low-20200731

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 July 31, 2020


☐			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 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 8/24/2020
Common Stock, $0.50 par value						755,736,046

LOWE’S COMPANIES, INC.

- TABLE OF CONTENTS -


			Page No.
Forward-Looking Statements				3
PART I - Financial Information				4
	Item 1.	Financial Statements	4
		Consolidated Balance Sheets	4
		Consolidated Statements of Earnings	5
		Consolidated Statements of Comprehensive Income	5
		Consolidated Statements of Shareholders’ Equity	6
		Consolidated Statements of Cash Flows	8
		Notes to Consolidated Financial Statements	9
		Note 1 : Summary of Significant Accounting Policies	9
		Note 2: Revenue	10
		Note 3: Investments	11
		Note 4: Fair Value Measurements	12
		Note 5 : Short-Term Borrowings	14
		Note 6 : Long-Term Debt	14
		Note 7 : Derivative Instruments	14
		Note 8 : Shareholders’ Equity	15
		Note 9 : Earnings Per Share	16
		Note 1 0 : Income Taxes	16
		Note 1 1 : Supplemental Disclosure	16
		Report of Independent Registered Public Accounting Firm	18
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
	Item 4.	Controls and Procedures	28
PART II - Other Information				30
	Item 1.	Legal Proceedings	30
	Item 1A.	Risk Factors	30
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
	Item 6.	Exhibits	31
		Signature	32

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FORWARD-LOOKING STATEMENTS

This Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements including words such as “believe”, “expect”, “anticipate”, “plan”, “desire”, “project”, “estimate”, “intend”, “will”, “should”, “could”, “would”, “may”, “strategy”, “potential”, “opportunity”, “outlook”, “guidance”, and similar expressions are forward-looking statements. Forward-looking statements involve, among other things, expectations, projections, and assumptions about future financial and operating results, objectives, business outlook, priorities, sales growth, shareholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for products and services, share repurchases, Lowe’s strategic initiatives, including those relating to acquisitions and dispositions and the impact of such transactions on our strategic and operational plans and financial results. Such statements involve risks and uncertainties and we can give no assurance that they will prove to be correct. Actual results may differ materially from those expressed or implied in such statements.

A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by these forward-looking statements including, but not limited to, changes in general economic conditions, such as the rate of unemployment, interest rate and currency fluctuations, fuel and other energy costs, slower growth in personal income, changes in consumer spending, changes in the rate of housing turnover, the availability of consumer credit and of mortgage financing, changes in commodity prices, changes or threatened changes in tariffs, outbreak of public health crises, such as the COVID-19 pandemic, availability and cost of goods from suppliers, changes in our management and key personnel, and other factors that can negatively affect our customers.

Investors and others should carefully consider the foregoing factors and other uncertainties, risks and potential events including, but not limited to, those described in “Item 1A - Risk Factors” in our most recent Annual Report on Form 10-K and as may be updated from time to time in Item 1A in our quarterly reports on Form 10-Q or other subsequent filings with the SEC, and in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” of this report on Form 10-Q. All such forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update these statements other than as required by law.

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Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

Lowe’s Companies, Inc.

Consolidated Balance Sheets (Unaudited)

In Millions, Except Par Value Data


	July 31, 2020		August 2, 2019		January 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	11,641	$	1,796	$	716
Short-term investments	1,085		275		160
Merchandise inventory – net	13,831		13,730		13,179
Other current assets	1,160		995		1,263
Total current assets	27,717		16,796		15,318
Property, less accumulated depreciation	18,612		18,203		18,669
Operating lease right-of-use assets	3,798		3,967		3,891
Long-term investments	326		179		372
Deferred income taxes – net	267		512		216
Other assets	1,043		1,038		1,005
Total assets	$	51,763	$	40,695	$	39,471

Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings	$	1,000	$	—	$	1,941
Current maturities of long-term debt	609		1,009		597
Current operating lease liabilities	520		492		501
Accounts payable	12,916		9,499		7,659
Accrued compensation and employee benefits	1,139		717		684
Deferred revenue	1,715		1,324		1,219
Other current liabilities	3,471		2,794		2,581
Total current liabilities	21,370		15,835		15,182
Long-term debt, excluding current maturities	20,197		16,538		16,768
Noncurrent operating lease liabilities	3,859		4,055		3,943
Deferred revenue – extended protection plans	981		868		894
Other liabilities	1,000		759		712
Total liabilities	47,407		38,055		37,499

Shareholders' equity:
Preferred stock, $5 par value: Authorized – 5.0 million shares; Issued and outstanding – none	—		—		—
Common stock, $0.50 par value: Authorized – 5.6 billion shares; Issued and outstanding – 756 million, 776 million, and 763 million shares, respectively	378		388		381
Capital in excess of par value	129		—		—
Retained earnings	4,134		2,439		1,727
Accumulated other comprehensive loss	(285)		(187)		(136)
Total shareholders' equity	4,356		2,640		1,972
Total liabilities and shareholders' equity	$	51,763	$	40,695	$	39,471

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

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Lowe’s Companies, Inc.

Consolidated Statements of Earnings (Unaudited)

In Millions, Except Per Share and Percentage Data


	Three Months Ended														Six Months Ended
	July 31, 2020						August 2, 2019						July 31, 2020				August 2, 2019
Current Earnings	Amount		% Sales		Amount		% Sales		Amount		% Sales		Amount		% Sales
Net sales	$	27,302	100.00	%	$	20,992	100.00	%	$	46,977	100.00	%	$	38,733	100.00	%
Cost of sales	17,998		65.92		14,252		67.89		31,161		66.33		26,412		68.19
Gross margin	9,304		34.08		6,740		32.11		15,816		33.67		12,321		31.81
Expenses:
Selling, general and administrative	5,020		18.39		4,048		19.29		9,215		19.62		7,909		20.42
Depreciation and amortization	327		1.20		311		1.48		653		1.39		614		1.58
Operating income	3,957		14.49		2,381		11.34		5,948		12.66		3,798		9.81
Interest – net	219		0.80		169		0.80		423		0.90		331		0.86

Pre-tax earnings	3,738		13.69		2,212		10.54		5,525		11.76		3,467		8.95
Income tax provision	910		3.33		536		2.56		1,360		2.89		745		1.92
Net earnings	$	2,828	10.36	%	$	1,676	7.98	%	$	4,165	8.87	%	$	2,722	7.03	%


Weighted average common shares outstanding – basic	752				781				754				788
Basic earnings per common share	$	3.74			$	2.14			$	5.50			$	3.44
Weighted average common shares outstanding – diluted	753				781				755				789
Diluted earnings per common share	$	3.74			$	2.14			$	5.50			$	3.44

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
	July 31, 2020						August 2, 2019						July 31, 2020				August 2, 2019
	Amount		% Sales		Amount		% Sales		Amount		% Sales		Amount		% Sales
Net earnings	$	2,828	10.36	%	$	1,676	7.98	%	$	4,165	8.87	%	$	2,722	7.03	%
Foreign currency translation adjustments – net of tax	114		0.41		69		0.33		(45)		(0.10)		36		0.09
Cash flow hedges – net of tax	(5)		(0.02)		—		—		(108)		(0.23)		(16)		(0.04)
Other	(1)		—		—		—		4		0.01		2		—
Other comprehensive income/(loss)	108		0.39		69		0.33		(149)		(0.32)		22		0.05
Comprehensive income	$	2,936	10.75	%	$	1,745	8.31	%	$	4,016	8.55	%	$	2,744	7.08	%

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

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Lowe’s Companies, Inc.

Consolidated Statements of Shareholders’ Equity (Unaudited)

In Millions


	Three Months Ended July 31, 2020
	Common Stock					Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
	Shares	Amount
Balance May 1, 2020	755	$	377	$	10	$	1,722	$	(393)		$	1,716

Net earnings	—	—		—		2,828		—			2,828
Other comprehensive income	—	—		—		—		108			108
Cash dividends declared, $0.55 per share	—	—		—		(416)		—			(416)
Share-based payment expense	—	—		41		—		—			41

Issuance of common stock under share-based payment plans	1	1		78		—		—			79
Balance July 31, 2020	756	$	378	$	129	$	4,134	$	(285)		$	4,356

	Six Months Ended July 31, 2020
	Common Stock					Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
	Shares	Amount
Balance January 31, 2020	763	$	381	$	—	$	1,727	$	(136)		$	1,972

Net earnings	—	—		—		4,165		—			4,165
Other comprehensive loss	—	—		—		—		(149)			(149)
Cash dividends declared, $1.10 per share	—	—		—		(831)		—			(831)
Share-based payment expense	—	—		64		—		—			64
Repurchases of common stock	(10)	(5)		(15)		(927)		—			(947)
Issuance of common stock under share-based payment plans	3	2		80		—		—			82
Balance July 31, 2020	756	$	378	$	129	$	4,134	$	(285)		$	4,356

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	Three Months Ended August 2, 2019
	Common Stock					Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive 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
Repurchases 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 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
Repurchases 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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Lowe’s Companies, Inc.

Consolidated Statements of Cash Flows (Unaudited)

In Millions


	Six Months Ended
	July 31, 2020		August 2, 2019
Cash flows from operating activities:
Net earnings	$	4,165	$	2,722
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	747		684
Noncash lease expense	234		228
Deferred income taxes	(14)		(121)
Loss on property and other assets – net	80		38

Share-based payment expense	64		51
Changes in operating assets and liabilities:
Merchandise inventory – net	(674)		(1,153)
Other operating assets	66		(104)
Accounts payable	5,259		1,202
Other operating liabilities	1,825		36
Net cash provided by operating activities	11,752		3,583

Cash flows from investing activities:
Purchases of investments	(1,132)		(245)
Proceeds from sale/maturity of investments	260		272
Capital expenditures	(710)		(526)
Proceeds from sale of property and other long-term assets	46		42
Other – net	(24)		(1)
Net cash used in investing activities	(1,560)		(458)

Cash flows from financing activities:
Net change in commercial paper	(941)		(722)
Net proceeds from issuance of debt	3,961		2,972
Repayment of long-term debt	(568)		(629)
Proceeds from issuance of common stock under share-based payment plans	83		72
Cash dividend payments	(836)		(767)
Repurchases of common stock	(966)		(2,770)
Other – net	(4)		(7)
Net cash provided by (used in) financing activities	729		(1,851)

Effect of exchange rate changes on cash	4		(1)

Net increase in cash and cash equivalents, including cash classified within current assets held for sale	10,925		1,273
Less: Net decrease in cash classified within current assets held for sale	—		12
Net increase in cash and cash equivalents	10,925		1,285
Cash and cash equivalents, beginning of period	716		511
Cash and cash equivalents, end of period	$	11,641	$	1,796

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

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Lowe’s Companies, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements (unaudited) and notes to the condensed 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 condensed consolidated financial statements (unaudited), in the opinion of management, contain all normal recurring adjustments necessary to present fairly the financial position as of July 31, 2020, and August 2, 2019, the results of operations, comprehensive income, and shareholders’ equity for the three and six months ended July 31, 2020, and August 2, 2019, and cash flows for the six months ended July 31, 2020, and August 2, 2019. The January 31, 2020 consolidated balance sheet was derived from the audited financial statements.

These interim condensed 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 31, 2020 (the Annual Report). The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.

Impacts of COVID-19

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. In response to the COVID-19 pandemic, federal, state and local governments put in place travel restrictions, quarantines, “shelter-in-place” orders, and various other restrictive measures in an attempt to control the spread of the disease. Such restrictions or orders have resulted in, and continue to result in, business closures, work stoppages, slowdowns and delays, among other effects that impact the Company’s operations, as well as customer demand and the operations of our suppliers.

At the onset of the pandemic, the Company implemented a number of measures to facilitate a safer store environment and to provide support for its associates, customers and community. During the first quarter, the Company expanded associate benefits in response to COVID-19 to provide additional paid time off, special payments to hourly associates, temporary wage increases and other benefits. During the second quarter of 2020, the Company provided additional bonus payments to hourly associates, in addition to continued enhanced cleaning protocols and charitable contributions. These actions resulted in $428 million and $740 million of expense included in selling, general and administrative (SG&A) expense in the consolidated statements of earnings for the three and six months ended July 31, 2020, respectively.

Also in response to COVID-19, the Company took proactive steps to further enhance its liquidity position by suspending its share repurchase program, increasing the capacity of its revolving credit facilities and the associated commercial paper program, as well as issuing senior notes in March 2020. See Note 5 and Note 6 for further discussion.

The Company continues to evaluate the carrying amounts of its long-lived assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable, including potential market impacts from the COVID-19 pandemic. The Company performed its quarterly assessment of long-lived assets and did not record any material long-lived asset impairments.

In addition, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which was enacted on March 27, 2020, includes measures to assist companies in response to the COVID-19 pandemic. In accordance with the CARES Act, the Company has deferred the payment of qualifying employer payroll taxes which are required to be paid over two years, with half to be paid by December 31, 2021 and the other half by December 31, 2022. As of July 31, 2020, the Company deferred $251 million of qualifying employer payroll taxes which is included in other liabilities in the consolidated balance sheets and included in cash flows from other operating liabilities in the consolidated statements of cash flows.

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation, including the addition of cash flow hedges – net of tax on the consolidated statements of comprehensive income, and the inclusion of goodwill within other assets on the consolidated balance sheets.

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Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting. The ASU provides practical expedients for contract modification accounting related to the transition away from the London Interbank Offered Rate (LIBOR) and other interbank offering rates to alternative reference rates. The expedients are applicable to contract modifications made and hedging relationships entered into on or before December 31, 2022. The Company intends to leverage the expedient when needed for reference rate transition. The Company continues to evaluate this standard update, and does not expect a material impact to the Company’s financial statements or disclosures.

Recent accounting pronouncements pending adoption not discussed in this Form 10-Q or in the 2019 Form 10-K are either not applicable to the Company or are not expected to have a material impact on the Company.

Note 2: Revenue - 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.

The following table presents the Company’s sources of revenue:


(In millions)	Three Months Ended									Six Months Ended
			July 31, 2020			August 2, 2019			July 31, 2020			August 2, 2019
Products	$	26,359		$	19,976		$	45,380		$	36,877
Services	508			591			907			1,144
Other	435			425			690			712
Net sales	$	27,302		$	20,992		$	46,977		$	38,733

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 $272 million at July 31, 2020, and $232 million at August 2, 2019. The associated right of return assets reflected in other current assets were $173 million at July 31, 2020, and $152 million at August 2, 2019.

Deferred revenue - retail

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 $1.3 billion at July 31, 2020, and $875 million at August 2, 2019. The majority of revenue for goods and services is recognized in the quarter following revenue deferral.

Deferred revenue - stored-value cards

The deferred revenues associated with outstanding stored-value cards (gift cards and returned merchandise credits) were $433 million and $449 million at July 31, 2020, and August 2, 2019, respectively, and these amounts are included in deferred revenue on the consolidated balance sheets. Amounts recognized as breakage were insignificant for the three and six months ended July 31, 2020, and August 2, 2019.

Deferred revenue - extended protection plans

The deferred revenues from separately priced extended protection plans were $981 million and $868 million at July 31, 2020, and August 2, 2019, respectively. Revenue recognized into sales were $101 million and $208 million for the three and six months ended July 31, 2020, respectively, and $101 million and $200 million for the three and six months ended August 2, 2019, respectively. Incremental direct acquisition costs associated with the sale of extended protection plans for contracts greater than one year are also deferred and recognized as expense on a straight-line basis over the respective contract term and were insignificant at July 31, 2020, and August 2, 2019.

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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 in cost of sales when incurred and totaled $42 million and $78 million for the three and six months ended July 31, 2020, respectively, and $48 million and $96 million for the three and six months ended August 2, 2019, respectively.

Disaggregation of Revenues

The following table presents the Company’s net sales disaggregated by merchandise division:


	Three Months Ended												Six Months Ended
	July 31, 2020						August 2, 2019					July 31, 2020		August 2, 2019
(In millions)	Net Sales		%		Net Sales		%		Net Sales		%	Net Sales	%
Hardlines ¹	$	10,091	37	%	$	7,188	34	%	$	16,524	35