10-Q 1 0001.txt -1- 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 April 28, 2000 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 incorporation or organization) Identification No.) 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) 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 May 26, 2000 Common Stock, $.50 par value 382,686,076 12 TOTAL PAGES -2- LOWE'S COMPANIES, INC. - INDEX - Page No. PART I - Financial Information: Consolidated Balance Sheets - April 28, 2000, April 30, 1999 and January 28, 2000 3 Consolidated Statements of Current and Retained Earnings - three months ended April 28, 2000 and April 30, 1999 4 Consolidated Statements of Cash Flows - three months ended April 28, 2000 and April 30, 1999 5 Notes to Consolidated Financial Statements 6-7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 Independent Accountants' Report 11 PART II - Other Information 12 Item 6 (a) - Exhibits Item 6 (b) - Reports on Form 8-K -3- Lowe's Companies, Inc. Consolidated Balance Sheets In Thousands
April 28, April 30, January 28, 2000 1999 2000 Assets Current assets: Cash and cash equivalents $ 522,935 $1,047,632 $ 491,122 Short-term investments 15,062 17,988 77,670 Accounts receivable - net 175,546 171,412 147,901 Merchandise inventory 3,338,322 2,814,402 2,812,361 Deferred income taxes 51,413 42,374 53,145 Other assets 168,336 80,232 127,342 Total current assets 4,271,614 4,174,040 3,709,541 Property, less accumulated depreciation 5,548,148 4,289,230 5,177,222 Long-term investments 33,028 33,013 31,114 Other assets 82,456 114,212 94,446 Total assets $9,935,246 $8,610,495 $9,012,323 Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings $ 100,000 $ 92,475 $ 92,475 Current maturities of long-term debt 31,074 132,180 59,908 Accounts payable 2,204,307 1,715,441 1,566,946 Employee retirement plans 63,118 85,668 101,946 Accrued salaries and wages 157,976 127,230 164,003 Other current liabilities 562,282 445,713 400,676 Total current liabilities 3,118,757 2,598,707 2,385,954 Long-term debt, excluding current maturities 1,732,202 1,722,316 1,726,579 Deferred income taxes 203,467 172,226 199,824 Other long-term liabilities 3,858 3,127 4,495 Total liabilities 5,058,284 4,496,376 4,316,852 Shareholders' equity Preferred stock - $5 par value, none issued - - - Common stock - $.50 par value; Shares Issued and Outstanding April 28, 2000 382,666 April 30, 1999 381,235 January 28, 2000 382,359 191,333 190,617 191,179 Capital in excess of par 1,760,421 1,698,757 1,755,616 Retained earnings 2,935,756 2,250,295 2,761,964 Unearned compensation- restricted stock awards (10,222) (25,780) (12,868) Accumulated other comprehensive income (326) 230 (420) Total shareholders' equity 4,876,962 4,114,119 4,695,471 Total liabilities and shareholders' equity $9,935,246 $8,610,495 $9,012,323 See accompanying notes to consolidated financial statements.
-4- Lowe's Companies, Inc. Consolidated Statements of Current and Retained Earnings In Thousands, Except Per Share Data
Three Months Ended April 28, 2000 April 30, 1999 Current Earnings Amount Percent Amount Percent Net sales $4,467,114 100.00 $3,771,919 100.00 Cost of sales 3,218,998 72.06 2,764,829 73.30 Gross margin 1,248,116 27.94 1,007,090 26.70 Expenses: Selling, general and administrative 806,708 18.06 664,351 17.61 Store opening costs 25,785 0.58 18,210 0.48 Depreciation 93,488 2.09 77,920 2.07 Interest 26,013 0.58 23,307 0.62 Nonrecurring merger costs - - 24,378 0.65 Total expenses 951,994 21.31 808,166 21.43 Pre-tax earnings 296,122 6.63 198,924 5.27 Income tax provision 108,973 2.44 73,966 1.96 Net earnings $187,149 4.19 $124,958 3.31 Shares outstanding - Basic 382,504 378,805 Basic Earnings Per Share $0.49 $0.33 Shares outstanding - Diluted 384,797 382,001 Diluted Earnings Per Share $0.49 $0.33 Retained Earnings Balance at beginning of period $2,761,964 $2,136,727 Net earnings 187,149 124,958 Cash dividends (13,357) (11,390) Balance at end of period $2,935,756 $2,250,295 See accompanying notes to consolidated financial statements.
-5- Lowe's Companies, Inc. Consolidated Statements of Cash Flows In Thousands
For the Three Months Ended April 28, April 30, 2000 1999 Cash Flows From Operating Activities: Net Earnings $187,149 $124,958 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Depreciation 93,488 77,920 Amortization of Original Issue Discount 140 161 Increase (Decrease) in Deferred Income Taxes 5,748 (3,700) Loss on Disposition/Writedown of Fixed and Other Assets 11,722 25,535 Changes in Operating Assets and Liabilities: Accounts Receivable - Net (27,645) (27,484) Merchandise Inventory (525,961) (429,701) Other Operating Assets (40,934) (30,820) Accounts Payable 637,361 494,898 Employee Retirement Plans (38,828) 18,456 Other Operating Liabilities 157,528 183,849 Net Cash Provided by Operating Activities 459,768 434,072 Cash Flows from Investing Activities: (Increase) Decrease in Investment Assets: Short-Term Investments 62,387 2,916 Purchases of Long-Term Investments (1,969) (6,554) Proceeds from Sale/Maturity of Long-Term Investments - 1,509 Increase in Other Long-Term Assets (3,032) (28,975) Fixed Assets Acquired (468,410) (288,771) Proceeds from the Sale of Fixed and Other Long-Term Assets 7,236 3,652 Net Cash Used in Investing Activities (403,788) (316,223) Cash Flows from Financing Activities: Net Increase (Decrease) in Short-Term Borrowings 7,525 (24,600) Long-Term Debt Borrowings 18,176 394,587 Repayment of Long-Term Debt (41,526) (16,135) Proceeds from Stock Offering - 348,299 Proceeds from Stock Options Exercised 5,015 10,148 Cash Dividend Payments (13,357) (11,390) Net Cash (Used in) Provided by Financing Activities (24,167) 700,909 Net Increase in Cash and Cash Equivalents 31,813 818,758 Cash and Cash Equivalents, Beginning of Period 491,122 228,874 Cash and Cash Equivalents, End of Period $522,935 $1,047,632 See accompanying notes to consolidated financial statements.
-6- Lowe's Companies, Inc. Notes to Consolidated Financial Statements Note 1: 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 April 28, 2000, and the results of operations and cash flows for the quarters ended April 28, 2000 and April 30, 1999. 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 28, 2000. Financial results for the interim periods may not be indicative of the financial results for the entire fiscal year. Note 2: Diluted earnings per share are calculated on the weighted average shares of common stock as adjusted for the dilutive effect of stock options at the balance sheet date. Note 3: Net interest expense is composed of the following (in thousands):
Three months ended April 28, 2000 April 30, 1999 Long-term debt $ 22,390 $ 22,535 Capitalized leases 10,339 10,337 Short-term debt 2,355 1,868 Amortization of loan cost 237 237 Short-term interest income (4,910) (7,954) Interest capitalized on construction in progress (4,398) (3,716) Net interest expense $ 26,013 $ 23,307
Note 4: Inventory is stated at the lower of cost or market using the First- In, First-Out inventory accounting method. Note 5: Property is shown net of accumulated depreciation of $1.3 billion at April 28, 2000, $1.1 billion at April 30, 1999 and $1.2 billion at January 28, 2000. Note 6: Supplemental disclosures of cash flow information (in thousands): Three months ended April 28, 2000 April 30, 1999 Cash paid for interest (net of capitalized) $ 53,298 $ 42,459 Cash paid for income taxes 7,293 3,414 Non-cash investing and financing activities: Common stock issued to ESOP - 18,254 Fixed assets acquired under capital lease - 3,709 -7- Note 7: In January 2000, the Board of Directors authorized the funding of the Fiscal 1999 ESOP contribution primarily with the purchase of existing shares of the Company's common stock. During the first three months of Fiscal 2000, the Company funded $60 million toward the purchase of shares to be contributed. In January 1999, the Board of Directors authorized the funding of the fiscal 1998 ESOP contribution primarily with the issuance of new shares of the Company's common stock. During the first quarter of 1999, the Company issued 296,244 shares with an aggregate market value of $18.3 million. Note 8: On May 31, 2000, the Company issued $500 million principal of 8.25% Notes due June 1, 2010. The notes were issued at an original price of $990.90 per $1,000 principal amount, net of the original issue discount and underwriters' discount. The notes may not be redeemed prior to maturity. The notes were issued under a shelf registration statement filed with the Securities and Exchange Commission in April 2000. Note 9: Total comprehensive income, comprised of net earnings and unrealized holding gains (losses) on available-for-sale securities, was $187.2 and $124.8 million for the quarters ended April 28, 2000 and April 30, 1999, respectively, compared to reported net earnings of $187.1 and $125.0 million for the first quarter of 2000 and 1999, respectively. -8- 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 and liquidity and capital resources during the quarter ended April 28, 2000. This discussion should be read in conjunction with the financial statements, and financial statement footnotes included in the Company's most recent Form 10-K dated April 26, 2000. OPERATIONS For the first quarter of fiscal 2000, sales increased 18% to $4.5 billion, comparable store sales increased 4.1% and net earnings rose 50% to $187.1 million compared to last year's first quarter results. Diluted earnings per share were $.49 compared to $.33 for the comparable quarter of last year. First quarter 1999 earnings per share included a one-time charge of $.04 per share for costs relating to the Company's merger with Eagle Hardware & Garden, Inc. (Eagle). Excluding the one-time charge, both net earnings and diluted earnings per share increased 32% over the comparable quarter last year. The sales increase in the first quarter was attributable to the addition of 9.4 million square feet of retail selling space relating to new and relocated stores since last year's first quarter and the 4.1% comparable store sales gain. Sales in the Company's core businesses performed well during the first quarter. The Company experienced its strongest sales increases in appliances, kitchen cabinets and furniture, floors, windows and walls, nursery and gardening products, tools and outdoor hardlines. Gross margin was 27.94% of sales for the quarter ended April 28, 2000 compared to 26.70% for last year's comparable quarter. The increase in this year's margin rate is primarily due to favorable changes in product mix, ongoing store pricing disciplines, lower product costs and more effective controls relating to inventory shrinkage. Selling, general and administrative expenses (SG&A) were 18.06% of sales versus 17.61% in last year's first quarter. SG&A increased by 21% compared to the 18% increase in sales for the quarter. Higher store salaries, which were partially offset by lower net advertising costs and higher credit card program income, brought about the increase in SG&A as a percent of sales during the first quarter. Store opening costs were $25.8 million for the quarter ended April 28, 2000 compared to $18.2 million last year, representing costs associated with the opening of 15 stores during the current year's first quarter (12 new, 2 relocated and 1 contractor yard) compared to 13 stores for the comparable period last year (8 new and 5 relocated). Charges in this quarter for future and prior openings were $12.7 million compared to $6.0 million in last year's first quarter. The Company's 2000 expansion plans are discussed under "Liquidity and Capital Resources" below. Depreciation was $93.5 million for the quarter ended April 28, 2000, representing an increase of 20.0% over the comparable period last year. The increase is due primarily to additions of buildings, fixtures, displays and computer equipment relating to the Company's expansion program. Interest expense increased from $23.3 million in last year's first quarter to $26.0 million for the quarter ended April 28, 2000. Interest has increased due to interest expense on debentures issued during last year's first quarter and a decrease in short-term interest income. -9- In the first quarter of 1999, the Company recorded nonrecurring costs of $24.4 million relating to the merger with Eagle which consisted of $15.7 million relating to the write-off of non-usable Eagle properties, $1.5 million in future severance payments to former Eagle executives and $7.2 million in direct merger costs such as accounting, legal, investment banker and other miscellaneous fees. The Company's effective income tax rate was 36.80% for the quarter ended April 28, 2000 and 37.18% for last year's first quarter. The higher rate in 1999 is primarily related to the impact of non-deductible merger expenses incurred during last year's first quarter. LIQUIDITY AND CAPITAL RESOURCES The primary source of liquidity during the first quarter of 2000 was cash flows from operating activities. Net cash provided by operating activities was $460 million for the three months ended April 28, 2000 compared to $434 million for the first three months of fiscal 1999. The $26 million increase in the current year resulted primarily from increased earnings and an increase in accounts payable. These increases were partially offset by an increase in merchandise inventory, a decrease in the liability for employee retirement plans, due to the earlier funding of the Company's ESOP, and a decrease in other operating liabilities due to the timing of payments. The Company's working capital was $1.2 billion at April 28, 2000 compared to $1.6 billion at April 30, 1999 and $1.3 billion at January 28, 2000. 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 $468 million and $289 million for the three months ended April 28, 2000 and April 30, 1999, respectively. At April 28, 2000, the Company had 589 stores in 39 states and 58.5 million square feet of retail selling space, a 19% increase over the selling space as of April 30, 1999. Cash flows used in financing activities were $24 million for the three months ended April 28, 2000. Cash flows provided by financing activities for the three months ended April 30, 1999 totaled $701 million. The major uses of cash during the first quarter of 2000 consisted of payments totaling $34 million for debt maturities relating to the Company's Series A Medium Term Notes, other normal debt repayments, and cash dividend payments totaling $13 million. The major sources of cash provided by financing activities in the first three months of 1999 included the issuance of $400 million principal of 6.5% debentures and $348.3 million in net proceeds from a common stock offering. Property has increased as a result of the Company's plan to continue its expansion of retail sales floor square footage by entering new markets and by relocating from older, smaller format stores to larger, more modern stores. The Company's 2000 capital budget is $2.2 billion, inclusive of approximately $225 million in operating or capital leases. Approximately 85% of this planned commitment is for store expansion and new distribution centers. Expansion plans for 2000 consist of approximately 95 stores (including the relocation of 17 older, smaller format stores). This planned expansion is expected to increase sales floor square footage by approximately 18%. Expansion in the first three months of fiscal 2000 included 12 new stores, 2 relocations and 1 contractor yard representing 1.5 million square feet of new incremental retail space. The Company believes that funds from operations, debt issuances, leases and existing short-term credit agreements will be adequate to finance the 2000 expansion plan and other operating requirements. -10- On May 31, 2000, the Company issued $500 million principal of 8.25% Notes due June 1, 2010. The notes were issued at an original price of $990.90 per $1,000 principal amount, net of the original issue discount and underwriters' discount. The notes may not be redeemed prior to maturity. The notes were issued under a shelf registration statement filed with the Securities and Exchange Commission in April 2000. MARKET RISK As discussed in the annual report for the year ended January 28, 2000, the Company's major market risk exposure is the potential loss arising from changing interest rates and its impact on long-term investments and long-term debt. The Company's policy is to manage interest rate risks by maintaining a combination of fixed and variable rate financial instruments. The risks associated with long-term investments at April 28, 2000 have not changed materially since January 28, 2000. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June 1998. SFAS 133 is effective for the Company in the year beginning February 3, 2001. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Management is currently evaluating the impact of the adoption of SFAS 133 and its effect on the Company's financial statements. FORWARD-LOOKING STATEMENTS This Securities and Exchange Commission Form 10-Q may include "forward- looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ from expectations include, but are not limited to, general economic trends, availability and development of real estate for expansion, commodity markets, the nature of competition, vendor supply, and weather conditions, all which are described in detail in the Company's 1999 Annual Report. -11- INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors Lowe's Companies, Inc.: We have reviewed the accompanying consolidated balance sheet of Lowe's Companies, Inc. and subsidiary companies (the "Company") as of April 28, 2000 and April 30, 1999, and the related consolidated statements of current and retained earnings, and cash flows for the three-month periods ended April 28, 2000 and April 30, 1999. 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 subsidiary companies as of January 28, 2000, 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 17, 2000, 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 28, 2000 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 May 10, 2000 -12- Part II - OTHER INFORMATION Item 6 (a) - Exhibits 27. Financial Data Schedule (only submitted to the SEC in electronic format). Item 6 (b) - Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended April 28, 2000. 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. June 8, 2000 /s/ Kenneth W. Black, Jr. Date_______________ ______________________________ Kenneth W. Black, Jr. Senior Vice President and Chief Accounting Officer