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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 2, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-7898
LOWE'S COMPANIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0578072
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1605 CURTIS BRIDGE ROAD, WILKESBORO, N.C. 28697
(Address of principal executive offices)
(Zip Code)
(336) 658-4000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 30, 2002
Common Stock, $.50 par value 780,399,756
21
TOTAL PAGES
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LOWE'S COMPANIES, INC.
- INDEX -
Page No.
PART I - Financial Information:
Consolidated Balance Sheets - August 2, 2002 (Unaudited),
August 3, 2001 (Unaudited) and February 1, 2002 3
Consolidated Statements of Current and
Retained Earnings (Unaudited) - three and six months
ended August 2, 2002 and August 3, 2001 4
Consolidated Statements of Cash Flows (Unaudited) -
six months ended August 2, 2002 and August 3, 2001 5
Notes to Unaudited Consolidated Financial Statements 6-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Independent Accountants' Report 15
Controls and Procedures 16
PART II - Other Information 16-18
Item 4 - Submission of Matters to a vote of Security Holders
Item 6 (a) - Exhibits
Item 6 (b) - Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
EXHIBIT INDEX 19
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Lowe's Companies, Inc.
Consolidated Balance Sheets
In Thousands
(Unaudited) (Unaudited)
August 2, August 3, February 1,
2002 2001 2002
Assets
Current assets:
Cash and cash equivalents $1,486,765 $629,293 $798,839
Short-term investments 47,903 36,408 54,389
Accounts receivable - net 200,803 213,430 165,578
Merchandise inventory 3,986,716 3,651,191 3,610,776
Deferred income taxes 106,151 98,508 92,504
Other assets 182,880 216,241 198,306
Total current assets 6,011,218 4,845,071 4,920,392
Property, less
accumulated depreciation 9,259,748 7,829,205 8,653,439
Long-term investments 13,905 30,985 21,660
Other assets 141,746 148,692 140,728
Total assets $15,426,617 $12,853,953 $13,736,219
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $50,000 $100,000 $100,000
Current maturities
of long-term debt 44,337 43,993 59,259
Accounts payable 2,105,604 1,910,317 1,714,776
Employee retirement plans 75,277 90,279 126,339
Accrued salaries and wages 257,762 181,197 220,885
Other current liabilities 1,234,620 820,145 795,571
Total current liabilities 3,767,600 3,145,931 3,016,830
Long-term debt, excluding
current maturities 3,733,020 3,278,166 3,734,011
Deferred income taxes 312,318 273,382 304,697
Other long-term liabilities 10,917 3,220 6,239
Total liabilities 7,823,855 6,700,699 7,061,777
Shareholders' equity:
Preferred stock - $5 par value,
none issued - - -
Common stock - $.50 par value;
Shares Issued and Outstanding
August 2, 2002 779,798
August 3, 2001 772,749
February 1, 2002 775,714 389,899 386,374 387,857
Capital in excess of par 1,948,839 1,723,515 1,804,161
Retained earnings 5,263,478 4,043,810 4,481,734
Unearned compensation-
restricted stock awards - (1,067) -
Accumulated other
comprehensive income 546 622 690
Total shareholders' equity 7,602,762 6,153,254 6,674,442
Total liabilities and
shareholders' equity $15,426,617 $12,853,953 $13,736,219
See accompanying notes to unaudited consolidated financial statements.
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Lowe's Companies, Inc.
Consolidated Statements of Current and Retained Earnings (Unaudited)
In Thousands, Except Per Share Data
Three Months Ended Six Months Ended
August 2, 2002 August 3, 2001 August 2, 2002 August 3, 2001
Current Earnings Amount Percent Amount Percent Amount Percent Amount Percent
Net sales $7,487,662 100.00 $6,126,726 100.00 $13,958,259 100.00 $11,403,091 100.00
Cost of sales 5,285,624 70.59 4,409,018 71.96 9,833,499 70.45 8,191,854 71.84
Gross margin 2,202,038 29.41 1,717,708 28.04 4,124,760 29.55 3,211,237 28.16
Expenses:
Selling, general
and administrative 1,232,899 16.47 999,706 16.32 2,373,995 17.01 1,939,451 17.01
Store opening costs 23,484 0.31 28,470 0.46 60,400 0.43 64,262 0.56
Depreciation 153,210 2.04 124,571 2.03 298,515 2.14 243,649 2.14
Interest 46,323 0.62 42,614 0.70 93,314 0.67 83,940 0.73
Total expenses 1,455,916 19.44 1,195,361 19.51 2,826,224 20.25 2,331,302 20.44
Pre-tax earnings 746,122 9.97 522,347 8.53 1,298,536 9.30 879,935 7.72
Income tax provision 279,050 3.73 193,264 3.16 485,653 3.48 325,572 2.86
Net earnings $467,072 6.24 $329,083 5.37 $812,883 5.82 $554,363 4.86
Shares outstanding - Basic 778,928 771,667 777,721 770,042
Basic earnings per share $0.60 $0.43 $1.05 $0.72
Shares outstanding - Diluted 800,011 795,087 799,073 791,282
Diluted earnings per share $0.59 $0.42 $1.02 $0.71
Retained Earnings
Balance at beginning
of period $4,812,001 $3,730,174 $4,481,734 $3,518,356
Net earnings 467,072 329,083 812,883 554,363
Cash dividends (15,595) (15,447) (31,139) (28,909)
Balance at end
of period $5,263,478 $4,043,810 $5,263,478 $4,043,810
See accompanying notes to unaudited consolidated financial statements.
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Lowe's Companies, Inc.
Consolidated Statements of Cash Flows (Unaudited)
In Thousands
For the Six Months Ended
August 2, August 3,
2002 2001
Cash Flows From Operating Activities:
Net Earnings $812,883 $554,363
Adjustments to Reconcile
Net Earnings to Net Cash Provided By
Operating Activities:
Depreciation & Amortization 307,788 251,539
Deferred Income Taxes (5,943) 4,375
Loss on Disposition/Writedown
of Fixed and Other Assets 9,450 27,196
Tax Effect of Stock Options Exercised 12,749 24,138
Changes in Operating Assets and Liabilities:
Accounts Receivable - Net (35,225) (52,445)
Merchandise Inventory (375,940) (365,821)
Other Operating Assets 15,441 (54,743)
Accounts Payable 390,828 195,947
Employee Retirement Plans 15,466 54,273
Other Operating Liabilities 480,604 173,543
Net Cash Provided by Operating Activities 1,628,101 812,365
Cash Flows from Investing Activities:
Decrease (Increase) in Investment Assets:
Short-Term Investments 16,132 (19,990)
Purchases of Long-Term Investments (2,112) (979)
Proceeds from Sale/Maturity
of Long-Term Investments - 1,400
Increase in Other Long-Term Assets (16,388) (36,704)
Fixed Assets Acquired (909,455) (1,063,863)
Proceeds from the Sale of Fixed
and Other Long-Term Assets 14,693 22,933
Net Cash Used in Investing Activities (897,130) (1,097,203)
Cash Flows from Financing Activities:
Net (Decrease) in Short-Term Borrowings (50,000) (149,829)
Long-Term Debt Borrowings - 597,953
Repayment of Long-Term Debt (29,341) (28,751)
Proceeds from Employee Stock Purchase Plan 23,403 16,176
Proceeds from Stock Options Exercised 44,032 51,833
Cash Dividend Payments (31,139) (28,909)
Net Cash (Used in) Provided
by Financing Activities (43,045) 458,473
Net Increase in Cash and Cash Equivalents 687,926 173,635
Cash and Cash Equivalents, Beginning of Period 798,839 455,658
Cash and Cash Equivalents, End of Period $1,486,765 $629,293
See accompanying notes to unaudited consolidated financial statements.
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Lowe's Companies, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Note 1: Basis of Presentation - The accompanying consolidated financial
statements are unaudited. These statements contain all adjustments
(consisting of normal recurring accruals) considered necessary by management
to present fairly the financial position, the results of operations and the
cash flows. Please refer to the report provided by our independent
accountants attached herein.
These interim financial statements should be read in conjunction with the
financial statements and notes thereto included in the Lowe's Companies, Inc.
(the Company) Annual Report on Form 10-K for the fiscal year ended February 1,
2002 The financial results for the interim periods may not be indicative of
the financial results for the entire fiscal year.
Note 2: Earnings Per Share (EPS) - Basic 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 are calculated
based on the weighted average shares of common stock as adjusted for the
potential dilutive effect of stock options and convertible notes at 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 calculation for the three and six months ended
August 2, 2002 because none of the conditions that would permit conversion had
been satisfied during the period. The calculation is detailed below (in
thousands, except per share data):
Three Months Ended Six Months Ended
August 2, August 3, August 2, August 3,
2002 2001 2002 2001
Basic Earnings per Share:
Net Earnings $467,072 $329,083 $812,883 $554,363
Weighted Average Shares Outstanding 778,928 771,667 777,721 770,042
Basic Earnings per Share $ 0.60 $ 0.43 $ 1.05 $ 0.72
Diluted Earnings per Share:
Net Earnings $467,072 $329,083 $812,883 $554,363
Net Earnings Adjustment for Interest
On Convertible Debt Net of Tax 2,565 2,413 5,116 4,445
Net Earnings, as Adjusted $469,637 $331,496 $817,999 $558,808
Weighted Average Shares Outstanding 778,928 771,667 777,721 770,042
Dilutive Effect of Stock Options 4,553 6,890 4,822 5,890
Dilutive Effect of Convertible Debt 16,530 16,530 16,530 15,350
Weighted Average Shares, as Adjusted 800,011 795,087 799,073 791,282
Diluted Earnings per Share $ 0.59 $ 0.42 $ 1.02 $ 0.71
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On August 19, 2002, the Company announced that it intends to begin recognizing
compensation expense relating to stock options in the fiscal year beginning
February 1, 2003. The Financial Accounting Standards Board (FASB) is
currently evaluating this issue. Any decisions made by the FASB could impact
the accounting treatment of compensation expense relating to stock options in
the future.
Note 3: Property - Property is shown net of accumulated depreciation of $2.3
billion at August 2, 2002, $1.8 billion at August 3, 2001 and $2.0 billion at
February 1, 2002.
Note 4: Supplemental Disclosure - Supplemental disclosures of cash flow
information (in thousands):
Six Months Ended
August 2, 2002 August 3, 2001
Cash paid for interest
(net of capitalized) $ 116,602 $ 115,388
Cash paid for income taxes 326,185 238,461
Non-cash investing and financing activities:
Common stock issued to ESOP 66,528 39,650
Fixed assets acquired under capital lease 4,254 5,057
Note 5: Employee Stock Ownership Plan (ESOP) - In January 2002, the Board of
Directors authorized the funding of the fiscal 2001 ESOP contribution
primarily with the issuance of new shares of the Company's common stock.
During the first six months of fiscal 2002, the Company issued a total of
1,531,937 shares, with a market value of $66.5 million to fund the obligation
relating to fiscal 2001. The Company announced on May 28, 2002 that it
intends to merge the ESOP into the Lowe's Companies 401(k) Plan effective
during fiscal year 2002. The Company will make no contributions to the ESOP
for fiscal 2002 but will instead make contributions to the 401(k) Plan based
on a performance matching schedule as approved by the Board of Directors. All
participants in the ESOP will become fully vested in their accounts when the
plans have been merged. Plan investments will be transferred into the
participants' 401(k) Plan accounts on that date. The Company anticipates that
the plans will merge in September 2002.
Note 6: Credit Facilities - 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 July
2003, 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 August 2, 2002. Sixteen banking institutions are
participating in the $800 million senior credit facility and, as of August 2,
2002, there were no outstanding loans under the facility.
Note 7: Total Comprehensive Income - Total comprehensive income, comprised of
net earnings and unrealized holding gains (losses) on available-for-sale
securities was $467.1 and $329.2 million, compared to net earnings of $467.1
and $329.1 million for the three months ended August 2, 2002 and August 3,
2001, respectively. Total comprehensive income was $812.8 and $554.5 million,
compared to net earnings of $812.9 and $554.4 million for the six months ended
August 2, 2002 and August 3, 2001, respectively.
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Note 8: Recent Accounting Pronouncements - In October 2001, the FASB issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS 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 144 was effective for
the Company for the fiscal year beginning February 2, 2002. The adoption of
this standard did not have a material impact on the Company's financial
statements.
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 this standard will
have a material impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement modifies the treatment of sale-leaseback
transactions and extinguishment of debt allowing gains and losses to be
treated as income in most circumstances. SFAS No. 145 is effective for the
Company for the fiscal year beginning February 1, 2003. Management does not
believe that the initial adoption of this standard will have a material impact
on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires that the Company
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
SFAS No. 146 is effective for the Company for any exit plans commencing after
December 31, 2002. Management does not believe that the initial adoption of
this standard will have a material impact on the Company's financial
statements.
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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 quarter and six months ended August 2, 2002. This discussion
should be read in conjunction with the financial statements and financial
statement footnotes that are included in the Company's fiscal 2001 Form 10-K.
On August 15, 2002, the Company's Chairman of the Board and Chief
Executive Officer, Robert L. Tillman, and Executive Vice President and Chief
Financial Officer, Robert A. Niblock submitted to the Securities and Exchange
Commission (SEC) sworn statements pursuant to Order No 4-460. These
statements certified that the Company's Annual Report on Form 10-K as of
February 1, 2002, along with all reports on Forms 10-Q, 8-K and all definitive
proxy materials of the Company filed subsequent to the 10-K identified above,
do not contain any untrue statements of material fact or omit any material
facts that would make the filings misleading. The Company will be filing
sworn statements as an exhibit to its quarterly report on Form 10-Q going
forward. See Exhibit 99.1 and 99.2 to this Form 10-Q.
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 presented in the annual report to
shareholders' filed as a part of the Company's fiscal 2001 Form 10-K.
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
inventory. 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
estimated shrink expense. Management believes it has sufficient current and
historical knowledge to record reasonable
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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.
On August 19, 2002, the Company announced that it intends to begin
recognizing compensation expense relating to stock options in the fiscal year
beginning February 1, 2003. The FASB is currently evaluating this issue. Any
decisions made by the FASB could impact the accounting treatment of
compensation expense relating to stock options in the future.
OPERATIONS
For the second quarter of fiscal 2002, sales increased 22.2% to $7.5
billion, comparable store sales for the quarter increased 6.8%, and net
earnings rose 41.9% to $467.1 million compared to last year's second quarter
results. Diluted earnings per share were $0.59 compared to $0.42 for the
comparable quarter of last year. For the six months ended August 2, 2002,
sales increased 22.4% to $14.0 billion, comparable store sales increased 7.1%,
and net earnings increased 46.6% to $812.9 million compared to the first six
months of fiscal year 2001. Diluted earnings per share for the first six
months of 2002 increased 43.7% to $1.02 per share over the same period a year
ago.
The sales increase during the second quarter and first six months of 2002
was primarily attributable to the addition of 14.1 million square feet of
retail selling space relating to new and relocated stores since last year's
second quarter and the increase in comparable store sales. The Company
experienced wide-spread strength in sales across most product categories which
contributed significantly to the comparable store sales increase during the
quarter. Product categories showing above average performance included paint,
windows and walls, cabinets, flooring, nursery, appliances, seasonal living,
outdoor power equipment, and rough plumbing and electrical products.
Deflation in lumber prices partially offset the increase in other categories.
Gross margin was 29.41% of sales for the quarter ended August 2, 2002
compared to 28.04% for last year's comparable quarter. Gross margin for the
six months ended August 2, 2002 was 29.55% versus 28.16% during the first six
months of 2001. The increase in margin rate for the second quarter and the
first six months of 2002 is primarily due to higher margin rates driven by a
reduction in inventory costs, product mix improvements and improved inventory
shrinkage results.
Selling, general and administrative expenses (SG&A) were 16.47% of sales
versus 16.32% in last year's second quarter. SG&A increased by 23.3% compared
to the 22.2% increase in sales for the quarter. The de-leverage during the
second quarter was primarily due to increased bonus expenses driven by
increased earnings and increased advertising costs resulting from promotional
credit offers. During the first six months of 2002, SG&A was flat as compared
to the same period a year ago at 17.01% of sales. SG&A and sales increased
22.4% for the six months ended August 2, 2002.
Store opening costs were $23.5 million for the quarter ended August 2,
2002 compared to $28.5 million last year. This represents costs associated
with the opening of 22 stores during the current year's second quarter (21 new
and 1 relocated) compared to 23 stores for the comparable period last
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year (21 new and 2 relocated). Charges in this quarter for future and prior
openings were $4.6 million compared to $15.2 million in last year's second
quarter. Store opening costs for the six months ended August 2, 2002 were
$60.4 million compared to $64.3 million last year. These costs were
associated with the opening of 68 stores during the first six months of 2002
(63 new and 5 relocated) compared to 60 stores in the first six months of 2001
(53 new and 7 relocated). The Company's 2002 expansion plans are discussed
under "Liquidity and Capital Resources" below.
Depreciation was $153.2 million for the quarter ended August 2, 2002 and
$298.5 million for the six months then ended. This represents an increase of
23.0% and 22.5% over last year's comparable periods. The increase is
primarily due to the addition of buildings, fixtures, displays and computer
equipment relating to the Company's ongoing expansion program and the increase
in the percentage of owned locations since last year's second quarter. At the
end of the current year's second quarter, the Company owned 74% of total
locations compared to 69% in the prior year's current quarter.
Interest expense increased from $42.6 and $83.9 million to $46.3 and
$93.3 million for the quarter and six months ended August 2, 2002,
respectively. The increase in interest expense is primarily due to the
issuance of $580.7 million aggregate principal amount of senior convertible
notes in October 2001. A decrease in interest income from investments due to
declining interest rates and a decrease in interest capitalized on
construction projects also contributed to the increase in net interest
expense.
The Company's effective income tax rate was 37.4% for the quarter and six
months ended August 2, 2002 compared to 37.0% for last year's comparable
periods. The higher rate during 2002 is primarily related to expansion into
states with higher income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
There have been no material changes in the Company's contractual
obligations during the six months ended August 2, 2002, except that short-term
debt has been reduced by $50 million. Please refer to the table summarizing
significant contractual obligations on page 21 of the annual report filed as
Exhibit 13 to Company's annual report of Form 10-K for the year ended February
1, 2002.
The primary sources of liquidity are cash flows from operating activities
and various lines of credit currently available to the Company. Net cash
provided by operating activities was $1.6 billion for the six months ended
August 2, 2002 compared to $812.4 million for the first six months of fiscal
2001. The increase in cash provided by operating activities in the current
year resulted primarily from an increase in net earnings, improved payables
leverage and an increase in operating liabilities. The increase in operating
liabilities resulted primarily from the Company's growth. The most
significant increases involved liabilities related to payroll, payroll taxes,
property taxes, health insurance, and the provision for income taxes. These
increases were offset by increases in inventory and receivables. Working
capital at August 2, 2002 was $2.2 billion compared to $1.7 billion at August
3, 2001 and $1.9 billion at February 1, 2002.
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 $909.5 million and $1.1 billion for the
six months ended August 2, 2002 and August 3, 2001, respectively. At August
2, 2002, the Company operated 806 stores in 43 states with 88.6 million square
feet of retail selling space, a 19.0% increase over the selling space as of
August 3, 2001.
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Cash flows used in financing activities were $43.0 million for the six
months ended August 2, 2002. For the six months ended August 3, 2001, cash
flows provided by financing activities were $458.5 million. Cash provided by
financing activities during the first six months of 2002 primarily resulted
from proceeds generated by stock option exercises and cash proceeds from the
employee stock purchase plan. These proceeds were offset by the repayment of
short-term borrowings, normal long-term debt repayments and cash dividend
payments. The major source of cash provided by financing activities during
the first six months of 2001 resulted from the issuance of $1.005 billion
aggregate principal of convertible notes at an issue price of $608.41 per
note, and proceeds generated by stock option exercises. These proceeds were
partially offset by the repayment of short-term borrowings relating to the
Company's commercial paper program, normal long-term debt repayments and cash
dividend payments. The ratio of long-term debt to equity plus long-term debt
was 32.9% and 34.8% for the quarters ended August 2, 2002 and August 3, 2001,
respectively.
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 July 2003, 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
August 2, 2002. Sixteen banking institutions are participating in the $800
million senior credit facility and, as of August 2, 2002, there were no
outstanding loans under the facility.
The Company also has a $100 million revolving credit and security
agreement with a financial institution, expiring in November 2002 which is
renewable for successive periods not to exceed 364 days each. The Company
intends to renew this facility in November 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 $50 million
outstanding at August 2, 2002 under this agreement, and $160.5 million in
accounts receivable pledged as collateral.
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 was in compliance with
these covenants at August 2, 2002. 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 August 2, 2002 and August 3, 2001, were
$289.4 and $236.1 million, respectively. Outstanding advances under those
commitments were $252.6 and $180.5 million as of August 2, 2002 and August 3,
2001. Future payments related to these lease agreements were included in the
significant contractual obligations and commercial commitments table referred
to previously.
The Company's 2002 capital budget is currently at $2.8 billion, inclusive
of $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 123 stores, of which 68 had been opened
through 2002's first six months. This includes 10 relocations of older
stores. This planned expansion
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is expected to increase sales floor square footage by approximately 17 to 18%.
Current plans indicate that around 4% of the 2002 projects will be leased and
96% will be owned. At August 2, 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 is expected to be
operational in early 2003.
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. There are no
provisions in any agreements that would require early cash settlement of
existing long-term 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 defined minimum investment grade rating is
not maintained.
MARKET RISK
As discussed in the annual report to shareholders for the year ended
February 1, 2002, the Company's major market risk exposure is the potential
loss arising from changing interest rates and its impact 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 Company's
market risk has not changed materially since February 1, 2002. Please see the
tables titled "Long-term Debt Maturites by Fiscal Year" on page 24 of the
annual report to shareholders' filed as Exhibit 13 of the Company's fiscal
2001 Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
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 this standard will
have a material impact on the Company's financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets," which supersedes SFAS 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 144 was effective for the Company for the fiscal year
beginning February 2, 2002. The adoption of this standard did not have a
material impact on the Company's financial statements.
-14-
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement modifies the treatment of sale-
leaseback transactions and extinguishment of debt allowing gains and losses to
be treated as comprehensive income in most circumstances. SFAS No. 145 is
effective for the Company for the fiscal year beginning February 1, 2003.
Management does not believe that the initial adoption of this standard will
have a material impact on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that
the Company recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an exit or disposal
plan. SFAS No. 146 is effective for the Company for any exit plans commencing
after December 31, 2002. Management does not believe that the initial adoption
of this standard will have a material impact on the Company's financial
statements.
FORWARD-LOOKING STATEMENTS
Our quarterly report on Form 10-Q to be filed with the Securities and
Exchange Commission talks about our future, particularly in the section titled
"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:
(1) 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.
(2) 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.
(3) Many of our products are commodities whose prices fluctuate erratically
within an economic cycle, a condition especially true of lumber and plywood.
(4) 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.
(5) 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.
(6) On a short-term basis, weather may affect sales of product groups like
nursery, lumber, and building materials.
-15-
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
Lowe's Companies, Inc.:
We have reviewed the accompanying consolidated balance sheets of Lowe's
Companies, Inc. and subsidiaries (the "Company") as of August 2, 2002 and
August 3, 2001, and the related consolidated statements of current and
retained earnings for the three-month and six-month periods ended August 2,
2002 and August 3, 2001 and consolidated statements of cash flows for the six-
month periods ended August 2, 2002 and August 3, 2001. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Lowe's Companies, Inc. and subsidiaries as of February 1, 2002, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
February 19, 2002, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of February 1, 2002 is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 14, 2002
-16-
Item 4 - Controls and Procedures
There have not been any significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of the chief executive officer's and chief financial officer's most
recent evaluation.
Part II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
(a) - The annual meeting of shareholders was held May 31, 2002.
(b) - Directors elected at the meeting: Robert A. Ingram, Richard K.
Lochridge and Claudine B. Malone.
Incumbent Directors whose terms expire in subsequent years are: Robert L.
Tillman, Kenneth D. Lewis, Thomas D. O'Malley, Robert G. Schwartz, Leonard L.
Berry, Paul Fulton, Peter C. Browning and Dawn E. Hudson.
(c) - The matters voted upon at the meeting and the results of the voting were
as follows:
(1) Election of Directors: FOR WITHHELD
Robert A. Ingram 566,636,850 132,327,346
Richard K. Lochridge 693,837,085 5,127,111
Claudine B. Malone 690,713,760 8,250,436
(2) Shareholder proposal concerning global workplace labor standards
FOR AGAINST ABSTAIN
34,682,287 538,255,265 33,792,137
Item 6 (a) - Exhibits
Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Item 6 (b) - Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended August
2, 2002.
-17-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOWE'S COMPANIES, INC.
September 12, 2002 /s/Kenneth W. Black, Jr.
_________________________ ________________________________
Date Kenneth W. Black, Jr.
Senior Vice President and Chief
Accounting Officer
CERTIFICATIONS
I, Robert L. Tillman, Chairman of the Board and Chief Executive Officer of
Lowe's Companies, Inc., certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Lowe's
Companies, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
/s/Robert L. Tillman
___________________________________
Name: Robert L. Tillman
Title: Chairman of the Board and
Chief Executive Officer
Date: September 12, 2002
-18-
I, Robert A. Niblock, Executive Vice President and Chief Financial Officer of
Lowe's Companies, Inc., certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Lowe's
Companies, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
/s/Robert A. Niblock
_______________________________________
Name: Robert A. Niblock
Title: Executive Vice President and
Chief Financial Officer
Date: September 12, 2002
-19-
Exhibit Index
Page
Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. 20
Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. 21
-20-
Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Lowe's Companies, Inc. (the
Company) on Form 10-Q for the period ending August 2, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Robert
L. Tillman, Chairman of the Board and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/Robert L. Tillman
____________________________________
Name: Robert L. Tillman
Title: Chairman of the Board and
Chief Executive Officer
Date: September 12, 2002
-21-
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Lowe's Companies, Inc. (the
Company) on Form 10-Q for the period ending August 2, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Robert
A. Niblock, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/Robert A. Niblock
_____________________________________
Name: Robert A. Niblock
Title: Executive Vice President and
Chief Financial Officer
Date: September 12, 2002