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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1995
OR
[ ] 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
LOWE'S COMPANIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0578072
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
PO BOX 1111, NORTH WILKESBORO, NC 28656
(Address of principal executive offices)
(Zip Code)
(910) 651-4000
(Registrant's telephone number, including area code)
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 .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 30, 1995
Common Stock, $.50 par value 160,807,046
20
TOTAL PAGES
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LOWE'S COMPANIES, INC.
- INDEX -
PART I - Financial Information: Page No.
Consolidated Balance Sheets - October 31, 1995
and January 31, 1995. 3
Consolidated Statements of Current and
Retained Earnings - three months and nine months
ended October 31, 1995 and 1994. 4
Consolidated Statements of Cash Flows - nine
months ended October 31, 1995 and 1994. 5
Notes to Consolidated Financial Statements. 6-8
Management's Discussion and Analysis of Results
of Operations and Financial Condition. 9-10
Independent Accountants' Report. 11
PART II - Other Information 12
Item 6 (a) - Exhibits.
Item 6 (b) - Reports on Form 8-K.
EXHIBIT INDEX 13
Exhibit 10 Release and Separation Agreement dated
November 9, 1995, between the Company
and Harry B. Underwood II 14-19
Exhibit 11 Computation of per share earnings 20
Consolidated Balance Sheets
Lowe's Companies, Inc. and Subsidiary Companies
Dollars in thousands
October 31, January 31,
1995 1995
Assets
Current assets:
Cash and cash equivalents $47,179 $150,319
Short-term investments 95,906 118,155
Accounts receivable - net 144,317 109,214
Merchandise inventory 1,364,544 1,132,282
Other assets 53,556 47,198
____________ ____________
Total current assets 1,705,502 1,557,168
Property, less accumulated depreciation 1,723,434 1,397,713
Long-term investments 42,641 83,459
Other assets 52,021 67,652
____________ ____________
Total assets $3,523,598 $3,105,992
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt $13,636 $26,913
Short-term notes payable 91,853 1,903
Accounts payable 713,945 675,436
Employee retirement plans 38,779 43,950
Accrued salaries and wages 51,808 63,356
Other current liabilities 172,174 134,334
____________ ____________
Total current liabilities 1,082,195 945,892
Long-term debt, excluding current maturities 748,886 681,184
Deferred income taxes 65,620 49,211
Accrued store restructuring costs 151 9,815
____________ ____________
Total liabilities 1,896,852 1,686,102
____________ ____________
Shareholders' equity
Common stock - $.50 par value;
Issued and Outstanding
October 31, 199160807046
January 31, 199159527389 80,389 79,764
Capital in excess of par 593,571 554,838
Retained earnings 958,304 792,891
Unearned compensation-restricted stock awards (4,757) (5,949)
Unrealized loss on available-for-sale securities,
net of income taxes of $481 at October 31, 1995
and $886 at January 31, 1995 (761) (1,654)
Total shareholders' equity 1,626,746 1,419,890
____________ ____________
Total liabilities and
shareholders' equity $3,523,598 $3,105,992
See accompanying notes to consolidated financial statements.
Consolidated Statements of Current and Retained Earnings
Lowe's Companies, Inc. and Subsidiary Companies
Dollars In Thousands, Except Per Share Data
Quarter Ended Nine Months Ended
October 31, 1995 October 31, 1994 October 31,1995 October 31, 1994
Current Earnings Amount Percent Amount Percent Amount Percent Amount Percent
Net sales $1,765,992 100.00 $1,579,005 100.00 $5,378,740 100.00 $4,623,032 100.00
Cost of sales 1,337,049 75.71 1,197,859 75.86 4,034,115 75.00 3,501,618 75.74
Gross margin 428,943 24.29 381,146 24.14 1,344,625 25.00 1,121,414 24.26
Expenses:
Selling, general
and administrative 284,828 16.13 239,190 15.15 840,969 15.63 685,196 14.82
Store opening costs 16,322 0.92 10,628 0.67 36,351 0.68 25,366 0.55
Depreciation 38,867 2.20 28,661 1.82 107,648 2.00 78,824 1.71
Employee retirement plans 11,574 0.66 13,265 0.84 38,301 0.71 37,507 0.81
Interest 9,145 0.52 5,852 0.37 27,404 0.51 21,580 0.47
Total expenses 360,736 20.43 297,596 18.85 1,050,673 19.53 848,473 18.36
Pre-tax earnings 68,207 3.86 83,550 5.29 293,952 5.47 272,941 5.90
Income tax provision 24,288 1.37 29,359 1.86 106,100 1.98 95,646 2.06
Net earnings $43,919 2.49 $54,191 3.43 $187,852 3.49 $177,295 3.84
Shares outstanding
(weighted average) 160,766 159,399 160,308 153,439
Earnings per common & common
equivalent share $0.27 $0.34 $1.17 $1.16
Earnings per common share -
assuming full dilution $0.27 $0.33 $1.13 $1.11
Retained earnings
Balance at beginning of period $922,416 $706,782 $792,891 $596,763
Net earnings 43,919 54,191 187,852 177,295
Cash dividends (8,031) (7,172) (22,439) (20,257)
Balance at end of period $958,304 $753,801 $958,304 $753,801
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Lowe's Companies, Inc. and Subsidiary Companies
Dollars in Thousands
For the nine months
ended October 31,
1995 1994
Cash Flows From Operating Activities:
Net Earnings $187,852 $177,295
Adjustments to Reconcile Net Earnings to Net Cash
Provided By Operating Activities:
Depreciation 107,648 78,824
Amortization of Original Issue Discount 2,756 2,399
Increase in Deferred Income Taxes 15,130 8,425
(Gain) Loss on Disposition/Writedown of Fixed and Other Assets (1,389) 3,635
Decrease (Increase) in Operating Assets:
Accounts Receivable - Net (35,103) (117,426)
Merchandise Inventory (232,262) (186,308)
Other Operating Assets (5,377) 33,696
Increase (Decrease) in Operating Liabilities:
Accounts Payable 38,509 129,853
Employee Retirement Plans 32,048 30,503
Accrued Store Restructuring (7,180) (7,281)
Other Operating Liabilities 26,828 53,968
Net Cash Provided by Operating Activities 129,460 207,583
Cash Flows from Investing Activities:
Decrease (Increase) in Investment Assets:
Short-Term Investments 30,763 (212,043)
Purchases of Long-Term Investments (24,388) (19,519)
Proceeds from Sale/Maturity of Long-Term Investments 58,065 15,304
Other Long-Term Assets (1,092) (2,358)
Fixed Assets Acquired (359,394) (257,578)
Proceeds from the Sale of Fixed and Other Long-Term Assets 19,222 11,640
Net Cash Used in Investing Activities (276,824) (464,554)
Cash Flows from Financing Activities:
Sources:
Long-Term Debt Borrowings 0 500
Net Increase in Short-Term Borrowings 89,950
Proceeds from Issuance of Common Stock 0 315,814
Stock Options Exercised 44 961
Total Financing Sources 89,994 317,275
Uses:
Repayment of Long-term Debt (23,331) (39,086)
Net Decrease in Short-Term Borrowings (363)
Cash Dividend Payments (22,439) (20,257)
Common Stock Purchased for Retirement (79)
Total Financing Uses (45,770) (59,785)
Net Cash Provided by Financing Activities 44,224 257,490
Net Increase (Decrease) in Cash and Cash Equivalents (103,140) 519
Cash and Cash Equivalents, Beginning of Period 150,319 73,253
Cash and Cash Equivalents, End of Period $47,179 $73,772
See accompanying notes to consolidated financial statements.
</TABLE
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Lowe's Companies, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
Note 1: The accompanying Consolidated Financial Statements (unaudited)
have been reviewed by an independent Certified Public Accountant, and in the
opinion of management, they contain all adjustments necessary to present
fairly the financial position as of October 31, 1995, and the results of
operations for the three-month and nine-month periods ended October 31, 1995
and 1994, and the cash flows for the nine-month periods ended October 31, 1995
and 1994.
Note 2: The results of operations for the nine-month periods ended
October 31, 1995 and 1994 are not necessarily indicative of the results to be
expected for the full year.
Note 3: The Company has a cash management program which provides for the
investment of excess cash balances in financial instruments which have
maturities of up to three years. Investments that are readily convertible to
cash within three months of purchase are classified as cash equivalents.
Investments with a maturity of between three months and one year are
classified as short-term investments. Investments with maturities greater than
one year are classified as long-term. Long-term investments were $42,641,000
and $83,459,000 at October 31, 1995 and January 31, 1995, respectively.
Note 4: Net interest expense is composed of the following:
Quarter ended Nine Months ended
October 31, October 31,
1995 1994 1995 1994
Long-term debt $8,841 $9,474 $26,351 $26,958
Capitalized leases 4,277 1,916 11,339 4,523
Short-term debt 892 141 1,500 801
Amortization of loan cost 70 70 211 225
Short-term interest income (2,891) (4,481) (8,056) (8,058)
Interest capitalized on
construction in progress (2,044) (1,268) (3,941) (2,869)
Net interest expense $9,145 $5,852 $27,404 $21,580
Note 5: If the FIFO method of inventory accounting had been used,
inventories would have been $75,272,000 higher at October 31, 1995 and
$64,976,000 higher at January 31, 1995.
Note 6: Stock options exercised consisted of 7,000 shares resulting in
proceeds of $45,000 for the three-month period ended October 31, 1994, and
4,000 and 117,800 shares resulting in proceeds of $44,000 and $961,000 for t
he nine-month periods ended October 31, 1995 and 1994, respectively. There
were no stock options exercised in the three-month period ended October 31,
1995.
Note 7: Property is shown net of accumulated depreciation of $427,674,000
at October 31, 1995 and $344,438,000 at January 31, 1995.
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Note 8: Supplemental disclosures of cash flow information:
Nine months ended October 31 1995 1994
Cash paid for interest
(net of capitalized) $ 42,502,000 $ 33,667,000
Cash paid for income taxes 76,373,000 83,136,000
Non-cash investing and financing activities:
Common stock issued to ESOP 37,219,000 31,729,000
Fixed assets acquired under
capital lease 77,232,000 48,795,000
Common stock issued to executives
and directors 2,981,000
Conversion of debt to common stock 2,231,000 217,000
Note 9: On January 31, 1995, the Board of Directors authorized the funding
of the Fiscal 1994 ESOP contribution primarily with the issuance of new shares
of the Company's common stock. During the first three quarters of Fiscal
1995, the Company issued 1,182,253 shares with a market value of $37.2
million.
Note 10: On January 10, 1994, the Company filed with the Securities and
Exchange Commission a shelf registration statement covering $500 million of
"unallocated" debt or equity securities. The shelf registration enables the
company to issue common stock, preferred stock, senior unsecured debt
securities or subordinated unsecured debt securities from time to time.
On June 27, 1994, the Company sold 10,350,000 shares of common stock
under the shelf registration discussed above. The Company received proceeds,
net of the underwriting discount and other costs, of $315,814,000. An
additional $117,000 in offering expenses were paid in the quarter ended
January 31, 1995 and were netted against the proceeds of the offering. The
proceeds are being used to finance the Company's large store expansion program
and for general corporate purposes.
Note 11: During the first three quarters of Fiscal 1995, $2,532,000
principal of the Company's 3% Convertible Subordinated Notes were converted
into 96,904 shares of the Company's common stock.
Note 12: Costs associated with the relocation and closing of stores during
the three months and nine months ended October 31, 1995, which were recognized
through the restructuring charge in Fiscal 1991, totaled $3,462,000 and
$12,771,000. Comparable costs incurred during the three months and nine
months ended October 31, 1994 were $4,990,000 and $15,850,000, respectively.
Note 13: Unearned Compensation - Restricted Stock Awards of $4,757,000
included in Shareholders' Equity on the balance sheet is the result of stock
grants totaling 190,000 shares made to certain executives and directors. The
amount is being amortized as earned over periods not exceeding seven years.
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Note 14: Earnings per common and common equivalent share is computed based
upon the weighted average number of common shares outstanding during the
period plus the dilutive effect of common shares contingently issuable from
stock options. Earnings per common share - assuming full dilution reflects
the potential dilutive effect of dilutive common share equivalents and the
Company's 3% Convertible Subordinated Notes issued July 22, 1993. These notes
are due July 22, 2003.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial statements
and the financial statement footnotes included in this Form 10-Q.
For the quarter ended October 31, 1995, the Company reported third quarter
sales growth of 12% to $1.766 billion, but regretfully an earnings decline to
$43.9 million, the first one since the fourth quarter of 1991. Earnings per
share (fully diluted) were $.27 compared to $.33 in the comparable quarter
last year. For the nine months ended October 31, 1995, sales grew 16% to
$5.379 billion, net earnings increased 6% to $187.9 million and earnings per
share (fully diluted) were $1.13 compared to $1.11 in the comparable period of
last year. Comparable store sales declined 3.6% quarter to date and increased
.7% year to date.
Sales in the third quarter were hindered by a softening in consumer demand.
An analysis of product sales shows that consumers are in a currently cautious
mood. Their emphasis is on just "fixing", rather than "fixing up" in a major
way. Also, there are major variations of economic strength state by state.
Overall, deflation caused a 2% decrease in total sales. The most significant
deflation came in lumber/building materials but prices in electronics, tools
and major appliances were lower also.
Gross margin was 24.29% of sales for the quarter ended October 31, 1995,
versus 24.14% in last year's quarter. Gross margin for the nine months ended
October 31, 1995, was 25.00% versus 24.26% last year. The modest increase in
gross margin rate continues to reflect favorable changes in our product mix as
well as the continuing shift in business from contractor to retail.
Selling, general and administrative expenses (SG&A) were 16.13% of sales in
the third quarter versus 15.15% in last year's quarter. SG&A increased 19%
compared to a 12% sales gain in the quarter. There was a 17% store salary
increase (excluding those in store opening costs). For the nine months ended
October 31, 1995, SG&A was 15.63% of sales versus 14.82% for the comparable
period last year. The overall increase in expenses as a percentage of sales
is due to the effect of lower comparable store sales and expenses related to
the Company's continued investment in new stores.
For the quarter ended October 31, 1995, store opening costs were $16.3
million versus $10.6 million last year, representing costs associated with the
opening of 16 stores this quarter (10 new and 6 relocated) compared to 10
stores in last year's third quarter (3 new and 7 relocated). Advertising and
staff training investments have been enhanced. For the nine months ended
October 31, 1995, store opening costs were $36.4 million versus $25.4 million
last year, representing costs associated with the opening of 42 stores this
year (27 new and 15 relocated) compared to 31 stores in the comparable period
last year (16 new and 15 relocated).
Depreciation was $38.9 million for the quarter ended October 31, 1995 and
$107.6 million for the nine months ended October 31, 1995, increases of 36%
and 37%, respectively, over the comparable periods last year. The increases
are due primarily to buildings, fixtures, displays and computer equipment for
our store expansion program.
Employee retirement plans expense was $11.6 million for the three months
ended October 31, 1995, a 13% decrease compared to last year's quarter. For
the nine months ended October 31,
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1995, employee retirement plans expense was up by only 2% to $38.3 million.
The decrease during the quarter and only modest increase for the nine month
period is due to an increase in new employees who are not yet eligible for the
Employee Stock Ownership Plan which is funded totally by the Company.
Interest expense increased $5.8 million to $27.4 million for the nine
months ended October 31, 1995. This is the result of an increase of $.9
million in the first quarter, an increase of $1.6 million in the second
quarter and an increase of $3.3 million in the third quarter. The increase is
primarily due to interest on capitalized building leases.
The Company's effective income tax rate was 35.61% for the three months
ended October 31, 1995, compared to 35.14% for the comparable three months
last year. The effective rate was 36.09% versus 35.04% for the nine months
ended October 31, 1995 and 1994, respectively. The current year's higher
rates are due primarily to a higher effective state tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The uses of cash in the first nine months have continued to lay the
groundwork for successfully implementing our strategic plan. Merchandise
inventory has increased $232.3 million. Real property has increased in line
with the Company's strategic plan to continue expansion of sales floor square
footage by relocating from older, smaller stores to larger stores and to
expand into new markets.
Our 1995 expansion has been financed through funds from operations,
operating leases, issuance of about $40 million in common stock to our ESOP
(see Note 9) and external financing. Financing in the first nine months came
from net earnings, short-term borrowings and sales of investments in our cash
management program. At October 31, 1995, the Company had an aggregate of $174
million available under a shelf registration statement filed with the
Securities and Exchange Commission (see Note 10). In addition to these
sources, the Company has available agreements for up to $155 million in lines
of credit for issuing documentary and standby letters of credit. Another $120
million is available for the purpose of short-term borrowings on a bid basis
from various banks. On April 10, 1995, the Company entered into a five year,
$300 million revolving credit facility with a group of thirteen commercial
banks to provide alternate liquidity for the Company's commercial paper
program and for general corporate purposes. On September 26, 1995, the
Company effectuated a separate, short-term revolving credit and security
agreement not to exceed $100 million and borrowed $90 million.
Lowe's ended the third quarter with 362 stores and 22.8 million square feet
of retail selling space, a 36% increase over last October's selling space. Our
first nine months' expansion included 15 relocations, 27 new stores and 2 new
contractor yards representing 4.2 million square feet of incremental retail
space. We also closed 2 contractor yards and 1 store. Our expansion plans for
the remainder of 1995 include 10 new stores in new markets and 3 relocations,
for approximately 1.7 million square feet of incremental selling space.
Approximately half the 1995 projects have been or will be leased and the other
half owned.
Also during the first quarter, both Moody's Investor Service and Standard
and Poor raised the Company's securities ratings. Moody's raised its ratings
as follows: Senior Unsecured Debt to A2 from A3; Subordinated Debt to A3
from Baa1; and Commercial Paper to Prime-1 from Prime-2. Standard and Poor
raised its ratings as follows: Senior Unsecured Debt to A from A-;
Subordinated Debt to A- from BBB+; and Commercial Paper to A-1 from A-2.
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INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Lowe's Companies, Inc.:
We have reviewed the accompanying consolidated balance sheet of Lowe's
Companies, Inc. and subsidiary companies as of October 31, 1995, and the
related consolidated statements of current and retained earnings for the
three-month and nine-month periods ended October 31, 1995 and 1994, and
cash flows for the nine-month periods ended October 31, 1995 and 1994.
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 generally
accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Lowe's Companies,
Inc. and subsidiary companies as of January 31, 1995, and the related
consolidated statements of current and retained earnings and cash flows
for the year then ended (not presented herein); and in our report dated
February 20, 1995, 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,
1995 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
November 10, 1995
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Part II - OTHER INFORMATION
Item 6 (a) - Exhibits
Exhibit 10 - Release and Separation Agreement dated November 9, 1995,
between the Company and Harry B. Underwood II
Exhibit 11 - Computation of per share earnings
Item 6 (b) - Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
October 31, 1995.
SIGNATURES
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.
December 13, 1995 \s\ Richard D. Elledge
Date __________________ ___________________________________________
Richard D. Elledge,
Vice President and Chief Accounting Officer
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EXHIBIT INDEX
Exhibit No. Description Page No.
10 Release and Separation Agreement dated
November 9, 1995, between the Company
and Harry B. Underwood II 14-19
11 Computation of per share earnings 20