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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended August 2, 2019
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
lowesgraphicimage01.jpg
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,
 
North Carolina
 
28117
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
Registrant’s telephone number, including area code
 
(704)
758-1000
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.50 per share
LOW
New York Stock Exchange

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   No

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  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 8/30/2019
Common Stock, $0.50 par value
 
771,798,638



LOWE’S COMPANIES, INC.
- TABLE OF CONTENTS -
PART I - Financial Information
Page No.
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
PART II - Other Information
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 


Table of Contents

Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Lowe’s Companies, Inc.
Consolidated Balance Sheets
In Millions, Except Par Value Data
 
 
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
August 2, 2019
 
August 3, 2018
 
February 1, 2019
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
$
1,796

 
$
2,251

 
$
511

Short-term investments
 
 
275

 
391

 
218

Merchandise inventory - net
 
 
13,730

 
11,885

 
12,561

Other current assets
 
 
995

 
956

 
938

Total current assets
 
 
16,796

 
15,483

 
14,228

Property, less accumulated depreciation
 
 
18,203

 
19,172

 
18,432

Operating lease right-of-use assets
 
 
3,967

 

 

Long-term investments
 
 
179

 
87

 
256

Deferred income taxes - net
 
 
512

 
249

 
294

Goodwill
 
 
303

 
1,271

 
303

Other assets
 
 
735

 
843

 
995

Total assets
 
 
$
40,695

 
$
37,105

 
$
34,508

 
 
 
 
 
 
 
 
Liabilities and shareholders' equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Short-term borrowings
 
 
$

 
$

 
$
722

Current maturities of long-term debt
 
 
1,009

 
894

 
1,110

Current operating lease liabilities
 
 
492

 

 

Accounts payable
 
 
9,499

 
8,984

 
8,279

Accrued compensation and employee benefits
 
 
717

 
671

 
662

Deferred revenue
 
 
1,324

 
1,449

 
1,299

Other current liabilities
 
 
2,794

 
2,583

 
2,425

Total current liabilities
 
 
15,835

 
14,581

 
14,497

Long-term debt, excluding current maturities
 
 
16,538

 
14,937

 
14,391

Noncurrent operating lease liabilities
 
 
4,055

 

 

Deferred revenue - extended protection plans
 
 
868

 
828

 
827

Other liabilities
 
 
759

 
978

 
1,149

Total liabilities
 
 
38,055

 
31,324

 
30,864

 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
 
 
Preferred stock - $5 par value, none issued
 
 

 

 

Common stock - $0.50 par value;
 
 
 
 
 
 
 
Shares issued and outstanding
 
 
 
 
 
 
 
August 2, 2019
776

 
 
 
 
 
 
August 3, 2018
811

 
 
 
 
 
 
February 1, 2019
801

 
388

 
406

 
401

Capital in excess of par value
 
 

 

 

Retained earnings
 
 
2,439

 
5,517

 
3,452

Accumulated other comprehensive loss
 
 
(187
)
 
(142
)
 
(209
)
Total shareholders' equity
 
 
2,640

 
5,781

 
3,644

Total liabilities and shareholders' equity
 
 
$
40,695

 
$
37,105

 
$
34,508

 
 

 
 

 
 

 
 

See accompanying notes to the consolidated financial statements (unaudited).

3

Table of Contents

Lowe’s Companies, Inc.
Consolidated Statements of Current and Retained Earnings (Unaudited)
In Millions, Except Per Share and Percentage Data
 
Three Months Ended
 
Six Months Ended
 
August 2, 2019
 
August 3, 2018
 
August 2, 2019
 
August 3, 2018
Current Earnings
Amount
 
% Sales
 
Amount
 
% Sales
 
Amount
 
% Sales
 
Amount
 
% Sales
Net sales
$
20,992

 
100.00
 
$
20,888

 
100.00
 
$
38,733

 
100.00
 
$
38,247

 
100.00
Cost of sales
14,252

 
67.89
 
14,003

 
67.04
 
26,412

 
68.19
 
25,615

 
66.97
Gross margin
6,740

 
32.11
 
6,885

 
32.96
 
12,321

 
31.81
 
12,632

 
33.03
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
4,048

 
19.29
 
4,386

 
20.99
 
7,909

 
20.42
 
8,319

 
21.75
Depreciation and amortization
311

 
1.48
 
336

 
1.61
 
614

 
1.58
 
685

 
1.79
Operating income
2,381

 
11.34
 
2,163

 
10.36
 
3,798

 
9.81
 
3,628

 
9.49
Interest - net
169

 
0.80
 
153

 
0.74
 
331

 
0.86
 
313

 
0.82
Pre-tax earnings
2,212

 
10.54
 
2,010

 
9.62
 
3,467

 
8.95
 
3,315

 
8.67
Income tax provision
536

 
2.56
 
490

 
2.34
 
745

 
1.92
 
806

 
2.11
Net earnings
$
1,676

 
7.98
 
$
1,520

 
7.28
 
$
2,722

 
7.03
 
$
2,509

 
6.56
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
781

 
 
 
813

 
 
 
788

 
 
 
819

 
 
Basic earnings per common share
$
2.14

 
 
 
$
1.86

 
 
 
$
3.44

 
 
 
$
3.05

 
 
Weighted average common shares outstanding - diluted
781

 
 
 
814

 
 
 
789

 
 
 
820

 
 
Diluted earnings per common share
$
2.14

 
 
 
$
1.86

 
 
 
$
3.44

 
 
 
$
3.05

 
 
Cash dividends per share
$
0.55

 
 
 
$
0.48

 
 
 
$
1.03

 
 
 
$
0.89

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained Earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
3,095

 
 
 
$
5,405

 
 
 
$
3,452

 
 
 
$
5,425

 
 
Cumulative effect of accounting change

 
 
 

 
 
 
(263
)
 
 
 
33

 
 
Net earnings
1,676

 
 
 
1,520

 
 
 
2,722

 
 
 
2,509

 
 
Cash dividends declared
(428
)
 
 
 
(390
)
 
 
 
(810
)
 
 
 
(728
)
 
 
Share repurchases
(1,904
)
 
 
 
(1,018
)
 
 
 
(2,662
)
 
 
 
(1,722
)
 
 
Balance at end of period
$
2,439

 
 
 
$
5,517

 
 
 
$
2,439

 
 
 
$
5,517

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the consolidated financial statements (unaudited).

Lowe’s Companies, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
In Millions, Except Percentage Data
 
Three Months Ended
 
Six Months Ended
 
August 2, 2019
 
August 3, 2018
 
August 2, 2019
 
August 3, 2018
 
Amount
 
% Sales
 
Amount
 
% Sales
 
Amount
 
% Sales
 
Amount
 
% Sales
Net earnings
$
1,676

 
7.98
 
$
1,520

 
7.28

 
$
2,722

 
7.03

 
$
2,509

 
6.56

Foreign currency translation adjustments - net of tax
69

 
0.33
 
(70
)
 
(0.34
)
 
36

 
0.09

 
(154
)
 
(0.40
)
Other

 
 

 

 
(14
)
 
(0.04
)
 

 

Other comprehensive income/(loss)
69

 
0.33
 
(70
)
 
(0.34
)
 
22

 
0.05

 
(154
)
 
(0.40
)
Comprehensive income
$
1,745

 
8.31
 
$
1,450

 
6.94

 
$
2,744

 
7.08

 
$
2,355

 
6.16

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the consolidated financial statements (unaudited).

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Lowe’s Companies, Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
In Millions, Except Per Share Data
 
Three Months Ended August 2, 2019
 
Common Stock
 
Capital in Excess
of Par Value
 
Retained Earnings
 
Accumulated Other Comprehensive
Income/(Loss)
 
Total Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
Balance May 3, 2019
795

 
$
397

 
$

 
$
3,095

 
$
(256
)
 
$
3,236

Net earnings
 
 
 
 
 
 
1,676

 
 
 
1,676

Other comprehensive income
 
 
 
 
 
 
 
 
69

 
69

Cash dividends declared, $0.55 per share
 
 
 
 
 
 
(428
)
 
 
 
(428
)
Share-based payment expense
 
 
 
 
13

 
 
 
 
 
13

Repurchase of common stock
(20
)
 
(9
)
 
(51
)
 
(1,904
)
 
 
 
(1,964
)
Issuance of common stock under share-based payment plans
1

 

 
38

 
 
 
 
 
38

Balance August 2, 2019
776

 
$
388

 
$

 
$
2,439

 
$
(187
)
 
$
2,640

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended August 2, 2019
 
Common Stock
 
Capital in Excess
of Par Value
 
Retained Earnings
 
Accumulated Other Comprehensive
Income/(Loss)
 
Total Shareholders’ Equity
 
Shares

 
Amount

 
 
 
 
Balance February 1, 2019
801

 
$
401

 
$

 
$
3,452

 
$
(209
)
 
$
3,644

Cumulative effect of accounting change
 
 
 
 
 
 
(263
)
 
 
 
(263
)
Net earnings
 
 
 
 
 
 
2,722

 
 
 
2,722

Other comprehensive income
 
 
 
 
 
 
 
 
22

 
22

Cash dividends declared, $1.03 per share
 
 
 
 
 
 
(810
)
 
 
 
(810
)
Share-based payment expense
 
 
 
 
52

 
 
 
 
 
52

Repurchase of common stock
(28
)
 
(14
)
 
(121
)
 
(2,662
)
 
 
 
(2,797
)
Issuance of common stock under share-based payment plans
3

 
1

 
69

 
 
 
 
 
70

Balance August 2, 2019
776

 
$
388

 
$

 
$
2,439

 
$
(187
)
 
$
2,640

See accompanying notes to the consolidated financial statements (unaudited).


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Table of Contents

Lowe’s Companies, Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
In Millions, Except Per Share Data
 
Three Months Ended August 3, 2018
 
Common Stock
 
Capital in Excess
of Par Value
 
Retained Earnings
 
Accumulated Other Comprehensive
Income/(Loss)
 
Total Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
Balance May 4, 2018
822

 
$
411

 
$

 
$
5,405

 
$
(71
)
 
$
5,745

Net earnings
 
 
 
 
 
 
1,520

 
 
 
1,520

Other comprehensive loss
 
 
 
 
 
 
 
 
(71
)
 
(71
)
Cash dividends declared, $0.48 per share
 
 
 
 
 
 
(390
)
 
 
 
(390
)
Share-based payment expense
 
 
 
 
40

 
 
 
 
 
40

Repurchase of common stock
(11
)
 
(5
)
 
(82
)
 
(1,018
)
 
 
 
(1,105
)
Issuance of common stock under share-based payment plans

 

 
42

 
 
 
 
 
42

Balance August 3, 2018
811

 
$
406

 
$

 
$
5,517

 
$
(142
)
 
$
5,781

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended August 3, 2018
 
Common Stock
 
Capital in Excess
of Par Value
 
Retained Earnings
 
Accumulated Other Comprehensive
Income/(Loss)
 
Total Shareholders’ Equity
 
Shares

 
Amount

 
 
 
 
Balance February 2, 2018
830

 
$
415

 
$
22

 
$
5,425

 
$
11

 
$
5,873

Cumulative effect of accounting change
 
 
 
 
 
 
33

 
 
 
33

Net earnings
 
 
 
 
 
 
2,509

 
 
 
2,509

Other comprehensive loss
 
 
 
 
 
 
 
 
(153
)
 
(153
)
Cash dividends declared, $0.89 per share
 
 
 
 
 
 
(728
)
 
 
 
(728
)
Share-based payment expense
 
 
 
 
61

 
 
 
 
 
61

Repurchase of common stock
(20
)
 
(10
)
 
(132
)
 
(1,722
)
 
 
 
(1,864
)
Issuance of common stock under share-based payment plans
1

 
1

 
49

 
 
 
 
 
50

Balance August 3, 2018
811

 
$
406

 

 
$
5,517

 
$
(142
)
 
$
5,781

See accompanying notes to the consolidated financial statements (unaudited).

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Table of Contents

Lowe’s Companies, Inc.
Consolidated Statements of Cash Flows (Unaudited)
In Millions
 
Six Months Ended
 
August 2, 2019
 
August 3, 2018
Cash flows from operating activities:
 
 
 
Net earnings
$
2,722

 
$
2,509

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
684

 
751

Noncash lease expense
228

 

Deferred income taxes
(121
)
 
(75
)
Loss on property and other assets - net
38

 
261

Loss on cost method and equity method investments
12

 
3

Share-based payment expense
51

 
62

Changes in operating assets and liabilities:
 
 
 
Merchandise inventory - net
(1,153
)
 
(549
)
Other operating assets
(116
)
 
(140
)
Accounts payable
1,202

 
2,408

Other operating liabilities
36

 
557

Net cash provided by operating activities
3,583

 
5,787

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of investments
(245
)
 
(980
)
Proceeds from sale/maturity of investments
272

 
1,012

Capital expenditures
(526
)
 
(543
)
Proceeds from sale of property and other long-term assets
42

 
30

Other - net
(1
)
 
1

Net cash used in investing activities
(458
)
 
(480
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net change in short-term borrowings
(722
)
 
(1,137
)
Net proceeds from issuance of long-term debt
2,972

 

Repayment of long-term debt
(629
)
 
(24
)
Proceeds from issuance of common stock under share-based payment plans
72

 
50

Cash dividend payments
(767
)
 
(678
)
Repurchase of common stock
(2,770
)
 
(1,846
)
Other - net
(7
)
 
(2
)
Net cash used in financing activities
(1,851
)
 
(3,637
)
 
 
 
 
Effect of exchange rate changes on cash
(1
)
 
(7
)
 
 
 
 
Net increase in cash and cash equivalents, including cash classified within current assets
   held for sale
1,273

 
1,663

Less: Net decrease in cash classified within current assets held for sale
12

 

Net increase in cash and cash equivalents
1,285

 
1,663

Cash and cash equivalents, beginning of period
511

 
588

Cash and cash equivalents, end of period
$
1,796

 
$
2,251

 
 
 
 
See accompanying notes to the consolidated financial statements (unaudited).

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Table of Contents

Lowe’s Companies, Inc.
Notes to Consolidated Financial Statements (Unaudited)

Note 1: Summary of Significant Accounting Policies

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 (GAAP). The consolidated financial statements (unaudited), in the opinion of management, contain all adjustments necessary to present fairly the financial position as of August 2, 2019, and August 3, 2018, the results of operations and comprehensive income for the three and six months ended August 2, 2019, and August 3, 2018, and cash flows for the six months ended August 2, 2019 and August 3, 2018.

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 February 1, 2019 (the Annual Report). The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.

Reclassifications

Certain prior period amounts have been reclassified to conform to current classifications.

Accounting Pronouncements Recently Adopted

Effective February 2, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), and all related amendments, using the optional transition approach and recognized the cumulative impact of adoption in the opening balance of retained earnings. Under ASU 2016-02, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The Company adopted the standard utilizing the transition election to not restate comparative periods for the impact of adopting the standard and recognizing the cumulative impact of adoption in the opening balance of retained earnings. The Company elected the package of transition expedients available for expired or existing contracts, which allowed the carry-forward of historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. Adoption of the standard resulted in the recording of additional net lease-related assets and lease-related liabilities of approximately $3.6 billion and $3.9 billion, respectively, as of February 2, 2019. The difference between the additional lease assets and lease liabilities, net of the $87 million deferred tax impact, was $263 million and was recorded as an adjustment to retained earnings. This adjustment to retained earnings primarily represents the write-off of right-of-use assets associated with closed locations, net of previously established store closing lease obligations as well as the derecognition of build-to-suit leases. The adoption of this standard by the Company did not have a material impact on its consolidated statements of earnings, comprehensive income or cash flows and will have no impact on the Company’s debt covenant compliance under its current agreements. See Note 3 for additional details of the Company’s leases.

Accounting Pronouncements Not Yet Adopted

Recent accounting pronouncements pending adoption not discussed in this Form 10-Q or in the 2018 Form 10-K are either not applicable to the Company or are not expected to have a material impact on the Company.

Note 2: Change in Accounting Principle - During the fourth quarter of fiscal 2018, the Company changed its method of accounting for shipping and handling costs from the Company’s stores, distribution centers, and other locations to customers. Under the new accounting principle, shipping and handling costs related to the delivery of products from the Company to customers are included in costs of sales, whereas previously, they were included in SG&A expense as well as depreciation and amortization. In connection with the change in presentation, the Company also changed its definition of shipping and handling costs to include all direct and indirect costs associated with delivering product to a customer, including expenses associated with the central delivery terminals and depreciation and amortization of delivery assets. Under the previous definition of shipping and handling costs, the Company only included third-party delivery costs, salaries, and vehicle operations expenses relating to the delivery of product from stores and distribution centers to customers. The impact of this change in definition was not material.


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Table of Contents

The Company believes including these expenses in cost of sales is preferable, as it better aligns these costs with the related revenue in the gross profit calculation and is consistent with the practices of other retailers. This change in accounting principle has been applied retrospectively, and the consolidated statements of earnings reflect the effect of this accounting principle change in all years presented. This reclassification had no impact on operating income, net earnings or diluted earnings per share. The consolidated balance sheets, the consolidated statements of comprehensive income, consolidated statements of shareholders’ equity, and the consolidated statements of cash flows were not impacted by this accounting principle change.

The consolidated statements of earnings for the three and six months ended August 3, 2018 have been adjusted to reflect this change in accounting principle. The impact of the adjustment for the three months ended August 3, 2018 was an increase of $314 million to cost of sales and a corresponding decrease to SG&A expense of $304 million and depreciation and amortization expense of $10 million. The impact of the adjustment for the six months ended August 3, 2018 was an increase of $579 million to cost of sales and a corresponding decrease to SG&A expense for $559 million and depreciation and amortization expense of $20 million.

Note 3: Leases - During the first quarter of fiscal 2019, the Company adopted ASU 2016-02, Leases (Topic 842), which requires leases to be recognized on the balance sheet. Leases with an original term of 12 months or less are not recognized on the Company’s balance sheet, and the lease expense related to those short-term leases is recognized over the lease term. The Company does not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class.

The Company leases certain retail stores, warehouses, distribution centers, office space, land and equipment under finance and operating leases. Lease commencement occurs on the date the Company takes possession or control of the property or equipment. Original terms for our facility-related leases are generally between five and 20 years.  These leases generally contain provisions for four to six renewal options of five years each. Original terms for equipment-related leases, primarily material handling equipment and vehicles, are generally between one and seven years. Some of the Company’s leases also include rental escalation clauses and/or termination provisions. Renewal options and termination options are included in the determination of lease payments when appropriate based on management’s assessment of the probability that the options will be exercised, considering the facility’s financial performance, strategic importance and/or invested capital.

If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of the Company’s leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable, the Company’s estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on information available at lease commencement.

Some lease agreements also provide for contingent rentals based on sales performance in excess of specified minimums or on changes in the consumer price index.  Contingent rentals, which are based on future performance or changes in indices, are excluded from the determination of lease payments and were not significant for any of the periods presented.  The Company’s lease agreements do not contain any material restrictions or covenants or any material residual value guarantees.

The Company subleases certain properties that are not used in its operations.  Sublease income was not significant for any of the periods presented.


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Table of Contents

The table below presents the lease-related assets and liabilities recorded on the balance sheet.
Leases
(In millions)
Classification
August 2, 2019
Assets
 
 
Operating lease assets
Operating lease right-of-use assets
$
3,967

Finance lease assets
Property, less accumulated depreciation 1
303

Total lease assets
 
4,270

 
 
 
Liabilities
 
 
Current
 
 
Operating
Current operating lease liabilities
492

Finance
Current maturities of long-term debt
35

Noncurrent
 
 
Operating
Noncurrent operating lease liabilities
4,055

Finance
Long-term debt, excluding current maturities
382

Total lease liabilities
 
$
4,964

1 
Finance lease assets are recorded net of accumulated amortization of $17 million as of August 2, 2019.

The table below presents the lease costs for finance and operating leases for the three and six months ended August 2, 2019:
Lease Cost
(In millions)
Three Months Ended August 2, 2019
Six Months Ended August 2, 2019
Finance lease cost
 
 
Amortization of leased assets
$
9

$
17

Interest on lease liabilities
7

14

Operating lease cost 1
176

339

Total lease cost
$
192

$
370

1 
Includes short-term leases, variable lease costs, and sublease income, which are immaterial.

The future minimum rental payments required under operating and finance lease obligations as of August 2, 2019 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:
Maturity of lease liabilities
(In millions)
Operating Leases 1
Finance
Leases 2
Total
2019
$
289

$
27

$
316

2020
675

61

736

2021
654

60

714

2022
659

63

722

2023
570

58

628

After 2023
3,010

321

3,331

Total lease payments
5,857

590

6,447

Less: interest 3
(1,310
)
(173
)
(1,483
)
Present value of lease liabilities 4
$
4,547

$
417

$
4,964


1 
Operating lease payments include $275 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $294 million of minimum lease payments for leases signed but not yet commenced.
2 
Finance lease payments include $19 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $329 million of minimum lease payments for leases signed but not yet commenced.
3 
Calculated using the lease-specific incremental borrowing rate.
4 
Includes the current portion of $492 million for operating leases and $35 million for finance leases.


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Table of Contents

Lease Term and Discount Rate
August 2, 2019
Weighted-average remaining lease term (years)
 
Operating leases
10.45

Finance leases
10.80

Weighted-average discount rate
 
Operating leases
4.23
%
Finance leases
7.38
%

Other Information
(In millions)
Six Months Ended August 2, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows used for operating leases
$
432

Operating cash flows used for finance leases
14

Financing cash flows used for finance leases
27

Leased assets obtained in exchange for new finance lease liabilities
31

Leased assets obtained in exchange for new operating lease liabilities
317



Prior Period Disclosures

As a result of the adoption of ASC 842, Leases, on February 2, 2019, the Company is required to present future minimum lease payments for operating and finance lease obligations having initial or remaining non-cancelable lease terms in excess of one year. These future minimum lease payments were previously disclosed in our 2018 Annual Report on Form 10-K and accounted for under previous lease guidance. Commitments as of February 1, 2019 were as follows:

 
February 1, 2019
Fiscal Year
(In millions)
Operating Leases

Capitalized Lease Obligations

Total

2019
$
595

$
133

$
728

2020
605

87

692

2021
564

90

654

2022
519

87

606

2023
473

86

559

Later years
2,609

783

3,392

Total minimum lease payments
$
5,365

$
1,266

$
6,631

Less amount representing interest
 
(492
)
 
Present value of minimum lease payments
 
774

 
Less current maturities
 
(65
)
 
Present value of minimum lease payments, less current maturities
 
$
709

 


Note 4: Revenue Recognition - Net sales consists primarily of revenue, net of sales tax, associated with contracts with customers for the sale of goods and services in amounts that reflect consideration the Company is entitled to in exchange for those goods and services.


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Table of Contents

The following table presents the Company’s sources of revenue:
(In millions)
Three Months Ended
 
Six Months Ended
August 2, 2019
 
August 3, 2018
 
August 2, 2019
 
August 3, 2018
Products
$
19,976

 
$
19,735

 
$
36,877

 
$
36,235

Services
591

 
709

 
1,144

 
1,333

Other
425

 
444

 
712

 
679

Net sales
$
20,992

 
$
20,888

 
$
38,733

 
$
38,247



Revenue from products primarily relates to in-store and online merchandise purchases, which are recognized at the point in time when the customer obtains control of the merchandise, which is at the time of in-store purchase or delivery of the product to the customer. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded.  The merchandise return reserve is presented on a gross basis, with a separate asset and liability included in the consolidated balance sheets. Anticipated sales returns reflected in other current liabilities were $232 million at August 2, 2019 and $228 million at August 3, 2018. The associated right of return assets reflected in other current assets were $152 million at August 2, 2019 and $147 million at August 3, 2018.
Revenues from services primarily relate to professional installation services the Company provides through subcontractors related to merchandise purchased by a customer. In certain instances, installation services include materials provided by the subcontractor, and both product and installation are included in service revenue. The Company recognizes revenue associated with services as they are rendered, and the majority of services are completed within one week from initiation.
Deferred revenue is presented for merchandise that has not yet transferred control to the customer and for services that have not yet been provided, but for which tender has been accepted. Deferred revenue is recognized in sales either at a point in time when the customer obtains control of merchandise through pickup or delivery, or over time as services are provided to the customer. Deferred revenues associated with amounts received for which customers have not taken possession of the merchandise or for which installation has not yet been completed were $875 million at August 2, 2019 and $1.0 billion at August 3, 2018. The majority of revenue for goods and services is recognized in the quarter following revenue deferral.
Stored-value cards
In addition, the Company defers revenues from stored-value cards, which include gift cards and returned merchandise credits, and recognizes revenue into sales when the cards are redeemed.  The liability associated with outstanding stored-value cards was $449 million and $419 million at August 2, 2019, and August 3, 2018, respectively, and these amounts are included in deferred revenue on the consolidated balance sheets. The Company recognizes income from unredeemed stored-value cards in proportion to the pattern of rights exercised by the customer. Amounts recognized as breakage were insignificant for the three and six months ended August 2, 2019 and August 3, 2018.
Extended protection plans
The Company also defers revenues for its separately-priced extended protection plan contracts, which is 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 five years from the date of purchase or the end of the manufacturer’s warranty, as applicable. Deferred revenue from extended protection plans recognized into sales were $101 million and $200 million for the three and six months ended August 2, 2019, respectively, and $101 million and $196 million for the three and six months ended August 3, 2018, respectively. 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 and were insignificant at August 2, 2019 and August 3, 2018, respectively.  The Company’s extended protection plan deferred costs are included in other assets (noncurrent) 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 and was not material in any of the periods presented.  Expenses for claims are recognized when incurred and totaled $48 million and $96 million for the three and six months ended August 2, 2019, respectively, and $48 million and $94 million for the three and six months ended August 3, 2018, respectively.


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Table of Contents

Disaggregation of Revenues

The following table presents the Company’s net sales disaggregated by merchandise division:
 
Three Months Ended
 
Six Months Ended
 
August 2, 2019
 
August 3, 2018
 
August 2, 2019
 
August 3, 2018
(In millions)
Total Sales
 
%
 
Total Sales
 
%
 
Total Sales
 
%
 
Total Sales
 
%
Hardlines ¹
$
7,153

 
34
 
$
6,925

 
33
 
$
12,682

 
33
 
$
12,053

 
32
Home Décor ²
6,938

 
33
 
6,750

 
32
 
13,211

 
34
 
12,951

 
34
Building Products ³
6,376

 
30
 
6,445

 
31
 
11,900

 
31
 
11,968

 
31
Other
525

 
3
 
768

 
4
 
940

 
2
 
1,275

 
3