10-Q 1 lowesform10q10282011.htm LOWE'S FORM 10-Q 10-28-2011 lowesform10q10282011.htm



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 28, 2011
 
or
 
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
 
LOWE'S LOGO

LOWE'S COMPANIES, INC.
(Exact name of registrant as specified in its charter)
 
NORTH CAROLINA
56-0578072
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
1000 Lowe's Blvd., Mooresville, NC
28117
(Address of principal executive offices)
(Zip Code)
   
Registrant's telephone number, including area code
(704) 758-1000  
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes   o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x
Accelerated filer    o
Non-accelerated filer     o
Smaller reporting company   o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 oYes   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 25, 2011
Common Stock, $.50 par value
  1,252,560,892
 

 
 
 

 


 
- INDEX -
     
PART I - Financial Information
   Page No.
     
Item 1.  
Financial Statements
 
     
     3
     
     4
     
     5
     
     6-16
     
     17
     
Item 2.   
   18-27
 
 
Item 3.  
   27
     
Item 4.
   27
     
PART II - Other Information
 
   
Item 1A.
   27
     
Item 5.
27-28
     
Item 6.
29-30
   
31
   
   
   

 
 

 
 
 
Part I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
Item 1.  Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lowe's Companies, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In Millions, Except Par Value Data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
 
 
(Unaudited)
 
 
 
 
 
 
October 28, 2011
   
October 29, 2010
 
January 28, 2011
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Current assets:
 
 
 
 
 
 
 
 
 
 
     Cash and cash equivalents
 
$
 675
 
$
 1,078
 
$
 652
 
     Short-term investments
 
 
 294
 
 
 659
 
 
 471
 
     Merchandise inventory - net
 
 
 8,990
 
 
 8,543
 
 
 8,321
 
     Deferred income taxes - net
 
 
 237
 
 
 202
 
 
 193
 
     Other current assets
 
 
 227
 
 
 219
 
 
 330
 
 
 
 
 
 
 
 
 
 
 
 
     Total current assets
 
 
 10,423
 
 
 10,701
 
 
 9,967
 
 
 
 
 
 
 
 
 
 
 
 
     Property, less accumulated depreciation
 
 
 21,888
 
 
 22,180
 
 
 22,089
 
     Long-term investments
 
 
 705
 
 
 865
 
 
 1,008
 
     Other assets
 
 
 850
 
 
 595
 
 
 635
 
 
 
 
 
 
 
 
 
 
 
 
     Total assets
 
$
 33,866
 
$
 34,341
 
$
 33,699
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Current liabilities:
 
 
 
 
 
 
 
 
 
 
     Current maturities of long-term debt
 
$
 590
 
$
 36
 
$
 36
 
     Accounts payable
 
 
 5,242
 
 
 4,959
 
 
 4,351
 
     Accrued compensation and employee benefits
 
 
 622
 
 
 678
 
 
 667
 
     Deferred revenue
 
 
 789
 
 
 802
 
 
 707
 
     Other current liabilities
 
 
 1,913
 
 
 1,533
 
 
 1,358
 
 
 
 
 
 
 
 
 
 
 
 
     Total current liabilities
 
 
 9,156
 
 
 8,008
 
 
 7,119
 
 
 
 
 
 
 
 
 
 
 
 
     Long-term debt, excluding current maturities
 
 
 6,025
 
 
 5,539
 
 
 6,537
 
     Deferred income taxes - net
 
 
 322
 
 
 456
 
 
 467
 
     Deferred revenue - extended protection plans
 
 
 687
 
 
 621
 
 
 631
 
     Other liabilities
 
 
 867
 
 
 825
 
 
 833
 
 
 
 
 
 
 
 
 
 
 
 
     Total liabilities
 
 
 17,057
 
 
 15,449
 
 
 15,587
 
 
 
 
 
 
 
 
 
 
 
 
     Shareholders' equity:
 
 
 
 
 
 
 
 
 
 
     Preferred stock - $5 par value, none issued
 
 
 - 
 
 
 - 
 
 
 - 
 
     Common stock - $.50 par value;
 
 
 
 
 
 
 
 
 
 
Shares issued and outstanding
 
 
 
 
 
 
 
 
 
 
October 28, 2011
1,260
 
 
 
 
 
 
 
 
 
October 29, 2010
1,394
 
 
 
 
 
 
 
 
 
January 28, 2011
1,354
 
 630
 
 
 697
 
 
 677
 
     Capital in excess of par value
 
 
 24
 
 
 6
 
 
 11
 
     Retained earnings
 
 
 16,109
 
 
 18,144
 
 
 17,371
 
     Accumulated other comprehensive income
 
 
 46
 
 
 45
 
 
 53
 
 
 
 
 
 
 
 
 
 
 
 
     Total shareholders' equity
 
 
 16,809
 
 
 18,892
 
 
 18,112
 
 
 
 
 
 
 
 
 
 
 
 
     Total liabilities and shareholders' equity
 
$
 33,866
 
$
 34,341
 
$
 33,699
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the consolidated financial statements (unaudited).
 
 
 
 
 

 
 
3

 
 
 Lowe's Companies, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 In Millions, Except Per Share Data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Three Months Ended
 
Nine Months Ended
 
   
October 28, 2011
 
October 29, 2010
 
October 28, 2011
 
October 29, 2010
 
Current Earnings
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Net sales
  $ 11,852     100.00   $ 11,587     100.00   $ 38,579     100.00   $ 38,335     100.00  
                                                   
Cost of sales
    7,815     65.94     7,526     64.95     25,208     65.34     24,909     64.98  
                                                   
Gross margin
    4,037     34.06     4,061     35.05     13,371     34.66     13,426     35.02  
                                                   
Expenses:
                                                 
                                                   
Selling, general and administrative
    3,233     27.27     2,931     25.30     9,583     24.84     9,214     24.03  
                                                   
Depreciation
    361     3.05     399     3.44     1,098     2.84     1,194     3.12  
                                                   
Interest - net
    91     0.77     80     0.69     269     0.70     246     0.64  
                                                   
Total expenses
    3,685     31.09     3,410     29.43     10,950     28.38     10,654     27.79  
                                                   
Pre-tax earnings
    352     2.97     651     5.62     2,421     6.28     2,772     7.23  
                                                   
Income tax provision
    127     1.07     247     2.13     904     2.35     1,047     2.73  
                                                   
Net earnings
  $ 225     1.90   $ 404     3.49   $ 1,517     3.93   $ 1,725     4.50  
                                                   
                                                   
Weighted average common shares outstanding - basic
    1,250           1,390           1,283           1,415        
                                                   
Basic earnings per common share
  $ 0.18         $ 0.29         $ 1.17         $ 1.21        
                                                   
Weighted average common shares outstanding - diluted
    1,252           1,392           1,286           1,417        
                                                   
Diluted earnings per common share
  $ 0.18         $ 0.29         $ 1.17         $ 1.21        
                                                   
Cash dividends per share
  $ 0.14         $ 0.11         $ 0.39         $ 0.31        
                                                   
                                                   
Retained Earnings
                                                 
Balance at beginning of period
  $ 16,060         $ 18,454         $ 17,371         $ 18,307        
Net earnings
    225           404           1,517           1,725        
Cash dividends
    (176 )         (154 )         (498 )         (440 )      
Share repurchases
    -           (560 )         (2,281 )         (1,448 )      
Balance at end of period
  $ 16,109         $ 18,144         $ 16,109         $ 18,144        
                                                   
                                                   
See accompanying notes to the consolidated financial statements (unaudited).
                         
                                 


 
4

 
 
 
Lowe's Companies, Inc.
 
 
   
 
 
 
 
   
 
 
In Millions
 
 
   
 
 
 
 
 
   
 
 
 
 
Nine Months Ended
 
 
 
October 28, 2011
   
October 29, 2010
 
Cash flows from operating activities:
 
 
   
 
 
Net earnings
  $ 1,517     $ 1,725  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
    1,171       1,272  
Deferred income taxes
    (200 )     (147 )
Loss on property and other assets - net
    407       72  
Share-based payment expense
    81       84  
Net changes in operating assets and liabilities:
               
             Merchandise inventory - net
    (669 )     (288 )
             Other operating assets
    126       (25 )
             Accounts payable
    892       668  
             Other operating liabilities
    567       472  
Net cash provided by operating activities
    3,892       3,833  
 
               
Cash flows from investing activities:
               
Purchases of investments
    (1,200 )     (2,033 )
Proceeds from sale/maturity of investments
    1,672       1,206  
Increase in other long-term assets
    (217 )     (53 )
Property acquired
    (1,264 )     (1,012 )
Proceeds from sale of property and other long-term assets
    26       24  
Net cash used in investing activities
    (983 )     (1,868 )
 
               
Cash flows from financing activities:
               
Net proceeds from issuance of long-term debt
    -       991  
Repayment of long-term debt
    (28 )     (542 )
Proceeds from issuance of common stock under share-based payment plans
    55       63  
Cash dividend payments
    (470 )     (418 )
Repurchase of common stock
    (2,434 )     (1,616 )
Other - net
    (9 )     1  
Net cash used in financing activities
    (2,886 )     (1,521 )
 
               
Effect of exchange rate changes on cash
    -       2  
 
               
Net increase in cash and cash equivalents
    23       446  
Cash and cash equivalents, beginning of period
    652       632  
Cash and cash equivalents, end of period
  $ 675     $ 1,078  
 
               
 
               
See accompanying notes to the consolidated financial statements (unaudited).
               
 

 
 
5

 
 
Lowe's Companies, Inc.

Note 1: Basis of Presentation - The accompanying consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) are presented in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America.  The consolidated financial statements (unaudited), in the opinion of management, contain all adjustments necessary to present fairly the financial position as of October 28, 2011, and October 29, 2010, and the results of operations for the three and nine months ended October 28, 2011, and October 29, 2010, and cash flows for the nine months ended October 28, 2011 and October 29, 2010.

These interim consolidated financial statements (unaudited) should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Lowe's Companies, Inc. (the Company) Annual Report on Form 10-K for the fiscal year ended January 28, 2011 (the Annual Report).  The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.

Certain prior period amounts have been reclassified to conform to current classifications. Deferred revenue – extended protection plans, which was previously included in other liabilities (noncurrent), is now a separate line item on the consolidated balance sheets.

Note 2: Fair Value Measurements and Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The authoritative guidance for fair value measurements establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of the hierarchy are defined as follows:

·  
Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities

·  
Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly

·  
Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The following tables present the Company’s financial assets measured at fair value on a recurring basis as of October 28, 2011, October 29, 2010, and January 28, 2011, classified by fair value hierarchy:

 
6

 


 
 
 
   
Fair Value Measurements at Reporting Date Using
 
 
 
 
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
 
 
 
 
(In millions)
 
October 28, 2011
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Available-for-sale securities:
 
 
   
 
   
 
   
 
 
   Money market funds
  $ 121     $ 121     $ -     $ -  
   Municipal obligations
    94       -       94       -  
   Municipal floating rate obligations
    32       -       32       -  
   Other
    2       2       -       -  
Trading securities:
                               
   Mutual funds
    45       45       -       -  
Total short-term investments
  $ 294     $ 168     $ 126     $ -  
Available-for-sale securities:
                               
   Municipal floating rate obligations
  $ 513     $ -     $ 513     $ -  
   Municipal obligations
    174       -       174       -  
   Other
    18       -       18       -  
Total long-term investments
  $ 705     $ -     $ 705     $ -  
 
                               
 
                               
 
         
Fair Value Measurements at Reporting Date Using
 
 
         
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
 
       
(In millions)
 
October 29, 2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Available-for-sale securities:
                               
   Money market funds
  $ 272     $ 272     $ -     $ -  
   Municipal obligations
    235       -       235       -  
   Municipal floating rate obligations
    98       -       98       -  
   Other
    7       2       5       -  
Trading securities:
                               
   Mutual funds
    47       47       -       -  
Total short-term investments
  $ 659     $ 321     $ 338     $ -  
Available-for-sale securities:
                               
   Municipal floating rate obligations
  $ 812     $ -     $ 812     $ -  
   Municipal obligations
    51       -       51       -  
   Other
    2       -       2       -  
Total long-term investments
  $ 865     $ -     $ 865     $ -  
 
 

 
7

 


 
 
 
   
Fair Value Measurements at Reporting Date Using
 
 
 
 
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
 
 
 
 
(In millions)
 
January 28, 2011
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Available-for-sale securities:
 
 
   
 
   
 
   
 
 
   Money market funds
  $ 66     $ 66     $ -     $ -  
   Municipal obligations
    190       -       190       -  
   Municipal floating rate obligations
    163       -       163       -  
   Other
    2       2       -       -  
Trading securities:
                               
   Mutual funds
    50       50       -       -  
Total short-term investments
  $ 471     $ 118     $ 353     $ -  
Available-for-sale securities:
                               
   Municipal floating rate obligations
  $ 765     $ -     $ 765     $ -  
   Municipal obligations
    208       -       208       -  
   Other
    35       -       35       -  
Total long-term investments
  $ 1,008     $ -     $ 1,008     $ -  


When available, quoted prices were used to determine fair value.  When quoted prices in active markets were available, investments were classified within Level 1 of the fair value hierarchy.  When quoted prices in active markets were not available, fair values were determined using pricing models and the inputs to those pricing models are based on observable market inputs.  The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

During the nine months ended October 28, 2011 and October 29, 2010, the Company’s only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition were certain assets subject to long-lived asset impairment.  The Company estimated the fair values of assets subject to long-lived asset impairment based on the Company’s own judgments about the assumptions that market participants would use in pricing the assets and on observable market data, when available. The Company classified these fair value measurements as Level 3.

In the determination of impairment for operating locations, the Company determined the fair values of individual operating locations using an income approach, which required discounting projected future cash flows.  When determining the stream of projected future cash flows associated with an individual operating location, management made assumptions, incorporating local market conditions, about key variables including sales growth rates, gross margin, controllable expenses, such as payroll and occupancy expense, and asset residual values.  In order to calculate the present value of those future cash flows, the Company discounted cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows.  In general, the selected market participants represent a group of other retailers with a location footprint similar in size to the Company’s.

In the determination of impairment for locations identified for closure and for excess properties held-for-use and held-for-sale, which consist of retail outparcels and property associated with relocated or closed locations, the fair values were determined using a market approach based on estimated selling prices. The Company determined the estimated selling prices by obtaining information from property brokers or appraisers in the specific markets being evaluated. The information included comparable sales of similar assets and assumptions about demand in the market for the purchase or lease of these assets.


 
8

 

The following tables present the Company’s non-financial assets measured at estimated fair value on a nonrecurring basis and the resulting long-lived asset impairment losses included in earnings. Because assets subject to long-lived asset impairment are not measured at fair value on a recurring basis, certain fair value measurements presented in the table may reflect values at earlier measurement dates and may no longer represent the fair values at October 28, 2011 and October 29, 2010.

   
Three Months Ended
 
   
October 28, 2011
   
October 29, 2010
 
(In millions)
 
Fair Value Measurements
   
Impairment Losses
   
Fair Value Measurements
   
Impairment Losses
 
Assets held-for-use:
 
 
   
 
   
 
   
 
 
   Operating locations
  $ 7     $ (22 )   $ 14     $ (30 )
   Locations identified for closure
    52       (208 )     -       -  
   Excess properties
    56       (31 )     31       (9 )
Total
  $ 115     $ (261 )   $ 45     $ (39 )
                                 
   
Nine Months Ended
 
   
October 28, 2011
   
October 29, 2010
 
(In millions)
 
Fair Value Measurements
   
Impairment Losses
   
Fair Value Measurements
   
Impairment Losses
 
Assets held-for-use:
                               
   Operating locations
  $ 16     $ (40 )   $ 15     $ (36 )
   Locations identified for closure
    73       (268 )     -       -  
   Excess properties
    78       (43 )     41       (12 )
Assets held-for-sale:
                               
   Excess properties
    2       -       21       (1 )
Total
  $ 169     $ (351 )   $ 77     $ (49 )

Fair Value of Financial Instruments

The Company’s financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt and are reflected in the financial statements at cost.  With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature.  Estimated fair values for long-term debt have been determined using available market information, including reported trades, benchmark yields and broker-dealer quotes.

Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding capitalized lease obligations, are as follows:

 
 
October 28, 2011
   
October 29, 2010
 
 
 
Carrying
   
Fair
   
Carrying
   
Fair
 
(In millions)
 
Amount
   
Value
   
Amount
   
Value
 
Long-term debt (excluding capitalized lease obligations)
  $ 6,215     $ 7,052     $ 5,213     $ 5,932  

 

 
9

 

Note 3: Restricted Investment Balances - Short-term and long-term investments include restricted balances pledged as collateral for the Company’s extended protection plan program and for a portion of the Company’s casualty insurance and Installed Sales program liabilities.  Restricted balances included in short-term investments were $186 million at October 28, 2011, $276 million at October 29, 2010, and $102 million at January 28, 2011.  Restricted balances included in long-term investments were $273 million at October 28, 2011, $80 million at October 29, 2010, and $260 million at January 28, 2011.

Note 4: Property - Property is shown net of accumulated depreciation of $12.2 billion at October 28, 2011, $10.9 billion at October 29, 2010, and $11.3 billion at January 28, 2011.

Note 5: Short-Term Borrowings - On October 25, 2011, the Company entered into a second amended and restated credit agreement (Amended Facility) to modify the senior credit facility dated June 2007, which provided for borrowings of up to $1.75 billion through June 2012.  The Amended Facility extends the maturity date to October 2016 and provides for borrowings of up to $1.75 billion.  The Amended Facility supports the Company’s commercial paper program and has a $500 million letter of credit sublimit.  Letters of credit issued pursuant to the Amended Facility reduce the amount available for borrowing under its terms.  Borrowings made are unsecured and are priced at a fixed rate based upon market conditions at the time of funding in accordance with the terms of the Amended Facility.  The Amended Facility contains certain restrictive covenants, which include maintenance of a debt leverage ratio as defined by the Amended Facility.  The Company was in compliance with those covenants as of October 28, 2011.  Thirteen banking institutions are participating in the Amended Facility.  As of October 28, 2011, there were no outstanding borrowings or letters of credit under the Amended Facility and no outstanding borrowings under the Company’s commercial paper program.

Note 6: Impairment of Long-Lived Assets and Exit Activities -
 
Impairment of long-lived assets

The Company reviews the carrying amounts of long-lived assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.  An impairment loss is recognized when the carrying amount of the asset (disposal) group is not recoverable and exceeds its fair value. The Company recorded impairment losses of $261 million and $351 million relating to operating locations, locations identified for closure and excess properties during the three and nine months ended October 28, 2011, respectively.  Included in these impairment losses are $232 million and $292 million of losses for the three and nine months ended October 28, 2011, respectively, relating to store closings and discontinued projects that are further described below.  The Company recorded impairment losses of $39 million and $49 million relating to operating locations and excess properties during the three and nine months ended October 29, 2010, respectively.  Impairment losses are recorded in selling, general and administrative expense in the consolidated statements of current and retained earnings.  Fair value measurements associated with long-lived asset impairments are further described in Note 2 to the consolidated financial statements.

Exit activities

When locations under operating leases are closed, the Company recognizes a liability for the fair value of future contractual obligations, including future minimum lease payments, property taxes, utilities, common area maintenance and other ongoing expenses, net of estimated sublease income and other recoverable items.  The Company closed 11 stores subject to operating leases, which includes one store that was relocated, during the nine months ended October 28, 2011.

The Company recognizes a liability in connection with one-time employee termination benefits when the company commits to an exit plan and communicates that plan to the affected employees.  The Company announced the closing of 27 stores which required the accrual of one-time termination benefits during the nine months ended October 28, 2011.

Subsequent changes to the liabilities, including a change resulting from a revision to either the timing or the amount of estimated cash flows, are recognized in the period of change.  Changes to the accrual for exit activities for the three and nine months ended October 28, 2011 are summarized as follows:

 
10

 


 
 
 
   
 
   
 
 
 
 
Three Months Ended October 28, 2011
 
(In millions)
 
Lease obligations
   
Severance
   
Total
 
Accrual for exit activities, balance at beginning of period
  $ 22     $ 5     $ 27  
Additions to the accrual
    57       11       68  
Cash payments
    (1 )     (2 )     (3 )
Accrual for exit activities, balance at end of period
  $ 78     $ 14     $ 92  
 
                       
 
 
Nine Months Ended October 28, 2011
 
(In millions)
 
Lease obligations
   
Severance
   
Total
 
Accrual for exit activities, balance at beginning of period
  $ 12     $ -     $ 12  
Additions to the accrual
    70       16       86  
Cash payments
    (4 )     (2 )     (6 )
Accrual for exit activities, balance at end of period
  $ 78     $ 14     $ 92  

Charges associated with accruals for exit activities for the three and nine months ended October 29, 2010, and the liabilities for exit activities at October 29, 2010, were immaterial. Expenses associated with exit activities are recorded in selling, general and administrative expense in the consolidated statements of current and retained earnings.

Store Closings and Discontinued Projects

During the nine months ended October 28, 2011, the Company approved and announced plans to close 27 underperforming stores across the United States.  Seventeen of these locations were closed during the three months ended October 28, 2011, while the remaining 10 locations will be closed during the fourth quarter of 2011.  In addition, after completing a comprehensive review of its pipeline of proposed new stores, the Company approved and announced plans during the three months ended October 28, 2011, to no longer pursue a number of planned new store projects.  These decisions were the result of the Company’s realignment of its store operations structure and its efforts to focus resources in a manner that would generate the greatest shareholder value.

Total charges associated with these store closings and discontinued projects were $336 million and $401 million for the three and nine months ended October 28, 2011, respectively.  The significant components of charges relating to these store closings and discontinued projects, including long-lived asset impairment losses and costs associated with exit activities included in the amounts above, are as follows:

 
 
Three Months Ended
   
Nine Months Ended
 
(In millions)
 
October 28, 2011
   
October 28, 2011
 
Long-lived asset impairments
  $ 232     $ 292  
Exit activities
    62       67  
Discontinued project write-offs
    30       30  
Inventory lower of cost or market adjustments
    12       12  
Total
  $ 336     $ 401  

Expenses associated with store closings and discontinued projects, excluding inventory adjustments, were included in selling, general and administrative expense in the consolidated statement of current and retained earnings.  Inventory lower of cost or market adjustments were included in cost of sales in the consolidated statement of current and retained earnings.

 
 
11

 

Note 7: Extended Protection Plans - The Company sells separately-priced extended protection plan contracts under a Lowe’s-branded program for which the Company is ultimately self-insured.  The Company recognizes revenue from extended protection plan sales on a straight-line basis over the respective contract term.  Extended protection plan contract terms primarily range from one to four years from the date of purchase or the end of the manufacturer’s warranty, as applicable.  Changes in deferred revenue for extended protection plan contracts are summarized as follows:

 
 
Three Months Ended
   
Nine Months Ended
 
(In millions)
 
October 28, 2011
   
October 29, 2010
   
October 28, 2011
   
October 29, 2010
 
Deferred revenue - extended protection plans, beginning of period
  $ 673     $ 605     $ 631     $ 549  
Additions to deferred revenue
    61       60       196       198  
Deferred revenue recognized
    (47 )     (44 )     (140 )     (126 )
Deferred revenue - extended protection plans, end of period
  $ 687     $ 621     $ 687     $ 621  

Incremental direct acquisition costs associated with the sale of extended protection plans are also deferred and recognized as expense on a straight-line basis over the respective contract term.  Deferred costs associated with extended protection plan contracts were $153 million at October 28, 2011, $171 million at October 29, 2010, and $166 million at January 28, 2011.  The Company’s extended protection plan deferred costs are included in other assets (non-current) on the consolidated balance sheets.  All other costs, such as costs of services performed under the contract, general and administrative expenses and advertising expenses are expensed as incurred.

The liability for extended protection plan claims incurred is included in other current liabilities on the consolidated balance sheets.  Changes in the liability for extended protection plan claims are summarized as follows:

 
 
Three Months Ended
   
Nine Months Ended
 
(In millions)
 
October 28, 2011
   
October 29, 2010
   
October 28, 2011
   
October 29, 2010
 
Liability for extended protection plan claims, beginning of period
  $ 24     $ 26     $ 20     $ 23  
Accrual for claims incurred
    23       24       68       61  
Claim payments
    (24 )     (28 )     (65 )     (62 )
Liability for extended protection plan claims, end of period
  $ 23     $ 22     $ 23     $ 22  

Note 8: Shareholders' Equity - The Company has a share repurchase program that is executed through purchases made from time to time either in the open market or through private transactions.  Shares purchased under the share repurchase program are retired and returned to authorized and unissued status.  During the second quarter of 2011, the Company utilized the remaining authorization under the prior share repurchase program that was authorized on January 29, 2010. On August 19, 2011, the Company's Board of Directors authorized a new $5.0 billion share repurchase program with no expiration.   At October 28, 2011, the Company had remaining authorization under the share repurchase program of $5.0 billion.

The Company also repurchases shares from employees to satisfy either the exercise price of stock options exercised or the statutory withholding tax liability resulting from the vesting of restricted stock awards.


 
12

 


Shares repurchased for the three and nine months ended October 28, 2011 and October 29, 2010 were as follows:

 
 
Three Months Ended
 
 
 
October 28, 2011
   
October 29, 2010
 
(In millions)
 
Shares
   
Cost 1
   
Shares
   
Cost 1
 
Share repurchase program
    -     $ -       29.0     $ 600  
Shares repurchased from employees
    0.1       1       0.1       1  
Total share repurchases
    0.1     $ 1       29.1     $ 601  
 
                               
 
 
Nine Months Ended
 
 
 
October 28, 2011
   
October 29, 2010
 
(In millions)
 
Shares
   
Cost 2
   
Shares
   
Cost 2
 
Share repurchase program
    97.5     $ 2,400       70.3     $ 1,600  
Shares repurchased from employees
    1.4       36       0.7       16  
Total share repurchases
    98.9     $ 2,436       71.0     $ 1,616  

1   A reduction of $560 million was recorded to retained earnings, after capital in excess of par value was depleted, for the three months ended October 29, 2010.

2   Reductions of $2.3 billion and $1.4 billion were recorded to retained earnings, after capital in excess of par value was depleted, for the nine months ended October 28, 2011 and October 29, 2010, respectively.

Note 9: Comprehensive Income - Comprehensive income represents changes in shareholders’ equity from non-owner sources and is comprised of net earnings plus or minus unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments.  The following table reconciles net earnings to comprehensive income for the three and nine months ended October 28, 2011 and October 29, 2010.

 
 
Three Months Ended
   
Nine Months Ended
 
(In millions)
 
October 28, 2011
   
October 29, 2010
   
October 28, 2011
   
October 29, 2010
 
Net earnings
  $ 225     $ 404     $ 1,517     $ 1,725  
Foreign currency translation adjustments
    (35 )     6       (8 )     19  
Net unrealized investment (losses) gains
    (1 )     -       1       (1 )
Comprehensive income
  $ 189     $ 410     $ 1,510     $ 1,743  

Note 10: Income Taxes - The Company is subject to examination by various foreign and domestic taxing authorities.  At October 28, 2011, the Company had unrecognized tax benefits of $150 million.  The Company is appealing IRS examinations for fiscal years 2004 to 2007 related to insurance deductions.  It is reasonably possible this issue as well as various U.S. state issues will be settled within the next twelve months resulting in a reduction in unrecognized tax benefits of $150 million.  There are currently ongoing U.S. state audits covering tax years 2002 to 2009.  The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

Note 11: Earnings Per Share - The Company calculates basic and diluted earnings per common share using the two-class method.  Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of unvested share-based payment awards that contain a nonforfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders.

Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period.  Diluted earnings per common share is

 
13

 

calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.  The following table reconciles earnings per common share for the three and nine months ended October 28, 2011, and October 29, 2010.

 
 
Three Months Ended
   
Nine Months Ended
 
(In millions, except per share data)
 
October 28, 2011
   
October 29, 2010
   
October 28, 2011
   
October 29, 2010
 
Basic earnings per common share:
 
 
   
 
   
 
   
 
 
Net earnings
  $ 225     $ 404     $ 1,517     $ 1,725  
Less: Net earnings allocable to participating securities
    (2 )     (4 )     (12 )     (15 )
Net earnings allocable to common shares
  $ 223     $ 400     $ 1,505     $ 1,710  
Weighted-average common shares outstanding
    1,250       1,390       1,283       1,415  
Basic earnings per common share
  $ 0.18     $ 0.29     $ 1.17     $ 1.21  
Diluted earnings per common share:
                               
Net earnings
  $ 225     $ 404     $ 1,517     $ 1,725  
Less: Net earnings allocable to participating securities
    (2 )     (4 )     (12 )     (15 )
Net earnings allocable to common shares
  $ 223     $ 400     $ 1,505     $ 1,710  
Weighted-average common shares outstanding
    1,250       1,390       1,283       1,415  
Dilutive effect of non-participating share-based awards
    2       2       3       2  
Weighted-average common shares, as adjusted
    1,252       1,392       1,286       1,417  
Diluted earnings per common share
  $ 0.18     $ 0.29     $ 1.17     $ 1.21  

Stock options to purchase 18.0 million and 20.0 million shares of common stock were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive for the three months ended October 28, 2011, and October 29, 2010, respectively.  Stock options to purchase 18.4 million and 19.9 million shares of common stock were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive for the nine months ended October 28, 2011, and October 29, 2010, respectively.

Note 12: Supplemental Disclosure -

Net interest expense is comprised of the following:
 
 
 
 
   
 
   
 
   
 
 
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
October 28, 2011
 
October 29, 2010
 
October 28, 2011
 
October 29, 2010
 
Long-term debt
  $ 83     $ 76     $ 250     $ 230  
Capitalized lease obligations
    10       9       28       27  
Interest income
    (3 )     (3 )     (10 )     (8 )
Interest capitalized
    (3 )     (5 )     (7 )     (12 )
Interest on tax uncertainties
    3       1       4       5  
Other
    1       2       4       4  
Interest - net
  $ 91     $ 80     $ 269     $ 246  


 
14

 

Supplemental disclosures of cash flow information: 
 
 
   
 
 
 
 
 
   
 
 
 
Nine Months Ended
 
(In millions)
October 28, 2011
 
October 29, 2010
 
Cash paid for interest, net of amount capitalized
  $ 353     $ 314  
Cash paid for income taxes
  $ 787     $ 1,262  
Non-cash investing and financing activities:
               
Non-cash property acquisitions, including assets acquired under capital lease
  $ 172     $ 47  
Loss on equity method investments
  $ (7 )   $ (3 )
Cash dividends declared but not paid
  $ 176     $ 154  
Non-cash employee stock option exercises
  $ 2     $ -  

Note 13: Recent Accounting Pronouncements - In May 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance that amends the existing requirements for fair value measurement and disclosure.  The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed.  It also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in shareholders’ equity.   The guidance is effective for interim and annual periods beginning after December 15, 2011.  The Company does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued authoritative guidance that amends the presentation requirements for comprehensive income in financial statements. The guidance requires entities to report components of comprehensive income either as part of a single continuous statement of comprehensive income that would combine the components of net income and other comprehensive income, or in a separate, but consecutive, statement following the statement of income.  The guidance is effective for interim and annual periods beginning after December 15, 2011, and is to be applied retrospectively. The adoption of this guidance will impact the presentation of comprehensive income, but will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued authoritative guidance that amends the existing requirements for goodwill impairment testing. The guidance gives companies the option to make a qualitative evaluation about the likelihood of goodwill impairment at their annual assessment date before calculating the fair value of a reporting unit. Companies will be required to perform the two-step impairment test only if, based on the qualitative evaluation, it concludes that the fair value of a reporting unit is more likely than not less than its carrying value. Companies will continue to be required to determine qualitatively whether an interim goodwill impairment test is required. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company is currently evaluating the impact of the adoption of the guidance on its consolidated financial statements.

Note 14: Subsequent Event - On November 23, 2011, the Company issued $1.0 billion of unsecured notes in two tranches: $500 million of 3.8% notes maturing in 2021 (the 2021 Notes) and $500 million of 5.125% notes maturing in 2041 (the 2041 Notes).  The 2021 and 2041 Notes were issued at discounts of approximately $3 million and $5 million, respectively.  Interest on these notes is payable semiannually in arrears in May and November of each year until maturity, beginning in May 2012.

These notes may be redeemed by the Company at any time, in whole or in part, at a redemption price plus accrued interest to the date of redemption.  The redemption price before three months for the 2021 Notes or six months for the 2041 Notes prior to the applicable maturity date is equal to the greater of (1) 100% of the principal amount of the notes to be redeemed, or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the date of redemption on a semi-annual basis at a specified rate, equal to a benchmark interest rate plus a spread.  The redemption price within three months for the 2021 Notes or six months for the 2041 Notes prior to the applicable maturity date is equal to 100% of the principal amount of the notes to be redeemed plus accrued interest

 
15

 


thereon to but excluding the date of redemption.  The indenture under which the notes were issued also contains a provision that allows the holders of the notes to require the Company to repurchase all or any part of their notes if a change of control triggering event occurs.  If elected under the change in control provisions, the repurchase of the notes will occur at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, on such notes to the date of purchase.  The indenture governing the notes does not limit the aggregate principal amount of debt securities that the Company may issue, nor is the Company required to maintain financial ratios or specified levels of net worth or liquidity.   However, the indenture contains various restrictive covenants, none of which is expected to impact the Company’s liquidity or capital resources.

 
16

 
 
 
 
To the Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville, North Carolina
 
We have reviewed the accompanying consolidated balance sheets of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as of October 28, 2011 and October 29, 2010, and the related consolidated statements of current and retained earnings for the fiscal three and nine-month periods then ended and of cash flows for the fiscal nine-month periods ended October 28, 2011 and October 29, 2010. These consolidated interim financial statements are the responsibility of the Company’s management.
 
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of January 28, 2011, and the related consolidated statements of current and retained earnings, shareholders’ equity, and cash flows for the fiscal year then ended (not presented herein); and in our report dated March 28, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet of the Company as of January 28, 2011 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
December 1, 2011

 
17

 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity and capital resources during the three and nine months ended October 28, 2011, and October 29, 2010.  This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2011 (the Annual Report), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report.  Unless otherwise specified, all comparisons made are to the corresponding period of 2010.  This discussion and analysis is presented in seven sections:

·  
Executive Overview
·  
Operations
·  
Company Outlook
·  
Financial Condition, Liquidity and Capital Resources
·  
Off-Balance Sheet Arrangements
·  
Contractual Obligations and Commercial Commitments
·  
Critical Accounting Policies and Estimates

EXECUTIVE OVERVIEW

We are focused on improving our core business, while also developing new capabilities and services for the future.  During the third quarter, we reorganized our store operations and merchandising organizations to improve efficiencies, increase speed to market for new products and services, and enhance the customer’s shopping experience.  As part of these decisions and our efforts to focus resources in a manner that will generate the greatest shareholder value, we announced the closing of 27 underperforming stores during the quarter.  In addition, after completing a comprehensive review of our pipeline of proposed new stores, we decided to discontinue a number of planned new store projects. We now expect to open 10 to 15 new stores per year in North America beginning in fiscal 2012, which represents a greater than 50% reduction in our expansion plan.  Charges associated with store closings and discontinued projects, which include the impairment of long-lived assets, write-off of costs related to store sites the Company no longer intends to pursue, exit costs and inventory lower of cost or market adjustments, were $336 million for the third quarter.

In addition to these changes to our organizational structure and store base, we continued to invest in our store systems infrastructure in order to enhance system speed and ease of use for our associates, providing a better experience for customers and greater productivity in our service model. As of the end of the third quarter, we are over 90% complete in upgrading our in-store data capacity.  We also rolled out mobile devices based on Apple’s iPhone® technology to more than 60% of our stores during the quarter, which will allow our store employees to scan items, track inventory, print price labels and search for items without ever leaving a customer.

We are also making incremental improvements to our business, with a near-term focus on value improvement and product differentiation. Value improvement will ensure that we are getting the lowest inventory acquisition cost and rationalizing the use of promotions, which will allow us to provide low everyday retail prices.  It also involves localizing our product assortments to ensure that we have the right product, in the right market, in the right quantity. Product differentiation will establish Lowe’s as the place to find the newest and most relevant products for home improvement and involves refreshing displays in our stores, while at the same time, expanding our online product assortments beyond what we stock in our stores to meet the demands of the customer.  We recognize that we need to bring excitement back to the Lowe’s experience and are confident that we are moving forward on a clear path to achieve this objective.

 
18

 


OPERATIONS

The following tables set forth the percentage relationship to net sales of each line item of the consolidated statements of earnings (unaudited), as well as the percentage change in dollar amounts from the prior period.  These tables should be read in conjunction with the following discussion and analysis and the consolidated financial statements (unaudited), including the related notes to the consolidated financial statements (unaudited).

   
Three Months Ended
   
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Period
   
Percentage Increase / (Decrease) in Dollar Amounts from Prior Period
 
   
October 28, 2011
   
October 29, 2010
   
2011 vs. 2010
   
2011 vs. 2010
 
Net sales
    100.00 %     100.00 %     N/A       2.3 %
Gross margin
    34.06       35.05       (99 )     (0.6 )
Expenses:
                               
Selling, general and administrative
    27.27       25.30       197       10.3  
Depreciation
    3.05       3.44       (39 )     (9.5 )
Interest - net
    0.77       0.69       8       14.1  
Total expenses
    31.09       29.43       166       8.0  
Pre-tax earnings
    2.97       5.62       (265 )     (45.9 )
Income tax provision
    1.07       2.13       (106 )     (48.7 )
Net earnings
    1.90 %     3.49 %     (159 )     (44.2 )%
EBIT margin 1
    3.74 %     6.31 %     (257 )     (39.4 )%
                                 
   
Nine Months Ended
   
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Period
   
Percentage Increase / (Decrease) in Dollar Amounts from Prior Period
 
   
October 28, 2011
   
October 29, 2010
   
2011 vs. 2010
   
2011 vs. 2010
 
Net sales
    100.00 %     100.00 %     N/A       0.6 %
Gross margin
    34.66       35.02       (36 )     (0.4 )
Expenses:
                               
Selling, general and administrative
    24.84       24.03       81       4.0  
Depreciation
    2.84       3.12       (28 )     (8.1 )
Interest - net
    0.70       0.64       6       9.5  
Total expenses
    28.38       27.79       59       2.8  
Pre-tax earnings
    6.28       7.23       (95 )     (12.7 )
Income tax provision
    2.35