Notes to Consolidated Financial Statements (Unaudited)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) are presented in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The consolidated financial statements (unaudited), in the opinion of management, contain all adjustments necessary to present fairly the financial position as of
October 28, 2016
and
October 30, 2015
, the results of operations and comprehensive income for the
three and nine months ended
October 28, 2016
and
October 30, 2015
, and cash flows for the
nine
months ended
October 28, 2016
and
October 30, 2015
.
These interim consolidated financial statements (unaudited) should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Lowe’s Companies, Inc. (the Company) Annual Report on Form 10-K for the fiscal year ended
January 29, 2016
(the Annual Report). The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.
Reclassifications
In the fourth quarter of fiscal year 2015, the Company elected to early adopt Accounting Standards Update (ASU) 2015-17,
Balance Sheet Classification of Deferred Taxes
, and ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, and applied the new guidance on a retrospective basis. The adoption of ASU 2015-17 resulted in a reclassification of
$255 million
of current deferred tax assets and
$40 million
of noncurrent deferred tax assets, previously included in noncurrent other assets, to noncurrent deferred tax assets in the Company’s consolidated balance sheet as of
October 30, 2015
. The adoption of ASU 2015-03 resulted in a reclassification of debt issuance costs of
$11 million
from noncurrent other assets to long-term debt, excluding current maturities in the Company’s consolidated balance sheet as of
October 30, 2015
.
Additionally, amounts representing goodwill have been reclassified and separately noted in the Company’s consolidated balance sheets as of January 29, 2016 and
October 30, 2015
to conform to current presentation.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The ASU eliminates the APIC pool concept and requires that excess tax benefits and tax deficiencies be recorded in the income statement when awards are settled. The pronouncement also addresses simplifications related to statement of cash flows classification, accounting for forfeitures, and minimum statutory tax withholding requirements. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact of adopting the ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The guidance in this ASU supersedes the leasing guidance in Topic 840,
Leases
. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Liabilities
. The ASU requires, among other things, that entities measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in net income. Under this ASU, entities will no longer be able to recognize unrealized holding gains and losses on available-for-sale equity securities in other comprehensive income, and they will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. The guidance for classifying and measuring investments in debt securities and loans is not impacted. ASU 2016-01 eliminates certain disclosure requirements related to financial
instruments measured at amortized cost and adds disclosures related to the measurement categories of financial assets and financial liabilities. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted for only certain portions of the ASU. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory.
The ASU requires entities using the first-in, first-out (FIFO) inventory costing method to subsequently value inventory at the lower of cost and net realizable value. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU requires prospective application and is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. The ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the ASU to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the transition methods and the impact of this guidance, along with related amendments and interpretations, on its consolidated financial statements.
Note
2
: Acquisitions
-
On
May 20, 2016
, the Company acquired all of the issued and outstanding common shares of RONA inc. (RONA) for
C$24
per share in cash. In addition, as part of the transaction, borrowings under RONA’s revolving credit facility were settled in full at the closing of the acquisition, and the facility was eliminated. Total cash consideration to acquire the equity and settle the debt was
C$3.1 billion
(
$2.4 billion
). RONA is one of Canada’s largest retailers and distributors of hardware, building materials, home renovation, and gardening products. The acquisition is expected to enable the Company to accelerate its growth strategy by significantly expanding its presence in the Canadian home improvement market. Acquisition-related costs were expensed as incurred and were not significant. The aggregate purchase price of this acquisition was preliminarily allocated as follows:
|
|
|
|
|
(In millions)
|
May 20, 2016
|
Purchase price:
|
|
Cash paid
|
$
|
2,367
|
|
|
|
Allocation:
|
|
Cash acquired
|
83
|
|
Accounts receivable
|
260
|
|
Merchandise inventory
|
817
|
|
Property
|
923
|
|
Amortizable intangible assets:
|
|
Trademarks
|
203
|
|
Dealer relationships
|
106
|
|
Other assets
|
142
|
|
Goodwill
|
922
|
|
Current liabilities assumed
|
(615
|
)
|
Long-term liabilities assumed
|
(365
|
)
|
Noncontrolling interest
|
(109
|
)
|
Total net assets acquired
|
$
|
2,367
|
|
The intangible assets acquired include trademarks of
$203 million
with a weighted average useful life of
15 years
and dealer relationships of
$106 million
with a weighted average useful life of
20 years
, which are included in other assets in the accompanying consolidated balance sheets. The goodwill of
$922 million
is primarily attributable to the synergies expected to arise after the acquisition. The intangible assets and goodwill are not expected to be deductible for tax purposes.
The transaction included the assumption by Lowe’s of unsecured debentures held by RONA of approximately
C$118 million
(
$91 million
) as of the acquisition date. The debentures were settled in October 2016.
As of the acquisition date,
6.9 million
preferred shares of RONA remained outstanding. The total fair value of the shares and Lowe’s corresponding noncontrolling interest was
$109 million
, which was determined based on the closing market price of RONA’s preferred shares on the acquisition date. The preferred shares consisted of approximately
4.7 million
Cumulative and Fixed 5-Year Rate Reset Series 6 Class A shares (Series 6 Shares) and approximately
2.2 million
Cumulative and Variable 5-Year Rate Reset Series 7 Class A shares (Series 7 Shares). Dividend payments for these preferred shares have been insignificant. In November 2016, subsequent to the end of the third fiscal quarter, the Company acquired all of the outstanding preferred shares of RONA for
C$24
per share in cash for a total price of
C$166 million
(
$122 million
).
Pro forma and historical financial information has not been provided as the acquisition was not material to the consolidated financial statements. In addition, net earnings attributable to the noncontrolling interest was not significant for any of the reporting periods presented, and no noncontrolling interest exists subsequent to the acquisition of the outstanding preferred shares.
Note 3: Investment in Australian Joint Venture -
In the fourth quarter of fiscal year 2015, the Company announced its decision to exit the Australian joint venture investment with Woolworths Limited (Woolworths) and recorded a
$530 million
impairment of its equity method investment due to a determination that there was a decrease in value that was other than temporary. The Company owns a one-third share in the joint venture, Hydrox Holdings Pty Ltd. (Hydrox), which operated Masters Home Improvement stores and Home Timber and Hardware Group’s retail stores and wholesale distribution in Australia. As a result of this decision to exit, Woolworths is required to purchase the Company’s one-third share at an agreed upon fair value as of January 18, 2016. The determination of this amount due the Company is currently in arbitration. The $530 million non-cash impairment charge recorded in fiscal 2015 was based on the Company’s estimate of the value of its portion of the overall joint venture fair value as of January 18, 2016, and the Company’s estimate of this value has not changed.
During the third quarter of fiscal year 2016, Woolworths claimed a unilateral termination of the joint venture agreement, and executed other agreements to initiate the wind down of Hydrox without the Company’s approval as required under the joint venture agreement. Due to this, Lowe’s has concluded that under applicable accounting standards, the investment should be accounted for as a cost method investment going forward. As a result of this determination, accumulated foreign currency translation adjustments of
$208 million
were reclassified from accumulated other comprehensive loss into the carrying value of the cost method investment. In addition, due to the unilateral actions of Woolworths to begin the liquidation of Hydrox, a triggering event occurred requiring the Company to evaluate the cost method investment for impairment, and the Company recorded a
$290 million
impairment charge during the third quarter of fiscal 2016 to reflect its estimated portion of the overall joint venture fair value in wind down. See Note
4
to the consolidated financial statements included herein for additional information regarding this fair value measurement.
The Company continues to maintain that amounts due under the joint venture agreement are to be based on fair value as of January 18, 2016 under a going concern basis. The recorded value of the investment is not reflective of this estimated value as the current operations are no longer deemed a going concern. The Company will treat its claims for additional value under the joint venture agreement, above and beyond any amounts expected to be received through the wind down process, as a contingent asset and will recognize these amounts as they are realized.
Note
4
: Fair Value Measurements -
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows:
|
|
•
|
Level 1
-
inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities
|
|
|
•
|
Level 2
-
inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly
|
|
|
•
|
Level 3
-
inputs to the valuation techniques that are unobservable for the assets or liabilities
|
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial assets measured at fair value on a recurring basis as of
October 28, 2016
,
October 30, 2015
, and
January 29, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
(In millions)
|
Measurement Level
|
|
October 28, 2016
|
|
October 30, 2015
|
|
January 29, 2016
|
Short-term investments:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Certificates of deposit
|
Level 1
|
|
$
|
55
|
|
|
$
|
96
|
|
|
$
|
56
|
|
Municipal obligations
|
Level 2
|
|
37
|
|
|
1
|
|
|
38
|
|
Money market funds
|
Level 1
|
|
28
|
|
|
50
|
|
|
192
|
|
Municipal floating rate obligations
|
Level 2
|
|
3
|
|
|
11
|
|
|
21
|
|
Total short-term investments
|
|
|
$
|
123
|
|
|
$
|
158
|
|
|
$
|
307
|
|
Long-term investments:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Municipal floating rate obligations
|
Level 2
|
|
$
|
430
|
|
|
$
|
372
|
|
|
$
|
212
|
|
Municipal obligations
|
Level 2
|
|
4
|
|
|
5
|
|
|
5
|
|
Certificates of deposit
|
Level 1
|
|
2
|
|
|
5
|
|
|
5
|
|
Total long-term investments
|
|
|
$
|
436
|
|
|
$
|
382
|
|
|
$
|
222
|
|
There were no transfers between Levels 1, 2, or 3 during any of the periods presented.
When available, quoted prices were used to determine fair value. When quoted prices in active markets were available, investments were classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable market inputs. The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads, and benchmark securities, among others.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
During the
three and nine months ended
October 28, 2016
and
October 30, 2015
, the Company’s only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition were certain long-lived assets, goodwill, and cost method investments.
Long-Lived Assets
The Company reviews the carrying amounts of long-lived assets for impairment whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. With input from retail store operations, the Company’s accounting and finance personnel that organizationally report to the chief financial officer, assess the performance of retail stores quarterly against historical patterns and projections of future profitability for evidence of possible impairment. An impairment loss is recognized when the carrying amount of the asset (disposal) group is not recoverable and exceeds its fair value. The Company estimated the fair values of assets subject to long-lived asset impairment based on the Company’s own judgments about the assumptions that market participants would use in pricing the assets and on observable market data, when available. The Company classified these fair value measurements as Level 3.
In the determination of impairment for operating locations, the Company determined the fair values of individual operating locations using an income approach, which required discounting projected future cash flows. When determining the stream of projected future cash flows associated with an individual operating location, management made assumptions, incorporating local market conditions and inputs from retail store operations, about key variables including the following unobservable inputs: sales growth rates, gross margin, controllable expenses, such as payroll and occupancy expense, and asset residual values. In order to calculate the present value of those future cash flows, the Company discounted cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows. In general, the selected market participants represented a group of other retailers with a location footprint similar in size to the Company’s.
During the
nine months ended
October 28, 2016
,
14
operating locations experienced a triggering event and were evaluated for recoverability.
Eleven
of the 14 operating locations were determined to be impaired due to a decline in cash flow trends and an unfavorable sales outlook, resulting in an impairment loss of
$34 million
. The discounted cash flow model used to estimate the fair value of the impaired operating locations assumed average annual sales growth rates ranging from
2.0%
to
3.7%
over the remaining life of the locations and applied a discount rate of approximately
8.0%
.
Three
of the 14 operating locations that experienced a triggering event during the
nine months ended
October 28, 2016
were determined to be recoverable and, therefore, were not impaired. A 10% reduction in projected sales used to estimate future cash flows for these operating locations would not have had a significant impact to impairment losses recognized during the
nine months ended
October 28, 2016
.
In the determination of impairment for excess properties held-for-use and held-for-sale, which consisted of retail outparcels and property associated with relocated or closed locations, the fair values were determined using a market approach based on estimated selling prices. The Company determined the estimated selling prices by obtaining information from property brokers or appraisers in the specific markets being evaluated or negotiated non-binding offers to purchase. The information obtained from property brokers or appraisers included comparable sales of similar assets and assumptions about demand in the market for these assets. Impairment charges for excess properties were insignificant for the
nine months ended
October 28, 2016
.
Goodwill
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired, less liabilities assumed, in a business combination. The Company reviews goodwill for impairment at the reporting unit level, which is one level below the operating segment level. Goodwill is not amortized but is evaluated at least annually for impairment or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable.
The first step of the goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. Fair value represents the price a market participant would be willing to pay in a potential sale of the reporting unit and is based on discounted future cash flows. If the fair value exceeds carrying value, then no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess, not to exceed the carrying value.
During the third quarter of fiscal year 2016, due to a strategic reassessment of the Orchard Supply Hardware (Orchard) operations, the Company determined potential indicators of impairment within the reporting unit existed, and quantitatively evaluated the Orchard reporting unit for impairment. The Company classified this fair value measurement as Level 3.
The Company performed a discounted cash flow analysis for the Orchard reporting unit. The discounted cash flow model included management assumptions for expected sales growth, expansion plans, capital expenditures, and overall operational forecasts. The analysis led to the conclusion that the goodwill allocated to the Orchard reporting unit had no implied value. Accordingly, the full carrying value of
$46 million
relating to Orchard goodwill was impaired during the quarter.
Cost Method Investments
Cost method investments are evaluated for impairment whenever certain events or changes in circumstances indicate that a decline in value has occurred that is other than temporary. Evidence considered in this evaluation includes, but would not necessarily be limited to, the financial condition and near-term prospects of the investee, recent operating trends and forecasted performance of the investee, market conditions in the geographic area or industry in which the investee operates, and the Company’s strategic plans for holding the investment in relation to the period of time expected for an anticipated recovery of its carrying value. Investments that are determined to meet the requirements for recording impairment are written down to estimated fair value.
Woolworths’ initiation of the wind down and sale of assets of Hydrox, following a claimed unilateral termination of the Australian joint venture agreement (further described in Note 3 included herein), represented a triggering event during the third quarter of fiscal 2016 requiring the Company to evaluate the cost method investment for impairment. Management determined that the requirements for determining impairment were met, and leveraged wind down cash flow projections in determining the estimated fair value of the entity as of October 28, 2016. The value was determined using an income approach based upon the expected future cash flows generated from the settlement of assets and liabilities inclusive of inventory, property, payables,
lease liabilities, and employee entitlements. As a result, the Company recorded a
$290 million
non-cash impairment charge during the third quarter of fiscal 2016. The Company classified this fair value measurement as Level 3.
The following table presents the Company’s non-financial assets measured at estimated fair value on a nonrecurring basis and the resulting impairment losses included in earnings. Because these assets are not measured at fair value on a recurring basis, certain fair value measurements presented in the table may reflect values at earlier measurement dates and may no longer represent the fair values at
October 28, 2016
and
October 30, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
Impairment Losses
|
(In millions)
|
October 28, 2016
|
|
|
Three Months Ended October 28, 2016
|
|
|
Nine Months Ended October 28, 2016
|
|
Assets-held-for-use:
|
|
|
|
|
|
Operating locations
|
$
|
3
|
|
|
$
|
(31
|
)
|
|
$
|
(34
|
)
|
Goodwill
|
—
|
|
|
(46
|
)
|
|
(46
|
)
|
Other assets:
|
|
|
|
|
|
Cost method investments
|
103
|
|
|
(290
|
)
|
|
(290
|
)
|
Total
|
$
|
106
|
|
|
$
|
(367
|
)
|
|
$
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
Impairment Losses
|
(In millions)
|
October 30, 2015
|
|
|
Three Months Ended October 30, 2015
|
|
|
Nine Months Ended October 30, 2015
|
|
Assets-held-for-use:
|
|
|
|
|
|
Operating locations
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
Total
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
Fair Value of Financial Instruments
The Company’s financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and long-term debt, and are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature. The fair values of the Company’s unsecured notes were estimated using quoted market prices. The fair values of the Company’s mortgage notes were estimated using discounted cash flow analyses, based on the future cash outflows associated with these arrangements and discounted using the applicable incremental borrowing rate.
Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding capitalized lease obligations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2016
|
|
October 30, 2015
|
|
January 29, 2016
|
(In millions)
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
1
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
Unsecured notes (Level 1)
|
$
|
14,318
|
|
|
$
|
15,948
|
|
|
$
|
12,071
|
|
|
$
|
13,245
|
|
|
$
|
12,073
|
|
|
$
|
13,292
|
|
Mortgage notes (Level 2)
|
10
|
|
|
10
|
|
|
7
|
|
|
8
|
|
|
7
|
|
|
8
|
|
Long-term debt (excluding capitalized lease obligations)
|
$
|
14,328
|
|
|
$
|
15,958
|
|
|
$
|
12,078
|
|
|
$
|
13,253
|
|
|
$
|
12,080
|
|
|
$
|
13,300
|
|
|
|
1
|
Carrying amounts as of
October 30, 2015
have been retrospectively adjusted as a result of the Company’s adoption of ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, during the fourth quarter of fiscal 2015. The adoption of this accounting standard required reclassification of debt issuance costs from other assets to long-term debt, excluding current maturities.
|
Note 5: Restricted Investment Balances -
Short-term and long-term investments include restricted balances pledged as collateral primarily for the Company’s extended protection plan program. Restricted balances included in short-term investments were
$53 million
at
October 28, 2016
,
$54 million
at
October 30, 2015
, and
$234 million
at
January 29, 2016
.
Restricted balances included in long-term investments were
$348 million
at
October 28, 2016
,
$262 million
at
October 30, 2015
, and
$202 million
at
January 29, 2016
.
Note 6: Property
-
Property is shown net of accumulated depreciation of
$17.1 billion
at
October 28, 2016
,
$16.2 billion
at
October 30, 2015
, and
$16.3 billion
at
January 29, 2016
.
Note 7: Extended Protection Plans -
The Company sells separately-priced extended protection plan contracts under a Lowe’s-branded program for which the Company is self-insured. The Company recognizes revenue from extended protection plan sales on a straight-line basis over the respective contract term. Extended protection plan contract terms primarily range from one to four years from the date of purchase or the end of the manufacturer’s warranty, as applicable. Changes in deferred revenue for extended protection plan contracts are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Deferred revenue - extended protection plans, beginning of period
|
$
|
744
|
|
|
$
|
739
|
|
|
$
|
729
|
|
|
$
|
730
|
|
Additions to deferred revenue
|
88
|
|
|
81
|
|
|
280
|
|
|
263
|
|
Deferred revenue recognized
|
(87
|
)
|
|
(89
|
)
|
|
(264
|
)
|
|
(262
|
)
|
Deferred revenue - extended protection plans, end of period
|
$
|
745
|
|
|
$
|
731
|
|
|
$
|
745
|
|
|
$
|
731
|
|
Incremental direct acquisition costs associated with the sale of extended protection plans are also deferred and recognized as expense on a straight-line basis over the respective contract term. Deferred costs associated with extended protection plan contracts were
$17 million
at
October 28, 2016
,
$22 million
at
October 30, 2015
, and
$20 million
at
January 29, 2016
. The Company’s extended protection plan deferred costs are included in other assets in the accompanying consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising expenses are expensed as incurred.
The liability for extended protection plan claims incurred is included in other current liabilities in the accompanying consolidated balance sheets and was not material in any of the periods presented. Expenses for claims are recognized when incurred and totaled
$39 million
and
$107 million
for the
three and nine months ended
October 28, 2016
, respectively, and
$36 million
and
$95 million
for the
three and nine months ended
October 30, 2015
, respectively.
Note 8: Short-Term Borrowings and Lines of Credit -
As of October 28, 2016, the Company had a
$1.75 billion
unsecured revolving credit agreement (the 2014 Credit Facility) with a syndicate of banks that was scheduled to expire in August 2019. The 2014 Credit Facility supported our commercial paper program and had a
$500 million
letter of credit sublimit. Letters of credit issued pursuant to the facility reduced the amount available for borrowing under its terms. Borrowings made were unsecured and priced at fixed rates based upon market conditions at the time of funding in accordance with the terms of the facility. The 2014 Credit Facility contained certain restrictive covenants, which included the maintenance of an adjusted debt leverage ratio as defined by the credit agreement. The Company was in compliance with those covenants at October 28, 2016. There were
no
outstanding borrowings or letters of credit under the 2014 Credit Facility and
no
outstanding borrowings under the commercial paper program as of October 28, 2016.
In November 2016, subsequent to the end of the third fiscal quarter, the Company entered into an agreement to amend and restate its
$1.75 billion
five-year unsecured revolving credit agreement (the Amended and Restated Credit Agreement) to, among other things, (i) extend the maturity date of the revolving credit facility, (ii) add a multicurrency subfacility and (iii) modify the revolving commitments of the lenders. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the Amended and Restated Credit Agreement, the Company may increase the aggregate availability under the facility by an additional
$500 million
. The Amended and Restated Credit Agreement contains customary representations, warranties, and covenants for a transaction of this type.
Note
9
: Long-Term Debt -
On April 20, 2016, the Company issued
$3.30 billion
of unsecured notes in four tranches:
$250 million
of floating rate notes maturing in
April 2019
(the 2019 Floating Rate Notes);
$350 million
of
1.15%
notes maturing in
April 2019
(the 2019 Fixed Rate Notes);
$1.35 billion
of
2.50%
notes maturing in
April 2026
(the 2026 Fixed Rate Notes); and
$1.35 billion
of
3.70%
notes maturing in
April 2046
(the 2046 Fixed Rate Notes). The 2019 Fixed Rate Notes, the 2026 Fixed Rate Notes, the 2046 Fixed Rate Notes (collectively, the Fixed Rate Notes), and the 2019 Floating Rate Notes were issued at discounts of approximately
$1 million
,
$12 million
,
$19 million
, and
$1 million
, respectively. The discounts associated with
these issuances are included in long-term debt and are being amortized over the respective terms of the notes using the effective interest rate method. The 2019 Floating Rate Notes will bear interest at a floating rate, reset quarterly, equal to the
three-month LIBOR
plus
0.24%
(
1.12%
as of
October 28, 2016
). Interest on the 2019 Floating Rate Notes is payable quarterly in arrears in April, July, October, and January of each year until maturity, beginning in July 2016. Interest on the Fixed Rate Notes is payable semiannually in arrears in April and October of each year until maturity, beginning in October 2016.
The indenture governing the notes contains a provision that allows the Company to redeem the Fixed Rate Notes at any time, in whole or in part, at specified redemption prices, plus accrued and unpaid interest, to the date of redemption. We do not have the right to redeem the 2019 Floating Rate Notes prior to maturity. The indenture also contains a provision that allows the holders of the 2019 Floating Rate Notes and the Fixed Rate Notes to require the Company to repurchase all or any part of their notes if a change of control triggering event (as defined in the indenture) occurs. If elected under the change of control provisions, the repurchase of the notes will occur at a purchase price of
101%
of the principal amount, plus accrued and unpaid interest on such notes to the date of purchase, if any. The indenture governing the notes does not limit the aggregate principal amount of debt securities that the Company may issue and does not require the Company to maintain specified financial ratios or levels of net worth or liquidity. However, the indenture includes various restrictive covenants, none of which is expected to impact the Company’s liquidity or capital resources.
Note
10
: Equity -
The Company has a share repurchase program that is executed through purchases made from time to time either in the open market, which may be made under pre-set trading plans meeting the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934, as amended, or through private off-market transactions. Shares purchased under the repurchase program are retired and returned to authorized and unissued status. On March 20, 2015, the Company’s Board of Directors authorized a
$5.0 billion
share repurchase program with no expiration, which was announced on the same day. As of
October 28, 2016
, the Company had
$627 million
remaining available under the program.
In February 2016, the Company entered into an Accelerated Share Repurchase (ASR) agreement with a third-party financial institution to repurchase
$500 million
of the Company’s common stock. At inception, pursuant to the agreement, the Company paid
$500 million
to the financial institution using cash on hand, and took delivery of
6.2 million
shares. In May 2016, the Company finalized the transaction and received an additional
0.6 million
shares.
In May 2016, the Company entered into an ASR agreement with a third-party financial institution to repurchase
$500 million
of the Company’s common stock. At inception, pursuant to the agreement, the Company paid
$500 million
to the financial institution using cash on hand, and took delivery of
5.3 million
shares. In August 2016, the Company finalized the transaction and received an additional
1.0 million
shares.
In August 2016, the Company entered into an ASR agreement with a third-party financial institution to repurchase
$250 million
of the Company’s common stock. At inception, pursuant to the agreement, the Company paid
$250 million
to the financial institution using cash on hand, and took delivery of
2.8 million
shares. In October 2016, the Company finalized the transaction and received an additional
0.6 million
shares.
Under the terms of the ASR agreements, upon settlement, the Company would either receive additional shares from the financial institution or be required to deliver additional shares or cash to the financial institution. The Company controlled its election to either deliver additional shares or cash to the financial institution and was subject to provisions which limited the number of shares the Company would be required to deliver.
The final number of shares received upon settlement of each ASR agreement was determined with reference to the volume-weighted average price of the Company’s common stock over the term of the ASR agreement. The initial repurchase of shares under these agreements resulted in an immediate reduction of the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted earnings per share.
The ASR agreements were accounted for as treasury stock transactions and forward stock purchase contracts. The par value of the shares received was recorded as a reduction to common stock with the remainder recorded as a reduction to capital in excess of par value and retained earnings. The forward stock purchase contracts were considered indexed to the Company’s own stock and were classified as equity instruments.
During the
three and nine months ended
October 28, 2016
, the Company also repurchased shares of its common stock through the open market totaling
3.9 million
and
22.5 million
shares, respectively, for a cost of
$300 million
and
$1.7 billion
, respectively.
The Company also withholds shares from employees to satisfy either the exercise price of stock options exercised or the statutory withholding tax liability resulting from the vesting of share-based awards.
Shares repurchased for the
three and nine months ended
October 28, 2016
and
October 30, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 28, 2016
|
|
October 30, 2015
|
(In millions)
|
Shares
|
|
|
Cost
1
|
|
|
Shares
|
|
|
Cost
1
|
|
Share repurchase program
|
8.3
|
|
|
$
|
550
|
|
|
12.0
|
|
|
$
|
750
|
|
Shares withheld from employees
|
0.3
|
|
|
24
|
|
|
0.1
|
|
|
4
|
|
Total share repurchases
|
8.6
|
|
|
$
|
574
|
|
|
12.1
|
|
|
$
|
754
|
|
|
|
1
|
Reductions of
$535 million
and
$714 million
were recorded to retained earnings, after capital in excess of par value was depleted, for the three months ended
October 28, 2016
and
October 30, 2015
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
October 28, 2016
|
|
October 30, 2015
|
(In millions)
|
Shares
|
|
|
Cost
2
|
|
|
Shares
|
|
|
Cost
2
|
|
Share repurchase program
|
39.0
|
|
|
$
|
2,949
|
|
|
45.0
|
|
|
$
|
3,250
|
|
Shares withheld from employees
|
1.1
|
|
|
77
|
|
|
0.9
|
|
|
66
|
|
Total share repurchases
|
40.1
|
|
|
$
|
3,026
|
|
|
45.9
|
|
|
$
|
3,316
|
|
|
|
2
|
Reductions of
$2.8 billion
and
$3.1 billion
were recorded to retained earnings, after capital in excess of par value was depleted, for the
nine
months ended
October 28, 2016
and
October 30, 2015
, respectively.
|
Note 11: Income Taxes -
The Company’s effective income tax rates were
51.2%
and
40.6%
for the three and nine months ended October 28, 2016, respectively, and
38.0%
and
38.5%
for the three and nine months ended October 30, 2015, respectively. The higher effective income tax rates for the three and nine months ended October 28, 2016, were primarily due to the Company recognizing an adjustment to the tax rate related to the non-cash impairment charge associated with the investment in the Australian joint venture with Woolworths. The losses are considered capital in nature, and no present or future capital gains have been identified through which the Company can utilize these losses.
Note 12: Earnings Per Share
-
The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of share-based payment awards that contain a nonforfeitable right to receive dividends and, therefore, are considered to participate in undistributed earnings with common shareholders.
Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted average number of common shares as of the balance sheet date, as adjusted for the potential dilutive effect of non-participating share-based awards. The following table reconciles earnings per common share for the
three and nine months ended
October 28, 2016
and
October 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions, except per share data)
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
Net earnings attributable to Lowe’s Companies, Inc.
|
$
|
378
|
|
|
$
|
736
|
|
|
$
|
2,428
|
|
|
$
|
2,535
|
|
Less: Net earnings allocable to participating securities
|
(2
|
)
|
|
(3
|
)
|
|
(9
|
)
|
|
(12
|
)
|
Net earnings allocable to common shares, basic
|
$
|
376
|
|
|
$
|
733
|
|
|
$
|
2,419
|
|
|
$
|
2,523
|
|
Weighted average common shares outstanding
|
873
|
|
|
918
|
|
|
884
|
|
|
933
|
|
Basic earnings per common share
|
$
|
0.43
|
|
|
$
|
0.80
|
|
|
$
|
2.74
|
|
|
$
|
2.70
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
Net earnings attributable to Lowe’s Companies, Inc.
|
$
|
378
|
|
|
$
|
736
|
|
|
$
|
2,428
|
|
|
$
|
2,535
|
|
Less: Net earnings allocable to participating securities
|
(2
|
)
|
|
(3
|
)
|
|
(9
|
)
|
|
(12
|
)
|
Net earnings allocable to common shares, diluted
|
$
|
376
|
|
|
$
|
733
|
|
|
$
|
2,419
|
|
|
$
|
2,523
|
|
Weighted average common shares outstanding
|
873
|
|
|
918
|
|
|
884
|
|
|
933
|
|
Dilutive effect of non-participating share-based awards
|
1
|
|
|
3
|
|
|
2
|
|
|
2
|
|
Weighted average common shares, as adjusted
|
874
|
|
|
921
|
|
|
886
|
|
|
935
|
|
Diluted earnings per common share
|
$
|
0.43
|
|
|
$
|
0.80
|
|
|
$
|
2.73
|
|
|
$
|
2.70
|
|
Stock options to purchase
1.1 million
and
0.9 million
shares of common stock were anti-dilutive for the
three and nine months ended
October 28, 2016
, respectively. Stock options to purchase
0.4 million
and
0.1 million
shares of common stock were anti-dilutive for the
three and nine months ended
October 30, 2015
, respectively.
Note 13: Supplemental Disclosure
Net interest expense is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Long-term debt
|
$
|
151
|
|
|
$
|
129
|
|
|
$
|
437
|
|
|
$
|
374
|
|
Capitalized lease obligations
|
13
|
|
|
10
|
|
|
40
|
|
|
32
|
|
Interest income
|
(4
|
)
|
|
(1
|
)
|
|
(10
|
)
|
|
(3
|
)
|
Interest capitalized
|
(1
|
)
|
|
(1
|
)
|
|
(3
|
)
|
|
(2
|
)
|
Interest on tax uncertainties
|
—
|
|
|
(1
|
)
|
|
2
|
|
|
(1
|
)
|
Other
|
4
|
|
|
5
|
|
|
20
|
|
|
9
|
|
Interest - net
|
$
|
163
|
|
|
$
|
141
|
|
|
$
|
486
|
|
|
$
|
409
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(In millions)
|
October 28, 2016
|
|
October 30, 2015
|
Cash paid for interest, net of amount capitalized
|
$
|
588
|
|
|
$
|
501
|
|
Cash paid for income taxes - net
|
$
|
1,657
|
|
|
$
|
1,654
|
|
Non-cash investing and financing activities:
|
|
|
|
Non-cash property acquisitions, including assets acquired under capital lease
|
$
|
72
|
|
|
$
|
74
|
|
Cash dividends declared but not paid
|
$
|
306
|
|
|
$
|
257
|
|
Note
14
: Derivative Instruments -
In February 2016, the Company entered into an option to purchase
3.2 billion
Canadian dollars in order to manage the foreign currency exchange rate risk on the consideration to be paid for the RONA acquisition. This option contract was not accounted for as a hedging instrument, and gains and losses resulting from changes in fair value and settlement were included in selling, general and administrative expense in the accompanying consolidated statements of current and retained earnings. The cash flows related to this option were included within investing activities in the accompanying consolidated statements of cash flows.
The premium paid for the foreign currency exchange option contract was
$103 million
. The option contract was settled during the second quarter of fiscal year 2016 for
$179 million
, resulting in a total realized gain of
$76 million
for the
nine months ended
October 28, 2016
.
The Company’s other derivative instruments, and related activity, were not material in any of the periods presented.