lowesform10q08012008.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 August 1,
2008
|
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 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 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).
o 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 AUGUST 29, 2008
|
Common
Stock, $.50 par value
|
|
1,465,680,775
|
LOWE’S
COMPANIES, INC.
-
INDEX -
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PART I - Financial
Information
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Page
No.
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Item
1.
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Financial
Statements
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3
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4
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5
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6 -
10
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11
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Item
2.
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12
- 19
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Item
3.
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19
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Item
4.
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19
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PART II - Other
Information
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Item
1A.
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20
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Item
4.
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20
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Item
6.
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21
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22
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23
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Part
I - FINANCIAL INFORMATION
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Item
1. Financial Statements
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Lowe's
Companies, Inc.
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In
Millions, Except Par Value Data
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(Unaudited)
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(Unaudited)
|
|
|
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August
1, 2008
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|
August
3, 2007
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|
February
1, 2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
477
|
|
$
|
337
|
|
$
|
281
|
|
Short-term investments (includes $39 million of trading securities at
August 1, 2008)
|
|
|
377
|
|
|
325
|
|
|
249
|
|
Merchandise
inventory - net
|
|
|
7,939
|
|
|
7,799
|
|
|
7,611
|
|
Deferred
income taxes - net
|
|
|
275
|
|
|
209
|
|
|
247
|
|
Other
current assets
|
|
|
236
|
|
|
181
|
|
|
298
|
|
|
|
|
|
|
|
|
|
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|
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Total
current assets
|
|
|
9,304
|
|
|
8,851
|
|
|
8,686
|
|
|
|
|
|
|
|
|
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Property,
less accumulated depreciation
|
|
|
22,066
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19,825
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21,361
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Long-term
investments
|
|
|
798
|
|
|
627
|
|
|
509
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Other
assets
|
|
|
381
|
|
|
341
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
assets
|
|
$
|
32,549
|
|
$
|
29,644
|
|
$
|
30,869
|
|
|
|
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|
|
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|
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Liabilities
and shareholders' equity
|
|
|
|
|
|
|
|
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|
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Current
liabilities:
|
|
|
|
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|
|
|
|
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Short-term
borrowings
|
|
$
|
189
|
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$
|
555
|
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$
|
1,064
|
|
Current
maturities of long-term debt
|
|
|
31
|
|
|
85
|
|
|
40
|
|
Accounts
payable
|
|
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4,786
|
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4,167
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3,713
|
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Accrued
compensation and employee benefits
|
|
|
492
|
|
|
414
|
|
|
467
|
|
Self-insurance
liabilities
|
|
|
736
|
|
|
726
|
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|
671
|
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Deferred
revenue
|
|
|
816
|
|
|
819
|
|
|
717
|
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Other
current liabilities
|
|
|
1,478
|
|
|
1,274
|
|
|
1,079
|
|
|
|
|
|
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|
|
|
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Total
current liabilities
|
|
|
8,528
|
|
|
8,040
|
|
|
7,751
|
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|
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Long-term
debt, excluding current maturities
|
|
|
5,050
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|
4,301
|
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|
5,576
|
|
Deferred
income taxes - net
|
|
|
641
|
|
|
628
|
|
|
670
|
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Other
liabilities
|
|
|
824
|
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|
706
|
|
|
774
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|
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|
|
|
|
|
|
|
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Total
liabilities
|
|
|
15,043
|
|
|
13,675
|
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|
14,771
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Shareholders'
equity:
|
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Preferred
stock - $5 par value, none issued
|
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-
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-
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-
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Common
stock - $.50 par value;
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Shares
issued and outstanding
|
|
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August
1, 2008
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
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August
3, 2007
|
1,485
|
|
|
|
|
|
|
|
|
|
|
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February
1, 2008
|
1,458
|
|
|
732
|
|
|
742
|
|
|
729
|
|
Capital
in excess of par value
|
|
|
118
|
|
|
11
|
|
|
16
|
|
Retained
earnings
|
|
|
16,648
|
|
|
15,210
|
|
|
15,345
|
|
Accumulated
other comprehensive income
|
|
|
8
|
|
|
6
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
shareholders' equity
|
|
|
17,506
|
|
|
15,969
|
|
|
16,098
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
liabilities and shareholders' equity
|
|
$
|
32,549
|
|
$
|
29,644
|
|
$
|
30,869
|
|
|
|
|
|
|
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|
Lowe's Companies,
Inc.
|
|
|
|
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In
Millions, Except Per Share Data
|
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|
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|
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|
|
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|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
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|
August
1, 2008
|
|
|
August
3, 2007
|
|
|
August
1, 2008
|
|
|
August
3, 2007
|
|
Current Earnings
|
|
|
Amount
|
Percent
|
|
|
Amount
|
Percent
|
|
|
Amount
|
Percent
|
|
|
Amount
|
Percent
|
|
Net sales
|
|
$
|
14,509
|
100.00
|
|
$
|
14,167
|
100.00
|
|
$
|
26,519
|
100.00
|
|
$
|
26,338
|
100.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Cost
of sales
|
|
|
9,527
|
65.66
|
|
|
9,284
|
65.53
|
|
|
17,371
|
65.50
|
|
|
17,195
|
65.29
|
|
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|
|
|
|
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|
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|
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|
|
|
|
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|
Gross margin
|
|
|
4,982
|
34.34
|
|
|
4,883
|
34.47
|
|
|
9,148
|
34.50
|
|
|
9,143
|
34.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Selling,
general and administrative
|
|
|
3,014
|
20.78
|
|
|
2,839
|
20.04
|
|
|
5,738
|
21.65
|
|
|
5,524
|
20.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
opening costs
|
|
|
21
|
0.14
|
|
|
26
|
0.18
|
|
|
38
|
0.14
|
|
|
38
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
381
|
2.63
|
|
|
332
|
2.35
|
|
|
757
|
2.85
|
|
|
656
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
- net
|
|
|
69
|
0.47
|
|
|
50
|
0.35
|
|
|
145
|
0.55
|
|
|
97
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,485
|
24.02
|
|
|
3,247
|
22.92
|
|
|
6,678
|
25.19
|
|
|
6,315
|
23.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
|
1,497
|
10.32
|
|
|
1,636
|
11.55
|
|
|
2,470
|
9.31
|
|
|
2,828
|
10.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
559
|
3.86
|
|
|
617
|
4.36
|
|
|
925
|
3.49
|
|
|
1,070
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
938
|
6.46
|
|
$
|
1,019
|
7.19
|
|
$
|
1,545
|
5.82
|
|
$
|
1,758
|
6.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
1,455
|
|
|
|
1,490
|
|
|
|
1,454
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
|
$
|
0.64
|
|
|
$
|
0.68
|
|
|
$
|
1.06
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
1,473
|
|
|
|
1,518
|
|
|
|
1,477
|
|
|
|
1,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per
share
|
|
$
|
0.64
|
|
|
$
|
0.67
|
|
|
$
|
1.05
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per
share
|
|
$
|
0.085
|
|
|
$
|
0.080
|
|
|
$
|
0.165
|
|
|
$
|
0.130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
15,835
|
|
|
$
|
14,968
|
|
|
$
|
15,345
|
|
|
$
|
14,860
|
|
|
Cumulative
effect adjustment1
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8)
|
|
|
Net
earnings
|
|
|
938
|
|
|
|
1,019
|
|
|
|
1,545
|
|
|
|
1,758
|
|
|
Cash
dividends
|
|
|
(125)
|
|
|
|
(119)
|
|
|
|
(242)
|
|
|
|
(194)
|
|
|
Share
repurchases
|
|
|
-
|
|
|
|
(658)
|
|
|
|
-
|
|
|
|
(1,206)
|
|
|
Balance
at end of period
|
|
$
|
16,648
|
|
|
$
|
15,210
|
|
|
$
|
16,648
|
|
|
$
|
15,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 The
Company adopted FIN 48, "Accounting for Uncertainty in Income Taxes",
effective February 3, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lowe's
Companies, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
Millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
August
1, 2008
|
|
August
3, 2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
$
|
1,545
|
|
$
|
1,758
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
816
|
|
|
701
|
|
Deferred
income taxes
|
|
|
|
(57)
|
|
|
3
|
|
Loss
on property and other assets
|
|
|
|
30
|
|
|
17
|
|
Loss
on redemption of long-term debt
|
|
|
|
8
|
|
|
-
|
|
Share-based
payment expense
|
|
|
|
54
|
|
|
45
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Merchandise
inventory - net
|
|
|
|
(328)
|
|
|
(655)
|
|
Other
operating assets
|
|
|
|
52
|
|
|
56
|
|
Accounts
payable
|
|
|
|
1,073
|
|
|
643
|
|
Other
operating liabilities
|
|
|
|
675
|
|
|
510
|
|
Net
cash provided by operating activities
|
|
|
|
3,868
|
|
|
3,078
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of short-term investments
|
|
|
|
(95)
|
|
|
(368)
|
|
Proceeds
from sale/maturity of short-term investments
|
|
|
|
171
|
|
|
524
|
|
Purchases
of long-term investments
|
|
|
|
(1,066)
|
|
|
(1,102)
|
|
Proceeds
from sale/maturity of long-term investments
|
|
|
|
565
|
|
|
589
|
|
Increase
in other long-term assets
|
|
|
|
(37)
|
|
|
(23)
|
|
Property
acquired
|
|
|
|
(1,620)
|
|
|
(1,698)
|
|
Proceeds
from sale of property and other long-term assets
|
|
|
|
20
|
|
|
26
|
|
Net
cash used in investing activities
|
|
|
|
(2,062)
|
|
|
(2,052)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in short-term borrowings
|
|
|
|
(873)
|
|
|
532
|
|
Proceeds
from issuance of long-term debt
|
|
|
|
11
|
|
|
4
|
|
Repayment
of long-term debt
|
|
|
|
(555)
|
|
|
(31)
|
|
Proceeds
from issuance of common stock under employee stock purchase
plan
|
|
|
|
39
|
|
|
40
|
|
Proceeds
from issuance of common stock from stock options exercised
|
|
|
|
11
|
|
|
43
|
|
Cash
dividend payments
|
|
|
|
(242)
|
|
|
(194)
|
|
Repurchase
of common stock
|
|
|
|
(2)
|
|
|
(1,450)
|
|
Excess
tax benefits of share-based payments
|
|
|
|
1
|
|
|
3
|
|
Net
cash used in financing activities
|
|
|
|
(1,610)
|
|
|
(1,053)
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
|
196
|
|
|
(27)
|
|
Cash
and cash equivalents, beginning of period
|
|
|
|
281
|
|
|
364
|
|
Cash
and cash equivalents, end of period
|
|
|
$
|
477
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lowe's Companies,
Inc.
Note 1: Basis of Presentation - The accompanying consolidated financial
statements (unaudited) and notes to 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 August 1, 2008 and August 3, 2007, and the results of
operations for the three and six months ended August 1, 2008 and August 3, 2007,
and cash flows for the six months ended August 1, 2008 and August 3,
2007.
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, 2008 (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. The previous accrued salaries and wages caption was
replaced with a new caption, accrued compensation and employee benefits, on the
consolidated balance sheets. As part of this, certain prior period
amounts were reclassified from other current liabilities into accrued
compensation and employee benefits.
Note 2: Fair Value Measurements - Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,”
provides a single definition of fair value, together with a framework for
measuring it, and requires additional disclosure about the use of fair value to
measure assets and liabilities. FASB Staff Position (FSP) FAS 157-2,
“Effective Date of FASB Statement No. 157” delayed the effective date for one
year for all nonrecurring fair value measurements of nonfinancial assets and
liabilities. As a result, the Company’s adoption of SFAS No. 157,
effective February 2, 2008, is currently limited to financial assets and
liabilities measured at fair value and other nonfinancial assets and liabilities
measured at fair value on a recurring basis. The Company elected a
partial deferral under the provisions of FSP FAS 157-2 related to the
measurement of fair value used when evaluating long-lived assets for impairment
and liabilities for exit or disposal activities.
SFAS No.
157 defines fair value 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. SFAS No. 157 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
|
The
effect of partially adopting this standard did not result in changes to the
valuation techniques the Company had previously used to measure the fair value
of its financial assets and liabilities. Therefore, the primary
impact to the Company upon partial adoption of SFAS No. 157 was expanded fair
value measurement disclosure.
The
Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities,” effective February 2, 2008. SFAS No. 159
provides entities with an option to measure many financial instruments and
certain other items at fair value, including available-for-sale securities
previously accounted for under SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities.” Under SFAS No. 159, unrealized gains
and losses on items for which the fair value option has been elected will be
reported in earnings at each reporting period. Certain pre-existing
financial
instruments
included in long-term investments in the consolidated balance sheet, for which
the fair value option has been elected upon the adoption of SFAS No. 159, will
now be reported as trading securities under SFAS No. 115. Unrealized
gains and losses on those trading securities were insignificant for the three
and six months ended August 1, 2008. Cash flows from purchases, sales
and maturities of trading securities continue to be included in cash flows from
investing activities on the consolidated statements of cash flows because the
nature and purpose for which the securities were acquired has not changed as a
result of the SFAS No. 159 election. The adoption of SFAS No. 159 did
not have a material impact on the Company’s consolidated financial
statements.
The
following table presents the Company’s financial assets measured at fair value
on a recurring basis as of August 1, 2008, classified by SFAS No. 157 fair
value hierarchy:
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
Significant
Other Observable Inputs
|
|
Significant
Unobservable Inputs
|
|
(In
millions)
|
|
August
1, 2008
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Short-term
investments
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
$
|
338
|
$
|
109
|
$
|
229
|
$
|
-
|
|
Trading
securities
|
|
39
|
|
39
|
|
-
|
|
-
|
|
Long-term
investments
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
798
|
|
-
|
|
798
|
|
-
|
|
Total
investments
|
$
|
1,175
|
$
|
148
|
$
|
1,027
|
$
|
-
|
|
When
available, quoted prices are used to determine fair value. When
quoted prices in active markets are available, investments are classified within
Level 1 of the fair value hierarchy. The Company’s Level 1
investments primarily consist of investments in money market and mutual
funds. When quoted prices in active markets are not available, fair
values are determined using pricing models and the inputs to those pricing
models are based on observable market inputs in active markets. The
inputs to the pricing models are typically benchmark yields, reported trades,
broker-dealer quotes, issuer spreads and benchmark securities, among
others. The Company’s Level 2 investments primarily consist of
investments in municipal obligations.
Note 3: Restricted Investment
Balances - Short-term and long-term investments include restricted
balances pledged as collateral for letters of credit for the Company’s extended
warranty program and for a portion of the Company’s casualty insurance and
installed sales program liabilities. Restricted balances included in
short-term investments were $194 million at August 1, 2008, $178 million at
August 3, 2007, and $167 million at February 1, 2008. Restricted
balances included in long-term investments were $152 million at August 1, 2008,
$102 million at August 3, 2007, and $172 million at February 1,
2008.
Note 4: Property - Property is shown net of accumulated
depreciation of
$8.2 billion at August 1,
2008, $6.8 billion at August 3, 2007, and $7.5 billion at February 1,
2008.
Note 5: Short-Term Borrowings - The Company has a Canadian dollar (C$)
denominated credit agreement in the amount of C$200 million for the purpose of
funding the build-out of retail stores and for working capital and other general
corporate purposes in Canada. 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 credit agreement. The credit
agreement contains certain restrictive covenants, which include maintenance of a
debt leverage ratio as defined by the credit agreement. The Company
was in compliance with those covenants at August 1, 2008. Three
banking institutions are participating in the credit agreement. As of
August 1, 2008, there was C$194 million or the equivalent of $189 million
outstanding under the credit agreement. The weighted-average interest
rate on the short-term borrowings was 3.26%.
Note 6: Long-Term Debt - On June 30, 2008, the Company redeemed
for cash approximately $19 million principal amount, $14 million carrying
amount, of its convertible notes issued in February 2001, which represented all
remaining
notes outstanding of such issue, at a
price equal to the sum of the issuance price plus accrued original issue
discount of such notes as of the redemption date ($730.71 per
note). During the first six months of 2008 and 2007, holders of an
insignificant number of notes exercised their right to convert their notes into
shares of the Company’s common stock at the rate of 32.896 shares per
note.
On June
25, 2008, the Company completed a single open market repurchase of approximately
$187 million principal amount, $164 million carrying amount, of its senior
convertible notes issued in October 2001 at a price of $875.73 per
note. The Company subsequently redeemed on June 30, 2008 for cash
approximately $392 million principal amount, $343 million carrying amount, of
its senior convertible notes issued in October 2001, which represented all
remaining notes outstanding of such issue, at a price equal to the sum of the
issuance price plus accrued original issue discount of such notes as of the
redemption date ($875.73 per note). During the first six months of
2008 and 2007, holders of an insignificant number of notes exercised their right
to convert their notes into shares of the Company’s common stock at the rate of
34.424 shares per note.
Upon
redemption of these convertible notes, the Company recognized in selling,
general and administrative expense (SG&A) a loss of approximately $8 million
related to the unamortized debt issuance costs and underwriting
discounts.
Note 7: Extended Warranties -
Lowe’s sells separately-priced extended warranty contracts under a
Lowe’s-branded program for which the Company is ultimately
self-insured. The Company recognizes revenue from extended warranty
sales on a straight-line basis over the respective contract
term. Extended warranty contract terms primarily range from one to
four years from the date of purchase or the end of the manufacturer’s warranty,
as applicable. Extended warranty deferred revenue is included in
other liabilities (non-current) in the accompanying consolidated balance
sheets. Changes in deferred revenue for extended warranty contracts
are summarized as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
August
1, 2008
|
|
|
August
3, 2007
|
|
|
August
1, 2008
|
|
|
August
3, 2007
|
|
Extended
warranty deferred revenue, beginning of period
|
|
$ |
430 |
|
|
$ |
343 |
|
|
$ |
407 |
|
|
$ |
315 |
|
Additions
to deferred revenue
|
|
|
56 |
|
|
|
50 |
|
|
|
105 |
|
|
|
94 |
|
Deferred
revenue recognized
|
|
|
(30 |
) |
|
|
(20 |
) |
|
|
(56 |
) |
|
|
(36 |
) |
Extended
warranty deferred revenue, end of period
|
|
$ |
456 |
|
|
$ |
373 |
|
|
$ |
456 |
|
|
$ |
373 |
|
Incremental
direct acquisition costs associated with the sale of extended warranties are
also deferred and recognized as expense on a straight-line basis over the
respective contract term. Unamortized deferred costs associated with extended
warranty contracts were $109 million and $85 million at August 1, 2008 and
August 3, 2007, respectively, and are included in other assets (non-current) in
the accompanying 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 warranty claims incurred is included in self-insurance
liabilities in the accompanying consolidated balance sheets. Changes
in the liability for extended warranty claims are summarized as
follows:
|
|
Three Months
Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
August
1, 2008
|
|
|
August
3, 2007
|
|
|
August
1, 2008
|
|
|
August
3, 2007
|
|
Liability
for extended warranty claims, beginning of period
|
|
$ |
12 |
|
|
$ |
9 |
|
|
$ |
14 |
|
|
$ |
10 |
|
Accrual
for claims incurred
|
|
|
13 |
|
|
|
11 |
|
|
|
25 |
|
|
|
19 |
|
Claim
payments
|
|
|
(8 |
) |
|
|
(2 |
) |
|
|
(22 |
) |
|
|
(11 |
) |
Liability
for extended warranty claims, end of period
|
|
$ |
17 |
|
|
$ |
18 |
|
|
$ |
17 |
|
|
$ |
18 |
|
Note 8: Shareholders’ Equity - No common shares were
repurchased under the share repurchase program during the first six months of
fiscal 2008. The Company repurchased 45.7 million common shares under the share
repurchase
program
during the first six months of fiscal 2007. The total cost of the share
repurchases was $1.5 billion (of which $1.2 billion was recorded as a reduction
in retained earnings, after capital in excess of par value was
depleted). As of August 1, 2008, the Company had remaining
authorization through 2009 under the share repurchase program of $2.2
billion.
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. For
the three months ended August 1, 2008, both comprehensive income and net
earnings totaled $0.9 billion. For the three months ended August 3, 2007, both
comprehensive income and net earnings totaled $1.0 billion. For the six months
ended August 1, 2008, both comprehensive income and net earnings totaled $1.5
billion. For the six months ended August 3, 2007, both comprehensive income and
net earnings totaled $1.8 billion.
Note 10: Earnings Per Share
- Basic earnings per share excludes
dilution and is computed by dividing the applicable net earnings by the
weighted-average number of common shares outstanding for the
period. Diluted earnings per share is calculated based on the
weighted-average shares of common stock as of the balance sheet date, as
adjusted for the potential dilutive effect of share-based awards and convertible
notes. The following table reconciles earnings per share for the
three and six months ended August 1, 2008 and August 3, 2007.
|
|
Three Months
Ended
|
|
|
Six
Months Ended
|
|
(In
millions, except per share data)
|
|
August
1, 2008
|
|
|
August
3, 2007
|
|
|
August
1, 2008
|
|
|
August
3, 2007
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
938 |
|
|
$ |
1,019 |
|
|
$ |
1,545 |
|
|
$ |
1,758 |
|
Weighted-average
shares outstanding
|
|
|
1,455 |
|
|
|
1,490 |
|
|
|
1,454 |
|
|
|
1,500 |
|
Basic
earnings per share
|
|
$ |
0.64 |
|
|
$ |
0.68 |
|
|
$ |
1.06 |
|
|
$ |
1.17 |
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
938 |
|
|
$ |
1,019 |
|
|
$ |
1,545 |
|
|
$ |
1,758 |
|
Net
earnings adjustment for interest on convertible notes, net of
tax
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Net
earnings, as adjusted
|
|
$ |
938 |
|
|
$ |
1,020 |
|
|
$ |
1,546 |
|
|
$ |
1,760 |
|
Weighted-average
shares outstanding
|
|
|
1,455 |
|
|
|
1,490 |
|
|
|
1,454 |
|
|
|
1,500 |
|
Dilutive
effect of share-based awards
|
|
|
5 |
|
|
|
7 |
|
|
|
6 |
|
|
|
9 |
|
Dilutive
effect of convertible notes
|
|
|
13 |
|
|
|
21 |
|
|
|
17 |
|
|
|
21 |
|
Weighted-average
shares, as adjusted
|
|
|
1,473 |
|
|
|
1,518 |
|
|
|
1,477 |
|
|
|
1,530 |
|
Diluted
earnings per share
|
|
$ |
0.64 |
|
|
$ |
0.67 |
|
|
$ |
1.05 |
|
|
$ |
1.15 |
|
Stock
options to purchase 22.1 million and 8.0 million shares of common stock were
excluded from the computation of diluted earnings per share because their effect
would have been anti-dilutive for the three months ended August 1, 2008 and
August 3, 2007, respectively. Stock options to purchase 18.0 million and 8.0
million shares of common stock were excluded from the computation of diluted
earnings per share because their effect would have been anti-dilutive for the
six months ended August 1, 2008 and August 3, 2007, respectively.
Note
11: Supplemental Disclosure
Net
interest expense is comprised of the following:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
August
1, 2008
|
|
|
August
3, 2007
|
|
|
August
1, 2008
|
|
|
August
3, 2007
|
|
Long-term
debt
|
|
$ |
73 |
|
|
$ |
54 |
|
|
$ |
146 |
|
|
$ |
109 |
|
Short-term
borrowings
|
|
|
2 |
|
|
|
1 |
|
|
|
7 |
|
|
|
1 |
|
Capitalized
leases
|
|
|
7 |
|
|
|
8 |
|
|
|
16 |
|
|
|
16 |
|
Interest
income
|
|
|
(12 |
) |
|
|
(13 |
) |
|
|
(21 |
) |
|
|
(24 |
) |
Interest
capitalized
|
|
|
(7 |
) |
|
|
(4 |
) |
|
|
(15 |
) |
|
|
(8 |
) |
Other
|
|
|
6 |
|
|
|
4 |
|
|
|
12 |
|
|
|
3 |
|
Interest
- net
|
|
$ |
69 |
|
|
$ |
50 |
|
|
$ |
145 |
|
|
$ |
97 |
|
Supplemental
disclosures of cash flow information:
|
|
Six
Months Ended
|
(In
millions)
|
|
August
1, 2008
|
|
|
August
3, 2007
|
Cash
paid for interest, net of amount capitalized
|
|
$ |
161 |
|
|
$ |
121 |
|
Cash
paid for income taxes
|
|
$ |
655 |
|
|
$ |
876 |
|
Non-cash
investing and financing activities:
|
|
|
Non-cash
property acquisitions
|
|
$ |
81 |
|
|
$ |
48 |
|
Note 12: Recent Accounting
Pronouncements - In June 2008, the Financial Accounting Standards Board
(FASB) issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities”. FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and affects entities that accrue cash
dividends on share-based payment awards during the awards’ service period when
the dividends do not need to be returned if the employees forfeit the
awards. FSP EITF 03-6-1 states that all outstanding unvested
share-based payment awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders and, therefore,
need to be included in the earnings allocation in computing earnings per share
under the two-class method. FSP EITF 03-6-1 is effective for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. The Company does not expect the adoption of FSP EITF 03-6-1 to
have a material impact on its consolidated financial statements.
Mooresville,
North Carolina
We have
reviewed the accompanying consolidated balance sheets of Lowe’s Companies, Inc.
and subsidiaries (the “Company”) as of August 1, 2008 and August 3, 2007, and
the related consolidated statements of current and retained earnings for the
fiscal three and six-month periods then ended, and of cash flows for the fiscal
six-month periods ended August 1, 2008 and August 3, 2007. These 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 February 1, 2008, and the related consolidated statements of
earnings, shareholders’ equity, and cash flows for the fiscal year then ended
(not presented herein); and in our report dated April 1, 2008, 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 February 1, 2008 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
September 3, 2008
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 six month periods ended August 1, 2008 and August 3, 2007. 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 February 1, 2008
(the Annual Report), as well as the consolidated financial statements
(unaudited) and notes to the consolidated financial statements (unaudited)
contained in this report.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
following discussion and analysis of the financial condition and results of
operations are based on the consolidated financial statements (unaudited) and
notes to consolidated financial statements (unaudited) contained in this report
that have been prepared 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 preparation of these financial statements requires us to
make estimates that affect the reported amounts of assets, liabilities, sales
and expenses, and related disclosures of contingent assets and
liabilities. We base these estimates on historical results and
various other assumptions believed to be reasonable, all of which form the basis
for making estimates concerning the carrying values of assets and liabilities
that are not readily available from other sources. Actual results may
differ from these estimates.
Our
significant accounting polices are described in Note 1 to the consolidated
financial statements presented in the Annual Report. Our critical accounting
policies and estimates are described in Management’s Discussion and Analysis of
Financial Condition and Results of Operations in the Annual
Report. Our significant and critical accounting policies have not
changed significantly since the filing of our Annual Report.
OPERATIONS
The
following tables set forth the percentage relationship to net sales of each line
item of the consolidated statements of earnings, 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
|
|
|
August
1, 2008
|
|
August
3, 2007
|
|
2008
vs. 2007
|
|
2008
vs. 2007
|
|
Net
sales
|
100.00
|
%
|
100.00
|
%
|
N/A
|
|
2.4
|
%
|
Gross
margin
|
34.34
|
|
34.47
|
|
(13)
|
|
2.0
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
20.78
|
|
20.04
|
|
74
|
|
6.2
|
|
Store
opening costs
|
0.14
|
|
0.18
|
|
(4)
|
|
(21.0)
|
|
Depreciation
|
2.63
|
|
2.35
|
|
28
|
|
14.7
|
|
Interest
– net
|
0.47
|
|
0.35
|
|
12
|
|
37.1
|
|
Total
expenses
|
24.02
|
|
22.92
|
|
110
|
|
7.3
|
|
Pre-tax
earnings
|
10.32
|
|
11.55
|
|
(123)
|
|
(8.4)
|
|
Income
tax provision
|
3.86
|
|
4.36
|
|
(50)
|
|
(9.2)
|
|
Net
earnings
|
6.46
|
%
|
7.19
|
%
|
(73)
|
|
(8.0)
|
%
|
|
|
|
|
|
|
|
|
|
EBIT
margin (1)
|
10.80
|
%
|
11.90
|
%
|
(110)
|
|
(7.1)
|
%
|
|
Six
Months Ended
|
|
Basis
Point Increase / (Decrease) in Percentage of Net Sales from Prior
Period
|
|
Percentage
Increase / (Decrease) in Dollar Amounts from Prior Period
|
|
|
August
1, 2008
|
|
August
3, 2007
|
|
2008
vs. 2007
|
|
2008
vs. 2007
|
|
Net
sales
|
100.00
|
%
|
100.00
|
%
|
N/A
|
|
0.7
|
%
|
Gross
margin
|
34.50
|
|
34.71
|
|
(21)
|
|
0.1
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
21.65
|
|
20.97
|
|
68
|
|
3.9
|
|
Store
opening costs
|
0.14
|
|
0.14
|
|
-
|
|
0.6
|
|
Depreciation
|
2.85
|
|
2.49
|
|
36
|
|
15.4
|
|
Interest
– net
|
0.55
|
|
0.37
|
|
18
|
|
48.8
|
|
Total
expenses
|
25.19
|
|
23.97
|
|
122
|
|
5.8
|
|
Pre-tax
earnings
|
9.31
|
|
10.74
|
|
(143)
|
|
(12.7)
|
|
Income
tax provision
|
3.49
|
|
4.07
|
|
(58)
|
|
(13.5)
|
|
Net
earnings
|
5.82
|
%
|
6.67
|
%
|
(85)
|
|
(12.1)
|
%
|
|
|
|
|
|
|
|
|
|
EBIT
margin (1)
|
9.86
|
%
|
11.11
|
%
|
(125)
|
|
(10.6)
|
%
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
Other
metrics:
|
|
August
1, 2008
|
|
August
3, 2007
|
|
August
1, 2008
|
|
August
3, 2007
|
|
Comparable
store sales changes (2)
|
|
(5.3)
|
%
|
(2.6)
|
%
|
(6.7)
|
%
|
(4.4)
|
%
|
Customer
transactions (in millions)
|
|
217
|
|
207
|
|
398
|
|
385
|
|
Average
ticket (3)
|
|
$
|
66.95
|
|
$
|
68.47
|
|
$
|
66.62
|
|
$
|
68.35
|
|
At
end of period:
|
|
|
|
|
|
|
|
|
|
Number
of stores
|
|
1,577
|
|
1,424
|
|
|
|
|
|
Sales
floor square feet (in millions)
|
|
179
|
|
162
|
|
|
|
|
|
Average
store size selling square feet (in thousands) (4)
|
|
113
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
(1) We
define EBIT margin as earnings before interest and taxes as a percentage of
sales (operating margin).
(2)
We define a comparable store
as a store that has been open longer than 13 months. A store that is
identified for relocation is no longer considered comparable one month prior to
its relocation. The relocated store must then remain open longer than
13 months to be considered comparable.
(3) We define average ticket as net
sales divided by number of customer transactions.
(4) We define average store size selling
square feet as sales floor square feet divided by the number of stores open at
the end of the period.
Our
employees focused on taking care of customers and capitalizing on opportunity in
order to deliver better than anticipated results for the quarter in a difficult
economic environment.
Contributing
to our better than expected results was relative strength in many of our
seasonal and outdoor products and continued stability in repair and maintenance
products. Also aiding sales in the quarter was the positive impact of
the fiscal stimulus tax rebates. However, the sales environment
remains challenging and we anticipate that it will continue to be so into
2009. Broad-based declines in home prices, rising mortgage
delinquencies and foreclosures, increasing inventory of unsold homes, tight
credit markets and rising mortgage rates, as well as rising unemployment all
suggest continued pressure on home improvement consumers. Nearly 90%
of our stores are located in markets experiencing housing price
declines. Until we see improvement in our core categories and larger
ticket items, we will continue to take a cautious and measured approach to
managing our business.
We have a
heightened focus on maximizing every customer interaction to drive sales while
improving customer service. Project selling to the do-it-yourself
customer has always been a priority for Lowe’s. We continue to look
for ways to maximize all opportunities to sell complete
projects. Earlier this year we rolled out a related item selling
report to our stores. This tool helps us sharpen our focus on project
selling and consistently offer customers all the supplies needed to successfully
complete their projects. By selling the entire project, we have the
opportunity to increase sales while providing the customer with a one-stop
shopping experience. In addition, we continually assess customer
service using our “Customer-Focused” program which measures each store’s
performance relative to five key components of customer satisfaction including:
selling skills, delivery, installed sales, checkout and phone
answering. Our customer service scores for the second quarter of 2008
increased in all five categories compared to the second quarter of
2007.
As a
result of our customer-focused efforts and product and service offerings, our
solid market share gains continued this quarter. According to
third-party estimates, we gained unit market share in 17 of our 20 product
categories in the second calendar quarter versus the same period last year and
gained 120 basis points of unit market share for the total store. We
also saw improvement in our draw rate, or the number of times that we were in
the consideration set of customers buying the products we sell, in 17 of our 20
product categories. We have plans in place to continue to capture
profitable market share, as well as capitalize on the opportunities created by
the changing competitive landscape in our industry.
Net Sales - The increase in sales
for both the quarter and six months ended August 1, 2008 was driven by our store
expansion program, which added 153 net new stores during the last four
quarters. Although total customer transactions increased 4.7%
compared to the second quarter of 2007, average ticket decreased 2.2% to $66.95.
Comparable store sales declined 5.3% for the quarter and 6.7% for the first half
of 2008. Comparable store customer transactions decreased 2.7%
compared to the second quarter of 2007 and comparable store average ticket
decreased 2.6%. Based on external estimates of spending within the
home improvement channel and our own consumer surveys, we believe the fiscal
stimulus tax rebates benefited comparable store sales for the quarter by 100 to
150 basis points.
Rough
plumbing and nursery, two of our 20 product categories, generated comparable
store sales increases for the second quarter. Our increase in
comparable store sales in rough plumbing was driven by solid sales in air
filtration products, pumps and tanks, water treatment and HVAC controls, as well
as commodity price inflation in copper and resin products. Seasonable
weather in the second quarter of 2008 helped drive nursery sales as consumers
took on small projects to enhance the appearance of their outdoor
space. Additionally, as homeowners repaired damage caused by last
year’s drought and continued to do routine lawn maintenance, we experienced
better than average comparable store sales in lawn & landscape products and
outdoor power equipment. Other categories that performed above our
average comparable store sales change for the second quarter included building
materials, hardware, paint, flooring, appliances and home
environment. In addition, walls & windows and seasonal living
performed at approximately our average comparable store sales
change.
Consumers
remain cautious about taking on larger discretionary projects, as evidenced by a
comparable store sales decline in big ticket products. We did achieve
an increase in comparable store sales for Installed Sales, however, for the
first time in several quarters. Installed Sales experienced total
sales growth of 9.8% and a comparable store sales increase of
1.1%.
Although
there was some weakness in Special Order Sales, we experienced total sales
growth of 4.6% driven by special order window treatments and
carpet. Comparable store Special Order Sales declined 3.3%, but
performed above our average comparable store sales change. Commercial
Business Customer sales outperformed our average for the quarter, which
indicated that our targeted marketing programs and products resonated with the
commercial customer. Although sales remained soft in lumber and
commodities, we continued to focus on property management where the day-to-day
repair business remained strong.
We
continued to experience a wide range of comparable store sales performance from
a geographic market perspective in the second quarter. Markets in the
western U.S., Florida, the Gulf Coast and certain areas of the Northeast
experienced double-digit declines in comparable store sales during the second
quarter. These areas include some of the markets most pressured by
the declining housing market and reduced our comparable store sales by
approximately 300 basis points for the quarter. Contrasting those
markets, we continued to see solid sales performance in our Texas and Oklahoma
markets, along with solid results in the Ohio Valley and parts of the upper
Midwest during the second quarter of 2008. These better performing
markets had a positive impact on total company comparable store sales of
approximately 225 basis points for the quarter.
Gross Margin - In the second
quarter, we experienced a 13 basis point decline in gross margin as a percentage
of sales from the second quarter of 2007. The decrease was primarily
driven by our carpet installation promotion, which negatively impacted gross
margin by approximately 20 basis points. In addition, vendor price
increases in a number of product categories negatively impacted gross margin by
approximately 10 basis points. Higher fuel costs and de-leverage in
distribution fixed costs also negatively impacted gross margin by approximately
10 basis points. The de-leverage from these factors was partially
offset by a positive impact of 13 basis points from lower inventory shrink and
eight basis points from the mix of products sold.
The
decrease in gross margin as a percentage of sales for the first six months of
2008 compared to 2007 was attributable to the same factors that contributed to
the decrease in gross margin in the second quarter of 2008.
SG&A - SG&A de-leveraged 74
basis points in the second quarter of 2008 versus the prior year, driven by
de-leverage of 32 basis points in store payroll. As sales per store
declined, additional stores were hitting the minimum staffing hours threshold,
which increased the proportion of fixed to total payroll. We also
experienced de-leverage of approximately 20 basis points in fixed expenses, such
as rent, property taxes and utilities, as a result of the weak sales
environment. In addition, we experienced de-leverage of 18 basis
points in bonus expense as we attained higher achievement of performance targets
this year versus missing many of our performance targets in the first half of
2007. We also saw de-leverage related to our proprietary credit
programs due to higher losses than in the prior year. Our expense
de-leverage was partially offset by leverage in store service and advertising
expense in the quarter.
The
increase in SG&A as a percentage of sales for the first six months was
similarly driven by de-leverage in store payroll and fixed expenses, such as
rent, property taxes and utilities, as a result of softer sales, as well as
de-leverage in bonus expense. Our expense de-leverage was partially
offset by leverage in store service expense.
Store Opening Costs - Store opening costs,
which include payroll and supply costs incurred prior to store opening as well
as grand opening advertising costs, totaled $21 million and $26 million in the
second quarters of 2008 and 2007, respectively. Because store opening
costs are expensed as incurred, the timing of expense recognition fluctuates
based on the timing of store openings. We opened 23 new stores in the
second quarter of 2008, compared to the opening of 26 stores (24 new and two
relocated) in the second quarter of 2007. Store opening costs for
stores opened during the second quarter of 2008 and 2007 averaged approximately
$0.7 million and $0.8 million per store, respectively.
Store
opening costs of $38 million for each of the first six months of 2008 and 2007,
were associated with the opening of 43 new stores in 2008, compared to 41 stores
(39 new and two relocated) in 2007. Store opening costs for stores
opened during each of the first six months of 2008 and 2007 averaged
approximately $0.8 million per store.
Depreciation - The de-leverage in
depreciation for the three and six month periods ended August 1, 2008 was driven
by the addition of 153 net new stores over the past four quarters and negative
comparable store sales. Property, less accumulated depreciation,
totaled $22.1 billion at August 1, 2008, an increase of 11.3% from $19.8 billion
at August 3,
2007. At
August 1, 2008, we owned 87% of our stores, compared to 86% at August 3, 2007,
which includes stores on leased land.
Interest - The de-leverage in interest
expense for the three and six month periods ended August 1, 2008 was primarily
due to additional expense as a result of the September 2007 $1.3 billion debt
issuance.
Income Tax Provision - Our
effective income tax rate was 37.4% and 37.5% for the three and six month
periods ended August 1, 2008, respectively, and 37.7% and 37.8% for the three
and six month periods ended August 3, 2007, respectively. Our
effective income tax rate was 37.7% for fiscal 2007.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
Our
primary sources of liquidity are cash flows from operating activities and our
$1.75 billion senior credit facility that expires in June 2012. Net
cash provided by operating activities totaled $3.9 billion and $3.1 billion for
the six month periods ended August 1, 2008 and August 3, 2007,
respectively. The change in cash flows from operating activities was
primarily the result of focused inventory management and continued efforts to
improve payment terms.
The primary component of net
cash used in investing activities continues to be opening new stores, investing
in existing stores through resets and remerchandising, and investing in our
distribution center and information technology infrastructure. Cash acquisitions
of property were $1.6 billion and $1.7
billion for the six month periods ended August 1, 2008 and August 3,
2007, respectively. At
August 1, 2008,
we operated 1,577 stores in the United States and Canada with 179 million square feet
of retail selling space, representing a 10.5% increase over the retail selling
space at August 3, 2007.
Net cash used in financing
activities was $1.6 billion and $1.1 billion for the six month periods ended
August 1, 2008 and August 3, 2007,
respectively. The change in cash flows from financing activities was
primarily driven by an $873 million net decrease in short-term borrowings as a
result of the repayment of $1.0 billion in commercial paper during the first six
months of 2008 as compared to a $532 million net increase in short-term
borrowings during the first six months of 2007. The change was also
attributable to the redemption in June 2008 of our convertible notes issued in
February 2001 and our senior convertible notes issued in October
2001. These uses of cash were partially offset by a
$1.4 billion decrease in share repurchases as compared to the first six months
of 2007. The ratio of debt to equity plus debt was 23.1%,
23.6% and 29.3% as of August 1, 2008, August 3, 2007, and February 1, 2008,
respectively.
Sources
of Liquidity
The
senior credit facility supports our commercial paper and revolving credit
programs. Borrowings made under the senior credit facility are
unsecured and are priced at a fixed rate based upon market conditions at the
time of funding in accordance with the terms of the senior credit facility. The
senior credit facility contains certain restrictive covenants, which include
maintenance of a debt leverage ratio as defined by the senior credit facility.
We were in compliance with all covenants at August 1, 2008. Eighteen
banking institutions are participating in the senior credit
facility. As of August 1, 2008, there were no outstanding borrowings
under the senior credit facility. In addition, we had no commercial
paper outstanding as of August 1, 2008.
The
Canadian dollar (C$) denominated credit agreement in the amount of C$200 million
was established for the purpose of funding the build-out of retail stores and
for working capital and other general corporate purposes in
Canada. 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 credit agreement. The credit agreement contains certain
restrictive covenants, which include maintenance of a debt leverage ratio as
defined by the credit agreement. We were in compliance with all
covenants at August 1, 2008. Three banking institutions are
participating in the credit agreement. As of August 1, 2008, there
was C$194 million or the equivalent of $189 million outstanding under the credit
agreement. The weighted-average interest rate on the short-term
borrowings was 3.26%.
We also
have a C$ denominated credit facility in the amount of C$50 million that
provides revolving credit support for our Canadian operations. This
uncommitted facility provides us with the ability to make unsecured borrowings,
which are priced at a fixed rate based upon market conditions at the time of
funding in accordance with the terms of the credit facility. As of
August 1, 2008, there were no borrowings outstanding under the credit
facility.
Cash
Requirements
Capital
Expenditures
Our
initial 2008 capital forecast was approximately $4.2 billion, inclusive of
approximately $350 million of lease commitments, resulting in a planned net cash
outflow of $3.8 billion in 2008. As of the end of the second quarter of
2008, we expect that net cash outflow will be approximately $3.6 billion.
Approximately 80% of this expected commitment is for store expansion.
Expansion plans for 2008 consist of approximately 120 new stores, increasing our
total sales floor square footage by 7% to 8% for the year. All of the 2008
projects will be owned, including approximately 30% that will be ground-leased
properties.
As of
August 1, 2008, we owned and operated 13 regional distribution centers
(RDCs). We plan to start operations at our next RDC in Pittston,
Pennsylvania in the fourth quarter of 2008. As of August 1, 2008, we also
operated 15 flatbed distribution centers (FDCs) for the handling of lumber,
building materials and other long-length items. We owned 13 and leased two
of these FDCs.
Debt
and Capital
On June
30, 2008, we redeemed for cash approximately $19 million principal amount, $14
million carrying amount, of our convertible notes issued in February 2001, which
represented all remaining notes outstanding of such issue, at a price equal to
the sum of the issuance price plus accrued original issue discount of such notes
as of the redemption date ($730.71 per note). From their issuance
through the redemption, principal amounts of $986 million, or approximately 98%,
of our February 2001 convertible notes had converted from debt to
equity. Insignificant amounts were converted during the first six
months of 2008 and 2007.
On June
25, 2008, we completed a single open market repurchase of approximately $187
million principal amount, $164 million carrying amount, of our senior
convertible notes issued in October 2001 at a price of $875.73 per
note. We subsequently redeemed on June 30, 2008 for cash
approximately $392 million principal amount, $343 million carrying amount, of
our senior convertible notes issued in October 2001, which represented all
remaining notes outstanding of such issue, at a price equal to the sum of the
issuance price plus accrued original issue discount of such notes as of the
redemption date ($875.73 per note). From their issuance through the
redemption, an insignificant amount of the senior convertible notes had
converted from debt to equity.
Our debt
ratings at August 1, 2008, were as follows:
Current
Debt Ratings
|
S&P
|
Moody’s
|
Fitch
|
Commercial
Paper
|
A1
|
P1
|
F1
|
Senior
Debt
|
A+
|
A1
|
A+
|
Outlook
|
Stable
|
Stable
|
Negative
|
We
believe that net cash provided by operating activities and financing activities
will be adequate for our expansion plans and other operating requirements over
the next 12 months. However, the availability of funds through the issuance of
commercial paper and new debt could be adversely affected due to a debt rating
downgrade or a deterioration of certain financial ratios. In
addition, continuing volatility in the capital markets may affect our ability to
access those markets for additional borrowings or increase costs associated with
borrowing funds. There are no provisions in any agreements that would
require early cash settlement of existing debt or leases as a result of a
downgrade in our debt rating or a decrease in our stock price.
We are
committed to maintaining strong commercial paper ratings through the management
of debt-related ratios.
During
the first six months of 2008, there were no share repurchases under the share
repurchase program. As of August 1, 2008, we had remaining authorization through
2009 under the share repurchase program of $2.2 billion. Our current
outlook does not assume any share repurchases for 2008.
OFF-BALANCE
SHEET ARRANGEMENTS
Other
than in connection with executing operating leases, we do not have any
off-balance sheet financing that has, or is reasonably likely to have, a
material, current or future effect on our financial condition, cash flows,
results of operations, liquidity, capital expenditures or capital
resources.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
On June
30, 2008, we redeemed all remaining notes outstanding of our convertible notes
issued in February 2001 and our senior convertible notes issued in October 2001,
as further described in Note 6 to the consolidated financial statements
(unaudited) contained herein.
|
|
Payments
Due by Period
|
|
Contractual
Obligations
|
|
|
|
|
Less
than
|
|
|
|
1-3
|
|
|
|
4-5
|
|
|
After
5
|
|
(In
millions)
|
|
Total
|
|
|
1
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Long-term
debt (principal and interest amounts,
excluding discount)
|
|
$ |
9,400 |
|
|
$ |
295 |
|
|
$ |
1,061 |
|
|
$ |
1,040 |
|
|
$ |
7,004 |
|
There
have been no other significant changes in our contractual obligations and
commercial commitments other than in the ordinary course of business since the
end of 2007. Refer to the Annual Report for additional information regarding our
contractual obligations and commercial commitments.
COMPANY
OUTLOOK
Third Quarter
As of
August 18, 2008, the date of our second
quarter 2008 earnings release, we expected to open approximately 38 new stores
during the third quarter of 2008, which ends on October 31, 2008, reflecting
square footage growth of approximately 10%. We expected total sales to increase
1% to 2% and comparable store sales to decline 5% to 7%. Earnings
before interest and taxes as a percentage of sales (operating margin) was
expected to decline approximately 290 basis points. In addition,
store opening costs were expected to be approximately $34 million. Diluted
earnings per share of $0.27 to $0.31 were expected for the third
quarter. All comparisons are with the third quarter of fiscal
2007.
Fiscal
2008
As of
August 18, 2008, the date of our second quarter 2008 earnings release, we
expected to open approximately 120 new stores during fiscal 2008, which ends on
January 30, 2009, reflecting total square footage growth of 7% to 8%. Total
sales were expected to increase approximately 1% for the year. Comparable store
sales were expected to decline 6% to 7%. Earnings before interest and
taxes as a percentage of sales (operating margin) was expected to decline
approximately 180 basis points. We expected store opening costs to be
approximately $97 million. Diluted earnings per share of $1.48 to
$1.56 were expected for fiscal 2008. All comparisons are with fiscal
2007.
FORWARD-LOOKING
STATEMENTS
This Form
10-Q contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 (the “Act”). All statements
other than those reciting historic fact are statements that could be
“forward-looking statements” under the Act. Such forward-looking
statements are found in, among other places, “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.” Statements containing words such as “expects,” “plans,”
“strategy,” “projects,” “believes,” “opportunity,” “anticipates,” “desires,” and
similar expressions are intended to highlight or indicate “forward-looking
statements.” Although we believe that the expectations, opinions,
projections, and comments reflected in our forward-looking statements are
reasonable, we can give no assurance that such statements will prove to be
correct. A wide variety of potential risks, uncertainties, and other
factors could materially affect our ability to achieve the results expressed or
implied by our forward-looking statements including, but not limited to, changes
in general economic conditions, such as interest rate and currency fluctuations,
higher fuel and other energy costs, slower growth in personal income and
consumer spending, declining housing turnover, the availability of mortgage
financing, inflation or deflation of commodity prices and other factors which
can negatively affect our customers, as well as our ability to: (i)
respond to adverse trends in the housing industry and the level of repairs,
remodeling, and additions to existing homes, as well as general reduction in
commercial building activity; (ii) secure, develop, and otherwise implement new
technologies and processes designed to enhance our efficiency and
competitiveness; (iii) attract, train, and retain highly-qualified associates;
(iv) locate, secure, and successfully develop new sites for store development
particularly in major metropolitan markets; (v) respond to fluctuations in the
prices and availability of services, supplies, and products; (vi) respond to the
growth and impact of competition; (vii) address legal and regulatory
developments; and (viii) respond to unanticipated weather conditions that could
adversely affect sales. For more information about these and other
risks and uncertainties that we are exposed to, you should read the “Risk
Factors” included in our Annual Report on Form 10-K to the United States
Securities and Exchange Commission and the description of material changes, if
any, in those “Risk Factors” included in our Quarterly Reports on Form
10-Q.
The
forward-looking statements contained in this Form 10-Q are based upon data
available as of the date of this report or other specified date and speak only
as of such date. We expressly disclaim any obligation to update or
revise any forward-looking statement, whether as a result of new information,
change in circumstances, future events, or otherwise.
The
Company's market risk has not changed materially from that disclosed in our
Annual Report on Form 10-K for the fiscal year ended February 1,
2008.
The
Company's management, with the participation of the Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company’s
“disclosure controls and procedures”, (as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, (the Exchange Act)). Based upon their evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of August 1, 2008, the
Company’s disclosure controls and procedures were effective for the purpose of
ensuring that the information required to be disclosed in the reports that the
Company files or submits under the Exchange Act with the Securities and Exchange
Commission (the SEC) (1) is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and (2) is
accumulated and communicated to the Company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.
In
addition, no change in the Company’s internal control over financial reporting
occurred during the quarter ended August 1, 2008 that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Part
II - OTHER INFORMATION
There
have been no material changes in our risk factors from those disclosed in our
Annual Report on Form 10-K.
(a)
|
The
annual meeting of shareholders was held on May 30,
2008.
|
(b)
|
Directors
elected at the meeting were: Robert A. Ingram, Robert L. Johnson, and
Richard K. Lochridge.
|
Incumbent
Directors whose terms expire in subsequent years are: Peter C. Browning,
Marshall O. Larsen, Stephen F. Page, O. Temple Sloan, Jr., David W. Bernauer,
Leonard L. Berry, Dawn E. Hudson and Robert A. Niblock.
(c)
|
The
matters voted upon at the meeting and the results of the voting were as
follows:
|
(1)
|
Election
of Directors:
|
|
CLASS
|
TERM
EXPIRING
|
FOR
|
WITHHELD
|
Robert
A. Ingram
|
I
|
2011
|
1,289,312,322
|
62,452,627
|
Robert
L. Johnson
|
I
|
2011
|
1,327,677,152
|
24,087,796
|
Richard
K. Lochridge
|
I
|
2011
|
1,330,894,150
|
20,870,798
|
|
|
|
|
|
(2)
|
Ratification
of Appointment of Deloitte & Touche LLP as the Company’s Independent
Registered Public Accounting Firm for the 2008 Fiscal
Year:
|
FOR
|
AGAINST
|
ABSTAIN
|
1,331,701,110
|
8,007,141
|
12,056,695
|
(3) Approval of the Amendment to
the Lowe’s Companies, Inc. Articles of Incorporation Eliminating
Classified Structure of Board of Directors:
|
|
FOR
|
AGAINST
|
ABSTAIN
|
1,326,934,631
|
11,219,319
|
13,610,997
|
(4) Shareholder Proposal Entitled
“Supermajority Vote Requirements”:
|
|
|
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
818,873,282
|
338,655,736
|
14,569,559
|
179,666,371
|
(5)
Shareholder Proposal Entitled
“Executive Compensation Plan”:
|
|
|
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
216,323,480
|
925,945,676
|
29,829,418
|
179,666,374
|
Exhibit
3.1 - Restated and
Amended Charter
Exhibit
10.1 - Form of the
Company’s Management Continuity Agreement for Tier I Senior
Officers
Exhibit
10.2 - Form of the
Company’s Management Continuity Agreement for Tier II Senior
Officers
Exhibit
12.1 - Statement Re
Computation of Ratio of Earnings to Fixed Charges
Exhibit
15.1 - Deloitte & Touche LLP Letter Re Unaudited Interim Financial
Information
Exhibit
31.1 - Certification Pursuant to Rules 13a-14(a) and 15d-14(a) Under the
Securities Exchange Act of 1934, as Amended
Exhibit
31.2 - Certification Pursuant to Rules 13a-14(a) and 15d-14(a) Under the
Securities Exchange Act of 1934, as Amended
Exhibit
32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit
32.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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.
|
|
|
|
September
3, 2008
Date
|
|
/s/Matthew
V. Hollifield
Matthew
V. Hollifield
Senior
Vice President and Chief Accounting
Officer
|
Exhibit
No.
|
|
Description
|
|
|
|
3.1
|
|
Restated
and Amended Charter
|
|
|
|
10.1
|
|
Form
of the Company’s Management Continuity Agreement for Tier I Senior
Officers
|
|
|
|
10.2
|
|
Form
of the Company’s Management Continuity Agreement for Tier II Senior
Officers
|
|
|
|
12.1
|
|
Statement
Re Computation of Ratio of Earnings to Fixed Charges
|
|
|
|
15.1
|
|
Deloitte
& Touche LLP Letter Re Unaudited Interim Financial
Information
|
|
|
|
31.1
|
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) Under the Securities Exchange
Act of 1934, as Amended
|
|
|
|
31.2
|
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) Under the Securities Exchange
Act of 1934, as Amended
|
|
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|