of Lowe's Companies, Inc., as amended and restated September 11, 2003Exhibit 31.1 - Certification Pursuant Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2 - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of2002.2002Exhibit99.232.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of2002.2002Refer to the Exhibit Index on page 22.
Item 6 (b) - Reports on Form 8-K
There were no reports filedCurrent Report on Form 8-Kbyfiled August 18, 2003, furnishing under Item 12 thereof theregistrant duringNews Release announcing the financial results for the Company's second quarter endedMay 2,August 1, 2003.
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SIGNATURE
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. | ||
Date
| /s/Kenneth W. Black, Jr. Kenneth W. Black, Jr. Senior Vice President and Chief Accounting Officer |
CERTIFICATIONS
I, Robert L. Tillman, Chairman of the Board and Chief Executive Officer of Lowe's Companies, Inc., certify that:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
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c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
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I, Robert F. Hull, Jr., Senior Vice President and Chief Financial Officer of Lowe's Companies, Inc., certify that:
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a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
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Exhibit IndexEXHIBIT INDEX
Exhibit No. | Description | |
Bylaws of Lowe's Companies, Inc., as amended and restated September 11, 2003 | ||
31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 | |
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section | ||
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