EX-13 5 ex13e.txt PORTIONS OF THE ANNUAL REPORT TO SECURITY HOLDERS Exhibit 13 - Portions of the Annual Report to Security Holders for the fiscal Year ended February 1, 2002 18 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Lowe's Companies, Inc. We have audited the accompanying consolidated balance sheets of Lowe's Companies, Inc. and subsidiaries (the "Company") as of February 1, 2002 and February 2, 2001, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three fiscal years in the period ended February 1, 2002, appearing on pages 25 through 38. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lowe's Companies, Inc. and subsidiaries at February 1, 2002 and February 2, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Charlotte, North Carolina February 19, 2002 19 Disclosure Regarding Forward-Looking Statements Our Annual Report talks about our future, particularly in the sections titled "To Our Shareholders" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." While we believe our expectations are reasonable, we can't guarantee them and you should consider this when thinking about statements we make that aren't historical facts. Some of the things that could cause our actual results to differ substantially from our expectations are: * Our sales are dependent upon the general economic health of the country, variations in the number of new housing starts and existing home sales, the level of repairs, remodeling and additions to existing homes, commercial building activity, and the availability and cost of financing. An economic downturn affecting consumer confidence in making housing and home improvement expenditures, could affect sales because a portion of our inventory is purchased for discretionary projects, which can be delayed. * Our expansion strategy may be impacted by environmental regulations, local zoning issues and delays, availability and development of land, and more stringent land use regulations than we have traditionally experienced as well as the availability of sufficient labor to facilitate our growth. * Many of our products are commodities whose prices fluctuate erratically within an economic cycle, a condition especially true of lumber and plywood. * Our business is highly competitive, and as we expand to larger markets we may face new forms of competition which do not exist in some of the markets we have traditionally served. * The ability to continue our everyday competitive pricing strategy and provide the products that customers want depends on our vendors providing a reliable supply of inventory at competitive prices. * On a short-term basis, weather may affect sales of product groups like nursery, lumber, and building materials. 20 Pages 20 - 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion summarizes the significant factors affecting the Company's consolidated operating results, liquidity and capital resources during the three-year period ended February 1, 2002 (i.e., fiscal years 2001, 2000, and 1999). Fiscal years 2001 and 1999 contain 52 weeks of sales and expenses compared to Fiscal 2000, which contains 53 weeks. This discussion should be read in conjunction with the financial statements and financial statement footnotes included in this annual report. On May 25, 2001, the Company's Board of Directors approved a two-for- one split of the Company's common stock. As a result, shareholders received one additional share on June 29, 2001 for each share held as of the record date on June 8, 2001. The par value of the Company's common stock remained $0.50. All related financial information presented, including per share data, reflects the effects of the stock split. ACCOUNTING POLICIES AND ESTIMATES The following discussion and analysis of the results of operations and financial condition are based on the Company's financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets, liabilities, revenues 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, the results 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. The Company's significant accounting polices are described in Note 1 to the consolidated financial statements. Management believes that the following accounting policies affect the more significant estimates used in preparing the consolidated financial statements. The Company records an inventory reserve for the loss associated with selling discontinued inventories at below cost. This reserve is based on management's current knowledge with respect to inventory levels, sales trends and historical experience relating to the liquidation of discontinued inventories. 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 actual shrink results from completed physical inventories could result in revisions to previously recorded shrink expense. Management believes it has sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves. The Company is self-insured for certain losses relating to worker's compensation, automobile, general and product liability claims. Self- insurance claims filed and claims incurred but not reported are accrued based upon management's estimates of the aggregate liability for uninsured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Although management believes it has the ability to adequately record estimated losses related to claims, it is possible that actual results could significantly differ from recorded self-insurance liabilities. OPERATIONS Net earnings for 2001 increased 26% to $1.02 billion or 4.6% of sales compared to $809.9 million or 4.3% of sales for 2000. Net earnings for 2000 increased 20% to $809.9 million or 4.3% of sales compared to $672.8 million or 4.2% of sales for 1999. Diluted earnings per share were $1.30 for 2001 compared to $1.05 for 2000 and $0.88 for 1999. Return on beginning assets was 9.0% for both 2001 and 2000, and return on beginning shareholders' equity was 18.6% for 2001 compared to 17.2% for 2000. The Company recorded sales of $22.1 billion in 2001, an 18% increase over 2000 sales of $18.8 billion. Sales for 2000 were 18% higher than 1999 levels. Comparable store sales increased 2.4% in 2001. The increases in sales are attributable to the Company's ongoing store expansion and relocation program. Stabilization in lumber and building material prices, as well as improved sales in most merchandising categories, brought about the comparable store sales increase. During the year, the Company experienced its strongest sales increases in building materials, paint, appliances and flooring. The following table presents sales and store information: 21 2001 2000 1999 Sales (in millions) $22,111 $18,779 $15,906 Sales Increases 18% 18% 19% Comparable Store Sales Increases 2% 1% 6% At end of year: Stores 744 650 576 Sales Floor Square Feet (in millions) 80.7 67.8 57.0 Average Store Size Square Feet (in thousands) 108 104 99 Gross margin in 2001 was 28.8% of sales compared to 28.2% in 2000. Both of these years showed improvement over the 27.5% rate achieved in 1999. Margin improvements have continued during 2001, primarily resulting from continued progress in line reviews, better buying and product mix improvements. Selling, general and administrative expenses (SG&A) were $3.9 billion or 17.7% of sales in 2001. SG&A in the two previous years were $3.3 and $2.8 billion or 17.8% and 17.4% of sales, respectively. During 2001, SG&A increased 17% compared to the 18% increase in sales. In 2000 SG&A increased 21% compared to the 18% sales increase. The leverage in SG&A during 2001 is primarily attributable to expense controls involving payroll and advertising costs. The increase in SG&A during 2000 was primarily attributable to an increase in store salaries combined with lower than expected sales levels. Store opening costs, which were expensed as incurred, were $139.9 million for 2001 compared to $131.8 and $98.4 million in 2000 and 1999, respectively. These costs are associated with the opening of 115 stores in 2001 (101 new and 14 relocated). This compares to 100 stores in 2000 (80 new and 20 relocated) and 91 stores in 1999 (60 new and 31 relocated). As a percentage of sales, store opening costs were 0.6% for 2001 compared to 0.7% and 0.6% in 2000 and 1999, respectively. Store opening costs averaged approximately $1.2 million, $1.1 million and $1.0 million per store in 2001, 2000 and 1999, respectively. Depreciation, reflecting continued fixed asset expansion, increased 26% to $516.8 million in 2001, compared to increases of 21% and 17% in 2000 and 1999, respectively. Depreciation as a percentage of sales was 2.4% for 2001, a slight increase from 2.2% in 2000 and 2.1% in 1999. Approximately 25% of new stores opened in the last three years have been leased, of which approximately 9% were under capital leases. Property, less accumulated depreciation, increased to $8.7 billion at February 1, 2002 compared to $7.0 billion at February 2, 2001. The increase in property resulted primarily from the Company's store expansion program, including land, building, store equipment, fixtures and displays. Net interest costs as a percent of sales were 0.8% for 2001, 0.7% for 2000 and 0.5% for 1999. Net interest costs totaled $173.5 million in 2001, $120.8 million in 2000, and $84.9 million in 1999. Interest costs have increased due to an increase in debt levels. Interest costs relating to capital leases were $40.4, $42.0 and $42.6 million for 2001, 2000 and 1999, respectively. See the discussion of liquidity and capital resources below. The Company's effective income tax rates were 37.0%, 36.8% and 36.7% in 2001, 2000, and 1999, respectively. The higher rates in 2001 and 2000 were primarily related to expansion into states with higher state income tax rates. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the Company's significant contractual obligations and commercial commitments.
Contractual Payments Due by Period Obligations Less than 1-3 4-5 After 5 (In Thousands) Total 1 year years years years Short-term Debt $ 100,000 $ 100,000 $ - $ - $ - Long-term Debt 3,826,290 40,321 64,494 616,674 3,104,801 Capital Lease Obligations 851,533 59,345 118,020 114,210 559,958 Operating Leases 2,991,367 187,705 379,349 358,586 2,065,727 Total Contractual Cash Obligations $7,769,190 $ 387,371 $ 561,863 $1,089,470 $5,730,486
The primary sources of liquidity are cash flows from operating activities and certain financing activities, along with various lines of credit. Net cash provided by operating activities was $1.6 billion for 2001. This compares to $1.1 billion and $1.2 billion in 2000 and 1999, respectively. The increase in cash provided by operating activities during 2001 resulted primarily from increased net earnings, the funding of the Company's ESOP with the issuance of common stock versus cash in the prior year and improved inventory management. The decrease in cash provided by operating activities during 2000 was primarily the result of a year-over-year increase in inventories that exceeded the increase in accounts payable, which was partially offset by increased earnings and an increase in other operating liabilities. Working capital at February 1, 2002 was $1.9 billion compared to $1.2 billion at February 2, 2001. The primary component of net cash used in investing activities continues to be new store facilities in connection with the Company's expansion plan. Cash acquisitions of fixed assets were 22 $2.2 billion for 2001. This compares to $2.3 billion and $1.5 billion for 2000 and 1999, respectively. Retail selling space as of February 1, 2002 increased 19% over the selling space as of February 2, 2001. The February 2, 2001 selling space total of 67.8 million square feet represents a 19% increase over 1999. Investing activities also include noncash transactions of capital leases for new store facilities and equipment, the result of which is to increase long-term debt and property. Cash flows provided by financing activities were $929.5 million in 2001, $1.1 billion in 2000 and $583.5 million in 1999. The cash provided by financing activities in 2001 primarily resulted from the issuance of $580.7 million aggregate principal amount of senior convertible notes due October 2021 and $1.005 billion aggregate principal amount of convertible notes due February 2021. These cash inflows were offset by a decrease in cash due to the payment of $59.9 million in cash dividends, $63.8 million in scheduled debt maturities and the repayment of $150 million in short-term borrowings. In 2000, cash provided by financing activities included the issuance of $500 million principal amount of 8.25% notes due June 2010 and $500 million principal amount of 7.50% notes due December 2005. These proceeds were offset by a decrease in cash of $53.5 million from cash dividend payments and $61.3 million in scheduled debt repayments. Major financing activities during 1999 included cash received from the issuance of $400 million principal amount of 6.5% debentures due March 2029 and $348.3 million in net proceeds from a common stock offering. These proceeds were offset by cash dividend payments of $47.6 million and $108.3 million of scheduled debt repayments. The ratio of long-term debt to equity plus long-term debt was 36.2%, 33.3% and 27.6% as of the fiscal years ended 2001, 2000, and 1999, respectively. In October 2001, the Company issued $580.7 million aggregate principal of senior convertible notes at an issue price of $861.03 per note. Interest on the notes, at the rate of .8610% per year on the principal amount at maturity, is payable semiannually in arrears until October 2006. After that date, the Company will not pay cash interest on the notes prior to maturity. Instead, in October 2021, the maturity date of the notes, a holder will receive $1,000 per note, representing a yield to maturity of 1%. Holders may convert their notes into 17.212 shares of the Company's common stock, subject to adjustment, only if (1) the sale price of the Company's common stock reaches specified thresholds, (2) the credit rating of the notes is below a specified level, (3) the notes are called for redemption, or (4) specified corporate transactions have occurred. Holders may require the Company to purchase all or a portion of their notes in October 2003 or October 2006, at a price of $861.03 per note plus accrued cash interest, if any, or in October 2011, at a price of $905.06 per note. The Company may choose to pay the purchase price of the notes in cash or common stock or a combination of cash and common stock. In addition, if a change in control of the Company occurs on or before October 2006, each holder may require the Company to purchase for cash all or a portion of such holder's notes. The Company may redeem for cash all or a portion of the notes at any time on or after October 2006, at a price equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the redemption date. None of the conditions that permitted conversion were satisfied at February 1, 2002. In February 2001, the Company issued $1.005 billion aggregate principal of convertible notes at an issue price of $608.41 per note. Interest will not be paid on the notes prior to maturity in February 2021 at which time the holders will receive $1,000 per note, representing a yield to maturity of 2.5%. Holders may convert their notes at any time on or before the maturity date, unless the notes have been previously purchased or redeemed, into 16.448 shares of the Company's common stock per note. Holders of the notes may require the Company to purchase all or a portion of their notes in February 2004 at a price of $655.49 per note or in February 2011 at a price of $780.01 per note. On either of these dates, the Company may choose to pay the purchase price of the notes in cash or common stock, or a combination of cash and common stock. In addition, if a change in the control of the Company occurs on or before February 2004, each holder may require the Company to purchase, for cash, all or a portion of the holders' notes. In August 2001, the Company completed an $800 million senior credit facility. The facility is split into a $400 million five-year tranche, expiring in August 2006 and a $400 million 364-day tranche, expiring in August 2002, which is renewable annually. The facility is used to support the Company's $800 million commercial paper program and for short-term borrowings. Any loans made are priced based upon market conditions at the time of funding in accordance with the terms of the senior credit facility. The senior credit facility contains certain restrictive covenants which include maintenance of specific financial ratios, among others. The Company was in compliance with these covenants at February 1, 23 2002. Fifteen banking institutions are participating in the $800 million senior credit facility and, as of February 1, 2002, there were no outstanding loans under the facility. This facility replaces a $300 million revolving credit agreement. At February 2, 2001, the Company had $149.8 million of commercial paper outstanding supported by the $300 million facility. The Company has several lines of credit available which can provide additional liquidity. In December 2001, the Company completed a $100 million revolving credit and security agreement, expiring in December 2002, and renewable annually with a financial institution. The Company intends to renew this facility in December 2002. Interest rates under this agreement are determined at the time of borrowing based on market conditions in accordance with the terms of the agreement. The Company had $100 million outstanding at February 1, 2002 under this agreement, and $134.7 million in accounts receivable pledged as collateral. This agreement replaced a $100 million revolving credit agreement which expired in November 2001. In addition, $25 million was available as of February 1, 2002, and $100 million was available on February 2, 2001, on an unsecured basis, for the purpose of short-term borrowings on a bid basis from various banks. These lines are uncommitted and are reviewed periodically by both the banks and the Company. There were no borrowings outstanding under these lines of credit as of February 1, 2002 or February 2, 2001. Seven banks have extended lines of credit aggregating $276.5 million for the purpose of issuing documentary letters of credit and standby letters of credit. These lines do not have termination dates but are reviewed periodically. Commitment fees ranging from .25% to .50% per annum are paid on the amounts of standby letters of credit issued. Outstanding letters of credit totaled $162.2 million as of February 1, 2002 and $133.2 million as of February 2, 2001. The Company has three operating lease agreements whereby lessors have committed to purchase land, fund construction costs, and lease properties to the Company. The initial lease terms are five years with two five-year renewal options. One initial term expires in 2005 and the two remaining initial lease terms expire in 2006. The agreements contain guaranteed residual values up to a portion of the properties' original cost and purchase options at original cost for all properties under the agreements. The agreements contain certain restrictive covenants which include maintenance of specific financial ratios, among others. The Company has financed four regional distribution centers, two of which are under construction, and fourteen retail stores through these lease agreements. Total commitments under these operating lease agreements as of February 1, 2002 and February 2, 2001, were $329.4 and $236.1 million, respectively. Outstanding advances under those commitments were $201.1 and $167.7 million as of February 1, 2002 and February 2, 2001. Payments related to these lease agreements have been included in the significant contractual obligations and commercial commitments table presented previously. The Company's 2002 capital budget is currently at $2.8 billion, inclusive of approximately $307 million of operating or capital leases. Approximately 96% of this planned commitment is for store expansion and new distribution centers. Expansion plans for 2002 consist of approximately 123 stores, including approximately 8 relocations of older stores. This planned expansion is expected to increase sales floor square footage by approximately 18%. Approximately 4% of the 2002 projects will be leased and 96% will be owned. At February 1, 2002, the Company operated seven regional distribution centers. During 2001, the Company began construction on two additional regional distribution centers. The first is located in Cheyenne, Wyoming and is expected to be operational in the third quarter of 2002 and the second is located in Northampton, North Carolina, which expected to be operational in late 2002. The Company believes that funds from operations, funds from debt issuances, leases and existing short-term lines of credit will be adequate to finance the 2002 expansion plan and other operating requirements. However, general economic downturns, fluctuations in the prices of products, unanticipated impact arising from competition and adverse weather conditions could have an effect on funds generated from operations and our expansion plans. In addition, the availability of funds through the issuance of commercial paper and new debt could be adversely affected due to a debt rating downgrade or a deterioration of certain financial ratios. The $100 million revolving credit and security agreement requires a minimum investment grade rating in order to receive funding. There are no provisions in any agreements that would require early cash settlement of existing debt or leases as a result of a downgrade in the Company's debt rating or a decrease in the Company's stock price. Holders of the Company's $580.7 million Senior Convertible notes may convert their notes into the Company's common stock if the minimum investment grade rating is not maintained. 24 MARKET RISK The Company's major market risk exposure is the potential loss arising from the impact of changing interest rates on long-term debt. The Company's policy is to manage interest rate risks by maintaining a combination of fixed and variable rate financial instruments. The following tables summarize the Company's market risks associated with long-term debt, excluding capitalized leases. The tables present principal cash outflows and related interest rates by year of maturity, excluding unamortized original issue discounts as of February 1, 2002 and February 2, 2001. The fair values included below were determined using quoted market rates or interest rates that are currently available to the Company on debt with similar terms and remaining maturities. Long-Term Debt Maturities by Fiscal Year February 1, 2002 Average Average Fixed Interest Variable Interest (Dollars in Millions) Rate Rate Rate Rate 2002 $ 40.2 7.65% $ 0.1 1.55% 2003 8.7 7.66 0.1 1.55 2004 55.6 7.98 0.1 1.55 2005 608.9 7.32 0.1 1.55 2006 7.7 7.70 - NA Thereafter 3,102.7 4.54% 2.1 1.65% Total $ 3,823.8 $ 2.5 Fair Value $ 3,811.3 $ 2.5 Long-Term Debt Maturities by Fiscal Year February 2, 2001 Average Average Fixed Interest Variable Interest (Dollars in Millions) Rate Rate Rate Rate 2001 $ 26.1 7.58% $ 0.1 4.60% 2002 43.2 7.63 0.1 4.60 2003 11.9 7.58 0.1 4.60 2004 59.1 7.95 0.1 4.60 2005 612.7 7.32 0.1 4.60 Thereafter 1,534.0 7.30% 2.1 4.27% Total $ 2,287.0 $ 2.6 Fair Value $ 2,269.1 $ 2.6 RECENT ACCOUNTING PRONOUNCEMENTS In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed of," but retains many of its fundamental provisions. Additionally, this statement expands the scope of discontinued operations to include more disposal transactions. SFAS No. 144 will be effective for the Company for the fiscal year beginning February 2, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS No. 143 will require the accrual, at fair value, of the estimated retirement obligation for tangible long-lived assets if the company is legally obligated to perform retirement activities at the end of the related asset's life. SFAS No. 143 is effective for the Company for the fiscal year beginning February 1, 2003. Management does not believe that the initial adoption of these standards will have a material impact on the Company's financial statements. 25 Lowe's Companies, Inc. Consolidated Statements of Earnings (In Thousands, Except Per Share Data)
February 1, % February 2, % January 28, % Years Ended on 2002 Sales 2001 Sales 2000 Sales Net Sales $22,111,108 100.0% $18,778,559 100.0% $15,905,595 100.0% Cost of Sales 15,743,267 71.2 13,487,791 71.8 11,525,013 72.5 Gross Margin 6,367,841 28.8 5,290,768 28.2 4,380,582 27.5 Expenses: Selling, General and Administrative (Note 5)3,913,355 17.7 3,348,060 17.8 2,772,428 17.4 Store Opening Costs 139,870 0.6 131,825 0.7 98,448 0.6 Depreciation 516,828 2.4 408,618 2.2 337,359 2.1 Interest (Note 15) 173,537 0.8 120,825 0.7 84,852 0.5 Nonrecurring Merger Costs (Note 2) - - - - 24,378 0.2 Total Expenses 4,743,590 21.5 4,009,328 21.4 3,317,465 20.8 Pre-Tax Earnings 1,624,251 7.3 1,281,440 6.8 1,063,117 6.7 Income Tax Provision (Note 13) 600,989 2.7 471,569 2.5 390,322 2.5 Net Earnings $ 1,023,262 4.6% $809,871 4.3% $672,795 4.2% Basic Earnings Per Share (Note 9) $1.33 $1.06 $0.88 Diluted Earnings Per Share (Note 9) $1.30 $1.05 $0.88 Cash Dividends Per Share $0.08 $0.07 $0.06 See accompanying notes to consolidated financial statements.
26 Lowe's Companies, Inc. Consolidated Balance Sheets (In Thousands, Except Per Value Data)
February 1, % February 2, % 2002 Total 2001 Total Assets Current Assets: Cash and Cash Equivalents $798,839 5.8% $455,658 4.0% Short-Term Investments (Note 3) 54,389 0.4 12,871 0.1 Accounts Receivable - Net (Notes 1 and 6) 165,578 1.2 160,985 1.4 Merchandise Inventory (Note 1) 3,610,776 26.3 3,285,370 28.9 Deferred Income Taxes (Note 13) 92,504 0.7 81,044 0.7 Other Current Assets 198,306 1.4 161,498 1.5 Total Current Assets 4,920,392 35.8 4,157,426 36.6 Property, Less Accumulated Depreciation (Notes 4 and 7) 8,653,439 63.0 7,034,960 61.9 Long-Term Investments (Note 3) 21,660 0.2 34,690 0.3 Other Assets (Note 5) 140,728 1.0 131,091 1.2 Total Assets $13,736,219 100.0% $11,358,167 100.0% Liabilities and Shareholders' Equity Current Liabilities: Short-Term Borrowings (Note 6) $100,000 0.7% $249,829 2.2% Current Maturities of Long-Term Debt (Note 7) 59,259 0.5 42,341 0.4 Accounts Payable 1,714,776 12.5 1,714,370 15.1 Employee Retirement Plans (Note 12) 126,339 0.9 75,656 0.7 Accrued Salaries and Wages 220 885 1.6 166,392 1.4 Other Current Liabilities (Note 5) 795,571 5.8 662,410 5.8 Total Current Liabilities 3,016,830 22.0 2,910,998 25.6 Long-Term Debt, Excluding Current Maturities (Notes 7, 8 and 11) 3,734,011 27.2 2,697,669 23.8 Deferred Income Taxes (Note 13) 304 697 2.2 251,450 2.2 Other Long-Term Liabilites 6,239 - 3,165 - Total Liabilities 7,061,777 51.4 5,863,282 51.6 Shareholders' Equity (Note 10): Preferred Stock - $5 Par Value, none issued - - - - Common Stock - $.50 Par Value; Shares Issued and Outstanding February 1, 2002 775,714 February 2, 2001 766,484 387,857 2.8 383,242 3.4 Capital in Excess of Par Value 1,804,161 13.2 1,595,148 14.0 Retained Earnings 4,481,734 32.6 3,518,356 31.0 Unearned Compensation-Restricted Stock Awards - - (2,312) - Accumulated Other Comprehensive Income 690 - 451 - Total Shareholders' Equity 6,674,442 48.6 5,494,885 48.4 Total Liabilities and Shareholders' Equity $13,736,219 100.0% $11,358,167 100.0% See accompanying notes to consolidated financial statements.
27 Lowe's Companies, Inc. Consolidated Statements of Shareholders' Equity (In Thousands)
Unearned Accumulated Capital in Compensation Other Total Common Stock Excess of Retained Restricted Comprehensive Shareholders' Shares Amount Par Value Earnings Stock Awards Income(Loss) Equity Balance January 29, 1999 748,776 $374,388 $1,138,622 $2,136,727 $(30,387) $417 $3,619,767 Comprehensive Income: Net Earnings 672,795 Other Comprehensive Income, Net of Income Taxes and Reclassification Adjustments: Unrealized Loss on Available-for- Sale Securities (Note 10) (837) Total Comprehensive Income 671,958 Tax Effect of Non-qualified Stock Options Exercised 9,888 9,888 Cash Dividends (47,558) (47,558) Common Stock Offering 12,414 6,206 342,094 348,300 Employee Stock Options Exercised (Note 10) 1,664 832 20,204 21,036 Stock Issued to ESOP (Notes 12 and 15) 2,156 1,078 58,434 59,512 Shares issued to Directors (Note 10) 32 16 35 51 Unearned Compensation - Restricted Stock Awards (Note 10) (324) (162) (4,840) 17,519 12,517 Balance January 28, 2000 764,718 $382,358 $1,564,437 $2,761,964 $(12,868) $(420) $4,695,471 Comprehensive Income: Net Earnings 809,871 Other Comprehensive Income, Net of Income Taxes and Reclassification Adjustments: Unrealized Gain on Available-for- Sale Securities (Note 10) 871 Total Comprehensive Income 810,742 Tax Effect of Non-qualified Stock Options Exercised 7,465 7,465 Cash Dividends (53,479) (53,479) Employee Stock Options Exercised (Note 10) 1,256 628 11,432 12,060 Directors' Stock Options Exercised (Note 10) 144 72 358 430 Employee Stock Purchase Plan (Note 10) 874 438 14,451 14,889 Unearned Compensation - Restricted Stock Awards (Note 10) (508) (254) (2,995) 10,556 7,307 Balance February 2, 2001 766,484 $383,242 $1,595,148 $3,518,356 $(2,312) $451 $5,494,885 Comprehensive Income: Net Earnings 1,023,262 Other Comprehensive Income, Net of Income Taxes and Reclassification Adjustments: Unrealized Gain on Available-for-Sale Securities (Note 10) 239 Total Comprehensive Income 1,023,501 Tax Effect of Non-qualified Stock Options Exercised 35,019 35,019 Cash Dividends (59,884) (59,884) Employee Stock Options Exercised (Note 10) 5,622 2,811 74,709 77,520 Directors' Stock Options Excercised (Note 10) 32 16 87 103 Stock Issued to ESOP (Notes 12 and 15) 1,946 973 62,476 63,449 Employee Stock Purchase Plan (Note 10) 1,688 844 37,093 37,937 Unearned Compensation - Restricted Stock Awards (Note 10) (58) (29) (371) 2,312 1,912 Balance February 1, 2002 775,714 $387,857 $1,804,161 $4,481,734 $ - $690 $6,674,442 See accompanying notes to consolidated financial statements.
28 Lowe's Companies, Inc. Consolidated Statements of Cash Flows (In Thousands)
February 1, February 2, January 28, Years Ended On 2002 2001 2000 Cash Flows From Operating Activities: Net Earnings $1,023,262 $809,871 $672,795 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Depreciation and Amortization 534,102 409,511 337,822 Deferred Income Taxes 41,658 23,284 13,439 Loss on Disposition/Writedown of Fixed and Other Assets 38,930 22,733 51,520 Tax Effect of Stock Options Exercised 35,019 7,465 9,888 Changes in Operating Assets and Liabilities: Accounts Receivable - Net (4,593) (13,084) (3,973) Merchandise Inventory (325,406) (473,009) (427,661) Other Operating Assets (36,792) (59,651) (50,324) Accounts Payable 406 158,419 335,408 Employee Retirement Plans 113,823 (26,357) 76,024 Other Operating Liabilities 192,640 270,527 182,223 Net Cash Provided by Operating Activities 1,613,049 1,129,709 1,197,161 Cash Flows from Investing Activities: (Increase) Decrease in Investment Assets: Short-Term Investments - Net (29,958) 75,738 (50,998) Purchases of Long-Term Investments (1,042) (13,951) (12,413) Proceeds from Sale/Maturity of Long-Term Investments 2,878 750 2,531 Increase in Other Long-Term Assets (13,661) (51,675) (53,028) Fixed Assets Acquired (2,199,108) (2,331,922) (1,472,348) Proceeds from the Sale of Fixed and Other Long-Term Assets 41,557 71,399 67,837 Net Cash Used in Investing Activities (2,199,334) (2,249,661) (1,518,419) Cash Flows from Financing Activities: Net (Decrease) Increase in Short-Term Borrowings (149,829) 157,354 (24,600) Long-Term Debt Borrowings 1,087,071 1,014,878 394,588 Repayment of Long-Term Debt (63,762) (61,285) (108,309) Proceeds from Stock Offering - - 348,300 Proceeds from Employee Stock Purchase Plan 37,937 14,889 - Proceeds from Stock Options Exercised 77,933 12,131 21,085 Cash Dividend Payments (59,884) (53,479) (47,558) Net Cash Provided by Financing Activities 929,466 1,084,488 583,506 Net Increase (Decrease) in Cash and Cash Equivalents 343,181 (35,464) 262,248 Cash and Cash Equivalents, Beginning of Year 455,658 491,122 228,874 Cash and Cash Equivalents, End of Year $798,839 $455,658 $491,122 See accompanying notes to consolidated financial statements.
29 LOWE'S COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 1, 2002, FEBRUARY 2, 2001 AND JANUARY 28, 2000 Pages 29 - 38 NOTE 1 - Summary of Significant Accounting Policies: The Company is the world's second largest home improvement retailer and operated 744 stores in 42 states at February 1, 2002. Below are those accounting policies considered to be significant. Fiscal Year - The Company's fiscal year ends on the Friday nearest January 31. The fiscal years ended February 1, 2002 and January 28, 2000 had 52 weeks. The fiscal year ended February 2, 2001 had 53 weeks. All references herein for the years 2001, 2000 and 1999 represent the fiscal years ended February 1, 2002, February 2, 2001 and January 28, 2000, respectively. Stock Split - On May 25, 2001, the Company's Board of Directors approved a two- for-one split of the Company's common stock. As a result, shareholders received one additional share on June 29, 2001 for each share held as of the record date on June 8, 2001. The par value of the Company's common stock remained $0.50. All related financial information presented, including per share data, reflects the effects of the stock split. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All material intercompany accounts and transactions have been eliminated. 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, revenues 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, the results 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. Investments - The Company has a cash management program which provides for the investment of cash balances, not expected to be used in current operations, in financial instruments that have maturities of up to five years. Investments, exclusive of cash equivalents, with a 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 consist primarily of tax-exempt notes and bonds, corporate notes, municipal preferred tax-exempt stock and repurchase agreements. The Company has classified all investment securities as available-for-sale, and they are carried at fair market value. Unrealized gains and losses on such securities are included in accumulated other comprehensive income in shareholders' equity. Derivative Financial Instruments - The Company does not use derivative financial instruments for trading purposes. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138, with the fiscal year beginning February 3, 2001. The adoption of this standard had no material impact on the Company's financial statements. Accounts Receivable - The majority of accounts receivable arise from sales to commercial business customers. The allowance for doubtful accounts is based on historical experience and a review of existing receivables. The allowance for doubtful accounts was $4.9 million at February 1, 2002 and $2.0 million at February 2, 2001. Sales generated through the Company's private label credit cards are not reflected in receivables. Under an agreement with Monogram Credit Card Bank of Georgia (the Bank), a wholly owned subsidiary of General Electric Capital Corporation (GECC), consumer credit is extended directly to customers by the Bank and all credit program related services are performed and controlled directly by the Bank. The Company has the option, but no obligation, at the end of the agreement to purchase the receivables. The total portfolio of receivables held by GECC approximated $2.9 billion at February 1, 2002 and $2.5 billion at February 2, 2001. Merchandise Inventory - Inventory is stated at the lower of cost or market using the first-in, first-out method of inventory accounting. The cost of inventory also includes certain processing costs associated with the preparation of inventory for resale. Property and Depreciation - Property is recorded at cost. Costs associated with major additions are capitalized and depreciated. Upon disposal, the cost of properties and related accumulated depreciation are removed from the accounts with gains and losses reflected in earnings. 30 Depreciation is provided over the estimated useful lives of the depreciable assets. Assets are generally depreciated using the straight-line method. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the related lease. Leases - Assets under capital leases are amortized in accordance with the Company's normal depreciation policy for owned assets or over the lease term, if shorter, and the charge to earnings is included in depreciation expense in the consolidated financial statements. Self-Insurance - The Company is self-insured for certain losses relating to workers' compensation, automobile, general and product liability claims. The Company has stop loss coverage to limit the exposure arising from these claims. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon the Company's estimates of the aggregate liability for uninsured claims incurred using actuarial assumptions followed in the insurance industry and the Company's historical experience. Income Taxes - Income taxes are provided for temporary differences between the tax and financial accounting bases of assets and liabilities using the liability method. The tax effects of such differences are reflected in the balance sheet at the enacted tax rates expected to be in effect when the differences reverse. Store Pre-opening Costs - Costs of opening new retail stores are charged to operations as incurred. Impairment/Store Closing Costs - Losses related to impairment of long-lived assets and for long-lived assets to be disposed of are recognized when circumstances indicate the carrying amount of the assets may not be recoverable. At the time management commits to close or relocate a store location, the Company evaluates the carrying value of the assets in relation to its expected future cash flows. If the carrying value of the assets is greater than the expected future cash flows, a provision is made for the impairment of the assets based on the assets' estimated fair value. Impairment losses for closed real estate are made when the carrying value of the assets exceed fair value. The impairment loss is measured based on the excess of carrying value over estimated fair value. When a leased location is closed or becomes impaired, a provision is made for the present value of future lease obligations, net of anticipated sublease income. Provisions for impairment and store closing costs are included in selling, general and administrative expenses. Revenue Recognition - The Company recognizes revenues when sales transactions occur and customers take possession of the merchandise. A provision for anticipated merchandise returns is provided in the period that the related sales are recorded. Advertising - Costs associated with advertising are charged to operations as incurred. Advertising expenses were $94.3, $114.1 and $69.2 million for 2001, 2000 and 1999, respectively. Stock Based Compensation - The Company applies the intrinsic value method of accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for stock-based compensation where the option price approximated the fair market value of the stock on the date of grant, other than for restricted stock grants. Recent Accounting Pronouncements - In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed of," but retains many of its fundamental provisions. Additionally, this statement expands the scope of discontinued operations to include more disposal transactions. SFAS No. 144 will be effective for the Company for the fiscal year beginning February 2, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS No. 143 will require the accrual, at fair value, of the estimated retirement obligation for tangible long-lived assets if the company is legally obligated to perform retirement activities at the end of the related asset's life. SFAS No. 143 is effective for the Company for the fiscal year beginning February 1, 2003. Management does not believe that the initial adoption of these standards will have a material impact on the Company's financial statements. 31 NOTE 2 - Merger: The Company completed its merger with Eagle Hardware & Garden, Inc. (Eagle) on April 2, 1999. The transaction was structured as a tax-free exchange of the Company's common stock for Eagle's common stock, and was accounted for as a pooling of interests. The Company incurred $24.4 million of merger related costs which were charged to operations during the first quarter of fiscal year 1999. These costs consisted of $15.7 million relating to the write-off of nonusable Eagle properties, $1.5 million for severance obligations to former Eagle executives, and $7.2 million in direct merger costs such as accounting, legal, investment banking and other miscellaneous fees. NOTE 3 - Investments: The Company's investment securities are classified as available-for-sale. The amortized cost, gross unrealized holding gains and losses and fair values of the investments at February 1, 2002 and February 2, 2001 are as follows: February 1, 2002 Gross Gross (In Thousands) Amortized Unrealized Unrealized Fair Type Cost Gains Losses Value Municipal Obligations $ 8,664 $ 104 - $ 8,768 Money Market Preferred Stock 40,000 - - 40,000 Corporate Notes 4,952 166 - 5,118 Federal Agency Note 500 3 - 503 Classified as Short-Term 54,116 273 - 54,389 Municipal Obligations 15,980 488 - 16,468 Corporate Notes 4,891 300 - 5,192 Classified as Long-Term 20,871 788 - 21,660 Total $74,987 $1,061 - $76,049 February 2, 2001 Gross Gross (In Thousands) Amortized Unrealized Unrealized Fair Type Cost Gains Losses Value Municipal Obligations $12,836 $ 51 $16 $12,871 Classified as Short-Term 12,836 51 16 12,871 Municipal Obligations 23,800 276 1 24,075 Federal Agency Note 500 10 - 510 Corporate Notes 9,756 349 - 10,105 Classified as Long-Term 34,056 635 1 34,690 Total $46,892 $686 $17 $47,561 The proceeds from sales of available-for-sale securities were $1.0, $8.6 and $17.1 million for 2001, 2000 and 1999, respectively. Gross realized gains and losses on the sale of available-for-sale securities were not significant for any of the periods presented. The municipal obligations and corporate notes classified as long-term at February 1, 2002 will mature in one to five years. NOTE 4 - Property and Accumulated Depreciation: Property is summarized below by major class: February 1, February 2, (In Thousands) 2002 2001 Cost: Land $ 2,622,803 $ 2,150,206 Buildings 4,276,713 3,465,163 Store, Distribution and Office Equipment 3,106,099 2,623,822 Leasehold Improvements 626,737 389,140 Total Cost 10,632,352 8,628,331 Accumulated Depreciation and Amortization (1,978,913) (1,593,371) Net Property $8,653,439 $7,034,960 The estimated depreciable lives, in years, of the Company's property are: buildings, 20 to 40; store, distribution and office equipment, 3 to 10; leasehold improvements, generally the life of the related lease. Net property includes $460.9 and $454.4 million in assets under capital leases at February 1, 2002 and February 2, 2001, respectively. NOTE 5 - Impairment and Store Closing Costs: When the Company's management makes the decision to close or relocate a store, the carrying value of the related assets is evaluated in relation to their expected future cash flows. Losses related to impairment of long-lived assets to be disposed of are recognized when the expected future cash flows are less than the assets' carrying value. If the carrying value of the assets is greater than the expected future cash flows, a provision is made for the impairment of the assets based on the excess of carrying value over fair value. The fair value of the assets is generally based on internal or external appraisals and the Company's historical experience. Provisions for impairment and store closing costs are included in selling, general and administrative expenses. The carrying amount of closed store real estate is included in other assets and amounted to $81.6 and $76.4 million at February 1, 2002 and February 2, 2001, respectively. When leased locations are closed or become impaired, a liability is recognized for the net present value of future lease obligations 32 net of anticipated sublease income. The following table illustrates this liability and the respective changes in the obligation, which is included in other current liabilities in the consolidated balance sheet. Lease Liability Balance at January 29, 1999 $18,433,701 Accrual for Store Closing Costs 4,489,091 Lease Payments, Net of Sublease Income (5,483,037) Balance at January 28, 2000 17,439,755 Accrual for Store Closing Costs 8,246,117 Lease Payments, Net of Sublease Income (6,250,011) Balance at February 2, 2001 19,435,861 Accrual for Store Closing Costs 6,262,682 Lease Payments, Net of Sublease Income (8,646,099) Balance at February 1, 2002 $17,052,444 NOTE 6 - Short-term Borrowings and Lines of Credit: The Company has an $800 million senior credit facility. The facility is split into a $400 million five-year tranche, expiring in August 2006 and a $400 million 364-day tranche, expiring in August 2002, which is renewable annually. The facility is used to support the Company's $800 million commercial paper program and for short-term borrowings. Borrowings made are priced based upon market conditions at the time of funding in accordance with the terms of the senior credit facility. The senior credit facility contains certain restrictive covenants which include maintenance of specific financial ratios, among others. The Company was in compliance with these covenants at February 1, 2002. Fifteen banking institutions are participating in the $800 million senior credit facility and as of February 1, 2002, there were no outstanding loans under the facility. This facility replaced a $300 million revolving credit agreement in August 2001. The Company intends to renew the 364-day tranche in August 2002. At February 2, 2001, the Company had $149.8 million of commercial paper outstanding supported by the $300 million facility. The Company also has a $100 million revolving credit and security agreement, expiring in December 2002 and renewable annually, with a financial institution. Interest rates under this agreement are determined at the time of borrowing based on market conditions in accordance with the terms of the agreement. The Company had $100 million outstanding at February 1, 2002 under this agreement. The Company intends to renew this facility in December 2002. At February 1, 2002, the Company had $134.7 million in accounts receivable pledged as collateral under this agreement. This agreement replaced a $100 million revolving credit agreement which expired in November 2001. The Company had $100 million outstanding and had $145.0 million in accounts receivable pledged as collateral at February 2, 2001 under the former agreement. In addition, $25 million was available as of February 1, 2002, and $100 million was available on February 2, 2001, on an unsecured basis, for the purpose of short-term borrowings on a bid basis from various banks. These lines are uncommitted and are reviewed periodically by both the banks and the Company. There were no borrowings outstanding under these lines of credit as of February 1, 2002 or February 2, 2001. Seven banks have extended lines of credit aggregating $276.5 million for the purpose of issuing documentary letters of credit and standby letters of credit. These lines do not have termination dates but are reviewed periodically. Commitment fees ranging from .25% to .50% per annum are paid on the amounts of standby letters of credit. Outstanding letters of credit totaled $162.2 million as of February 1, 2002 and $133.2 million as of February 2, 2001. The interest rate on short-term borrowings outstanding at February 1, 2002 was 1.86%. At February 2, 2001, the weighted average interest rate on short-term borrowings was 6.40%. NOTE 7 - Long-Term Debt: Fiscal Year (In Thousands) of Final February 1, February 2, Debt Category Interest Rates Maturity 2002 2001 Secured Debt:1 Mortgage Notes 7.00% to 9.25% 2028 $ 61,631 $ 93,395 Other Notes 1.55% to 8.00% 2020 4,764 7,117 Unsecured Debt: Debentures 6.50% to 6.88% 2029 691,790 691,481 Notes 7.50% to 8.25% 2010 993,692 992,583 Medium Term Notes Series A 7.08% to 8.20% 2023 106,000 121,000 Medium Term Notes2 Series B 6.70% to 7.59% 2037 266,363 266,215 Senior Notes 6.38% 2005 99,597 99,493 Convertible Notes 0.9% to 2.5% 2021 1,102,677 - Capital Leases 6.58% to 19.57% 2029 466,756 468,726 Total Long-Term Debt 3,793,270 2,740,010 Less Current Maturities 59,259 42,341 Long-Term Debt, Excluding Current Maturities $3,734,011 $2,697,669 33 Debt maturities, exclusive of capital leases, for the next five fiscal years are as follows (in millions): 2002, $40.3; 2003, $8.8; 2004, $55.7; 2005, $609.0; 2006, $7.7. The Company's debentures, senior notes, medium term notes and convertible notes contain certain financial covenants, including the maintenance of specific financial ratios, among others. The Company was in compliance with all covenants in these agreements at February 1, 2002 and February 2, 2001. In October 2001, the Company issued $580.7 million aggregate principal of senior convertible notes at an issue price of $861.03 per note. Interest on the notes, at the rate of 0.8610% per year on the principal amount at maturity, is payable semiannually in arrears until October 2006. After that date, the Company will not pay cash interest on the notes prior to maturity. Instead, in October 2021 when the notes mature, a holder will receive $1,000 per note, representing a yield to maturity of 1%. Holders may convert their notes into 17.212 shares of the Company's common stock, subject to adjustment, only if: the sale price of the Company's common stock reaches specified thresholds, the credit rating of the notes is below a specified level, the notes are called for redemption, or specified corporate transactions have occurred. Holders may require the Company to purchase all or a portion of their notes in October 2003 or October 2006, at a price of $861.03 per note plus accrued cash interest, if any, or in October 2011, at a price of $905.06 per note. The Company may choose to pay the purchase price of the notes in cash or common stock or a combination of cash and common stock. In addition, if a change in control of the Company occurs on or before October 2006, each holder may require the Company to purchase for cash all or a portion of such holder's notes. The Company may redeem for cash all or a portion of the notes at any time beginning October 2006, at a price equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the redemption date. The conditions that permit conversion were not satisfied at February 1, 2002. In February 2001, the Company issued $1.005 billion aggregate principal of convertible notes at an issue price of $608.41 per note. Interest will not be paid on the notes prior to maturity in February 2021, at which time the holders will receive $1,000 per note, representing a yield to maturity of 2.5%. Holders may convert their notes at any time on or before the maturity date, unless the notes have been previously purchased or redeemed, into 16.448 shares of the Company's common stock per note. Holders of the notes may require the Company to purchase all or a portion of their notes in February 2004 at a price of $655.49 per note or in February 2011 at a price of $780.01 per note. On either of these dates, the Company may choose to pay the purchase price of the notes in cash or common stock, or a combination of cash and common stock. In addition, if a change in control of the Company occurs on or before February 2004, each holder may require the Company to purchase, for cash, all or a portion of the holder's notes. Notes: 1. Real properties pledged as collateral for secured debt had net book values at February 1, 2002, as follows: mortgage notes - $134.5 million and other notes - $26.6 million. 2. Approximately 37% of these Medium Term Notes may be put at the option of the holder on either the tenth or twentieth anniversary date of the issue at par value. None of these notes are currently putable. NOTE 8 - Financial Instruments: Cash and cash equivalents, accounts receivable, short-term borrowings, trade accounts payable, and accrued liabilities are reflected in the financial statements at cost which approximates fair value. Short and long-term investments, classified as available-for-sale securities, are reflected in the financial statements at fair value. Estimated fair values for long-term debt have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value of the Company's long-term debt excluding capital leases is as follows: February 1, 2002 February 2, 2001 Carrying Fair Carrying Fair (In Thousands) Amount Value Amount Value Liabilities: Long-Term Debt (Excluding Capital Leases) $3,326,514 $3,813,861 $2,271,284 $2,271,729 Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. 34 NOTE 9 - Earnings Per Share: Basic earnings per share (EPS) excludes dilution and is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is calculated based on the weighted average shares of common stock as adjusted for the potential dilutive effect of stock options and applicable convertible notes as of the balance sheet date. The effect of the assumed conversion of the $580.7 million Senior Convertible Notes, issued in October 2001, has been excluded from diluted earnings per share for the year ended February 1, 2002 because none of the conditions that would permit conversion had been satisfied during the period (see Note 7). Following is the reconciliation of EPS for 2001, 2000, and 1999. (In Thousands, Except Per Share Data) 2001 2000 1999 Basic Earnings per Share: Net Earnings $ 1,023,262 $ 809,871 $ 672,795 Weighted Average Shares Outstanding 772,098 765,596 762,480 Basic Earnings per Share $ 1.33 $ 1.06 $ 0.88 Diluted Earnings per Share: Net Earnings $ 1,023,262 $ 809,871 $ 672,795 Net Earnings Adjustment for Interest on Convertible Debt Net of Tax 9,315 - - Net Earnings, as Adjusted $ 1,032,577 $ 809,871 $ 672,795 Weighted Average Shares Outstanding 772,098 765,596 762,480 Dilutive Effect of Stock Options 6,559 3,354 5,228 Dilutive Effect of Convertible Debt 15,940 - - Weighted Average Shares, as Adjusted 794,597 768,950 767,708 Diluted Earnings per Share $ 1.30 $ 1.05 $ 0.88 NOTE 10 - Shareholders' Equity: Authorized shares of common stock were 2.8 billion at February 1, 2002 and February 2, 2001. The Company has 5 million authorized shares of preferred stock ($5 par), 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. The Company has a shareholder rights plan, which provides for a distribution of 0.5 preferred share purchase rights on each outstanding share of common stock. Purchase rights become distributable and exercisable only if a person or group acquires or commences a tender offer for 15% or more of Lowe's common stock. Once exercisable, each 0.5 purchase right will entitle shareholders (other than the acquiring person or group) to buy one unit of a series of preferred stock for $76.25; the price of the unit to the acquiring person or group in such event would be $152.50. Each unit is intended to be the economic equivalent of one share of common stock, and the plan was adopted to act as a deterrent to unsolicited offers to acquire control of the Company. The rights will expire in 2008, unless the Company redeems or exchanges them earlier. The Company has three stock incentive plans, referred to as the "2001," "1997," and "1994" Incentive Plans, under which incentive and non-qualified stock options may be granted to key employees. No awards may be granted after 2011 under the 2001 plan, 2007 under the 1997 plan, and 2004 under the 1994 plan. Stock options generally have terms ranging from 5 to 10 years, normally vest evenly over 3 years, and are assigned an exercise price of not less than the fair market value on the date of grant. At February 1, 2002, there were 25,844,880, 1,515,486, and 1,393,750 shares available for grants under the 2001, 1997, and 1994 plans, respectively. Stock option information related to the 2001, 1997, and 1994 Incentive Plans is summarized as follows: 35 Key Employee Stock Option Plans Shares Weighted-Average (In Thousands) Exercise Price Per Share Outstanding at January 29, 1999 11,488 $13.35 Granted 2,288 $24.97 Canceled or Expired (1,240) $21.38 Exercised (1,470) $10.73 Outstanding at January 28, 2000 11,066 $16.18 Granted 7,370 $23.39 Canceled or Expired (1,672) $23.33 Exercised (1,256) $10.03 Outstanding at February 2, 2001 15,508 $19.43 Granted 10,866 $34.17 Canceled or Expired (1,611) $25.50 Exercised (5,622) $14.99 Outstanding at February 1, 2002 19,141 $28.77 Exercisable at February 1, 2002 6,707 $21.67 Exercisable at February 2, 2001 9,422 $16.94 Exercisable at January 28, 2000 6,540 $12.81 Outstanding Exercisable _______________________________ _______________________ Weighted- Weighted- Weighted- Range of Average Average Average Exercise Options Remaining Exercise Options Exercise Prices (In Thousands) Term Price (In Thousands) Price $ 5.18 - $ 7.52 117 3.2 $ 5.98 117 $ 5.98 8.70 - 12.90 524 2.9 11.65 524 11.65 13.19 - 19.73 292 5.1 15.28 292 15.28 20.71 - 30.66 14,050 5.3 25.13 5,774 23.21 $ 31.16 - $45.70 4,158 7.0 44.85 - - Totals 19,141 5.5 $ 28.77 6,707 $ 21.67 Restricted stock awards of 20,000, and 1,741,400 shares, with per share weighted-average fair values of $17.57, and $12.40, were granted to certain executives in 1998 and 1997, respectively. No restricted stock awards were granted in 2001, 2000, and 1999. These shares were nontransferable and subject to forfeiture for periods prescribed by the Company. During 2001, a total of 31,800 shares were forfeited and 312,600 shares vested. At February 1, 2002, all restricted stock awards were fully vested. Related expenses (charged to compensation expense) for 2001, 2000 and 1999 were $1.9, $7.3, and $12.5 million, respectively. In 1999, the Company's shareholders approved the Lowe's Companies, Inc. Directors' Stock Option Plan, which replaced the Directors' Stock Incentive Plan that expired on May 29, 1998. During the term of the Plan, each non-employee Director will be awarded 4,000 options on the date of the first board meeting after each annual meeting of the Company's shareholders (the award date). The maximum number of shares available for grant under the Plan is 500,000, subject to adjustment. No awards may be granted under the Plan after the award date in 2008. The options vest evenly over three years, expire after seven years and are assigned a price equal to the fair market value of the Company's common stock on the date of grant. During 2001, 40,000 shares were granted at a price of $35.91 per share; these shares remain outstanding at February 1, 2002. During 2000, 32,000 shares were granted at a price of $22.88 per share and remain outstanding at February 1, 2002. At February 1, 2002, a total of 10,672 options are exercisable from the 2000 grant. During 1999, 36,000 shares were granted under the Plan at a price of $25.84 per share, of which 28,000 remain outstanding at February 1, 2002. During 2001, 8,000 shares were canceled under the Plan. At February 1, 2002, a total of 18,669 shares are exercisable under the 1999 grant. During 2000, the Company established a qualified Employee Stock Purchase Plan that allows eligible employees to participate in the purchase of designated shares of the Company's common stock. Ten million shares were authorized for this plan with 7,436,586 remaining available at February 1, 2002. The purchase price of this stock is equal to 85% of the lower of the closing price at the beginning or the end of each semi-annual stock purchase period. The Company issued 1,688,966 and 874,448 shares of common stock pursuant to this plan during 2001 and 2000, respectively. No compensation expense has been recorded in the accompanying consolidated statement of earnings related to this Plan as the Plan qualifies as non-compensatory. The Company applies the intrinsic value method of accounting for its stock- based compensation plans. Accordingly, no compensation expense has been recognized for stock-based compensation where the option price approximated the fair market value of the stock on the date of grant, other than for restricted stock grants. Had compensation expense for 2001, 2000, and 1999 stock options granted been determined using the fair value method, the Company's net earnings and earnings per share (EPS) amounts would approximate the following pro forma amounts (in thousands, except per share data): 2001 2000 1999 As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma Net Earnings $1,023,262 $ 968,181 $ 809,871 $ 773,430 $ 672,795 $ 652,786 Basic EPS $ 1.33 $ 1.25 $ 1.06 $ 1.01 $ 0.88 $ 0.86 Diluted EPS $ 1.30 $ 1.22 $ 1.05 $ 1.01 $ 0.88 $ 0.85 36 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions listed below. 2001 2000 1999 Weighted average fair value per option $17.39 $11.57 $ 13.03 Assumptions used: Weighted average expected volatility 41.1% 37.7% 38.1% Weighted average expected dividend yield 0.23% 0.41% 0.52% Weighted average risk-free interest rate 4.58% 5.15% 6.24% Weighted average expected life, in years 7.0 7.0 7.0 The Company reports comprehensive income in its consolidated statement of shareholders' equity. Comprehensive income represents changes in shareholders' equity from non-owner sources. For the three years ended February 1, 2002, unrealized holding gains (losses) on available-for-sale securities were the only items of other comprehensive income for the Company. The following schedule summarizes the activity in other comprehensive income for the years ended February 1, 2002 and February 2, 2001: 2001 2000 _________________________ ___________________________ After Pre-Tax Tax Tax After Gain (Expense)/ Gain/ Pre-Tax Tax Tax (In Thousands) (Loss) Benefit (Loss) Gain Expense Gain Unrealized net holding gains/ losses arising during the year $353 $(124) $229 $1,319 $(445) $874 Less: Reclassification adjustment for gains/losses included in net earnings (16) 6 (10) 5 (2) 3 Unrealized net gains/losses on available-for-sale securities, net of reclassification adjustment $369 $(130) $239 $1,314 $(443) $871 NOTE 11 - Leases: The Company leases certain store facilities under agreements with original terms generally of 20 years. Certain lease agreements contain rent escalation clauses that are charged to rent expense on a straight-line basis. Some agreements also provide for contingent rental based on sales performance in excess of specified minimums. In fiscal years 2001, 2000, and 1999, contingent rentals have been nominal. The leases usually contain provisions for four renewal options of five years each. Certain equipment is also leased by the Company under agreements ranging from two to five years. These agreements typically contain renewal options providing for a renegotiation of the lease, at the Company's option, based on the fair market value at that time. The future minimum rental payments required under capital and operating leases having initial or remaining noncancelable lease terms in excess of one year are summarized as follows: (In Thousands) Operating Leases Capital Leases Fiscal Year Real Estate Equipment Real Estate Equipment Total 2002 $ 187,276 $ 429 $ 56,842 $ 2,503 $ 247,050 2003 192,328 41 56,795 2,303 251,467 2004 186,976 4 56,978 1,944 245,902 2005 181,349 - 56,993 182 238,524 2006 177,237 - 56,993 42 234,272 Later Years 2,065,727 - 559,958 - 2,625,685 Total Minimum Lease Payments $2,990,893 $474 $844,559 $6,974 $3,842,900 Total Minimum Capital Lease Payments $851,533 Less Amount Representing Interest 384,777 ______________________________________________________________________________ Present Value of Minimum Lease Payments 466,756 Less Current Maturities 18,938 _____ ____________ Present Value of Minimum Lease Payments, Less Current Maturities $ 447,818 Rental expenses under operating leases for real estate and equipment were $188.2, $161.9 and $144.0 million in 2001, 2000 and 1999, respectively. The Company has three operating lease agreements whereby lessors have committed to purchase land, fund construction costs and lease properties to the Company. The initial lease terms are five years with two five-year renewal options. One initial term expires in 2005 and the two remaining initial lease terms expire in 2006. The agreements contain guaranteed residual values up to a portion of the properties' original cost and purchase options at original cost for all properties under the agreements. The agreements contain certain restrictive covenants which include maintenance of specific financial ratios, among others. The Company has financed four regional distribution centers, two of which are under construction, and 14 retail stores through these lease agreements. Total commitments under these operating lease agreements as of February 1, 2002 and February 2, 2001 were $329.4 and $236.1 million, respectively. 37 Outstanding advances under those commitments were $201.1 and $167.7 million as Of February 1, 2002 and February 2, 2001. Payments related to these lease agreements have been included in the minimum lease payments table above. NOTE 12 - Employee Retirement Plans: The Company's contribution to its Employee Stock Ownership Plan (ESOP) is based on a minimum contribution that may be increased based on the attainment of certain performance measures which are subject to approval by the Board of Directors. The ESOP generally covers all Lowe's employees after completion of one year of employment and 1,000 hours of service during that year, with contributions vesting ratably over seven years. Employees participating in the Plan, who are age 50 or older with 10 or more years of service, are provided with a diversification option allowing them to transfer 50% of their shares in the Plan to the Company's 401(k) Plan. Participating employees, with at least 20 years of service, may also elect to receive a one-time withdrawal of 50% of their balance. Once a participant reaches age 59 1/2, with seven or more years of service, they may elect to have their entire account balance distributed to them. Contributions are allocated to participants based on their eligible compensation relative to total eligible compensation. Contributions may be made in cash or shares of the Company's common stock and are usually made in the following year. ESOP expense for 2001, 2000 and 1999 was $119.2, $72.1 and $84.7 million, respectively. At February 1, 2002 the ESOP held approximately 6.2% of the outstanding common stock of the Company. Company shares held on the participants behalf by the Plan are voted by the participants. The Company's contributions to the 401(k) plan are based upon a matching formula applied to employee contributions. Employees are eligible to participate in the 401(k) plan after completing 90 days of continuous service. The Company's contributions to the 401(k) plan vest immediately in the participant's account. Company contributions to the 401(k) for 2001, 2000 and 1999 were $14.7, $13.6 and $11.5 million, respectively. Participants are allowed to choose from a group of mutual funds in order to designate how both employer and employee contributions are to be invested. The Company's common stock is also one of the investment options for contributions to the plan. Company shares held on the participant's behalf by the Plan are voted by the participants. NOTE 13 - Income Taxes: 2001 2000 1999 Statutory Rate Reconciliation Statutory Federal Income Tax Rate 35.0% 35.0% 35.0% State Income Taxes-Net of Federal Tax Benefit 3.0 2.7 2.8 Other, Net (1.0) (0.9) (1.1) Effective Tax Rate 37.0% 36.8% 36.7% (In Thousands) Components of Income Tax Provision Current Federal $490,569 $398,335 $333,257 State 68,762 49,950 43,626 Total Current 559,331 448,285 376,883 Deferred Federal 35,120 19,298 11,303 State 6,538 3,986 2,136 Total Deferred 41,658 23,284 13,439 Total Income Tax Provision $600,989 $471,569 $390,322 The tax effect of cumulative temporary differences that gave rise to the deferred tax assets and liabilities at February 1, 2002 and February 2, 2001 is as follows (in thousands): February 1, 2002 (In Thousands) Assets Liabilities Total Excess Property and Store Closing Costs $27,856 - $27,856 Insurance 62,885 - 62,885 Depreciation - $(330,888) (330,888) Vacation Accrual 27,160 - 27,160 Sales Returns 8,397 - 8,397 Other, Net 12,282 (19,885) (7,603) Total $138,580 $(350,773) $(212,193) February 2, 2001 (In Thousands) Assets Liabilities Total Excess Property and Store Closing Costs $20,879 - $20,879 Insurance 45,228 - 45,228 Depreciation - $(272,170) (272,170) Vacation Accrual 23,220 - 23,220 Sales Returns 6,467 - 6,467 Other, Net 19,492 (13,522) 5,970 Total $115,286 $(285,692) $(170,406) 38 NOTE 14 - Litigation: The Company is a defendant in legal proceedings considered to be in the normal course of business, none of which, singularly or collectively, are considered material to the Company. NOTE 15 - Other Information: Net interest expense is composed of the following: (In Thousands) 2001 2000 1999 Long-Term Debt $161,228 $117,024 $ 86,675 Mortgage Interest 7,980 7,667 6,686 Capitalized Leases 40,441 42,041 42,552 Short-Term Debt 4,154 11,638 5,847 Amortization of Original Issue Discount and Loan Costs 18,165 2,631 801 Interest Income (24,653) (25,049) (38,373) Interest Capitalized (33,778) (35,127) (19,336) Net Interest Expense $173,537 $120,825 $ 84,852 _____________________________________________________________________________ Supplemental Disclosures of Cash Flow Information: (In Thousands) 2001 2000 1999 Cash Paid for Interest (Net of Amount Capitalized) $178,354 $132,457 $128,265 Cash Paid for Income Taxes $532,235 $428,385 $408,366 _____________________________________________________________________________ Noncash Investing and Financing Activities: Fixed Assets Acquired under Capital Leases $ 12,677 $ 1,259 $ 27,573 Termination of Capital Leases - 2,223 - Common Stock Issued to ESOP (Note 12) 63,449 - 59,512 Common Stock Issued to Executives and Directors, net of Unearned Compensation 1,912 7,734 12,488 Notes Received in Exchange for Sale of Real Estate $ 4,150 $ - $ - _____________________________________________________________________________ Sales by Product Category: 2001 2000 1999 (Dollars in Millions) Total Total Total Product Category Sales % Sales % Sales % Appliances $2,504 11% $1,922 10% $1,341 8% Lumber/Plywood 1,997 9 1,676 9 1,607 10 Outdoor Fashion 1,474 7 1,323 7 1,102 7 Millwork 1,443 6 1,197 6 1,021 6 Nursery 1,401 6 1,247 7 1,006 6 Cabinets/Furniture/Shelving 1,383 6 1,138 6 897 6 Fashion Electrical 1,340 6 1,135 6 959 6 Tools 1,282 6 1,124 6 951 6 Flooring 1,278 6 1,009 5 726 5 Fashion Plumbing 1,263 6 1,046 6 862 5 Hardware 1,251 6 1,070 6 946 6 Paint 1,244 6 996 5 858 5 Building Materials 1,239 6 1,148 6 1,080 7 Rough Plumbing & Electrical 1,147 5 993 5 854 5 Outdoor Power Equipment 818 4 768 4 676 4 Walls/Windows 533 2 452 2 361 2 Other 514 2 535 4 659 6 Totals $22,111 100% $18,779 100% $15,906 100% 40 Stock Performance (Unaudited) Lowe's Quarterly Stock Price Range and Cash Dividend Payment*
Fiscal 2001 Fiscal 2000 Fiscal 1999 High Low Dividend High Low Dividend High Low Dividend 1st Quarter $ 32.30 $ 24.79 $ 0.018 $ 33.63 $ 20.38 $ 0.018 $ 33.22 $ 25.66 $ 0.015 2nd Quarter 39.86 30.30 0.020 26.35 20.19 0.018 30.00 24.84 0.015 3rd Quarter 39.30 24.99 0.020 27.25 17.13 0.018 27.97 21.50 0.015 4th Quarter $ 48.88 $ 33.70 $ 0.020 $ 27.75 $ 18.88 $ 0.018 $ 30.00 $ 21.53 $ 0.018 * Adjusted for 2-for-1 stock split to shareholders of record on June 8, 2001, as applicable.
41 LOWE'S COMPANIES, INC. SELECTED FINANCIAL DATA (Unaudited) (In Thousands, Except Per Share Data)
2001 2000 1999 1998 1997 Selected Statement of Earnings Data: Net Sales $22,111,108 $18,778,559 $15,905,595 $13,330,540 $11,108,378 Gross Margin 6,367,841 5,290,768 4,380,582 3,573,895 2,953,046 Net Earnings 1,023,262 809,871 672,795 500,374 383,030 Basic Earnings Per Share 1.33 1.06 .88 .68 .52 Diluted Earnings Per Share 1.30 1.05 .88 .67 .52 Dividends Per Share $ .08 $ .07 $ .06 $ .06 $ .06 _______________________________________________________________________________________________________________________ Selected Balance Sheet Data: Total Assets $13,736,219 $11,358,167 $9,006,757 $7,086,882 $5,861,790 Long-Term Debt, Excluding Current Maturities $3,734,011 $2,697,669 $1,726,579 $1,364,278 $1,191,406 _______________________________________________________________________________________________________________________ Selected Quarterly Data First Second Third Fourth 2001 Net Sales $5,276,365 $6,126,726 $5,454,534 $5,253,483 Gross Margin 1,493,529 1,717,708 1,590,889 1,565,715 Net Earnings 225,280 329,083 250,497 218,402 Basic Earnings Per Share .29 .43 .32 .28 Diluted Earnings Per Share $ .29 $ .42 $ .32 $ .28 2000 Net Sales $4,467,114 $5,264,252 $4,504,141 $4,543,052 Gross Margin 1,248,116 1,452,027 1,299,372 1,291,253 Net Earnings 187,149 279,599 202,293 140,830 Basic Earnings Per Share .24 .37 .26 .18 Diluted Earnings Per Share $ .24 $ .36 $ .26 $ .18