Company Quick10K Filing
Quick10K
Lowes Companies
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$96.16 803 $77,210
10-Q 2018-11-02 Quarter: 2018-11-02
10-Q 2018-08-03 Quarter: 2018-08-03
10-Q 2018-05-04 Quarter: 2018-05-04
10-K 2018-02-02 Annual: 2018-02-02
10-Q 2017-11-03 Quarter: 2017-11-03
10-Q 2017-08-04 Quarter: 2017-08-04
10-Q 2017-05-05 Quarter: 2017-05-05
10-K 2017-02-03 Annual: 2017-02-03
10-Q 2016-10-28 Quarter: 2016-10-28
10-Q 2016-07-29 Quarter: 2016-07-29
10-Q 2016-04-29 Quarter: 2016-04-29
10-K 2016-01-29 Annual: 2016-01-29
8-K 2019-01-25 Amend Bylaw, Exhibits
8-K 2019-01-25 Amend Bylaw, Exhibits
8-K 2018-12-12 Regulation FD, Exhibits
8-K 2018-11-20 Earnings, Exhibits
8-K 2018-11-19 Officers
8-K 2018-11-08 Officers
8-K 2018-10-31 Exit Costs, Impairments, Regulation FD, Exhibits
8-K 2018-10-02 Officers
8-K 2018-09-27 Officers
8-K 2018-09-10 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-08-16 Earnings, Exit Costs, Impairments, Officers, Amend Bylaw, Code of Ethics, Regulation FD, Exhibits
8-K 2018-07-20 Officers, Regulation FD, Exhibits
8-K 2018-07-09 Officers, Regulation FD, Exhibits
8-K 2018-06-18 Officers
8-K 2018-06-04 Officers, Regulation FD, Exhibits
8-K 2018-05-31 Officers
8-K 2018-05-23 Earnings, Exhibits
8-K 2018-05-20 Officers, Amend Bylaw, Regulation FD, Exhibits
8-K 2018-03-26 Officers, Exhibits
8-K 2018-02-28 Earnings, Exhibits
8-K 2018-01-18 Officers, Exhibits
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BECN Beacon Roofing Supply
BLDR Builders Firstsource
GMS GMS
FBM Foundation Building Materials
LL Lumber Liquidators
SGBX SG Blocks
LOW 2018-11-02
Part I - Financial Information
Item 1. Financial Statements
Note 1: Summary of Significant Accounting Policies
Note 13: Supplemental Disclosure
Item 2.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
Item 4. - Controls and Procedures
Part II - Other Information
Item 1. - Legal Proceedings
Item 1A. - Risk Factors
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. - Exhibits
EX-10.5 exhibit105_11022018.htm
EX-10.6 exhibit106_11022018.htm
EX-15.1 exhibit151_11022018.htm
EX-31.1 exhibit311_11022018.htm
EX-31.2 exhibit312_11022018.htm
EX-32.1 exhibit321_11022018.htm
EX-32.2 exhibit322_11022018.htm

Lowes Companies Earnings 2018-11-02

LOW 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q_11022018.htm FORM 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 2, 2018
or 
o
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
lowesgraphicimage01.jpg
LOWE’S COMPANIES, INC.
(Exact name of registrant as specified in its charter)
North Carolina
 
56-0578072
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1000 Lowe’s Blvd., Mooresville, NC
 
28117
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant’s telephone number, including area code
 
(704) 758-1000
 
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. ý Yes  o No

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  ý 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 11/30/2018
Common Stock, $0.50 par value
 
802,957,007



LOWE’S COMPANIES, INC.
- TABLE OF CONTENTS -
PART I - Financial Information
Page No.
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
PART II - Other Information
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 



Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Lowe’s Companies, Inc.
Consolidated Balance Sheets
In Millions, Except Par Value Data
 
 
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
November 2, 2018
 
November 3, 2017
 
February 2, 2018
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
$
1,668

 
$
743

 
$
588

Short-term investments
 
 
208

 
85

 
102

Merchandise inventory - net
 
 
12,365

 
12,393

 
11,393

Other current assets
 
 
897

 
788

 
689

Total current assets
 
 
15,138

 
14,009

 
12,772

Property, less accumulated depreciation
 
 
18,923

 
19,818

 
19,721

Long-term investments
 
 
290

 
370

 
408

Deferred income taxes - net
 
 
285

 
347

 
168

Goodwill
 
 
1,272

 
1,327

 
1,307

Other assets
 
 
805

 
912

 
915

Total assets
 
 
$
36,713

 
$
36,783

 
$
35,291

 
 
 
 
 
 
 
 
Liabilities and shareholders' equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Short-term borrowings
 
 
$

 
$
171

 
$
1,137

Current maturities of long-term debt
 
 
1,117

 
297

 
294

Accounts payable
 
 
9,283

 
8,903

 
6,590

Accrued compensation and employee benefits
 
 
806

 
808

 
747

Deferred revenue
 
 
1,356

 
1,404

 
1,378

Other current liabilities
 
 
2,507

 
2,155

 
1,950

Total current liabilities
 
 
15,069

 
13,738

 
12,096

Long-term debt, excluding current maturities
 
 
14,460

 
15,570

 
15,564

Deferred revenue - extended protection plans
 
 
827

 
794

 
803

Other liabilities
 
 
963

 
939

 
955

Total liabilities
 
 
31,319

 
31,041

 
29,418

 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
 
 
Preferred stock - $5 par value, none issued
 
 

 

 

Common stock - $0.50 par value;
 
 
 
 
 
 
 
Shares issued and outstanding
 
 
 
 
 
 
 
November 2, 2018
806

 
 
 
 
 
 
November 3, 2017
831

 
 
 
 
 
 
February 2, 2018
830

 
403

 
415

 
415

Capital in excess of par value
 
 

 

 
22

Retained earnings
 
 
5,156

 
5,289

 
5,425

Accumulated other comprehensive income/(loss)
 
 
(165
)
 
38

 
11

Total shareholders' equity
 
 
5,394

 
5,742

 
5,873

Total liabilities and shareholders' equity
 
 
$
36,713

 
$
36,783

 
$
35,291

 
 

 
 

 
 

 
 

See accompanying notes to the consolidated financial statements (unaudited).

3


Lowe’s Companies, Inc.
Consolidated Statements of Current and Retained Earnings (Unaudited)
In Millions, Except Per Share and Percentage Data
 
Three Months Ended
 
Nine Months Ended
 
November 2, 2018
 
November 3, 2017
 
November 2, 2018
 
November 3, 2017
Current Earnings
Amount
 
% Sales
 
Amount
 
% Sales
 
Amount
 
% Sales
 
Amount
 
% Sales
Net sales
$
17,415

 
100.00
 
$
16,770

 
100.00
 
$
55,662

 
100.00
 
$
53,125

 
100.00
Cost of sales
11,755

 
67.50
 
11,057

 
65.93
 
36,791

 
66.10
 
34,942

 
65.77
Gross margin
5,660

 
32.50
 
5,713

 
34.07
 
18,871

 
33.90
 
18,183

 
34.23
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
4,270

 
24.51
 
3,808

 
22.71
 
13,147

 
23.62
 
11,615

 
21.87
Depreciation and amortization
433

 
2.49
 
358

 
2.13
 
1,138

 
2.04
 
1,080

 
2.03
Operating income
957

 
5.50
 
1,547

 
9.23
 
4,586

 
8.24
 
5,488

 
10.33
Interest - net
153

 
0.88
 
160

 
0.96
 
467

 
0.84
 
479

 
0.91
Loss on extinguishment of debt

 
 

 
 

 
 
464

 
0.87
Pre-tax earnings
804

 
4.62
 
1,387

 
8.27
 
4,119

 
7.40
 
4,545

 
8.55
Income tax provision
175

 
1.01
 
515

 
3.07
 
981

 
1.76
 
1,652

 
3.10
Net earnings
$
629

 
3.61
 
$
872

 
5.20
 
$
3,138

 
5.64
 
$
2,893

 
5.45
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
806

 
 
 
831

 
 
 
815

 
 
 
843

 
 
Basic earnings per common share
$
0.78

 
 
 
$
1.05

 
 
 
$
3.84

 
 
 
$
3.42

 
 
Weighted average common shares outstanding - diluted
807

 
 
 
832

 
 
 
816

 
 
 
844

 
 
Diluted earnings per common share
$
0.78

 
 
 
$
1.05

 
 
 
$
3.83

 
 
 
$
3.42

 
 
Cash dividends per share
$
0.48

 
 
 
$
0.41

 
 
 
$
1.37

 
 
 
$
1.17

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained Earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
5,517

 
 
 
$
5,253

 
 
 
$
5,425

 
 
 
$
6,241

 
 
Cumulative effect of accounting change

 
 
 

 
 
 
33

 
 
 

 
 
Net earnings
629

 
 
 
872

 
 
 
3,138

 
 
 
2,893

 
 
Cash dividends declared
(387
)
 
 
 
(341
)
 
 
 
(1,115
)
 
 
 
(984
)
 
 
Share repurchases
(603
)
 
 
 
(495
)
 
 
 
(2,325
)
 
 
 
(2,861
)
 
 
Balance at end of period
$
5,156

 
 
 
$
5,289

 
 
 
$
5,156

 
 
 
$
5,289

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the consolidated financial statements (unaudited).


4


Lowe’s Companies, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
In Millions, Except Percentage Data
 
Three Months Ended
 
Nine Months Ended
 
November 2, 2018
 
November 3, 2017
 
November 2, 2018
 
November 3, 2017
 
Amount
 
% Sales
 
Amount
 
% Sales
 
Amount
 
% Sales
 
Amount
 
% Sales
Net earnings
$
629

 
3.61

 
$
872

 
5.20
 
$
3,138

 
5.64

 
$
2,893

 
5.45
Foreign currency translation adjustments - net of tax
(21
)
 
(0.13
)
 
173

 
1.03
 
(176
)
 
(0.32
)
 
278

 
0.52
Net unrealized investment loss - net of tax
(1
)
 

 

 
 
(1
)
 

 

 
Other comprehensive income/(loss)
(22
)
 
(0.13
)
 
173

 
1.03
 
(177
)
 
(0.32
)
 
278

 
0.52
Comprehensive income
$
607

 
3.48

 
$
1,045

 
6.23
 
$
2,961

 
5.32

 
$
3,171

 
5.97
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the consolidated financial statements (unaudited).

5


Lowe’s Companies, Inc.
Consolidated Statements of Cash Flows (Unaudited)
In Millions
 
Nine Months Ended
 
November 2, 2018
 
November 3, 2017
Cash flows from operating activities:
 
 
 
Net earnings
$
3,138

 
$
2,893

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,206

 
1,148

Deferred income taxes
(139
)
 
(118
)
Loss on property and other assets - net
400

 
21

Loss on extinguishment of debt

 
464

(Gain) loss on cost method and equity method investments
6

 
(86
)
Share-based payment expense
79

 
78

Changes in operating assets and liabilities:
 
 
 
Merchandise inventory - net
(1,030
)
 
(1,783
)
Other operating assets
(94
)
 
186

Accounts payable
2,708

 
2,251

Other operating liabilities
524

 
318

Net cash provided by operating activities
6,798

 
5,372

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of investments
(1,298
)
 
(680
)
Proceeds from sale/maturity of investments
1,309

 
870

Capital expenditures
(846
)
 
(787
)
Proceeds from sale of property and other long-term assets
50

 
21

Acquisition of business - net

 
(509
)
Other - net
(3
)
 
13

Net cash used in investing activities
(788
)
 
(1,072
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net change in short-term borrowings
(1,137
)
 
(340
)
Net proceeds from issuance of long-term debt

 
2,968

Repayment of long-term debt
(288
)
 
(2,836
)
Proceeds from issuance of common stock under share-based payment plans
73

 
87

Cash dividend payments
(1,068
)
 
(947
)
Repurchase of common stock
(2,498
)
 
(3,054
)
Other - net
(3
)
 
(8
)
Net cash used in financing activities
(4,921
)
 
(4,130
)
 
 
 
 
Effect of exchange rate changes on cash
(9
)
 
15

 
 
 
 
Net increase in cash and cash equivalents
1,080

 
185

Cash and cash equivalents, beginning of period
588

 
558

Cash and cash equivalents, end of period
$
1,668

 
$
743

 
 
 
 
See accompanying notes to the consolidated financial statements (unaudited).

6


Lowe’s Companies, Inc.
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). During the first quarter of fiscal year 2018, the Company conformed the financial reporting calendar of a subsidiary, which did not have a significant effect on the consolidated financial statements. The consolidated financial statements (unaudited), in the opinion of management, contain all adjustments necessary to present fairly the financial position as of November 2, 2018, and November 3, 2017, and the results of operations and comprehensive income for the three and nine months ended November 2, 2018, and November 3, 2017, and cash flows for the nine months ended November 2, 2018 and November 3, 2017.

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 February 2, 2018 (the Annual Report). The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.

Accounting Pronouncements Recently Adopted

Effective February 3, 2018, the Company adopted Accounting Standards Update 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606), and all the related amendments, using the modified retrospective method. ASU 2014-09 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.

Upon adoption of ASU 2014-09, the Company recorded an immaterial adjustment to the opening balance of retained earnings as of February 3, 2018, with related adjustments to other current assets, deferred revenue, accounts payable, other current liabilities, and related tax effects. The adjustment to retained earnings primarily relates to the change in revenue recognition related to gift card breakage. The adoption of the guidance also required a change in the timing of when installation services are recognized, the presentation of sales return reserve on the consolidated balance sheet, and a change in the presentation of the Company’s profit sharing income from its proprietary credit program. We applied ASU 2014-09 only to contracts that were not completed prior to fiscal 2018. Results for reporting periods beginning after February 2, 2018 are presented under ASU 2014-09, while comparative prior period amounts have not been restated and continue to be presented under accounting standards in effect in those periods. See Note 2 for additional details of the Company’s revenues.


7


The impact of adopting the new revenue recognition guidance on our consolidated statement of earnings is as follows:
 
 
Three Months Ended November 2, 2018
Consolidated Statement of Earnings
(in millions)
 
As Reported
 
Under Historical Guidance
 
Impact of Adopting ASU 2014-09
Net sales
 
$
17,415

 
$
17,176

 
$
239

Cost of sales
 
11,755

 
11,777

 
(22
)
Gross margin
 
5,660

 
5,399

 
261

Selling, general and administrative
 
4,270

 
4,009

 
261

Operating income
 
957

 
957

 

Pre-tax earnings
 
804

 
804

 

Net earnings
 
629

 
629

 


 
 
Nine Months Ended November 2, 2018
Consolidated Statement of Earnings
(in millions)
 
As Reported
 
Under Historical Guidance
 
Impact of Adopting ASU 2014-09
Net sales
 
$
55,662

 
$
55,150

 
$
512

Cost of sales
 
36,791

 
36,849

 
(58
)
Gross margin
 
18,871

 
18,301

 
570

Selling, general and administrative
 
13,147

 
12,578

 
569

Operating income
 
4,586

 
4,585

 
1

Pre-tax earnings
 
4,119

 
4,118

 
1

Net earnings
 
3,138

 
3,137

 
1


The impacts of adopting the new revenue recognition guidance to assets and liabilities on our consolidated balance sheet are as follows:
 
 
Balance at November 2, 2018
Consolidated Balance Sheet
(in millions)
 
As Reported
 
Under Historical Guidance
 
Impact of Adopting ASU 2014-09
Assets
 
 
 
 
 
 
Other current assets
 
$
897

 
$
746

 
$
151

 
 
 
 
 
 

Liabilities
 
 
 
 
 
 
Accounts payable
 
9,283

 
9,272

 
11

Deferred revenue
 
1,356

 
1,433

 
(77
)
Other current liabilities
 
2,507

 
2,339

 
168


Accounting Pronouncements Not Yet Adopted

In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). The ASU eliminates Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation to the identified assets and liabilities of the reporting unit to measure goodwill impairment. Under the amendments in this update, a goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for fiscal years beginning after December 15, 2019, 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.


8


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. In July 2018, the FASB issued ASU 2018-11, which allows a transition election to not restate comparative periods for the effects of applying the new standard. This transition election permits entities to change the date of initial application of the standard to the beginning of the year of adoption and to recognize the effects of applying Topic 842 as a cumulative-effect adjustment to the opening balance of retained earnings. Certain qualitative and quantitative disclosures are also required. The Company will adopt this ASU and related amendments on February 2, 2019. The Company also expects to elect the optional transition approach and recognize the cumulative impact of adoption in the opening balance of retained earnings to beginning fiscal year 2019. Management is implementing a new lease software to assist in complying with the ASU. The Company is currently evaluating the impact of adopting Topic 842 on its consolidated financial statements but expects the ASU to have a material impact on its consolidated balance sheet, as a result of the requirement to recognize right-of-use assets and lease liabilities for operating leases. The Company does not expect a material impact to the Company’s Consolidated Statements of Current and Retained Earnings or Consolidated Statements of Cash Flows.

Note 2: Net Sales - Net sales consists primarily of revenue, net of sales tax, associated with contracts with customers for the sale of goods and services in amounts that reflect consideration the Company is entitled to in exchange for those goods and services.

The following table presents the Company’s sources of revenue:
(In millions)
Three Months Ended
 
Nine Months Ended
November 2, 2018
 
November 3, 2017
 
November 2, 2018
 
November 3, 2017
Products
$
16,293

 
$
15,903

 
$
52,527

 
$
50,720

Services
665

 
657

 
1,999

 
1,915

Other
457

 
210

 
1,136

 
490

Net sales
$
17,415

 
$
16,770

 
$
55,662

 
$
53,125


Revenue from products primarily relates to in-store and online merchandise purchases, which are recognized at the point in time when the customer obtains control of the merchandise, which is at the time of in-store purchase or delivery of the product to the customer. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded.  Under ASU 2014-09, the merchandise return reserve is presented on a gross basis, with a separate asset and liability included in the consolidated balance sheets as of reporting periods after February 2, 2018. Reporting periods prior to the adoption of ASU 2014-09 reflect merchandise return reserves on a net basis. As of November 2, 2018, anticipated sales returns of $229 million are reflected in other current liabilities, and the associated right of return assets of $151 million are reflected in other current assets. As of November 3, 2017, the merchandise return reserve, net of the associated asset, was $85 million reflected in other current liabilities.
Revenues from services primarily relate to professional installation services the Company provides through subcontractors related to merchandise purchased by a customer. In certain instances, installation services include materials provided by the subcontractor, and both product and installation are included in service revenue. The Company recognizes revenue associated with services as they are rendered, and the majority of services are completed within one week from initiation.
Deferred revenue is presented for merchandise that has not yet transferred control to the customer and for services that have not yet been provided, but for which tender has been accepted. Deferred revenue is recognized in sales either at a point in time when the customer obtains control of merchandise through pickup or delivery, or over time as services are provided to the customer. Deferred revenues associated with amounts received for which customers have not taken possession of the merchandise or for which installation has not yet been completed were $945 million at November 2, 2018 and $952 million at November 3, 2017. The majority of revenue for goods and services is recognized in the quarter following revenue deferral.
Stored-value cards
In addition, the Company defers revenues from stored-value cards, which include gift cards and returned merchandise credits, and recognizes revenue into sales when the cards are redeemed.  The liability associated with outstanding stored-value cards was $411 million and $452 million at November 2, 2018, and November 3, 2017, respectively, and these amounts are included in deferred revenue on the consolidated balance sheets. Upon adoption of ASU 2014-09, the Company recognizes income from unredeemed stored-value cards in proportion to the pattern of rights exercised by the customer. Amounts recognized as breakage were insignificant for the three and nine months ended November 2, 2018 and November 3, 2017.

9


Extended protection plans
The Company also defers revenues for its separately-priced extended protection plan contracts, which is a Lowe’s-branded program for which the Company is ultimately self-insured.  The Company recognizes revenue from extended protection plan sales on a straight-line basis over the respective contract term.  Extended protection plan contract terms primarily range from one to five years from the date of purchase or the end of the manufacturer’s warranty, as applicable. Deferred revenue from extended protection plans recognized into sales were $97 million and $293 million for the three and nine months ended November 2, 2018, respectively, and $92 million and $273 million for the three and nine months ended November 3, 2017, respectively. 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 and were insignificant at November 2, 2018 and November 3, 2017, respectively.  The Company’s extended protection plan deferred costs are included in other assets (noncurrent) on the 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 on the consolidated balance sheets and was not material in any of the periods presented.  Expenses for claims are recognized when incurred and totaled $47 million and $141 million for the three and nine months ended November 2, 2018, respectively, and $43 million and $119 million for the three and nine months ended November 3, 2017, respectively.

Disaggregation of Revenues

The following table presents the Company’s net sales disaggregated by merchandise division:
 
Three Months Ended
 
Nine Months Ended
 
November 2, 2018
 
November 3, 2017
 
November 2, 2018
 
November 3, 2017
(In millions)
Total Sales
 
%
 
Total Sales
 
%
 
Total Sales
 
%
 
Total Sales
 
%
Building & Maintenance ¹
$
7,322

 
42
 
$
7,202

 
43
 
$
22,042

 
40
 
$
21,069

 
40
Home Décor ²
6,959

 
40
 
6,874

 
41
 
21,207

 
37
 
20,688

 
39
Seasonal ³
2,570

 
15
 
2,382

 
15
 
10,964

 
20
 
10,573

 
20
Other
564

 
3
 
312

 
1
 
1,449

 
3
 
795

 
1
Total
$
17,415

 
100
 
$
16,770

 
100
 
$
55,662

 
100
 
$
53,125

 
100
1 
Building & Maintenance includes the following product categories: Lumber & Building Materials, Millwork, Rough Plumbing & Electrical, and Tools & Hardware
2 
Home Décor includes the following product categories: Appliances, Fashion Fixtures, Flooring, Kitchens, and Paint
3 
Seasonal includes the following product categories: Lawn & Garden and Seasonal & Outdoor Living

The following table presents the Company’s net sales disaggregated by geographical area:
(In millions)
Three Months Ended
 
Nine Months Ended
November 2, 2018
 
November 3, 2017
 
November 2, 2018
 
November 3, 2017
United States
$
15,991

 
$
15,279

 
$
51,319

 
$
49,102

International
1,424

 
1,491

 
4,343

 
4,023

Net Sales
$
17,415

 
$
16,770

 
$
55,662

 
$
53,125


Practical Expedients

Sales commissions and selling-related goods or services are considered immaterial and are expensed as incurred because the amortization period of the assets would be one year or less. These costs are reflected within selling, general and administrative expenses.

Note 3: Acquisitions - On June 23, 2017, the Company completed its acquisition of Maintenance Supply Headquarters, a leading distributor of maintenance, repair and operations (MRO) products serving the multifamily housing industry. The acquisition is expected to enable the Company to deepen and broaden its relationship with Pro customers and better serve their needs. The aggregate cash purchase price of this acquisition was $513 million and is included in the investing section of the

10


consolidated statements of cash flows, net of cash acquired. Acquisition-related costs were expensed as incurred and were not significant.

The following table summarizes the aggregate purchase price allocation:
(In millions)
June 23, 2017
Allocation:
 
Cash acquired
$
4

Merchandise inventory
68

Other current assets
36

Property
12

Goodwill
160

Other assets
260

Accounts payable
(18
)
Other current liabilities
(9
)
Net assets acquired
$
513


Intangible assets acquired totaled $259 million, and include a trademark of $34 million with a useful life of 15 years and a customer list of $225 million with a useful life of 20 years, each of which are included in other assets in the accompanying consolidated balance sheets. The goodwill of $160 million is primarily attributable to the synergies expected to arise after the acquisition and is deductible for tax purposes.

Pro forma and historical financial information has not been provided as the acquisition was not material to the consolidated financial statements.

Note 4: Investment in Australian Joint Venture - During the second quarter of fiscal 2017, the Company completed the sale of our interest in the Australian joint venture with Woolworths Limited and received proceeds of $199 million, which is included in cash flows from investing activities in the accompanying consolidated statements of cash flows. The proceeds from the sale exceeded the carrying value of the investment and resulted in a gain of $96 million. The carrying value prior to the sale reflected the non-cash impairment charges taken in fiscal years 2015 and 2016. The gain is included in selling, general and administrative expense in the accompanying consolidated statements of current and retained earnings.

Note 5: 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


11


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 November 2, 2018, November 3, 2017, and February 2, 2018. The fair values of these instruments approximated amortized costs.
 
 
 
Fair Value Measurements at
(In millions)
Measurement Level
 
November 2, 2018
 
November 3, 2017
 
February 2, 2018
Short-term investments:
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Money market funds
Level 1
 
$
181

 
$
70

 
$
86

Certificates of deposit
Level 1
 
17

 
15

 
16

Agency securities
Level 2
 
10

 

 

Total short-term investments
 
 
$
208

 
$
85

 
$
102

Long-term investments:
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Corporate debt securities
Level 2
 
$
224

 
$

 
$

Agency securities
Level 2
 
66

 

 

Municipal floating rate obligations
Level 2
 

 
368

 
407

Certificates of deposit
Level 1
 

 
2

 
1

Total long-term investments
 
 
$
290

 
$
370

 
$
408


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 November 2, 2018, 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. During the three and nine months ended November 3, 2017, the Company had no significant measurements of assets and liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

The Company reviews the carrying amounts of long-lived assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable.  With input from executive management and 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, projections of future profitability and whether it is more likely than not the assets will be disposed of significantly prior to the end of their estimated useful life 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, including highest and best use, incorporating local market conditions and inputs from retail store operations where necessary, and about key variables including the following unobservable inputs: sales growth rates, gross margin, controllable and uncontrollable expenses, 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

12


general, the selected market participants represented a group of other retailers with a location footprint similar in size to the Company’s.

As part of a strategic reassessment of Orchard Supply Hardware (Orchard), during the three months ended August 3, 2018, it was determined to be more likely than not the assets of Orchard would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives, and therefore, these assets experienced a triggering event and were evaluated for recoverability. Operating locations evaluated for recoverability included all Orchard stores, as well as a distribution facility that services the Orchard stores and a corporate facility. Based on this evaluation of Orchard, certain long-lived assets, including tangible and intangible assets, were written down to their fair value of $284 million resulting in impairment charges of $206 million. These non-cash impairment charges are included in selling, general and administrative expense in the accompanying consolidated statements of current and retained earnings.

During the three months ended November 2, 2018, the company committed to closing 20 U.S. home improvement stores and 31 locations in Canada, including 27 stores, as well as exiting certain immaterial non-core activities within its U.S. home improvement business. As a result of these decisions, the related assets experienced a triggering event and were evaluated for recoverability. Based on this evaluation, certain long-lived assets were written down to their fair value of $81 million resulting in impairment charges of $99 million, with $90 million associated with the location closures and $9 million associated with the exit of non-core activities. These non-cash impairment charges are included in selling, general and administrative expense in the accompanying consolidated statements of current and retained earnings.

In addition, as part of the Company’s strategic reassessment process, during the three months ended November 2, 2018, it was determined to be more likely than not the assets of the Mexico retail operations would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives, and therefore, these assets experienced a triggering event and were evaluated for recoverability. Operating locations evaluated for recoverability included all 13 stores in Mexico, as well as a corporate facility. Based on this evaluation of the Mexico retail operations, certain long-lived assets were written down to their fair value of $107 million resulting in impairment charges of $22 million. These non-cash impairment charges are included in selling, general and administrative expense in the accompanying consolidated statements of current and retained earnings.

See Note 8 for additional information regarding the Company’s decisions to exit its Orchard operations and certain U.S. and Canada locations during the third quarter as part of the Company’s ongoing strategic reassessment of the business.

The following table presents the Company’s non-financial assets measured at estimated fair value on a nonrecurring basis and the resulting long-lived asset impairment losses included in earnings. Because assets subject to long-lived asset impairment 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 November 2, 2018.

 
Fair Value Measurements

 
Impairment Losses
(In millions)
November 2, 2018

 
Three Months Ended November 2, 2018

 
Nine Months Ended November 2, 2018

Assets-held-for-use:
 
 
 
 
 
Operating locations
$
473

 
$
(112
)
 
$
(329
)
Total
$
473

 
$
(112
)
 
$
(329
)

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, short-term borrowings, 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.


13


Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding capitalized lease obligations, are as follows:
 
November 2, 2018
 
November 3, 2017
 
February 2, 2018
(In millions)
Carrying Amount

 
Fair Value

 
Carrying Amount

 
Fair Value

 
Carrying Amount

 
Fair Value

Unsecured notes (Level 1)
$
14,718

 
$
14,430

 
$
14,958

 
$
15,974

 
$
14,961

 
$
15,608

Mortgage notes (Level 2)
6

 
6

 
7

 
7

 
6

 
7

Long-term debt (excluding capitalized lease obligations)
$
14,724

 
$
14,436

 
$
14,965

 
$
15,981

 
$
14,967

 
$
15,615


Note 6: 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 $191 million at November 2, 2018, $70 million at November 3, 2017, and $86 million at February 2, 2018.

Restricted balances included in long-term investments were $255 million at November 2, 2018, $332 million at November 3, 2017, and $381 million at February 2, 2018.

Note 7: Property - Property is shown net of accumulated depreciation of $17.7 billion at November 2, 2018, $17.1 billion at November 3, 2017, and $17.2 billion at February 2, 2018.

Note 8: Exit Activities - During the second quarter of fiscal year 2018, the Company initiated a strategic reassessment of its business to drive increased focus on its core home improvement operations. As a result of this reassessment, the Company has decided to exit certain activities and close certain locations as further described below.

Orchard Supply Hardware (Orchard)

On August 17, 2018, the Company approved plans to exit its Orchard operations by closing all 99 Orchard stores, which are located in California, Oregon and Florida, as well as the distribution facility that services the Orchard stores, and the Orchard corporate office. To facilitate an orderly wind-down, the Company has partnered with Hilco Merchant Services to help manage the store closing sales process and provide a seamless experience for customers. All stores are expected to be closed before the end of the Company’s 2018 fiscal year (February 1, 2019).

During the second quarter ended August 3, 2018, the Company recorded $230 million of pre-tax charges associated with its Orchard operations. This included $206 million of impairment of certain long-lived assets, including tangible and intangible assets, due to the determination it was more likely than not the assets of Orchard would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives (see Note 5 to the consolidated financial statements) and $24 million related primarily to three store projects that were discontinued during the quarter. During the third quarter ended November 2, 2018, the Company recorded $123 million of pre-tax charges related to the exit of its Orchard operations, including accelerated depreciation and amortization of $103 million, severance costs of $11 million, and costs associated with lease obligations of $9 million. The Company expects additional pre-tax charges associated with the exit of Orchard during the fourth quarter of fiscal 2018, of $270 to $350 million, primarily associated with lease obligation costs.

Other Store Closings and Exit of Certain Non-Core Activities
 
On October 31, 2018, the Company committed to closing 20 U.S. home improvement stores and 31 locations in Canada, including 27 stores.  The store closings are estimated to be completed by the end of fiscal 2018. In addition, the Company concurrently decided to no longer pursue a new store project that was in process. As a result of these decisions, during the third quarter ended November 2, 2018, the Company recorded $121 million of pre-tax charges, including $90 million of impairment of certain long-lived assets (see Note 5 to the consolidated financial statements), severance costs of $21 million, and discontinued project costs of $10 million. The Company expects additional pre-tax charges associated with these closings during the fourth quarter of fiscal 2018, of $190 to $230 million, primarily associated with lease obligation costs and accelerated depreciation.

In addition, during the third quarter ended November 2, 2018, the Company decided to pursue an exit of certain immaterial non-core activities within its U.S. home improvement business. As a result of these decisions, during the third quarter ended November 2, 2018, the Company recorded $14 million of pre-tax charges, including long-lived asset impairments of $9 million (see Note 5 to the consolidated financial statements), and the write-down of inventory to net realizable value of $5 million.

14



Mexico Retail Operations

On November 9, 2018, subsequent to the end of the Company’s third quarter of fiscal 2018, management and the board of directors decided to pursue an exit of the Company’s Mexico retail operations consisting of 13 stores, and the Company is exploring exit alternatives. During the third quarter ended November 2, 2018, the Company recorded $22 million of pre-tax charges associated with long-lived asset impairment due to the determination it was more likely than not the assets of the Mexico retail operations would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives (see Note 5 to the consolidated financial statements). The amounts, nature and timing of any additional charges associated with the intended exit of the Mexico retail operations will depend on the plan executed and cannot be reasonably estimated.

A summary of the significant components of charges associated with the exit activities discussed above, are as follows:
 
Costs Incurred
 
Three Months Ended
 
Nine Months Ended
(In millions)
November 2, 2018
 
November 2, 2018
Long-lived asset impairments
$
121

 
$
327

Accelerated depreciation and amortization
103

 
103

Severance costs
32

 
32

Discontinued project write-offs
10

 
34

Lease obligation costs for closed locations
9

 
9

Inventory adjustments to net realizable value
5

 
5

Total
$
280

 
$
510


All estimated amounts are subject to change until finalized. Expenses associated with long-lived asset impairment, discontinued projects, severance, and lease obligations, are included in selling, general and administrative expense in the consolidated statement of current and retained earnings. Inventory adjustments to net realizable value are included in cost of sales in the consolidated statement of current and retained earnings.

Note 9: Short-Term Borrowings - In September 2018, the Company entered into a $1.75 billion five year unsecured revolving second amended and restated credit agreement (the Second Amended and Restated Credit Agreement) with a syndicate of banks. The Second Amended and Restated Credit Agreement amends and restates the Company’s amended and restated credit agreement, dated November 23, 2016 (the Amended and Restated Credit Agreement), to among other things (i) extend the maturity date of the revolving credit facility to September 2023 and (ii) modify the revolving commitments of the existing lenders. The Company may request borrowings under the Second Amended and Restated Credit Agreement that are denominated in U.S. Dollar, Euro, Sterling, Canadian Dollar and other currencies approved by the administrative agent and the lenders. Borrowings under the Second Amended and Restated Credit Agreement will bear interest calculated according to a Base Rate or a Eurocurrency Rate, plus an applicable margin.
Subject to obtaining commitments from the lenders and satisfying other conditions specified in the Second Amended and Restated Credit Agreement, the Company may increase the aggregate availability by an additional $500 million.  The Second Amended and Restated Credit Agreement contains customary representations, warranties, and covenants for a transaction of this type. The Company was in compliance with those covenants at November 2, 2018.
In September 2018, the Company entered into a $250 million unsecured 364-day credit agreement (the 364-Day Credit Agreement) with a syndicate of banks. The Company may request borrowings under the 364-Day Credit Agreement that are denominated in U.S. Dollar, Euro, Sterling, Canadian Dollar and other currencies approved by the administrative agent and the lenders. The Company must repay the aggregate principal amount of loans outstanding under the 364-Day Credit Agreement on the termination date in effect at such time (currently September 9, 2019). The Company may elect to convert all of the loans outstanding under the 364-Day Credit Agreement on the termination date into a term loan which the Company shall repay in full on the first anniversary date of the termination date. Borrowings under the 364-Day Credit Agreement will bear interest calculated according to a Base Rate or a Eurocurrency Rate plus an applicable margin. The 364-Day Credit Agreement contains customary representations, warranties and covenants for a transaction of this type. The Company was in compliance with those covenants at November 2, 2018.
The Second Amended and Restated Credit Agreement and the 364-Day Credit Agreement both support our commercial paper program.  The amount available to be drawn under the Second Amended and Restated Credit Agreement and the 364-Day

15


Credit Agreement is reduced by the amount of borrowings under our commercial paper program. There were no outstanding borrowings under the Second Amended and Restated Credit Agreement, the 364-Day Credit Agreement, or our commercial paper program as of November 2, 2018. As of November 3, 2017, there were $171 million of outstanding borrowings under the commercial paper program with a weighted average interest rate of 1.37% and no outstanding borrowings or letters of credit under the Amended and Restated Credit Agreement.
Note 10: Shareholders’ 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, or through private off-market transactions. Shares purchased under the repurchase program are retired and returned to authorized and unissued status. On January 26, 2018, 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 November 2, 2018, the Company had $4.5 billion remaining in its share repurchase program.

In May 2018, the Company entered into an Accelerated Share Repurchase (ASR) agreement with a third-party financial institution to repurchase $550 million of the Company’s common stock. At inception, pursuant to the agreement, the Company paid $550 million to the financial institution using cash on hand, and took delivery of 4.8 million shares. The Company finalized the transaction and received an additional 0.8 million shares prior to the end of the second quarter.

In August 2018, the Company entered into an ASR agreement with a third-party financial institution to repurchase $310 million of the Company’s common stock. At inception, pursuant to the agreement, the Company paid $310 million to the financial institution using cash on hand, and took delivery of 2.5 million shares. The Company finalized the transaction and received an additional 0.3 million shares prior to the end of the third quarter.

Under the terms of the ASR agreements, upon settlement, the Company would either receive additional shares from the applicable financial institution or be required to deliver additional shares or cash to such 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 of the ASR agreements was determined with reference to the volume-weighted average price of the Company’s common stock over the term of the applicable ASR agreement. The initial repurchase of shares under the agreement 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 a treasury stock transaction and forward stock purchase contract. 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 contract was considered indexed to the Company’s own stock and was classified as an equity instrument.

During the three and nine months ended November 2, 2018, the Company repurchased shares of its common stock through the open market totaling 2.9 million and 17.5 million shares, respectively, for a cost of $310 million and $1.6 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 November 2, 2018 and November 3, 2017 were as follows:
 
Three Months Ended
 
November 2, 2018
 
November 3, 2017
(In millions)
Shares

 
Cost 1

 
Shares

 
Cost 1

Share repurchase program
5.7

 
$
620

 
6.4

 
$
500

Shares withheld from employees
0.2

 
25

 
0.4

 
27

Total share repurchases
5.9

 
$
645

 
6.8

 
$
527

1 
Reductions of $603 million and $495 million were recorded to retained earnings, after capital in excess of par value was depleted, for the three months ended November 2, 2018 and November 3, 2017, respectively.


16


 
Nine Months Ended
 
November 2, 2018
 
November 3, 2017
(In millions)
Shares

 
Cost 2

 
Shares

 
Cost 2

Share repurchase program
25.9

 
$
2,470

 
37.5

 
$
3,000

Shares withheld from employees
0.3

 
38

 
0.5

 
41

Total share repurchases
26.2

 
$
2,508

 
38.0

 
$
3,041

2 
Reductions of $2.3 billion and $2.9 billion were recorded to retained earnings, after capital in excess of par value was depleted, for the nine months ended November 2, 2018 and November 3, 2017, respectively.

Note 11: 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 non-forfeitable 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 November 2, 2018 and November 3, 2017:
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share data)
November 2, 2018
 
November 3, 2017
 
November 2, 2018
 
November 3, 2017
Basic earnings per common share:
 
 
 
 
 
 
 
Net earnings
$
629

 
$
872

 
$
3,138

 
$
2,893

Less: Net earnings allocable to participating securities
(1
)
 
(2
)
 
(10
)
 
(10
)
Net earnings allocable to common shares, basic
628

 
$
870

 
$
3,128

 
$
2,883

Weighted-average common shares outstanding
806

 
831

 
815

 
843

Basic earnings per common share
$
0.78

 
$
1.05

 
$
3.84

 
$
3.42

Diluted earnings per common share:
 
 
 
 
 

 
 

Net earnings
$
629

 
$
872

 
$
3,138

 
$
2,893

Less: Net earnings allocable to participating securities
(1
)
 
(2
)
 
(10
)
 
(10
)
Net earnings allocable to common shares, diluted
$
628

 
$
870

 
$
3,128

 
$
2,883

Weighted-average common shares outstanding
806

 
831

 
815

 
843

Dilutive effect of non-participating share-based awards
1

 
1

 
1

 
1

Weighted-average common shares, as adjusted
807

 
832

 
816

 
844

Diluted earnings per common share
$
0.78

 
$
1.05

 
$
3.83

 
$
3.42


Stock options to purchase 0.2 million and 0.4 million shares of common stock were anti-dilutive for the three and nine months ended November 2, 2018, respectively. Stock options to purchase 1.0 million shares of common stock were anti-dilutive for the three and nine months ended November 3, 2017, respectively.

Note 12: Income Taxes - The Company’s effective income tax rates were 21.8% and 23.8% for the three and nine months ended November 2, 2018, respectively, and 37.1% and 36.3% for the three and nine months ended November 3, 2017, respectively. The lower effective income tax rate for the three and nine months ended November 2, 2018 was primarily due to

17


the enactment of the Tax Cuts and Jobs Act (Tax Act) during fiscal 2017, which lowered the corporate federal income tax rate from 35% to 21%.

Based on the Company’s interpretation of the Tax Act, the Company made reasonable estimates to record provisional adjustments during the fourth quarter of fiscal 2017. However, the final impact may differ due to subsequent legislative action, changes in interpretations and assumptions, as well as the issuance of additional guidance from the Internal Revenue Service and state taxing authorities. We have not made any measurement-period adjustments related to these items during the nine months ended November 2, 2018, because we have not finalized the following items: the earnings and profits of the relevant subsidiaries, deemed repatriation of deferred foreign income, and prior year deferred tax activity. The Company will continue to evaluate the Tax Act and gather additional information within the measurement period allowed, which will be completed no later than the fourth quarter of fiscal 2018.

Note 13: Supplemental Disclosure

Net interest expense is comprised of the following:
 
Three Months Ended
 
Nine Months Ended
(In millions)
November 2, 2018
 
November 3, 2017
 
November 2, 2018
 
November 3, 2017
Long-term debt
$
145

 
$
146

 
$
437

 
$
438

Capitalized lease obligations
15

 
14

 
44

 
41

Interest income
(9
)
 
(2
)
 
(21
)
 
(10
)
Interest capitalized

 
(2
)
 
(2
)
 
(4
)
Interest on tax uncertainties

 

 

 
(1
)
Other
2

 
4

 
9

 
15

Interest - net
$
153

 
$
160

 
$
467

 
$
479


Supplemental disclosures of cash flow information:
 
Nine Months Ended
(In millions)
November 2, 2018
 
November 3, 2017
Cash paid for interest, net of amount capitalized
$
555

 
$
610

Cash paid for income taxes - net
$
1,069

 
$
1,322

Non-cash investing and financing activities:
 
 
 
Non-cash property acquisitions, including assets acquired under capital lease
$
42

 
$
91

Cash dividends declared but not paid
$
387

 
$
341


Note 14: Subsequent Events - As part of a strategic reassessment, on November 9, 2018, subsequent to the end of the Company’s third quarter of fiscal 2018, management and the board of directors decided to pursue an exit of the Company’s Mexico retail operations consisting of 13 stores, and the Company is exploring exit alternatives. The amounts, nature and timing of any future charges associated with the intended exit of the Mexico retail operations will depend on the plan executed and cannot be reasonably estimated. As of November 2, 2018, the total net book value of the Company’s Mexico retail operation is $294 million, including a cumulative translation adjustment of $100 million.

18


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Lowe’s Companies, Inc.

Results of Review of Interim Financial Information

We have reviewed the accompanying consolidated balance sheets of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as of November 2, 2018 and November 3, 2017, the related consolidated statements of current and retained earnings and comprehensive income for the fiscal three-month and nine-month periods ended November 2, 2018 and November 3, 2017, and of cash flows for the nine-month periods ended November 2, 2018 and November 3, 2017, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of February 2, 2018, and the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows for the fiscal year then ended (not presented herein); and in our report dated April 2, 2018, 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 2, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, 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.


/s/ DELOITTE & TOUCHE LLP

Charlotte, North Carolina
December 5, 2018

19


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity and capital resources during the three and nine months ended November 2, 2018, and November 3, 2017. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2018 (the Annual Report), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report. Unless otherwise specified, all comparisons made are to the corresponding period of 2017. This discussion and analysis is presented in six sections:

Executive Overview
Operations
Financial Condition, Liquidity and Capital Resources
Off-Balance Sheet Arrangements
Contractual Obligations and Commercial Commitments
Critical Accounting Policies and Estimates

EXECUTIVE OVERVIEW

Our top priority during the quarter was taking necessary steps to build a sustainable foundation to position the Company for long-term success through a continued strategic reassessment of our business. As part of this, early in the third quarter of 2018, the Company committed to exit its Orchard Supply Hardware (Orchard) operations and plans to have all stores closed before the end of the Company’s 2018 fiscal year (February 1, 2019). In addition, during the third quarter, we committed to close 20 underperforming stores across the U.S. and 31 locations in Canada, including 27 stores and 4 other Canadian locations. We expect these store closings to be completed by the end of the 2018 fiscal year as well. We also made the decision during the quarter to pursue an exit of certain non-core activities within our U.S home improvement business, specifically Alacrity Renovation Services and Iris Smart Home, and intend to complete these exits before fiscal year-end. In addition, based on the strategic reassessment during the quarter, management and the board of directors decided on November 9, 2018, to pursue an exit of the Company’s Mexico retail operations consisting of 13 stores. As a result of these assessments and decisions, the Company recorded $280 million of pre-tax charges during the third quarter of 2018, primarily related to long-lived asset impairments, accelerated depreciation and amortization, severance and lease obligations. The Company expects additional pre-tax charges associated with these decisions during the fourth quarter of fiscal 2018, of $460 to $580 million, primarily associated with lease obligation costs and accelerated depreciation and amortization.

Impacted by the charges associated with the strategic actions discussed above, net earnings for the third quarter of 2018 decreased 27.9% to $629 million. Diluted earnings per common share decreased 25.7% in the third quarter of 2018 to $0.78 from $1.05 in the third quarter of the prior year. The pre-tax charges totaling $280 million decreased diluted earnings per share by $0.26. Excluding the impact of these items, adjusted diluted earnings per common share decreased 1.0% to $1.04 in the third quarter of 2018 from adjusted diluted earnings per common share of $1.05 in the same period of the prior year (see discussion of non-GAAP financial measures beginning on page 22).

Net sales for the third quarter of 2018 increased by 3.8% to $17.4 billion, and comparable sales increased 1.5%. During the quarter, 11 of 14 U.S. regions generated comparable sales increases with the Tampa, Florida and Houston, Texas markets experiencing the weakest comparable sales, primarily due to comparisons to prior year Hurricanes Harvey and Irma. Seven of 11 product categories generated positive comparable sales with particular strength in Seasonal & Outdoor Living, Appliances, Lawn & Garden, Kitchens, and Rough Plumbing & Electrical. While we drove strong traffic to our stores during the quarter, we continued to experience challenges with out-of-stocks, reset execution, and assortments in certain categories, which put pressure on our ability to turn those visits into transactions. We experienced pressure in Millwork, Paint, Fashion Fixtures, and Flooring, primarily due to reset execution.

With the substantial completion of our strategic reassessment of the business, we can now intensify our attention on improving execution in our retail stores and online. With our new leadership team, we have begun to design and implement store operations and merchandising strategies to address some of the issues we experienced during the third quarter, such as reset execution and out-of-stocks, and have developed plans to drive sustainable improvements. This is reflective of our priority of building a foundation for sustainable long-term success.


20


Although interest rates have ticked up and housing turnover has been pressured, the home improvement backdrop remains strong, driven by robust real residential investment and home price appreciation which continues to encourage homeowners to engage in discretionary projects. Consumer confidence continues to hover at high levels as consumers remain upbeat about their employment and income prospects, suggesting that we should see continued gains in consumer spending supported by stronger real disposable personal income growth. In addition, we operate in a fragmented $900 billion marketplace and believe we have a compelling opportunity to improve our performance and increase our market share as we address certain process and system issues.

OPERATIONS

The following tables set forth the percentage relationship to net sales of each line item of the consolidated statements of current and retained earnings (unaudited), as well as the percentage change in dollar amounts from the prior period. These tables should be read in conjunction with the following discussion and analysis and the consolidated financial statements (unaudited), including the related notes to the consolidated financial statements (unaudited).
 
Three Months Ended
 
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Period

 
Percentage Increase / (Decrease) in Dollar Amounts from Prior Period

 
November 2, 2018
 
November 3, 2017
 
2018 vs. 2017

 
2018 vs. 2017

Net sales
100.00
%
 
100.00
%
 
N/A

 
3.8
 %
Gross margin
32.50

 
34.07

 
(157
)
 
(0.9
)
Expenses:
 
 
 
 
 
 
 
Selling, general and administrative
24.51

 
22.71

 
180

 
12.1

Depreciation and amortization
2.49

 
2.13

 
36

 
21.0

Operating income
5.50

 
9.23

 
(373
)
 
(38.1
)
Interest - net
0.88

 
0.96

 
(8
)
 
(4.3
)
Pre-tax earnings
4.62

 
8.27

 
(365
)
 
(42.0
)
Income tax provision
1.01

 
3.07

 
(206
)
 
(66.0
)
Net earnings
3.61
%
 
5.20
%
 
(159
)
 
(27.9
)%

 
Nine Months Ended
 
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Period

 
Percentage Increase / (Decrease) in Dollar Amounts from Prior Period

 
November 2, 2018
 
November 3, 2017
 
2018 vs. 2017

 
2018 vs. 2017

Net sales
100.00
%
 
100.00
%
 
N/A

 
4.8
 %
Gross margin
33.90

 
34.23

 
(33
)
 
3.8

Expenses:
 
 
 
 
 
 
 
Selling, general and administrative
23.62

 
21.87

 
175

 
13.2

Depreciation and amortization
2.04

 
2.03

 
1

 
5.4

Operating income
8.24

 
10.33

 
(209
)
 
(16.4
)
Interest - net
0.84

 
0.91

 
(7
)
 
(2.7
)
Loss on extinguishment of debt

 
0.87

 
(87
)
 
(100.0
)
Pre-tax earnings
7.40

 
8.55

 
(115
)
 
(9.4
)
Income tax provision
1.76

 
3.10

 
(134
)
 
(40.6
)
Net earnings
5.64
%
 
5.45
%
 
19

 
8.5
 %
Note: The Company adopted ASU 2014-09 and all the related amendments using the modified retrospective method, effective February 3, 2018. Prior period results have not been restated, which affects comparability.

21



 
Three Months Ended
 
Nine Months Ended
Other Metrics
November 2, 2018
 
November 3, 2017
 
November 2, 2018
 
November 3, 2017
Comparable sales increase 1
1.5
%
 
5.7
%
 
2.6
%
 
4.0
%
Total customer transactions (in millions)
229

 
231

 
738

 
742

Average ticket 2
$
75.89

 
$
72.63

 
$
75.47

 
$
71.59

At end of period:
 
 
 
 
 
 
 
Number of stores
2,133

 
2,144

 
 
 
 
Sales floor square feet (in millions)
215

 
214

 
 
 
 
Average store size selling square feet (in thousands) 3
101

 
100

 
 
 
 
Return on invested capital 4
19.0
%
 
19.5
%
 
 
 
 
1 
A comparable location is defined as a location that has been open longer than 13 months. A location that is identified for relocation is no longer considered comparable in the month of its relocation. The relocated location must then remain open longer than 13 months to be considered comparable. A location we have decided to close is no longer considered comparable as of the beginning of the month in which we announce its closing. Acquired locations are included in the comparable sales calculation beginning in the first full month following the first anniversary of the date of the acquisition. Comparable sales include online sales, which positively impacted third quarter fiscal 2018 comparable sales by approximately 60 basis points and fiscal 2018 comparable sales by approximately 85 basis points. The comparable store sales calculation included in the preceding table was calculated using comparable 13-week and 39-week periods.
2 
Average ticket is defined as net sales divided by the total number of customer transactions.
3 
Average store size selling square feet is defined as sales floor square feet divided by the number of stores open at the end of the period. The average Lowe’s-branded home improvement store has approximately 112,000 square feet of retail selling space.
4 
Return on invested capital is a non-GAAP financial measure. See below for additional information and a reconciliation to the most comparable GAAP measure.

Non-GAAP Financial Measures

Adjusted Diluted Earnings Per Share
Adjusted diluted earnings per share is considered a non-GAAP financial measure. The Company believes this non-GAAP financial measure provides useful insight for analysts and investors in evaluating what management considers the Company’s core financial performance. Adjusted diluted earnings per share excludes the impact of certain discrete items, as further described below, not contemplated in the Company’s original business outlooks for fiscal 2018 and 2017. Unless otherwise noted, the income tax effect of these adjustments is calculated using the marginal rates for the respective periods.

During the nine months ended November 3, 2017, the Company recognized the following pre-tax charges:

In the first quarter of 2017, the Company recognized a $464 million loss on extinguishment of debt in connection with a $1.6 billion cash tender offer.

In the second quarter of 2017, the Company recognized a $96 million gain from the sale of the Company’s interest in its Australian joint venture. This gain had no impact on the Company’s income tax provision due to the reduction of a previously established deferred tax valuation allowance.

During the nine months ended November 2, 2018, the Company recognized the following pre-tax charges resulting from its strategic reassessment of the business:

In the second quarter of 2018, the Company recognized $230 million of pre-tax charges, consisting of long-lived asset impairments and discontinued projects, associated with Orchard. In addition, during the third quarter of 2018, the Company recorded $123 million of pre-tax charges, consisting of accelerated depreciation and amortization, severance, and lease obligations related to the decision to close all Orchard locations (Orchard Supply Hardware charges).

22



In the third quarter of 2018, the Company recognized $121 million of pre-tax charges, consisting of long-lived asset impairment and severance associated with the decision to close 20 U.S. stores and 31 stores and other locations in Canada (U.S. and Canada closing charges).

In the third quarter of 2018, the Company recognized $22 million of pre-tax charges, consisting of long-lived asset impairments, associated with its Mexico retail operations (Mexico impairment charge).

In the third quarter of 2018, the Company recognized $14 million of pre-tax charges associated with the exit of certain immaterial non-core activities within its U.S. home improvement business (Non-core activities charges).

Adjusted diluted earnings per share should not be considered an alternative to, or more meaningful indicator of, the Company’s diluted earnings per common share as prepared in accordance with GAAP. The Company’s methods of determining this non-GAAP financial measure may differ from the method used by other companies for this or similar non-GAAP financial measures. Accordingly, these non-GAAP measures may not be comparable to the measures used by other companies.

 
Three Months Ended
 
November 2, 2018
 
November 3, 2017
 
Pre-Tax Earnings
 
Tax
 
Net Earnings
 
Pre-Tax Earnings
 
Tax
 
Net Earnings
Diluted earnings per share, as reported
 
 
 
 
$
0.78

 
 
 
 
 
$
1.05

Non-GAAP adjustments - per share impacts
 
 
 
 
 
 
 
 
 
 
 
Orchard Supply Hardware charges
0.15

 
(0.03
)
 
0.12

 

 

 

U.S. and Canada closing charges
0.15

 
(0.04
)
 
0.11

 

 

 

Mexico impairment charge
0.02

 

 
0.02

 

 

 

Non-core activities charges
0.02

 
(0.01
)
 
$
0.01

 

 

 
$

Adjusted diluted earnings per share
 
 
 
 
$
1.04

 
 
 
 
 
$
1.05

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
November 2, 2018
 
November 3, 2017
 
Pre-Tax Earnings
 
Tax
 
Net Earnings
 
Pre-Tax Earnings
 
Tax
 
Net Earnings
Diluted earnings per share, as reported
 
 
 
 
$
3.83

 
 
 
 
 
$
3.42

Non-GAAP adjustments - per share impacts
 
 
 
 
 
 
 
 
 
 
 
Orchard Supply Hardware charges
0.44

 
(0.11
)
 
0.33

 

 

 

U.S. and Canada closing charges
0.15

 
(0.04
)
 
0.11

 

 

 

Mexico impairment charge
0.02

 

 
0.02