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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 November 1, 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
incorporation or organization) Identification No.)
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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). 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 November 29, 2002
Common Stock, $.50 par value 780,943,932
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TOTAL PAGES
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LOWE'S COMPANIES, INC.
- INDEX -
Page No.
PART I - Financial Information:
Consolidated Balance Sheets - November 1, 2002 (Unaudited),
November 2, 2001 (Unaudited) and February 1, 2002 3
Consolidated Statements of Current and
Retained Earnings (Unaudited) - three and nine months
ended November 1, 2002 and November 2, 2001 4
Consolidated Statements of Cash Flows (Unaudited) -
nine months ended November 1, 2002 and November 2, 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
Item 4 - Controls and Procedures 16
PART II - Other Information 16-19
Item 6 (a) - Exhibits
Item 6 (b) - Reports on Form 8-K
Signature
Certifications Persuant to Section 302 of the
Sarbanes-Oxley Act of 2002
EXHIBIT INDEX 20
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Lowe's Companies, Inc.
Consolidated Balance Sheets
In Thousands
(Unaudited) (Unaudited)
November 1, November 2, February 1,
2002 2001 2002
Assets
Current assets:
Cash and cash equivalents $1,305,371 $610,543 $798,839
Short-term investments 91,511 24,767 54,389
Accounts receivable - net 186,851 197,771 165,578
Merchandise inventory 4,150,533 3,905,859 3,610,776
Deferred income taxes 110,153 93,210 92,504
Other assets 179,819 229,578 198,306
Total current assets 6,024,238 5,061,728 4,920,392
Property, less
accumulated depreciation 9,647,546 8,279,838 8,653,439
Long-term investments 9,772 25,876 21,660
Other assets 129,646 140,684 140,728
Total assets $15,811,202 $13,508,126 $13,736,219
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $50,000 - $100,000
Current maturities
of long-term debt 39,062 50,333 59,259
Accounts payable 2,046,204 1,895,822 1,714,776
Employee retirement plans 65,699 92,795 126,339
Accrued salaries and wages 294,867 170,090 220,885
Other current liabilities 1,290,954 823,098 795,571
Total current liabilities 3,786,786 3,032,138 3,016,830
Long-term debt, excluding
current maturities 3,738,971 3,763,291 3,734,011
Deferred income taxes 318,440 290,129 304,697
Other long-term liabilities 9,340 3,248 6,239
Total liabilities 7,853,537 7,088,806 7,061,777
Shareholders' equity:
Preferred stock - $5 par value,
none issued - - -
Common stock - $.50 par value;
Shares Issued and Outstanding
November 1, 2002 780,839
November 2, 2001 773,752
February 1, 2002 775,714 390,420 386,876 387,857
Capital in excess of par 1,979,724 1,753,283 1,804,161
Retained earnings 5,587,075 4,278,839 4,481,734
Unearned compensation-
restricted stock awards - (485) -
Accumulated other
comprehensive income 446 807 690
Total shareholders' equity 7,957,665 6,419,320 6,674,442
Total liabilities and
shareholders' equity $15,811,202 $13,508,126 $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 Nine Months Ended
November 1, 2002 November 2, 2001 November 1, 2002 November 2, 2001
Current Earnings Amount Percent Amount Percent Amount Percent Amount Percent
Net sales $6,414,812 100.00 $5,454,534 100.00 $20,373,071 100.00 $16,857,625 100.00
Cost of sales 4,449,596 69.36 3,863,645 70.83 14,283,095 70.11 12,055,499 71.51
Gross margin 1,965,216 30.64 1,590,889 29.17 6,089,976 29.89 4,802,126 28.49
Expenses:
Selling, general
and administrative 1,192,670 18.59 973,036 17.84 3,566,665 17.51 2,912,487 17.28
Store opening costs 27,529 0.43 42,766 0.78 87,929 0.43 107,028 0.63
Depreciation 159,301 2.48 134,054 2.46 457,816 2.25 377,703 2.24
Interest 43,839 0.69 43,419 0.80 137,153 0.67 127,359 0.76
Total expenses 1,423,339 22.19 1,193,275 21.88 4,249,563 20.86 3,524,577 20.91
Pre-tax earnings 541,877 8.45 397,614 7.29 1,840,413 9.03 1,277,549 7.58
Income tax provision 202,663 3.16 147,117 2.70 688,316 3.38 472,689 2.81
Net earnings $339,214 5.29 $250,497 4.59 $1,152,097 5.65 $804,860 4.77
Shares outstanding - Basic 780,530 773,531 778,657 771,145
Basic earnings per share $0.44 $0.32 $1.48 $1.04
Shares outstanding - Diluted 800,946 795,639 799,557 792,808
Diluted earnings per share $0.43 $0.32 $1.45 $1.02
Retained Earnings
Balance at beginning
of period $5,263,478 $4,043,810 $4,481,734 $3,518,356
Net earnings 339,214 250,497 1,152,097 804,860
Cash dividends (15,617) (15,468) (46,756) (44,377)
Balance at end
of period $5,587,075 $4,278,839 $5,587,075 $4,278,839
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 Nine Months Ended
November 1, November 2,
2002 2001
Cash Flows From Operating Activities:
Net Earnings $1,152,097 $804,860
Adjustments to Reconcile
Net Earnings to Net Cash Provided By
Operating Activities:
Depreciation & Amortization 471,633 389,863
Deferred Income Taxes (3,775) 26,320
Loss on Disposition/Writedown
of Fixed and Other Assets 17,223 28,071
Tax Effect of Stock Options Exercised 20,046 25,852
Changes in Operating Assets and Liabilities:
Accounts Receivable - Net (21,273) (36,786)
Merchandise Inventory (539,757) (620,489)
Other Operating Assets 18,510 (68,071)
Accounts Payable 331,428 181,452
Employee Retirement Plans 16,387 80,580
Other Operating Liabilities 572,466 165,933
Net Cash Provided by Operating Activities 2,034,985 977,585
Cash Flows from Investing Activities:
(Increase) Decrease in Investment Assets:
Short-Term Investments (23,626) (3,382)
Purchases of Long-Term Investments (1,984) (1,030)
Proceeds from Sale/Maturity
of Long-Term Investments - 1,878
Increase in Other Long-Term Assets (22,011) (10,896)
Fixed Assets Acquired (1,449,352) (1,674,365)
Proceeds from the Sale of Fixed
and Other Long-Term Assets 28,762 34,675
Net Cash Used in Investing Activities (1,468,211) (1,653,120)
Cash Flows from Financing Activities:
Net (Decrease) in Short-Term Borrowings (50,000) (249,829)
Long-Term Debt Borrowings - 1,087,513
Repayment of Long-Term Debt (44,531) (35,725)
Proceeds from Employee Stock Purchase Plan 23,403 16,176
Proceeds from Stock Options Exercised 57,642 56,662
Cash Dividend Payments (46,756) (44,377)
Net Cash (Used in) Provided
by Financing Activities (60,242) 830,420
Net Increase in Cash and Cash Equivalents 506,532 154,885
Cash and Cash Equivalents, Beginning of Period 798,839 455,658
Cash and Cash Equivalents, End of Period $1,305,371 $610,543
See accompanying notes to unaudited consolidated financial statements.
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Lowe's Companies, Inc.
Notes to (Unaudited) Consolidated Financial Statements
Note 1: Basis of Presentation - The accompanying Consolidated Financial
Statements (unaudited) have been reviewed by independent certified public
accountants, and in the opinion of management, they contain all adjustments
necessary to present fairly the financial position as of November 1, 2002 and
November 2, 2001, the results of operations for the three and nine months
ended November 1, 2002 and November 2, 2001, and the cash flows for the nine
months ended November 1, 2002 and November 2, 2001.
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 for the three and nine months ended November 1,
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 Nine Months Ended
Nov. 1, Nov. 2, Nov. 1, Nov. 2,
2002 2001 2002 2001
Basic earmings per share:
Net earnings $339,214 $250,497 $1,152,097 $804,860
Weighted average number of
common shares outstanding 780,530 773,351 778,657 771,145
Basic earnings per share $ .44 $ .32 $ 1.48 $ 1.04
Diluted earnings per share:
Net earnings $339,214 $250,497 $1,152,097 $804,860
Tax-effected interest expense
attributable to convertible
notes 2,580 2,428 7,695 6,872
Net earnings assuming dilution $341,794 $252,925 $1,159,792 $811,732
Weighted average number of
common shares outstanding 780,530 773,351 778,657 771,145
Effect of potentially dilutive
securities:
Convertible notes 16,530 16,530 16,530 15,743
Employee stock option plans 3,886 5,758 4,370 5,920
Weighted average number of
common shares assuming
dilution 800,946 795,639 799,557 792,808
Diluted earnings per share $ .43 $ .32 $ 1.45 $ 1.02
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As previously annouced, the Company intends to begin recognizing compensation
expense relating to stock options granted in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123 for the fiscal year beginning
February 1, 2003.
Note 3: Property - Property is shown net of accumulated depreciation of $2.4
billion at November 1, 2002, $1.9 billion at November 2, 2001 and $2.0 billion
at February 1, 2002.
Note 4: Supplemental Disclosure - Supplemental disclosures of cash flow
information (in thousands):
Nine Months Ended
Nov. 1, 2002 Nov. 2, 2001
Cash paid for interest
(net of amount capitalized) $ 171,724 $ 169,972
Cash paid for income taxes 512,225 414,021
Non-cash investing and financing
activities:
Common stock issued to ESOP 78,852 63,441
Fixed assets acquired under
capital lease 15,478 9,666
Note 5: Employee Stock Ownership Plan (ESOP) - In January 2002, the Board
of Directors authorized the funding of the fiscal 2001 ESOP contribution
during fiscal 2002 primarily with the issuance of new shares of the
Company's common stock. During the first nine months of fiscal 2002, the
Company issued a total of 1,885,405 shares, with a market value of $78.9
million. The Company merged the ESOP into the Lowe's Companies 401(k) Plan
effective September 2002. The Company will make no contributions to the
ESOP in 2003 but will instead make contributions to the 401(k) Plan based
on a performance matching schedule approved by the Board of Directors. All
participants in the ESOP became fully vested in their accounts as of
September 2002. Plan investments were transferred into the participants'
401(k) Plan accounts on that date.
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 November 1, 2002. Sixteen banking institutions are
participating in the $800 million senior credit facility and, as of November
1, 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 2003 which is renewable for
successive periods not to exceed 364 days each. 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 November 1, 2002 under this agreement, and $156.6 million in
customer accounts receivable pledged as collateral.
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Note 7: Total Comprehensive Income - Total comprehensive income, comprised of
net earnings and unrealized holding gains (losses) on available-for-sale
securities was $339.1 and $250.7 million, compared to net earnings of $339.2
and $250.5 million for the three months ended November 1, 2002 and November 2,
2001, respectively. Total comprehensive income was $1,151.9 and $805.2
million, compared to net earnings of $1,152.1 and $804.9 million for the nine
months ended November 1, 2002 and November 2, 2001, respectively.
Note 8: 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 was effective
for the Company for the current fiscal year. 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 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 initiated 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 nine months ended November 1, 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.
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 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 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.
As previously announced, the Company intends to begin recognizing
compensation expense relating to stock options granted in accordance with SFAS
No. 123 for the fiscal year beginning February 1, 2003.
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OPERATIONS
For the third quarter of fiscal 2002, sales increased 17.6% to $6.4
billion, comparable store sales for the quarter increased 4.1%, and net
earnings rose 35.4% to $339.2 million compared to last year's third quarter
results. Diluted earnings per share were $0.43 compared to $0.32 for the
comparable quarter of last year. For the nine months ended November 1, 2002,
sales increased 20.9% to $20.4 billion, comparable store sales increased 6.1%,
and net earnings increased 43.1% to $1.2 billion compared to the first nine
months of fiscal year 2001. Diluted earnings per share for the first nine
months of 2002 increased 41.7% to $1.45 per share over the same period a year
ago.
The sales increase during the third quarter and first nine months of 2002
was primarily attributable to the addition of 11.9 million square feet of
retail selling space relating to new and relocated stores since last year's
third quarter and the increase in comparable store sales. The Company
experienced above average growth in several 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, appliances, outdoor power equipment,
hardware, fashion plumbing, fashion electric, home organization and rough
plumbing and electrical products. Deflation in lumber prices partially offset
the increase in other categories.
Gross margin was 30.64% of sales for the quarter ended November 1, 2002
compared to 29.17% for last year's comparable quarter. Gross margin for the
nine months ended November 1, 2002 was 29.89% versus 28.49% during the first
nine months of 2001. The increase in margin rate for the third quarter and
the first nine 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. In addition, the Company's inventory turnover
ratio, based on a rolling four quarters, improved to 4.49 as of the end of the
current year's third quarter compared to 4.19 in the prior year.
Selling, general and administrative expenses (SG&A) were 18.59% of sales
versus 17.84% in last year's third quarter. SG&A increased by 22.6% compared
to the 17.6% increase in sales for the quarter. During the first nine months
of 2002, SG&A was 17.51% of sales compared to 17.29% for the same period a
year ago. SG&A increased 22.5% during the first nine months of 2002 compared
to a 20.9% increase in sales for this same period. The de-leverage in SG&A
for the third quarter and first nine months of 2002 was primarily due to
increased bonus acheivement levels driven by increased earnings.
Store opening costs were $27.5 million for the quarter ended November 1,
2002 compared to $42.8 million last year. This represents costs associated
with the opening of 18 new stores during the current year's third quarter (18
new and none relocated) compared to 39 stores for the comparable period last
year (35 new and 4 relocated). Because store opening costs are expensed as
incurred, the expenses recognized may fluctuate based on the timing of store
openings in future or prior periods. Store opening costs for the nine months
ended November 1, 2002 were $87.9 million compared to $107.0 million last
year. These costs were associated with the opening of 86 stores during the
first nine months of 2002 (81 new and 5 relocated) compared to 99 stores in
the first nine months of 2001 (88 new and 11 relocated). The Company's 2002
expansion plans are discussed under "Liquidity and Capital Resources" below.
-11-
Depreciation was $159.3 million for the quarter ended November 1, 2002
and $457.8 million for the nine months then ended. This represents an
increase of 18.8% and 21.2% 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 third quarter. At the
end of the current year's third quarter, the Company owned 74% of total
locations compared to 71% at the end of the prior year's third quarter.
Interest expense increased from $43.4 and $127.4 million to $43.8 and
$137.2 million for the quarter and nine months ended November 1, 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 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
nine months ended November 1, 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 nine months ended November 1, 2002, except that short-
term debt has been reduced by $50 million and $14.5 million in capitalized
real estate leases have been added. 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 on Form 10-K for the year ended February
1, 2002.
The primary sources of liquidity are cash on hand, cash flows from
operating activities and various lines of credit currently available to the
Company. Net cash provided by operating activities was $2.0 billion for the
nine months ended November 1, 2002 compared to $977.6 million for the first
nine 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 due to better inventory turns 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 general insurance reserves, customer deposits,
sales taxes, property taxes, health insurance, and the provision for income
taxes. Working capital at November 1, 2002 was $2.2 billion compared to $2.0
billion at November 2, 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 $1.4 billion and $1.7 billion for the
nine months ended November 1, 2002 and November 2, 2001, respectively. At
November 1, 2002, the Company operated 823 stores in 43 states with 90.8
million square feet of retail selling space, a 15.0% increase over the selling
space as of November 2, 2001.
Cash flows used in financing activities were $60.0 million for the nine
months ended November 1, 2002. For the nine months ended November 2, 2001,
cash flows provided by financing activities were $830.4 million. Financing
uses of cash during the first nine months of 2002 primarily consisted of the
repayment of short-term borrowings, normal long-term debt repayments and cash
dividend payments. These uses were partially offset by proceeds generated
from stock option exercises and cash proceeds from the employee stock purchase
plan. The major source of cash provided by financing activities
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during the first nine 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, the issuance of $580.7 million aggregate principal of senior
convertible notes at an issue price of $861.03 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 32.0% and 37.1% at
November 1, 2002 and November 2, 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
November 1, 2002. Sixteen banking institutions are participating in the $800
million senior credit facility and, as of November 1, 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 2003 which is
renewable for successive periods not to exceed 364 days each. 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 November 1, 2002 under this agreement, and $156.6
million in customer 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 November 1, 2002. The Company has financed four regional
distribution centers, one of which is still under construction, and fourteen
retail stores through these lease agreements. Total commitments under these
operating lease agreements as of November 1, 2002 and November 2, 2001, were
$289.4 and $204.4 million, respectively. Outstanding advances under those
commitments were $260.9 and $165.4 million as of November 1, 2002 and November
2, 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 $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 86 had been opened through
2002's first nine months. This includes 11 relocations of older stores. This
planned expansion 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 November 1, 2002, the
Company operated eight regional distribution centers. The eighth regional
distribution center, located in Cheyenne, WY, opened during the third quarter
of 2002. The Company's ninth regional distribution
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center, located in Northampton, North Carolina, is currently under
construction and is expected to be operational in early 2003.
The Company believes that cash on hand, funds from operations, 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 October 2001, the 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 was effective
for the Company for the current fiscal year. 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 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.
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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
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 and security 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. An
economic downturn or unforseen event 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 a sufficient work force 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 continue to expand, we may
face new forms of competition.
(5) The ability to continue our everyday competitive pricing strategy and
provide the products that customers want depends on our ability to purchase 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.
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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 November 1, 2002 and
November 2, 2001, and the related consolidated statements of current and
retained earnings for the three-month and nine-month periods ended November 1,
2002 and November 2, 2001 and consolidated statements of cash flows for the
nine-month periods ended November 1, 2002 and November 2, 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
November 13, 2002
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Item 4 - Controls and Procedures
The Company has designed and maintains disclosure controls and procedures to
ensure that information required to be disclosed in its reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and
forms. These controls and procedures are also designed to ensure that such
information is communicated to the Company's management, including its Chief
Executive and Chief Financial Officers as appropriate, to allow them to make
timely decisions about required disclosures.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.
Based on that evaluation, which was conducted within 90 days of the filing of
this quarterly report on Form 10-Q, the Chief Executive Officer and Chief
Financial Officer concluded that disclosure controls and procedures are
effective.
There have been no 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 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
A report was filed on August 15, 2002 by the registrant. Therein
under Item 9, the Company attached copies of sworn statements from its
Chief Executive Officer, Robert L. Tillman, and its Chief Financial
Officer, Robert A. Niblock, submitted to the SEC pursuant to
Securities and Exchange Commission Order No. 4-460.
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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.
December 9, 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;
(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;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures for
the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
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c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/Robert L. Tillman
____________________________________
Name: Robert L. Tillman
Title: Chairman of the Board and
Chief Executive Officer
Date: December 9, 2002
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;
(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;
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(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures for
the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/Robert A. Niblock
_______________________________________
Name: Robert A. Niblock
Title: Executive Vice President and
Chief Financial Officer
Date: December 9, 2002
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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. 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. 22