NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 29, 2021, JANUARY 31, 2020 AND FEBRUARY 1, 2019
NOTE 1: Summary of Significant Accounting Policies
Lowe’s Companies, Inc. and subsidiaries (the Company) is the world’s second-largest home improvement retailer and operated 1,974 stores in the United States and Canada at January 29, 2021. Below are those accounting policies considered by the Company to be significant.
Fiscal Year - The Company’s fiscal year ends on the Friday nearest the end of January. Each of the fiscal years presented contained 52 weeks. All references herein for the years 2020, 2019, and 2018 represent the fiscal years ended January 29, 2021, January 31, 2020, and February 1, 2019, respectively.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All intercompany accounts and transactions have been eliminated.
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 remainder of fiscal 2020, the Company provided additional bonus payments to hourly associates, in addition to continued enhanced cleaning protocols and charitable contributions. These actions resulted in $1.2 billion of expense included in selling, general and administrative (SG&A) expense in the consolidated statements of earnings for the fiscal year ended January 29, 2021.
Also, in response to the uncertainties surrounding COVID-19, during the first quarter of 2020, the Company took proactive steps to further enhance its liquidity position by temporarily 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. During the third quarter, the Company reinstated its previously authorized share repurchase program.
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 assessments 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 due by December 31, 2021, and the other half due by December 31, 2022. As of January 29, 2021, the Company deferred $481 million of qualifying employer payroll taxes, of which $241 million is included in accrued compensation and employee benefits, and $240 million is included in other liabilities in the consolidated balance sheet and included in cash flows from other operating liabilities in the consolidated statement of cash flows.
Foreign Currency - The functional currencies of the Company’s international subsidiaries are generally the local currencies of the countries in which the subsidiaries are located. Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is included as a component of shareholders’ equity in accumulated other comprehensive loss. Gains and losses from foreign currency transactions are included in SG&A expense.
Use of Estimates - The preparation of the Company’s financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. The Company bases 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.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with original maturities of three months or less when purchased. Cash and cash equivalents are carried at amortized cost on the consolidated balance sheets. The majority of payments due from financial institutions for the settlement of credit card and debit card transactions process within two business days and are, therefore, classified as cash and cash equivalents.
Investments - Investments generally consist of agency securities, corporate debt securities, governmental securities, and money market funds, which are classified as available-for-sale. Available-for-sale debt securities are recorded at fair value, and unrealized gains and losses are recorded, net of tax, as a component of accumulated other comprehensive loss.
The proceeds from sales of available-for-sale debt securities were $42 million, $121 million, and $506 million for 2020, 2019, and 2018, respectively. Gross realized gains and losses on the sale of available-for-sale debt securities were not significant for any of the periods presented.
Investments with a stated maturity date of one year or less from the balance sheet date or that are expected to be used in current operations are classified as short-term investments. All other investments are classified as long-term. Investments classified as long-term at January 29, 2021, will mature in one to four years, based on stated maturity dates.
The Company classifies as investments restricted balances primarily pledged as collateral for the Company’s extended protection plan program. Restricted balances included in short-term investments were $506 million at January 29, 2021, and $160 million at January 31, 2020. Restricted balances included in long-term investments were $200 million at January 29, 2021, and $372 million at January 31, 2020.
Merchandise Inventory - The majority of the Company’s inventory is stated at the lower of cost and net realizable value using the first-in, first-out method of inventory accounting. Inventory for certain subsidiaries representing approximately 7% and 6% of the consolidated inventory balances as of January 29, 2021 and January 31, 2020, respectively, are stated at lower of cost and net realizable value using the weighted average cost method. The cost of inventory includes certain costs associated with the preparation of inventory for resale, including distribution center costs, and is net of vendor funds.
The Company records an inventory reserve for the anticipated loss associated with selling inventories below cost. This reserve is based on management’s current knowledge with respect to inventory levels, sales trends, and historical experience. Management does not believe the Company’s merchandise inventories are subject to significant risk of obsolescence in the near term, and management has the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in consumer purchasing patterns could result in the need for additional reserves. The Company also records an inventory reserve for the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrink results from previous physical inventories. Changes in the estimated shrink reserve are made based on the timing and results of physical inventories.
The Company receives funds from vendors in the normal course of business, principally as a result of purchase volumes, sales, early payments, or promotions of vendors’ products. Generally, these vendor funds do not represent the reimbursement of specific, incremental, and identifiable costs incurred by the Company to sell the vendor’s product. Therefore, the Company treats these funds as a reduction in the cost of inventory and are recognized as a reduction of cost of sales when the inventory is sold. Funds that are determined to be reimbursements of specific, incremental, and identifiable costs incurred to sell vendors’ products are recorded as an offset to the related expense. The Company develops accrual rates for vendor funds based on the provisions of the agreements in place. Due to the complexity and diversity of the individual vendor agreements, the Company performs analyses and reviews historical trends throughout the year and confirms actual amounts with select vendors to ensure the amounts earned are appropriately recorded. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected annual purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met.
Derivative Financial Instruments - The Company is exposed to the impact of changes in foreign currency exchange rates, benchmark interest rates, and the prices of commodities used in the normal course of business. The Company occasionally utilizes derivative financial instruments to manage certain business risks. All derivative financial instruments are recognized at their fair values as either assets or liabilities at the balance sheet date and reported on a gross basis.
The Company held forward interest rate swap agreements to hedge its exposure to changes in benchmark interest rates on forecasted debt issuances as of January 29, 2021 and January 31, 2020. The cash flows related to forward interest rate swap agreements are included within operating activities in the consolidated statements of cash flows. The Company accounts for these contracts as cash flow hedges, thus the effective portion of gains and losses resulting from changes in fair value are recognized in other comprehensive income/(loss), net of tax effects, in the consolidated statements of comprehensive income and is recognized in earnings when the underlying hedged transaction impacts the consolidated statements of earnings.
To hedge the economic risk of changes in value of the October 2020 cash tender offers prior to its pricing date, the Company entered into reverse treasury lock derivative contracts which were not designated as hedging instruments. The cash flows related to these contracts are included within financing activities in the consolidated statements of cash flows.
Credit Programs and Sale of Business Accounts Receivable - The Company has branded and private label proprietary credit cards which generate sales that are not reflected in receivables. Under an agreement with Synchrony Bank (Synchrony), credit is extended directly to customers by Synchrony. All credit program-related services are performed and controlled directly by Synchrony. The Company has the option, but no obligation, to purchase the receivables at the end of the agreement.
The Company also has an agreement with Synchrony under which Synchrony purchases at face value commercial business accounts receivable originated by the Company and services these accounts. The Company primarily accounts for these transfers as sales of the accounts receivable. When the Company transfers its commercial business accounts receivable, it retains certain interests in those receivables, including the funding of a loss reserve and its obligation related to Synchrony’s ongoing servicing of the receivables sold. Any gain or loss on the sale is determined based on the previous carrying amounts of the transferred assets allocated at fair value between the receivables sold and the interests retained. Fair value is based on the present value of expected future cash flows, taking into account the key assumptions of anticipated credit losses, payment rates, late fee rates, Synchrony’s servicing costs, and the discount rate commensurate with the uncertainty involved. Due to the short-term nature of the receivables sold, changes to the key assumptions would not materially impact the recorded gain or loss on the sales of receivables or the fair value of the retained interests in the receivables.
Total commercial business accounts receivable sold to Synchrony were $3.3 billion in 2020, $3.2 billion in 2019, and $3.1 billion in 2018. The Company recognized losses of $54 million in 2020, $41 million in 2019, and $41 million in 2018 on these receivable sales, which primarily relates to servicing costs that are remitted to Synchrony monthly.
Property and Depreciation - Property is recorded at cost. Costs associated with major additions are capitalized and depreciated. Capital assets are expected to yield future benefits and have original useful lives which exceed one year. The total cost of a capital asset generally includes all applicable sales taxes, delivery costs, installation costs, and other appropriate costs incurred by the Company, including interest in the case of self-constructed assets. Upon disposal, the cost of properties and related accumulated depreciation is removed from the accounts, with gains and losses reflected in SG&A expense in the consolidated statements of earnings.
Property consists of land, buildings and building improvements, equipment, finance lease assets, and construction in progress. Buildings and building improvements includes owned buildings, as well as buildings under finance lease and leasehold improvements. Equipment primarily includes store racking and displays, computer hardware and software, forklifts, vehicles, finance lease equipment, and other store equipment. In addition, excess properties held for use are included within land and buildings.
Depreciation is recognized over the estimated useful lives of the depreciable assets. Assets are depreciated using the straight-line method. Leasehold improvements and finance lease assets are depreciated and amortized, respectively, over the shorter of their estimated useful lives or the term of the related lease. The amortization of these assets is included in depreciation and amortization expense in the consolidated statements of earnings.
Long-Lived Asset Impairment - The carrying amounts of long-lived assets are reviewed whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. A potential impairment has occurred for long-lived assets held-for-use if projected future undiscounted cash flows expected to result from the use and eventual disposition of the assets are less than the carrying amounts of the assets. The carrying value of a location’s asset group includes inventory, property, operating and finance lease right-of-use assets, and operating liabilities, including inventory payables, salaries payable and operating lease liabilities. Financial and non-operating liabilities are excluded from the carrying value of the asset group. An impairment loss is recorded for long-lived assets held-for-use when the carrying amount of the asset is not recoverable and exceeds its fair value.
Excess properties that are expected to be sold within the next 12 months and meet the other relevant held-for-sale criteria are classified as long-lived assets held-for-sale. Excess properties consist primarily of retail outparcels and property associated with relocated or closed locations. An impairment loss is recorded for long-lived assets held-for-sale when the carrying amount of the asset exceeds its fair value less cost to sell. A long-lived asset is not depreciated while it is classified as held-for-sale.
For long-lived assets to be abandoned, the Company considers the asset to be disposed of when it ceases to be used. Until it ceases to be used, the Company continues to classify the asset as held-for-use and tests for potential impairment accordingly. If the Company commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, its depreciable life is evaluated.
Impairment losses are included in SG&A expense in the consolidated statements of earnings. Fair value measurements associated with long-lived asset impairments are further described in Note 3 to the consolidated financial statements.
Goodwill - Goodwill is the excess of the purchase price over the fair value of identifiable assets acquired, less liabilities assumed, in a business combination. The Company reviews goodwill for impairment at the reporting unit level, which is the operating segment level or one level below the operating segment level. Goodwill is not amortized but is evaluated for impairment at least annually on the first day of the fourth quarter or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable. The evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If, after assessing qualitative factors, we determine it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the quantitative goodwill impairment test is performed.
The quantitative goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. Fair value represents the price a market participant would be willing to pay in a potential sale of the reporting unit and is based on a combination of an income approach, based on discounted future cash flows, and a market approach, based on market multiples applied to free cash flow. If the fair value exceeds carrying value, then no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Any impairment identified is included within SG&A expense in the consolidated statements of earnings. The income tax effect from any tax deductible goodwill on the carrying amount of the reporting unit, if applicable, is considered in determining the goodwill impairment loss.
A reporting unit is an operating segment or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. During fiscal 2020, goodwill was allocated to the U.S. Home Improvement reporting unit.
The changes in the carrying amount of goodwill for 2020, 2019, and 2018 were as follows:
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Years Ended
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(In millions)
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January 29, 2021
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January 31, 2020
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February 1, 2019
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Goodwill, balance at beginning of year
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$
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303
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$
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303
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$
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1,307
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Acquisitions
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8
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—
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—
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Impairment
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—
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—
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(952)
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Other adjustments 1
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—
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—
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(52)
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Goodwill, balance at end of year
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$
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311
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|
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$
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303
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|
|
$
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303
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1 Other adjustments primarily consist of changes in the goodwill balance as a result of foreign currency translation.
The Company’s annual goodwill impairment analysis performed during the fourth quarter of fiscal 2018 included a quantitative analysis of the Canada-Retail and Canada-Distribution reporting units. The Company classified these fair value measurements as Level 3. The Company performed a discounted cash flow analysis and market multiple analysis for the Canada-Retail and Canada-Distribution reporting units. These discounted cash flow models included management assumptions for expected sales growth, margin expansion, operational leverage, capital expenditures, and overall operational forecasts. The market multiple analysis included historical and projected performance, market capitalization, volatility, and multiples for industry peers. These analyses led to the conclusion that the fair value of these reporting units was less than their carrying values by an amount that exceeded the carrying value of goodwill, primarily driven by a softening outlook for the Canadian housing market.
Accordingly, the full carrying value of $952 million relating to the Canadian reporting units’ goodwill was impaired during the fourth quarter of 2018.
Gross carrying amounts and cumulative goodwill impairment losses are as follows:
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January 29, 2021
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January 31, 2020
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(In millions)
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Gross Carrying Amount
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Cumulative Impairment
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Gross Carrying Amount
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Cumulative Impairment
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Goodwill
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$
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1,310
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|
|
$
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(999)
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|
|
$
|
1,302
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|
|
$
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(999)
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Leases - The Company leases certain retail stores, warehouses, distribution centers, office space, land and equipment under finance and operating leases. Lease commencement occurs on the date the Company takes possession or control of the property or equipment. Original terms for facility-related leases are generally between five and twenty years. These leases generally contain provisions for four to six renewal options of five years each. Original terms for equipment-related leases, primarily material handling equipment and vehicles, are generally between one and seven years. Some of the Company’s leases also include rental escalation clauses and/or termination provisions. Renewal options and termination options are included in the determination of lease payments when management determines the options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital. Leases with an original term of 12 months or less are not recognized on the Company’s balance sheet, and the lease expense related to those short-term leases is recognized over the lease term. The Company does not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class.
If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of the Company’s leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable, the Company’s estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on information available at lease commencement.
The Company’s real estate leases typically require payment of common area maintenance and real estate taxes which represent the majority of variable lease costs. Certain lease agreements also provide for variable rental payments based on sales performance in excess of specified minimums, usage measures, or changes in the consumer price index. Variable rent payments based on future performance, usage, or changes in indices were not significant for any of the periods presented. Variable lease costs are excluded from the present value of lease obligations.
The Company’s lease agreements do not contain any material restrictions, covenants, or any material residual value guarantees. The Company subleases certain properties that are not used in its operations. Sublease income was not significant for any of the periods presented.
Accounts Payable - The Company has agreements with third parties to provide accounts payable tracking systems which facilitate participating suppliers’ ability to finance payment obligations from the Company with designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal in entering into these arrangements is to capture overall supply chain savings in the form of pricing, payment terms, or vendor funding, created by facilitating suppliers’ ability to finance payment obligations at more favorable discount rates, while providing them with greater working capital flexibility.
The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to finance amounts under these arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by these arrangements for those payment obligations that have been financed by suppliers. The Company’s outstanding payment obligations with participating suppliers were $2.5 billion as of January 29, 2021, and $1.9 billion as of January 31, 2020, and are included in accounts payable on the consolidated balance sheets, and participating suppliers financed $1.7 billion and $1.3 billion, respectively, of those payment obligations to participating financial institutions. Total payment obligations that were placed and settled on the accounts payable tracking systems were $9.7 billion and $8.7 billion for each of the years ended January 29, 2021 and January 31, 2020, respectively.
Other Current Liabilities - Other current liabilities on the consolidated balance sheets consist of:
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(In millions)
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January 29, 2021
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January 31, 2020
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Accrued dividends
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$
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440
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$
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420
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Self-insurance liabilities
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435
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|
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501
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Sales tax liabilities
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256
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|
|
153
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Sales return reserve
|
252
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|
|
194
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Accrued interest
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250
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|
|
221
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|
Income taxes payable
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168
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|
|
15
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Accrued property taxes
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120
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|
|
104
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Other
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1,314
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|
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973
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Total
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$
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3,235
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$
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2,581
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Self-Insurance - The Company is self-insured for certain losses relating to workers’ compensation, automobile, property, and general and product liability claims. The Company has insurance coverage to limit the exposure arising from these claims. The Company is also self-insured for certain losses relating to extended protection plans, as well as medical and dental claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management’s estimates of the discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Although management believes it has the ability to reasonably estimate losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities. Total self-insurance liability, including the current and non-current portions, was $1.1 billion and $1.1 billion at January 29, 2021 and January 31, 2020, respectively.
The Company provides surety bonds issued by insurance companies to secure payment of workers’ compensation liabilities as required in certain states where the Company is self-insured. Outstanding surety bonds relating to self-insurance were $270 million and $262 million at January 29, 2021 and January 31, 2020, respectively.
Income Taxes - The Company establishes deferred income tax assets and liabilities for temporary differences between the tax and financial accounting bases of assets and liabilities. The tax effects of such differences are reflected in the consolidated balance sheets at the enacted tax rates expected to be in effect when the differences reverse. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets if it is more likely than not that all or a portion of the asset will not be realized. The tax balances and income tax expense recognized by the Company are based on management’s interpretation of the tax statutes of multiple jurisdictions.
The Company establishes a liability for tax positions for which there is uncertainty as to whether or not the position will be ultimately sustained. The Company includes interest related to tax issues as part of net interest on the consolidated financial statements. The Company records any applicable penalties related to tax issues within the income tax provision.
Shareholders’ Equity - The Company has a share repurchase program that is executed through purchases made from time to time either in the open market or through private market transactions. Shares purchased under the repurchase program are retired and returned to authorized and unissued status. Any excess of cost over par value is charged to additional paid-in capital to the extent that a balance is present. Once additional paid-in capital is fully depleted, remaining excess of cost over par value is charged to retained earnings.
Revenue Recognition - The Company recognizes revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. A description of the Company’s principle revenue generating activities is as follows:
•Products - Revenue from products primarily relates to in-store and online merchandise purchases, which are recognized at the point in time when the customer obtains control of the merchandise. This occurs at the time of in-store purchase or delivery of the product to the customer. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded. The merchandise return reserve is presented on a gross basis, with a separate asset and liability included in the consolidated balance sheets.
•Services - Revenues from services primarily relate to professional installation services the Company provides through subcontractors related to merchandise purchased by a customer. In certain instances, installation services include materials provided by the subcontractor, and both product and installation are included in service revenue. The
Company recognizes revenue associated with services as they are rendered, and the majority of services are completed within one week from initiation.
Deferred revenue is presented for merchandise that has not yet transferred control to the customer and for services that have not yet been provided, but for which tender has been accepted. Deferred revenue is recognized in sales either at a point in time when the customer obtains control of merchandise through pickup or delivery, or over time as services are provided to the customer. In addition, the Company defers revenues from stored-value cards, which include gift cards and returned merchandise credits, and recognizes revenue into sales when the cards are redeemed.
The Company also defers revenues for its separately-priced extended protection plan contracts, which is a Lowe’s-branded program for which the Company is ultimately self-insured. The Company recognizes revenue from extended protection plan sales on a straight-line basis over the respective contract term. Extended protection plan contract terms primarily range from one to five years from the date of purchase or the end of the manufacturer’s warranty, as applicable.
Cost of Sales and Selling, General and Administrative Expenses - The following lists the primary costs classified in each major expense category:
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Cost of Sales
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Selling, General and Administrative
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n Total cost of products sold, including:
- Purchase costs, net of vendor funds;
- Freight expenses associated with moving merchandise inventories from vendors to selling locations;
- Costs associated with operating the Company’s distribution network, including payroll and benefit costs and occupancy costs;
- Depreciation of assets associated with the Company’s distribution network;
n Costs of installation services provided;
n Costs associated with shipping and handling to customers, as well as directly from vendors to customers by third parties;
n Depreciation of assets used in delivering product to customers;
n Costs associated with inventory shrinkage and obsolescence;
n Costs of services performed under the extended protection plan.
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n Payroll and benefit costs for retail and corporate employees;
n Occupancy costs of retail and corporate facilities;
n Advertising;
n Store environment costs;
n Tender costs, including bank charges, costs associated with credit card interchange fees;
n Costs associated with self-insured plans, and premium costs for stop-loss coverage and fully insured plans;
n Long-lived asset impairment losses, gains/losses on disposal of assets, and exit costs;
n Other administrative costs, such as supplies, and travel and entertainment.
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Advertising - Costs associated with advertising are charged to expense as incurred. Advertising expenses were $798 million, $871 million, and $963 million in 2020, 2019, and 2018, respectively.
Comprehensive Income - The Company reports comprehensive income in its consolidated statements of comprehensive income and consolidated statements of shareholders’ equity. Comprehensive income represents changes in shareholders’ equity from non-owner sources and is comprised of net earnings adjusted primarily for foreign currency translation adjustments and cash flow hedge derivative contracts. Net foreign currency translation losses, net of tax, classified in accumulated other comprehensive loss were $37 million, $115 million, and $209 million at January 29, 2021, January 31, 2020, and February 1, 2019, respectively. Net cash flow hedge losses, net of tax, classified in accumulated other comprehensive loss were $103 million, $24 million, and $1 million at January 29, 2021, January 31, 2020, and February 1, 2019, respectively.
Segment Information - The Company’s home improvement retail operations represent a single reportable segment. Key operating decisions are made at the Company level in order to maintain a consistent retail customer experience. The Company’s home improvement retail and hardware stores, in addition to online selling channels, sell similar products and services, use similar processes to sell those products and services, and sell their products and services to similar classes of customers. In addition, the Company’s operations exhibit similar long-term economic characteristics. The amounts of long-lived assets and net sales outside of the U.S. were approximately 7.5% and 5.9%, respectively, at January 29, 2021. The amounts of long-lived assets and net sales outside of the U.S. were approximately 7.7% and 6.9%, respectively, at January 31, 2020. The amounts of long-lived assets and net sales outside of the U.S. were approximately 9.1% and 7.6%, respectively, at February 1, 2019.
Reclassifications - Certain prior period amounts have been reclassified to conform to current period presentation, including the separate disclosure of cash flow hedges – net of tax on the consolidated statements of comprehensive income, the inclusion of goodwill within other assets on the consolidated balance sheets, the reclassification of excess property from other assets to property, less accumulated depreciation on the consolidated balance sheets, and the separate disclosure of changes in deferred revenue within operating activities on the consolidated statements of cash flows.
Accounting Pronouncements Recently Adopted - Effective February 2, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), and all related amendments, using the optional transition election to not restate comparative periods for the impact of adopting the standard and recognized the cumulative impact of adoption in the opening balance of retained earnings. The Company elected the package of transition expedients available for expired or existing contracts, which allowed the carry-forward of historical assessments of (1) whether contracts are or contain leases, (2) lease classification, and (3) initial direct costs. Adoption of the standard resulted in the recording of additional net lease-related assets and lease-related liabilities of approximately $3.6 billion and $3.9 billion, respectively, as of February 2, 2019. The difference between the additional lease assets and lease liabilities, net of the $87 million deferred tax impact, was $263 million and was recorded as an adjustment to retained earnings. This adjustment to retained earnings primarily represents the write-off of right-of-use assets associated with closed locations, net of previously established store closing lease obligations as well as the derecognition of build-to-suit leases. The adoption of this standard by the Company did not have a material impact on its consolidated statements of earnings, comprehensive income or cash flows and had no impact on the Company’s debt covenant compliance under its current agreements. See Note 5 for additional details of the Company’s leases.
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, and subsequent clarifications, provide 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 use the expedients where needed for reference rate transition. The Company continues to evaluate this standard update and does not currently expect a material impact to the Company’s financial statements or disclosures.
Recent accounting pronouncements pending adoption not discussed in this 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)
|
|
Years Ended
|
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
Products
|
|
$
|
86,046
|
|
|
$
|
68,377
|
|
|
$
|
67,197
|
|
Services
|
|
1,949
|
|
|
2,112
|
|
|
2,539
|
|
Other
|
|
1,602
|
|
|
1,659
|
|
|
1,573
|
|
Net sales
|
|
$
|
89,597
|
|
|
$
|
72,148
|
|
|
$
|
71,309
|
|
Anticipated sales returns reflected in other current liabilities were $252 million at January 29, 2021, and $194 million at January 31, 2020. The associated right of return assets reflected in other current assets were $164 million at January 29, 2021, and $129 million at January 31, 2020.
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 $1.0 billion at January 29, 2021, and $685 million at January 31, 2020. 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 $562 million and $534 million at January 29, 2021 and January 31, 2020, respectively, and these amounts are included in deferred revenue on the consolidated balance sheets. Amounts recognized as breakage were insignificant for the years ended January 29, 2021, January 31, 2020, and February 1, 2019.
Deferred revenue - extended protection plans
The deferred revenues from separately priced extended protection plans were $1.0 billion at January 29, 2021, and $894 million at January 31, 2020. Previously deferred revenue recognized into sales were $430 million for the fiscal year ended January 29, 2021, $408 million for the fiscal year ended January 31, 2020, and $390 million for the fiscal year ended February 1, 2019. 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 January 29, 2021, January 31, 2020, and February 1, 2019.
The liability for extended protection plan claims incurred is included in other current liabilities on the consolidated balance sheets and was not material in any of the periods presented. Expenses for claims are recognized when incurred and totaled $158 million for the fiscal year ended January 29, 2021, $184 million for the fiscal year ended January 31, 2020, and $183 million for the fiscal year ended February 1, 2019.
Disaggregation of Revenues
The following table presents the Company’s net sales disaggregated by merchandise division:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
(In millions)
|
|
Total Sales
|
|
%
|
|
Total Sales
|
|
%
|
|
Total Sales
|
|
%
|
Home Décor ¹
|
|
$
|
31,577
|
|
|
35
|
%
|
|
$
|
26,238
|
|
|
36
|
%
|
|
$
|
25,338
|
|
|
35
|
%
|
Building Products ²
|
|
28,175
|
|
|
32
|
|
|
22,435
|
|
|
31
|
|
|
22,626
|
|
|
32
|
|
Hardlines ³
|
|
27,802
|
|
|
31
|
|
|
21,382
|
|
|
30
|
|
|
20,545
|
|
|
29
|
|
Other
|
|
2,043
|
|
|
2
|
|
|
2,093
|
|
|
3
|
|
|
2,800
|
|
|
4
|
|
Total
|
|
$
|
89,597
|
|
|
100
|
%
|
|
$
|
72,148
|
|
|
100
|
%
|
|
$
|
71,309
|
|
|
100
|
%
|
Note: Merchandise division net sales for prior periods have been reclassified to conform to the current year presentation.
1 Home Décor includes the following product categories: Appliances, Décor, Flooring, Kitchens & Bath, and Paint
2 Building Products includes the following product categories: Building Materials, Electrical, Lighting, Lumber, Millwork, and Rough Plumbing
3 Hardlines includes the following product categories: Hardware, Lawn & Garden, Seasonal & Outdoor Living, and Tools
The following table presents the Company’s net sales disaggregated by geographical area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Years Ended
|
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
United States
|
|
$
|
84,303
|
|
|
$
|
67,147
|
|
|
$
|
65,872
|
|
International
|
|
5,294
|
|
|
5,001
|
|
|
5,437
|
|
Net Sales
|
|
$
|
89,597
|
|
|
$
|
72,148
|
|
|
$
|
71,309
|
|
NOTE 3: Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows:
•Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities
•Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly
•Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The Company’s available-for-sale debt securities represented the only significant assets measured at fair value on a recurring basis for the fiscal years ended January 29, 2021 and January 31, 2020. The following table presents the Company’s financial assets measured at fair value on a recurring basis. The fair values of these instruments approximate amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
(In millions)
|
Measurement Level
|
|
January 29, 2021
|
|
January 31, 2020
|
Assets:
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
U.S. Treasury securities
|
Level 1
|
|
$
|
223
|
|
|
$
|
13
|
|
Money market funds
|
Level 1
|
|
109
|
|
|
105
|
|
Commercial Paper
|
Level 2
|
|
97
|
|
|
—
|
|
Corporate debt securities
|
Level 2
|
|
47
|
|
|
23
|
|
Agency securities
|
Level 2
|
|
30
|
|
|
19
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
$
|
506
|
|
|
$
|
160
|
|
Long-term investments:
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
U.S. Treasury securities
|
Level 1
|
|
$
|
129
|
|
|
$
|
280
|
|
Corporate debt securities
|
Level 2
|
|
58
|
|
|
62
|
|
Agency securities
|
Level 2
|
|
—
|
|
|
30
|
|
Municipal obligations
|
Level 2
|
|
13
|
|
|
—
|
|
|
|
|
|
|
|
Total long-term investments
|
|
|
$
|
200
|
|
|
$
|
372
|
|
Other assets:
|
|
|
|
|
|
Derivative instruments
|
|
|
|
|
|
Forward interest rate swaps
|
Level 2
|
|
$
|
4
|
|
|
$
|
—
|
|
Total other assets
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
|
Derivative instruments
|
|
|
|
|
|
Forward interest rate swaps
|
Level 2
|
|
$
|
8
|
|
|
$
|
11
|
|
Total other current liabilities
|
|
|
$
|
8
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Levels 1, 2, or 3 during any of the periods presented.
When available, quoted prices were used to determine fair value. When quoted prices in active markets were available, investments were classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable market inputs. The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
For the fiscal years ended January 29, 2021 and January 31, 2020, the Company had no material measurements of assets and liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
Other Fair Value Disclosures
The Company’s financial assets and liabilities not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings, and long-term debt and are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature. The fair values of the Company’s unsecured notes were estimated using quoted market prices. The fair values of the Company’s mortgage notes were estimated using discounted cash flow analyses, based on the future cash outflows associated with these arrangements and discounted using the applicable incremental borrowing rate.
Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding finance lease obligations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 29, 2021
|
|
January 31, 2020
|
(In millions)
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Unsecured notes (Level 1)
|
$
|
21,121
|
|
|
$
|
24,349
|
|
|
$
|
16,648
|
|
|
$
|
18,808
|
|
Mortgage notes (Level 2)
|
5
|
|
|
5
|
|
|
5
|
|
|
6
|
|
Long-term debt (excluding finance lease obligations)
|
$
|
21,126
|
|
|
$
|
24,354
|
|
|
$
|
16,653
|
|
|
$
|
18,814
|
|
NOTE 4: Property and Accumulated Depreciation
Property is summarized by major class in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Estimated Depreciable Lives, In Years
|
|
January 29, 2021
|
|
January 31, 2020 1
|
Cost:
|
|
|
|
|
|
Land
|
N/A
|
|
$
|
7,315
|
|
|
$
|
7,321
|
|
Buildings and building improvements
|
5-40
|
|
18,090
|
|
|
17,875
|
|
Equipment
|
2-15
|
|
10,466
|
|
|
10,377
|
|
|
|
|
|
|
|
Construction in progress
|
N/A
|
|
831
|
|
|
506
|
|
Total cost
|
|
|
36,702
|
|
|
36,079
|
|
Accumulated depreciation
|
|
|
(17,547)
|
|
|
(17,310)
|
|
Property, less accumulated depreciation
|
|
|
$
|
19,155
|
|
|
$
|
18,769
|
|
1 Effective as of January 29, 2021, excess property amounts previously reported in other assets were reclassified to property, less accumulated depreciation. Prior year amounts have been reclassified to conform to current period presentation.
As of January 29, 2021 and January 31, 2020, included in property, less accumulated depreciation are assets under finance lease of $661 million less accumulated depreciation of $122 million and $597 million less accumulated depreciation of $42 million, respectively. The related amortization expense for assets under finance leases are included in depreciation and amortization expense. The Company recognized depreciation and amortization expense, inclusive of amounts presented in cost of sales, of $1.5 billion in 2020 and $1.4 billion in 2019 and $1.6 billion in 2018.
NOTE 5: Leases
The lease-related assets and liabilities recorded on the balance sheet are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
(In millions)
|
Classification
|
January 29, 2021
|
|
January 31, 2020
|
Assets
|
|
|
|
|
Operating lease assets
|
Operating lease right-of-use assets
|
$
|
3,832
|
|
|
$
|
3,891
|
|
Finance lease assets
|
Property, less accumulated depreciation 1
|
539
|
|
|
555
|
|
Total lease assets
|
|
4,371
|
|
|
4,446
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating
|
Current operating lease liabilities
|
541
|
|
|
501
|
|
Finance
|
Current maturities of long-term debt
|
86
|
|
|
72
|
|
Noncurrent
|
|
|
|
|
Operating
|
Noncurrent operating lease liabilities
|
3,890
|
|
|
3,943
|
|
Finance
|
Long-term debt, excluding current maturities
|
564
|
|
|
612
|
|
Total lease liabilities
|
|
$
|
5,081
|
|
|
$
|
5,128
|
|
1Finance lease assets are recorded net of accumulated amortization of $122 million as of January 29, 2021, and $42 million as of January 31, 2020.
The table below presents the lease costs for finance and operating leases for fiscal years ended January 29, 2021 and January 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Lease Cost
(In millions)
|
Years Ended
|
January 29, 2021
|
|
January 31, 2020
|
Finance lease cost
|
|
|
|
Amortization of leased assets
|
$
|
82
|
|
|
$
|
45
|
|
Interest on lease liabilities
|
32
|
|
|
30
|
|
Operating lease cost 1
|
659
|
|
|
674
|
|
Variable lease cost
|
244
|
|
|
224
|
|
Total lease cost
|
$
|
1,017
|
|
|
$
|
973
|
|
1Includes short-term leases and sublease income, which are immaterial.
The future minimum rental payments required under operating and finance lease obligations as of January 29, 2021, having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of lease liabilities
(In millions)
|
Operating Leases 1
|
Finance
Leases 2
|
Total
|
2021
|
$
|
684
|
|
$
|
113
|
|
$
|
797
|
|
2022
|
749
|
|
118
|
|
867
|
|
2023
|
664
|
|
113
|
|
777
|
|
2024
|
565
|
|
104
|
|
669
|
|
2025
|
557
|
|
91
|
|
648
|
|
After 2025
|
2,300
|
|
257
|
|
2,557
|
|
Total lease payments
|
5,519
|
|
796
|
|
6,315
|
|
Less: interest 3
|
(1,088)
|
|
(146)
|
|
(1,234)
|
|
Present value of lease liabilities 4
|
$
|
4,431
|
|
$
|
650
|
|
$
|
5,081
|
|
1Operating lease payments include $295 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $669 million of minimum lease payments for leases signed but not yet commenced.
2Finance lease payments include $11 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $6 million of minimum lease payments for leases signed but not yet commenced.
3Calculated using the lease-specific incremental borrowing rate.
4Includes the current portion of $541 million for operating leases and $86 million for finance leases.
|
|
|
|
|
|
|
|
|
|
|
|
Lease Term and Discount Rate
|
January 29, 2021
|
|
January 31, 2020
|
Weighted-average remaining lease term (years)
|
|
|
|
Operating leases
|
9.61
|
|
10.25
|
Finance leases
|
7.88
|
|
9.06
|
Weighted-average discount rate
|
|
|
|
Operating leases
|
3.88
|
%
|
|
4.10
|
%
|
Finance leases
|
5.34
|
%
|
|
5.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information
|
Years Ended
|
(In millions)
|
January 29, 2021
|
|
January 31, 2020
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows used for operating leases
|
$
|
643
|
|
|
$
|
825
|
|
Operating cash flows used for finance leases
|
32
|
|
|
30
|
|
Financing cash flows used for finance leases
|
104
|
|
|
57
|
|
Leased assets obtained in exchange for new finance lease liabilities
|
69
|
|
|
329
|
|
Leased assets obtained in exchange for new operating lease liabilities 1
|
465
|
|
|
551
|
|
1Excludes $669 million of leases signed but not yet commenced as of January 29, 2021.
NOTE 6: Exit Activities
During fiscal years 2020, 2019, and 2018, the Company has incurred costs associated with an ongoing strategic reassessment of its business to drive an increased focus on its core home improvement operations and to improve overall operating performance and profitability. As a result of this reassessment, the Company decided to exit certain activities and close certain locations as further described below. Expenses associated with long-lived asset impairment, discontinued projects, severance, and lease obligations are included in SG&A expense in the consolidated statements of earnings. Expenses associated with accelerated depreciation are included in depreciation and amortization expense in the consolidated statements of earnings. Inventory adjustments to net realizable value are included in cost of sales in the consolidated statements of earnings.
Canada Restructuring
During the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations, and as a result, recognized pre-tax charges of $53 million associated with long-lived asset impairment. Subsequent to the end of the Company’s third quarter of fiscal 2019, a decision was made to close 34 under-performing stores in Canada and take additional restructuring actions to improve future sales and profitability of the Canadian operations. As a result of these actions, during fiscal 2020, the Company recognized pre-tax charges of $35 million. A summary of the significant charges associated with the restructuring of the Canadian operations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
Cumulative
|
|
|
|
|
(In millions)
|
January 29, 2021
|
January 31, 2020
|
Amount
|
|
|
|
|
Long-lived asset impairment
|
$
|
—
|
|
$
|
53
|
|
$
|
53
|
|
|
|
|
|
Severance costs
|
15
|
|
17
|
|
32
|
|
|
|
|
|
Accelerated depreciation and amortization
|
1
|
|
23
|
|
24
|
|
|
|
|
|
Other closing costs
|
19
|
|
15
|
|
34
|
|
|
|
|
|
Total
|
$
|
35
|
|
$
|
108
|
|
$
|
143
|
|
|
|
|
|
Other
During fiscal year ending February 1, 2019, the Company recorded pre-tax charges of $1.1 billion associated with its exit of Orchard Supply Hardware, the closing of 20 U.S. home improvement stores and 31 locations in Canada, the exit of the Company’s Mexico operations, and the exit of other non-core activities within its U.S home improvement business.
Prior to the adoption of ASU 2016-02, Leases (Topic 842), as of February 2, 2019, when locations under operating leases were closed, a liability was recognized for the fair value of future contractual obligations, including future minimum lease payments, property taxes, utilities, common area maintenance, and other ongoing expenses, net of estimated sublease income and other recoverable items. Subsequent changes to the liabilities, including a change resulting from a revision to either the timing or the amount of estimated cash flows, were recognized in the period of change.
The following table summarizes store closing lease obligations activity during the twelve months ended January 29, 2021 and January 31, 2020:
|
|
|
|
|
|
(In millions)
|
Lease obligations
|
Accrual for exit activities, balance at February 1, 2019
|
$
|
361
|
|
ASU 2016-02 adoption impact 2
|
(168)
|
|
Cash payments
|
(43)
|
|
Adjustments 1
|
(62)
|
|
Accrual for exit activities, balance at January 31, 2020
|
$
|
88
|
|
|
|
|
|
Cash payments
|
(18)
|
|
Adjustments 1
|
(1)
|
|
Accrual for exit activities, balance at January 29, 2021
|
$
|
69
|
|
1Adjustments represent lease terminations and changes in estimates around sublease assumptions.
2Upon adoption of ASU 2016-02, Leases (Topic 842), rent liabilities previously recognized in connection with leases were included in the determination of right-of-use assets at transition.
NOTE 7: Short-Term Borrowings
Commercial Paper Program
In March 2020, the Company entered into a $1.02 billion five-year unsecured revolving credit agreement (the 2020 Credit Agreement) with a syndicate of banks. In connection with the 2020 Credit Agreement, the Company refinanced the $250 million 364-Day Credit Agreement (2019 Credit Agreement), dated as of September 9, 2019, and terminated any commitments under the 2019 Credit Agreement as of March 23, 2020. Borrowings under the 2020 Credit Agreement will bear interest calculated according to a Base Rate or a Eurocurrency Rate, plus an applicable margin. The 2020 Credit Agreement
contains customary representations, warranties and covenants for a transaction of this type. The Company was in compliance with those covenants at January 29, 2021.
In September 2018, the Company entered into a $1.75 billion five-year unsecured revolving second amended and restated credit agreement (the Second Amended and Restated Credit Agreement) with a syndicate of banks. In January 2019, the Company increased the aggregate availability under the Second Amended and Restated Credit Agreement by $230 million for a total of $1.98 billion available. Borrowings under the Second Amended and Restated Credit Agreement will bear interest calculated according to a Base Rate or a Eurocurrency rate, plus an applicable margin. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the Second Amended and Restated Credit Agreement, the Company may increase the aggregate availability by an additional $270 million. The Second Amended and Restated Credit Agreement contains customary representations, warranties, and covenants for a transaction of this type. The Company was in compliance with those covenants at January 29, 2021.
The 2020 Credit Agreement and the Second Amended and Restated Credit Agreement (collectively, Credit Agreements) support the Company’s commercial paper program. The amounts available to be drawn under the Credit Agreements are reduced by the amount of borrowings under the commercial paper program. There were no outstanding borrowings under the Company’s commercial paper program, the Second Amended and Restated Credit Agreement, or the 2020 Credit Agreement as of January 29, 2021. Outstanding borrowings under the Company’s commercial paper program were $941 million, with a weighted average interest rate of 2.10%, as of January 31, 2020. There were no outstanding borrowings under the Second Amended and Restated Credit Agreement or the 2019 Credit Agreement as of January 31, 2020. Total combined availability under the 2020 Credit Agreement and Second Amended and Restated Credit Agreement was $3.0 billion as of January 29, 2021.
Other Short-Term Borrowings
In January 2020, the Company entered into a $1.0 billion unsecured 364-day term loan facility (the Term Loan), which was scheduled to mature in December 2020, but was repaid early in September 2020. Outstanding borrowings under the Term Loan were $1.0 billion, with a weighted average interest rate of 2.29%, as of January 31, 2020. The weighted average interest rate of total short-term borrowings was 2.14% as of January 31, 2020.
NOTE 8: Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Category
(In millions)
|
Weighted-Average Interest Rate at January 29, 2021
|
|
January 29, 2021
|
|
January 31, 2020
|
Secured debt:
|
|
|
|
|
|
Mortgage notes due through fiscal 2027 1
|
5.03
|
%
|
|
$
|
5
|
|
|
$
|
5
|
|
Unsecured debt:
|
|
|
|
|
|
Notes due through fiscal 2025
|
3.59
|
%
|
|
4,225
|
|
|
3,976
|
|
Notes due fiscal 2026-2030
|
3.19
|
%
|
|
8,478
|
|
|
5,004
|
|
Notes due fiscal 2031-2035
|
5.50
|
%
|
|
341
|
|
|
340
|
|
Notes due fiscal 2036-2040
|
5.74
|
%
|
|
1,052
|
|
|
785
|
|
Notes due fiscal 2041-2045
|
4.61
|
%
|
|
1,461
|
|
|
2,256
|
|
Notes due fiscal 2046-2050
|
3.78
|
%
|
|
5,564
|
|
|
4,287
|
|
Finance or capitalized lease obligations due through fiscal 2037
|
|
|
654
|
|
|
712
|
|
Total long-term debt
|
|
|
21,780
|
|
|
17,365
|
|
Less current maturities
|
|
|
(1,112)
|
|
|
(597)
|
|
Long-term debt, excluding current maturities
|
|
|
$
|
20,668
|
|
|
$
|
16,768
|
|
1 Real properties with an aggregate book value of $16 million as of January 29, 2021, were pledged as collateral for secured debt.
Debt maturities, exclusive of unamortized original issue discounts, unamortized debt issuance costs, and finance lease obligations, for the next five fiscal years and thereafter are as follows: 2021, $1.0 billion; 2022, $765 million; 2023, $503 million; 2024, $450 million; 2025, $1.5 billion; thereafter, $17.1 billion.
The Company’s unsecured notes are issued under indentures that generally have similar terms and, therefore, have been grouped by maturity date for presentation purposes in the table above. The notes contain certain restrictive covenants, none of which are expected to impact the Company’s capital resources or liquidity. The Company was in compliance with all covenants of these agreements at January 29, 2021.
During 2020, the Company issued $8.0 billion of unsecured fixed rate notes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue Date
|
|
Principal Amount
(in millions)
|
|
Maturity Date
|
|
Interest Rate
|
|
Discount
(in millions)
|
March 2020
|
|
$
|
750
|
|
|
April 2025
|
|
4.000%
|
|
$
|
4
|
|
March 2020
|
|
$
|
1,250
|
|
|
April 2030
|
|
4.500%
|
|
$
|
12
|
|
March 2020
|
|
$
|
750
|
|
|
April 2040
|
|
5.000%
|
|
$
|
10
|
|
March 2020
|
|
$
|
1,250
|
|
|
April 2050
|
|
5.125%
|
|
$
|
13
|
|
October 2020
|
|
$
|
1,000
|
|
|
April 2028
|
|
1.300%
|
|
$
|
5
|
|
October 2020
|
|
$
|
1,250
|
|
|
October 2030
|
|
1.700%
|
|
$
|
10
|
|
October 2020
|
|
$
|
1,750
|
|
|
October 2050
|
|
3.000%
|
|
$
|
17
|
|
Interest on the March 2020 Notes and October 2020 Notes (collectively, the 2020 Notes) is payable semiannually in arrears in April and October of each year until maturity.
During 2019, the Company issued $3.0 billion of unsecured fixed rate notes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue Date
|
|
Principal Amount
(in millions)
|
|
Maturity Date
|
|
Interest Rate
|
|
Discount
(in millions)
|
April 2019
|
|
$
|
1,500
|
|
|
April 2029
|
|
3.650%
|
|
$
|
9
|
|
April 2019
|
|
$
|
1,500
|
|
|
April 2049
|
|
4.550%
|
|
$
|
19
|
|
Interest on the notes issued in 2019 (the 2019 Notes) is payable semiannually in arrears in April and October of each year until maturity.
The indentures governing the 2020 and 2019 Notes contain a provision that allows the Company to redeem these notes at any time, in whole or in part, at specified redemption prices, plus accrued interest, if any, up to the date of redemption. The indentures also contain a provision that allows the holders of the notes to require the Company to repurchase all or any part of their notes if a change of control triggering event occurs. If elected under the change of control provisions, the repurchase of the notes will occur at a purchase price of 101% of the principal amount, plus accrued interest, if any, on such notes up to the date of purchase. The indentures governing the notes do not limit the aggregate principal amount of debt securities that the Company may issue and do not require the Company to maintain specified financial ratios or levels of net worth or liquidity. However, the indentures include various restrictive covenants, none of which is expected to impact the Company’s liquidity or capital resources.
The discounts associated with these issuances, which include the underwriting and issuance discounts, are recorded in long-term debt and are being amortized over the respective terms of the notes using the effective interest method.
During 2020, the Company completed cash tender offers to purchase and retire $3.0 billion combined aggregate principal amount of its outstanding notes with a weighted average interest rate of 4.80%. As a result of the 2020 cash tender offers, the Company recognized a loss on extinguishment of debt of $1.1 billion which includes premium paid to holders of the debt, unamortized deferred financing fees and original issue discounts, and loss on reverse treasury lock derivative contracts. See Note 9 for additional information regarding the reverse treasury lock derivative contracts.
NOTE 9: Derivative Instruments
Cash Flow Hedges
The Company held forward interest rate swap agreements with notional amounts totaling $638 million at January 29, 2021, and $770 million at January 31, 2020. See Note 3 for the gross fair values of the Company’s outstanding derivative financial instruments and corresponding fair value classifications.
The impact of forward interest rate swap derivatives, both matured and outstanding, designated as cash flow hedges recorded in other comprehensive income and earnings for 2020, 2019, and 2018, including its line item in the financial statements, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
(In millions)
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
Other comprehensive income
|
|
|
|
|
|
Cash flow hedges – net of tax (expense)/benefit of $21 million, $8 million, and $0 million, respectively
|
(76)
|
|
|
(23)
|
|
|
(1)
|
|
Net earnings
|
|
|
|
|
|
Interest – net
|
10
|
|
|
2
|
|
|
—
|
|
Other Derivatives Not Designated as Hedging Instruments
To hedge the economic risk of changes in value of the 2020 cash tender offers prior to the pricing date, the Company entered into reverse treasury lock derivative contracts with a combined notional amount of $2.0 billion. Upon the pricing of the 2020 cash tender offers, the Company settled the reverse treasury lock derivative contracts and made a payment to its counterparty for $26 million, which is included in loss on extinguishment of debt in the consolidated statements of earnings for the year ended January 29, 2021. The cash flows related to these contracts are included within financing activities in the accompanying consolidated statements of cash flows.
NOTE 10: Shareholders’ Equity
Authorized shares of preferred stock were 5.0 million ($5 par value) at January 29, 2021 and January 31, 2020, none of which have been issued. The Board of Directors may issue the preferred stock (without action by shareholders) in one or more series, having such voting rights, dividend and liquidation preferences, and such conversion and other rights as may be designated by the Board of Directors at the time of issuance.
Authorized shares of common stock were 5.6 billion ($0.50 par value) at January 29, 2021 and January 31, 2020.
The Company has a share repurchase program that is executed through purchases made from time to time either in the open market or through private off-market transactions. Shares purchased under the repurchase program are retired and returned to authorized and unissued status. On December 9, 2020, the Company announced that its Board of Directors authorized a $15.0 billion share repurchase under the program, in addition to the $10.0 billion of share repurchases authorized by the Board of Directors in December 2018, with no expiration. As of January 29, 2021, the Company had $19.7 billion remaining under the program.
During the year ended January 29, 2021, the Company entered into Accelerated Share Repurchase (ASR) agreements with third-party financial institutions to repurchase a total of 24.2 million shares of the Company’s common stock for $3.5 billion. At inception, the Company paid the financial institutions using cash on hand and took initial delivery of shares. Under the terms of the ASR agreements, upon settlement, the Company would either receive additional shares from the financial institution or be required to deliver additional shares or cash to the financial institution. The Company controlled its election to either deliver additional shares or cash to the financial institution and was subject to provisions which limited the number of shares the Company would be required to deliver.
The final number of shares received upon settlement of each ASR agreement was determined with reference to the volume-weighted average price of the Company’s common stock over the term of the ASR agreement. The initial repurchase of shares under these agreements resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share.
These ASR agreements were accounted for as treasury stock transactions and forward stock purchase contracts. The par value of the shares received was recorded as a reduction to common stock with the remainder recorded as a reduction to capital in excess of par value and retained earnings. The forward stock purchase contracts were considered indexed to the Company’s own stock and were classified as equity instruments.
The terms of each ASR agreement entered into during the last three fiscal years, structured as outlined above, follow (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreement Execution Date
|
ASR Settlement Date
|
ASR Agreement Amount
|
Minimum Notional Amount1
|
Maximum Notional Amount1
|
Cash Payment Received at Settlement1
|
Initial Shares Delivered
|
Additional Shares Delivered at Settlement
|
Total Shares Delivered
|
Q2 2018
|
Q2 2018
|
$
|
550
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
4.8
|
|
0.8
|
|
5.6
|
|
Q3 2018
|
Q3 2018
|
310
|
|
—
|
|
—
|
|
—
|
|
2.5
|
|
0.3
|
|
2.8
|
|
Q4 2018
|
Q1 2019
|
270
|
|
—
|
|
—
|
|
—
|
|
2.6
|
|
0.3
|
|
2.9
|
|
Q1 2019
|
Q1 2019
|
350
|
|
350
|
|
500
|
|
150
|
|
2.9
|
|
0.3
|
|
3.2
|
|
Q2 2019
|
Q2 2019
|
990
|
|
990
|
|
1,410
|
|
420
|
|
8.9
|
|
1.0
|
|
9.9
|
|
Q3 2019
|
Q3 2019
|
397
|
|
350
|
|
500
|
|
103
|
|
2.8
|
|
0.8
|
|
3.6
|
|
Q1 2020
|
Q1 2020
|
500
|
|
—
|
|
—
|
|
—
|
|
3.9
|
|
1.6
|
|
5.5
|
|
Q4 2020
|
Q4 2020
|
3,000
|
|
—
|
|
—
|
|
—
|
|
17.1
|
|
1.6
|
|
18.7
|
|
1The Company entered into variable notional ASR agreements with third-party financial institutions to repurchase between a minimum notional amount and a maximum notional amount. At inception of each transaction, the Company paid the maximum notional amount and received shares. When the Company finalized each transaction, it received additional shares as well as a cash payment from the third-party financial institution equal to the difference between the prepayment amount (maximum notional amount) and the final notional amount.
During the year ended January 29, 2021, the Company also repurchased shares of its common stock through the open market totaling 10.0 million shares for a cost of $1.4 billion.
The Company also withholds shares from employees to satisfy either the exercise price of stock options exercised or the statutory withholding tax liability resulting from the vesting of restricted stock awards and performance share units.
Shares repurchased for 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
|
(In millions)
|
Shares
|
|
Cost 1
|
|
Shares
|
|
Cost 1
|
|
Shares
|
|
Cost 1
|
|
Share repurchase program
|
34.2
|
|
|
$
|
4,940
|
|
|
41.0
|
|
|
$
|
4,288
|
|
|
31.2
|
|
|
$
|
2,999
|
|
|
Shares withheld from employees
|
0.1
|
|
|
11
|
|
|
0.3
|
|
|
37
|
|
|
0.5
|
|
|
46
|
|
|
Total share repurchases
|
34.3
|
|
|
$
|
4,951
|
|
|
41.3
|
|
|
$
|
4,325
|
|
|
31.7
|
|
|
$
|
3,045
|
|
|
1 Reductions of $4.7 billion, $4.1 billion, and $2.8 billion were recorded to retained earnings, after capital in excess of par value was depleted, for 2020, 2019, and 2018, respectively.
NOTE 11: Accounting for Share-Based Payments
Overview of Share-Based Payment Plans
The Company has a number of active and inactive equity incentive plans (the Incentive Plans) under which the Company has been authorized to grant share-based awards to key employees and non-employee directors. The Company also has an employee stock purchase plan (the ESPP) that allows employees to purchase Company shares at a discount through payroll deductions. All of these plans contain a non-discretionary anti-dilution provision that is designed to equalize the value of an award as a result of any stock dividend, stock split, recapitalization, or any other similar equity restructuring.
A total of 199.0 million shares have been previously authorized for grant to key employees and non-employee directors under all of the Company’s Incentive Plans, but only 80.0 million of those shares were authorized for grants of share-based awards under the Company’s currently active Incentive Plans. At January 29, 2021, there were 27.7 million shares remaining available for grants under the currently active Incentive Plans
On May 29, 2020, shareholders approved the Lowe’s Companies, Inc. 2020 Employee Stock Purchase Plan (the 2020 ESPP), which permits a maximum number of shares offered under the new plan of 20.0 million shares. The first offering date under
the 2020 ESPP began December 1, 2020, following the expiration of the Lowe’s Companies Employee Stock Purchase Plan – Stock Options for Everyone (the Former ESPP), under which 50.5 million of the 70.0 million authorized shares were issued from its adoption to expiration on the last exercise date on November 30, 2020. The first offering period under the 2020 ESPP ends May 31, 2021 with the automatic exercise of options to occur the same day, thus no shares have been issued thereunder at the time of filing this Annual Report, and 20.0 million shares remaining available for purchases.
The Company recognized share-based payment expense within SG&A expense in the consolidated statements of earnings of $155 million, $98 million, and $74 million in 2020, 2019, and 2018 respectively. The total associated income tax benefit recognized, exclusive of excess tax benefits, was $29 million, $15 million, and $15 million in 2020, 2019, and 2018, respectively.
Total unrecognized share-based payment expense for all share-based payment plans was $290 million at January 29, 2021, of which $159 million will be recognized in 2021, $113 million in 2022, and $19 million thereafter. This results in these amounts being recognized over a weighted-average period of 1.6 years.
For all share-based payment awards, the expense recognized has been adjusted for estimated forfeitures where the requisite service is not expected to be met. Estimated forfeiture rates are developed based on the Company’s analysis of historical forfeiture data for homogeneous employee groups.
General terms and methods of valuation for the Company’s share-based awards are as follows:
Stock Options
Stock options have terms of 10 years, with one-third of each grant vesting each year for three years, subsequent to the date of the grant, and are assigned an exercise price equal to the closing market price of a share of the Company’s common stock on the date of grant. Options are expensed on a straight-line basis over the grant vesting period, which is considered to be the requisite service period.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. When determining expected volatility, the Company considers the historical volatility of the Company’s stock price, as well as implied volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, based on the options’ expected term. The expected term of the options is based on the Company’s evaluation of option holders’ exercise patterns and represents the period of time that options are expected to remain unexercised. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted average assumptions used in the Black-Scholes option-pricing model and weighted-average grant date fair value for options granted in 2020, 2019, and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
Weighted-average assumptions used:
|
|
|
|
|
|
Expected volatility
|
28.8
|
%
|
|
23.0
|
%
|
|
23.3
|
%
|
Dividend yield
|
1.78
|
%
|
|
1.73
|
%
|
|
1.71
|
%
|
Risk-free interest rate
|
0.47
|
%
|
|
2.28
|
%
|
|
2.71
|
%
|
Expected term, in years
|
6.50
|
|
6.38
|
|
6.58
|
|
|
|
|
|
|
Weighted-average grant date fair value
|
$
|
18.82
|
|
|
$
|
23.66
|
|
|
$
|
21.12
|
|
The total intrinsic value of options exercised, representing the difference between the exercise price and the market price on the date of exercise, was approximately $60 million, $44 million, and $36 million in 2020, 2019, and 2018, respectively.
Transactions related to stock options for the fiscal year ended January 29, 2021 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(In thousands)
|
|
Weighted-Average Exercise Price Per Share
|
|
Weighted-Average Remaining Term (In years)
|
|
Aggregate Intrinsic Value (In thousands)
|
Outstanding at January 31, 2020
|
2,343
|
|
|
$
|
86.01
|
|
|
|
|
|
Granted
|
842
|
|
|
82.29
|
|
|
|
|
|
Canceled, forfeited or expired
|
(139)
|
|
|
93.68
|
|
|
|
|
|
Exercised
|
(911)
|
|
|
73.20
|
|
|
|
|
|
Outstanding at January 29, 2021
|
2,135
|
|
|
$
|
89.51
|
|
|
7.87
|
|
$
|
165,091
|
|
Vested and expected to vest at January 29, 20211
|
2,037
|
|
|
$
|
89.60
|
|
|
7.81
|
|
$
|
157,355
|
|
Exercisable at January 29, 2021
|
819
|
|
|
$
|
86.80
|
|
|
6.56
|
|
$
|
65,558
|
|
1 Includes outstanding vested options as well as outstanding nonvested options after a forfeiture rate is applied.
Restricted Stock Awards
Restricted stock awards are valued at the market price of a share of the Company’s common stock on the date of grant. In general, these awards vest at the end of a three-year period from the date of grant. Beginning in fiscal 2019, certain awards vest 50% at the end of a two-year period from the date of grant and 50% at the end of a three-year period from the date of grant. All awards are expensed on a straight-line basis over a three-year period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock awards granted was $83.83, $109.04, and $86.99 in 2020, 2019, and 2018, respectively. The total fair value of restricted stock awards vesting each year was approximately $31 million, $64 million, and $85 million in 2020, 2019, and 2018, respectively.
Transactions related to restricted stock awards for the fiscal year ended January 29, 2021 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(In thousands)
|
|
Weighted-Average Grant-Date Fair Value Per Share
|
Nonvested at January 31, 2020
|
1,997
|
|
|
$
|
97.81
|
|
Granted
|
1,599
|
|
|
83.83
|
|
Vested
|
(307)
|
|
|
83.76
|
|
Canceled or forfeited
|
(317)
|
|
|
93.38
|
|
Nonvested at January 29, 2021
|
2,972
|
|
|
$
|
92.30
|
|
Deferred Stock Units
Deferred stock units are valued at the market price of a share of the Company’s common stock on the date of grant. For non-employee Directors, these awards vest immediately and are expensed on the grant date. During 2020, 2019, and 2018, each non-employee Director was awarded a number of deferred stock units determined by dividing the annual award amount by the fair market value of a share of the Company’s common stock on the award date and rounding up to the next 100 units. The annual award amount used to determine the number of deferred stock units granted to each Director was $175,000 for 2020, 2019, and 2018. During 2018, the Company appointed a new Chairman of the Board who received an additional grant of deferred stock units. The award amount used to determine the additional units granted was $140,000. During 2020, 15,100 deferred stock units were granted and immediately vested for non-employee Directors. The weighted-average grant-date fair value per share of deferred stock units granted was $130.35, $93.28, and $95.83 in 2020, 2019, and 2018, respectively. The total fair value of deferred stock units vested was $2 million, $2 million, and $2 million in 2020, 2019, and 2018, respectively. At January 29, 2021, there were 142 thousand deferred stock units outstanding, all of which are vested.
Performance Share Units
The Company issues performance share units classified as equity awards. Expense is recognized on a straight-line basis over the requisite service period, based on the probability of achieving the performance condition, with changes in expectations recognized as an adjustment to earnings in the period of the change. Compensation cost is not recognized for performance share units that do not vest because service or performance conditions are not satisfied, and any previously recognized compensation cost is reversed. Performance share units do not have dividend rights. The Company uses historical data to estimate the timing and amount of forfeitures.
The Company’s performance share units are classified as equity and contain performance and service conditions that must be satisfied for an employee to earn the right to benefit from the award. For awards issued in fiscal 2019 and after, the performance condition is primarily based on the achievement of the Company’s target return on invested capital (ROIC). For awards issued prior to fiscal 2019, the performance condition is primarily based on the achievement of the Company’s target return on non-cash average assets (RONCAA).
The performance share units contain a market condition modifier, in addition to having a performance and service condition. The performance condition for these awards continues to be based primarily on the achievement of the Company’s ROIC or RONCAA targets. The market condition is based on the Company’s total shareholder return (TSR) compared to the median TSR of companies listed in the S&P 500 Index over a three year performance period. The Company uses a Monte-Carlo simulation to determine the grant date fair value for these awards, which takes into consideration the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period, as well as the possible outcomes pertaining to the TSR market condition.
The weighted-average assumptions used in the Monte Carlo simulations for these awards granted in 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
January 29, 2021
|
|
January 31, 2020
|
Weighted-average assumptions used:
|
|
|
|
Expected volatility
|
38.5
|
%
|
|
24.1
|
%
|
Dividend yield
|
1.89
|
%
|
|
1.89
|
%
|
Risk-free interest rate
|
0.13
|
%
|
|
2.28
|
%
|
Expected term, in years
|
2.42
|
|
2.84
|
In general, 0% to 200% of the Company’s performance share units vest at the end of a three year service period from the date of grant based upon achievement of the performance condition, or a combination of the performance and market conditions, specified in the performance share unit agreement.
The weighted-average grant-date fair value per unit of performance share units classified as equity awards granted was $203.85, $115.93, and $82.22 in 2020, 2019, and 2018, respectively. The total fair value of performance share units vesting was approximately $0 million, $19 million, and $13 million in 2020, 2019, and 2018, respectively.
Transactions related to performance share units classified as equity awards for the fiscal year ended January 29, 2021 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
(In thousands)1
|
|
Weighted-Average Grant-Date Fair Value Per Unit
|
Nonvested at January 31, 2020
|
569
|
|
|
$
|
97.86
|
|
Granted
|
348
|
|
|
203.85
|
|
Vested
|
—
|
|
|
—
|
|
Canceled or forfeited
|
(214)
|
|
|
100.17
|
|
Nonvested at January 29, 2021
|
703
|
|
|
$
|
149.61
|
|
¹ The number of units presented is based on achieving the targeted performance goals as defined in the performance share unit agreements. As of January 29, 2021, the maximum number of nonvested units that could vest under the provisions of the agreements was 0.4 million for the RONCAA awards and 1.1 million for the ROIC awards.
Restricted Stock Units
Restricted stock units do not have dividend rights and are valued at the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period. In general, these awards vest at the end of a three-year period from the date of grant. Beginning in fiscal 2019, certain awards vest 50% at the end of a two-year period from the date of grant and 50% at the end of a three-year period from the date of grant. All awards are expensed on a straight-line basis over that period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock units granted was $75.59, $103.40, and $80.32 in 2020, 2019, and 2018, respectively. The total fair value of restricted stock units vesting was approximately $5 million, $9 million, and $7 million in 2020, 2019, and 2018, respectively.
Transactions related to restricted stock units for the fiscal year ended January 29, 2021 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(In thousands)
|
|
Weighted-Average Grant-Date Fair Value Per Share
|
Nonvested at January 31, 2020
|
506
|
|
|
$
|
96.39
|
|
Granted
|
662
|
|
|
75.59
|
|
Vested
|
(41)
|
|
|
75.16
|
|
Canceled or forfeited
|
(135)
|
|
|
83.92
|
|
Nonvested at January 29, 2021
|
992
|
|
|
$
|
84.84
|
|
ESPP
On May 29, 2020, shareholders approved the 2020 ESPP. The first offering date under the 2020 ESPP began December 1, 2020, following the expiration of the Former ESPP. The purchase price of the shares under both the 2020 ESPP and the Former ESPP equals 85% of the closing price on the date of purchase. The Company’s share-based payment expense per share is equal to 15% of the closing price on the date of purchase. The ESPP is considered a liability award and is measured at fair value at each reporting date, and the share-based payment expense is recognized over the six-month offering period. Under the Former ESPP, the Company issued 0.7 million shares of common stock in 2020, 0.8 million shares of common stock in 2019, and 0.9 million shares of common stock in 2018 and recognized $16 million of share-based payment expense pursuant to the Former ESPP in 2020 and $13 million of share-based payment expense pursuant to the Former ESPP in 2019 and 2018. The first offering period under the 2020 ESPP ends May 31, 2021 with the automatic exercise of options to occur the same day; no shares have been issued thereunder at the time of filing this Annual Report.
NOTE 12: Employee Retirement Plans
The Company maintains a defined contribution retirement plan for eligible employees (the 401(k) Plan). Eligible employees may participate in the 401(k) Plan the first of the month after thirty days of employment. The Company makes contributions to the 401(k) Plan each payroll period, based upon a matching formula applied to employee deferrals (the Company
Match). Participants are eligible to receive the Company Match pursuant to the terms of the 401(k) Plan. The Company Match varies based on how much the employee elects to defer up to a maximum of 4.25% of eligible compensation. The Company Match is invested identically to employee contributions and is immediately vested.
The Company maintains a Benefit Restoration Plan to supplement benefits provided under the 401(k) Plan to participants whose benefits are restricted as a result of certain provisions of the Internal Revenue Code of 1986. This plan provides for employee salary deferrals and employer contributions in the form of a Company Match.
The Company maintains a non-qualified deferred compensation program called the Lowe’s Cash Deferral Plan. This plan is designed to permit certain employees to defer receipt of portions of their compensation, thereby delaying taxation on the deferral amount and on subsequent earnings until the balance is distributed. This plan does not provide for Company contributions.
The Company recognized expense associated with these employee retirement plans of $175 million, $175 million, and $164 million in 2020, 2019, and 2018, respectively.
NOTE 13: Income Taxes
The following is a reconciliation of the federal statutory tax rate to the effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State income taxes, net of federal tax benefit
|
4.0
|
|
|
4.1
|
|
|
4.8
|
|
Valuation allowance
|
—
|
|
|
1.3
|
|
|
—
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
5.5
|
|
Mexico impairment
|
—
|
|
|
(1.4)
|
|
|
1.5
|
|
Other, net
|
(0.4)
|
|
|
(1.1)
|
|
|
(1.0)
|
|
Effective tax rate
|
24.6
|
%
|
|
23.9
|
%
|
|
31.8
|
%
|
The components of the income tax provision are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
(In millions)
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
Current:
|
|
|
|
|
|
Federal
|
$
|
1,578
|
|
|
$
|
935
|
|
|
$
|
963
|
|
State
|
425
|
|
|
268
|
|
|
274
|
|
Total current 1
|
2,003
|
|
|
1,203
|
|
|
1,237
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(73)
|
|
|
121
|
|
|
(102)
|
|
State
|
(26)
|
|
|
18
|
|
|
(55)
|
|
Total deferred 1
|
(99)
|
|
|
139
|
|
|
(157)
|
|
Total income tax provision
|
$
|
1,904
|
|
|
$
|
1,342
|
|
|
$
|
1,080
|
|
1 Amounts applicable to foreign income taxes were insignificant for all periods presented.
The tax effects of cumulative temporary differences that gave rise to the deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
January 29, 2021
|
|
January 31, 2020
|
Deferred tax assets:
|
|
|
|
Self-insurance
|
$
|
284
|
|
|
$
|
260
|
|
Share-based payment expense
|
48
|
|
|
30
|
|
|
|
|
|
Operating lease liabilities
|
1,328
|
|
|
1,377
|
|
|
|
|
|
Capital loss carryforwards
|
225
|
|
|
225
|
|
Net operating losses
|
274
|
|
|
273
|
|
Other, net
|
337
|
|
|
131
|
|
Total deferred tax assets
|
2,496
|
|
|
2,296
|
|
Valuation allowance
|
(601)
|
|
|
(561)
|
|
Net deferred tax assets
|
1,895
|
|
|
1,735
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Operating lease assets
|
(1,146)
|
|
|
(1,198)
|
|
Property
|
(382)
|
|
|
(293)
|
|
Other, net
|
(27)
|
|
|
(28)
|
|
Total deferred tax liabilities
|
(1,555)
|
|
|
(1,519)
|
|
|
|
|
|
Net deferred tax asset
|
$
|
340
|
|
|
$
|
216
|
|
As of January 29, 2021, the Company reported a deferred tax asset of $225 million, for the capital loss realized in 2017 for U.S. federal income tax purposes related to the exit from the Company’s joint venture investment in Australia. Since no present or future capital gains have been identified through which the asset can be realized, the Company has a full valuation allowance against the deferred tax asset. For U.S. federal tax purposes, this loss has a five-year carryforward period expiring at the end of fiscal 2022.
The Company operates Lowe’s Companies Canada, ULC as a branch and has cumulatively incurred Canadian net operating losses of $769 million and $738 million as of January 29, 2021 and January 31, 2020, respectively. The Company operates RONA inc. as a foreign corporation and has cumulatively incurred Canadian net operating losses of $261 million and $292 million as of January 29, 2021 and January 31, 2020, respectively. These net operating losses are subject to expiration in 2024 through 2040. Deferred tax assets have been established for these foreign net operating losses in the accompanying consolidated balance sheets. Given the uncertainty regarding the realization of the foreign net deferred tax assets, the Company recorded cumulative valuation allowances of $357 million and $319 million as of January 29, 2021 and January 31, 2020, respectively. These valuation allowances are based on management’s assessment of the available positive and negative evidence to estimate the realization of this entity’s existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year periods ended January 29, 2021 and January 31, 2020, respectively. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and if estimates of future taxable income are increased.
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
(In millions)
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
Unrecognized tax benefits, beginning of year
|
$
|
4
|
|
|
$
|
10
|
|
|
$
|
—
|
|
Additions for tax positions of prior years
|
—
|
|
|
2
|
|
|
10
|
|
|
|
|
|
|
|
Reductions for tax positions of prior years
|
—
|
|
|
(3)
|
|
|
—
|
|
Settlements
|
(2)
|
|
|
(5)
|
|
|
—
|
|
|
|
|
|
|
|
Unrecognized tax benefits, end of year
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
10
|
|
The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $2 million as of January 29, 2021 and $3 million as of January 31, 2020.
The interest income and interest expense recognized by the Company related to uncertain tax positions was insignificant for 2020, 2019, and 2018.
Penalties recognized related to uncertain tax positions were insignificant for 2020, 2019, and 2018. There were no accrued penalties as of January 29, 2021, and penalties were insignificant as of January 31, 2020.
The Company is subject to examination by various foreign and domestic taxing authorities. There are ongoing U.S. state audits covering tax years 2015 to 2019. An audit of the Company’s Canadian operations by the Canada Revenue Agency for fiscal years 2015 and 2016 is on-going. The Company remains subject to income tax examinations for fiscal years 2015 through 2019. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.
Note 14: Earnings Per Share
The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of share-based payment awards that contain a nonforfeitable right to receive dividends and, therefore, are considered to participate in undistributed earnings with common shareholders.
Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares as of the balance sheet date, as adjusted for the potential dilutive effect of non-participating share-based awards. The following table reconciles earnings per common share for 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
(In millions, except per share data)
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
Basic earnings per common share:
|
|
|
|
|
|
Net earnings attributable to Lowe's Companies, Inc.
|
$
|
5,835
|
|
|
$
|
4,281
|
|
|
$
|
2,314
|
|
Less: Net earnings allocable to participating securities
|
(24)
|
|
|
(13)
|
|
|
(7)
|
|
|
|
|
|
|
|
Net earnings allocable to common shares, basic
|
$
|
5,811
|
|
|
$
|
4,268
|
|
|
$
|
2,307
|
|
Weighted-average common shares outstanding
|
748
|
|
|
777
|
|
|
811
|
|
Basic earnings per common share
|
$
|
7.77
|
|
|
$
|
5.49
|
|
|
$
|
2.84
|
|
Diluted earnings per common share:
|
|
|
|
|
|
Net earnings attributable to Lowe's Companies, Inc.
|
$
|
5,835
|
|
|
$
|
4,281
|
|
|
$
|
2,314
|
|
Less: Net earnings allocable to participating securities
|
(24)
|
|
|
(13)
|
|
|
(7)
|
|
|
|
|
|
|
|
Net earnings allocable to common shares, diluted
|
$
|
5,811
|
|
|
$
|
4,268
|
|
|
$
|
2,307
|
|
Weighted-average common shares outstanding
|
748
|
|
|
777
|
|
|
811
|
|
Dilutive effect of non-participating share-based awards
|
2
|
|
|
1
|
|
|
1
|
|
Weighted-average common shares, as adjusted
|
750
|
|
|
778
|
|
|
812
|
|
Diluted earnings per common share
|
$
|
7.75
|
|
|
$
|
5.49
|
|
|
$
|
2.84
|
|
Anti-dilutive securities excluded from diluted weighted-average common shares outstanding totaled 0.3 million, 0.9 million, and 0.5 million shares for 2020, 2019, and 2018, respectively.
NOTE 15: Commitments and Contingencies
The Company is, from time to time, party to various legal proceedings considered to be in the normal course of business, none of which, individually or in the aggregate, are expected to be material to the Company’s financial statements. In evaluating liabilities associated with its various legal proceedings, the Company has accrued for probable liabilities associated with these matters. The amounts accrued were not material to the Company’s consolidated financial statements in any of the years presented. Reasonably possible losses for any of the individual legal proceedings which have not been accrued were not material to the Company’s consolidated financial statements.
As of January 29, 2021, the Company had non-cancellable commitments of $1.1 billion related to certain marketing and information technology programs, and purchases of merchandise inventory. Payments under these commitments are scheduled to be made as follows: 2021, $654 million; 2022, $258 million; 2023, $106 million; 2024, $50 million; thereafter, $50 million.
At January 29, 2021, the Company held standby and documentary letters of credit issued under banking arrangements which totaled $61 million. The majority of the Company’s letters of credit were issued for insurance and construction contracts.
NOTE 16: Related Parties
A member of the Company’s Board of Directors also serves on the Board of Directors of a vendor that provides branded consumer packaged goods to the Company. The Company purchased products from this vendor in the amount of $214 million in 2020, $165 million in 2019, and $156 million in 2018. Amounts payable to this vendor were insignificant at January 29, 2021 and January 31, 2020.
The Company’s President and Chief Executive Officer also serves on the Board of Directors of a vendor that provides transportation and business services to the Company. The Company purchased services from this vendor in the amount of $138 million in 2020, $117 million in 2019, and $91 million in 2018. Amounts payable to this vendor were insignificant at January 29, 2021 and January 31, 2020.
NOTE 17: Other Information
Net interest expense is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
(In millions)
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
Long-term debt
|
$
|
807
|
|
|
$
|
668
|
|
|
$
|
582
|
|
Lease obligations
|
32
|
|
|
30
|
|
|
58
|
|
Short-term borrowings
|
13
|
|
|
—
|
|
|
—
|
|
Interest income
|
(24)
|
|
|
(27)
|
|
|
(28)
|
|
Interest capitalized
|
—
|
|
|
(1)
|
|
|
(3)
|
|
Interest on tax uncertainties
|
—
|
|
|
—
|
|
|
3
|
|
Other
|
20
|
|
|
21
|
|
|
12
|
|
Interest – net
|
$
|
848
|
|
|
$
|
691
|
|
|
$
|
624
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
(In millions)
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
Cash paid for interest, net of amount capitalized
|
$
|
824
|
|
|
$
|
671
|
|
|
$
|
635
|
|
Cash paid for income taxes, net
|
$
|
1,588
|
|
|
$
|
1,423
|
|
|
$
|
1,316
|
|
Non-cash investing and financing activities: 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared but not paid
|
$
|
440
|
|
|
$
|
420
|
|
|
$
|
385
|
|
1See Note 5 for supplemental cash flow disclosures related to finance and operating leases.
Sales by product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
January 29, 2021
|
|
January 31, 2020
|
|
February 1, 2019
|
(Dollars in millions)
|
Total Sales
|
|
%
|
|
Total Sales
|
|
%
|
|
Total Sales
|
|
%
|
Appliances
|
$
|
12,098
|
|
|
14
|
%
|
|
$
|
9,989
|
|
|
14
|
%
|
|
$
|
9,484
|
|
|
13
|
%
|
Seasonal & Outdoor Living
|
8,856
|
|
|
10
|
|
|
6,814
|
|
|
9
|
|
|
6,592
|
|
|
9
|
|
Lawn & Garden
|
8,854
|
|
|
10
|
|
|
6,481
|
|
|
9
|
|
|
6,166
|
|
|
9
|
|
Lumber
|
8,337
|
|
|
9
|
|
|
5,709
|
|
|
8
|
|
|
5,863
|
|
|
8
|
|
Kitchens & Bath
|
6,158
|
|
|
7
|
|
|
5,434
|
|
|
8
|
|
|
5,584
|
|
|
8
|
|
Tools
|
5,394
|
|
|
6
|
|
|
4,246
|
|
|
6
|
|
|
4,062
|
|
|
6
|
|
Paint
|
5,371
|
|
|
6
|
|
|
4,074
|
|
|
6
|
|
|
4,040
|
|
|
6
|
|
Millwork
|
4,962
|
|
|
6
|
|
|
4,197
|
|
|
6
|
|
|
4,056
|
|
|
6
|
|
Hardware
|
4,698
|
|
|
5
|
|
|
3,841
|
|
|
5
|
|
|
3,724
|
|
|
5
|
|
Flooring
|
4,457
|
|
|
5
|
|
|
3,894
|
|
|
5
|
|
|
3,905
|
|
|
5
|
|
Rough Plumbing
|
4,306
|
|
|
5
|
|
|
3,742
|
|
|
5
|
|
|
3,676
|
|
|
5
|
|
Building Materials
|
4,119
|
|
|
5
|
|
|
3,452
|
|
|
5
|
|
|
3,731
|
|
|
5
|
|
Décor
|
3,493
|
|
|
4
|
|
|
2,846
|
|
|
4
|
|
|
2,326
|
|
|
3
|
|
Lighting
|
3,482
|
|
|
4
|
|
|
2,888
|
|
|
4
|
|
|
3,022
|
|
|
4
|
|
Electrical
|
2,969
|
|
|
3
|
|
|
2,447
|
|
|
3
|
|
|
2,278
|
|
|
3
|
|
Other
|
2,043
|
|
|
1
|
|
|
2,094
|
|
|
3
|
|
|
2,800
|
|
|
5
|
|
Net sales
|
$
|
89,597
|
|
|
100
|
%
|
|
$
|
72,148
|
|
|
100
|
%
|
|
$
|
71,309
|
|
|
100
|
%
|
Note: Product category sales for prior periods have been reclassified to conform to the current year presentation.
SUPPLEMENTARY DATA
Selected Quarterly Data (UNAUDITED)
The following table summarizes the quarterly consolidated results of operations for 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 29, 2021
|
(In millions, except per share data)
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net sales
|
$
|
19,675
|
|
|
$
|
27,302
|
|
|
$
|
22,309
|
|
|
$
|
20,311
|
|
Gross margin
|
6,513
|
|
|
9,304
|
|
|
7,300
|
|
|
6,456
|
|
Net earnings
|
1,337
|
|
|
2,828
|
|
|
692
|
|
|
978
|
|
Basic earnings per common share
|
1.76
|
|
|
3.74
|
|
|
0.92
|
|
|
1.33
|
|
Diluted earnings per common share
|
$
|
1.76
|
|
|
$
|
3.74
|
|
|
$
|
0.91
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31, 2020
|
(In millions, except per share data)
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net sales
|
$
|
17,741
|
|
|
$
|
20,992
|
|
|
$
|
17,388
|
|
|
$
|
16,027
|
|
Gross margin
|
5,581
|
|
|
6,740
|
|
|
5,640
|
|
|
4,981
|
|
Net earnings
|
1,046
|
|
|
1,676
|
|
|
1,049
|
|
|
509
|
|
Basic earnings per common share
|
1.31
|
|
|
2.14
|
|
|
1.36
|
|
|
0.67
|
|
Diluted earnings per common share
|
$
|
1.31
|
|
|
$
|
2.14
|
|
|
$
|
1.36
|
|
|
$
|
0.66
|
|