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Lowe`s Cos. (LOW)

Filed: 3 Dec 19, 7:00pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 1, 2019
or 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to  ______
Commission File Number 1-7898
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, North Carolina 28117
(Address of principal executive offices) (Zip Code)
      
Registrant’s telephone number, including area code (704)758-1000
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.50 per shareLOWNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   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).  Yes   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 Accelerated filer
Non-accelerated filer Smaller reporting company
   Emerging growth company
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. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  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 11/29/2019
Common Stock, $0.50 par value 766,475,430



LOWE’S COMPANIES, INC.
- TABLE OF CONTENTS -



Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Lowe’s Companies, Inc.
Consolidated Balance Sheets
In Millions, Except Par Value Data
   (Unaudited) (Unaudited)  
   November 1, 2019 November 2, 2018 February 1, 2019
Assets       
Current assets:       
Cash and cash equivalents  $794
 $1,668
 $511
Short-term investments  127
 208
 218
Merchandise inventory - net  13,716
 12,365
 12,561
Other current assets  1,025
 897
 938
Total current assets  15,662
 15,138
 14,228
Property, less accumulated depreciation  18,371
 18,923
 18,432
Operating lease right-of-use assets  3,873
 
 
Long-term investments  363
 290
 256
Deferred income taxes - net  479
 285
 294
Goodwill  303
 1,272
 303
Other assets  713
 805
 995
Total assets  $39,764
 $36,713
 $34,508
        
Liabilities and shareholders' equity       
Current liabilities:       
Short-term borrowings  $637
 $
 $722
Current maturities of long-term debt  574
 1,117
 1,110
Current operating lease liabilities  499
 
 
Accounts payable  8,822
 9,283
 8,279
Accrued compensation and employee benefits  779
 806
 662
Deferred revenue  1,222
 1,356
 1,299
Other current liabilities  2,530
 2,507
 2,425
Total current liabilities  15,063
 15,069
 14,497
Long-term debt, excluding current maturities  16,635
 14,460
 14,391
Noncurrent operating lease liabilities  3,942
 
 
Deferred revenue - extended protection plans  875
 827
 827
Other liabilities  791
 963
 1,149
Total liabilities  37,306
 31,319
 30,864
        
Shareholders' equity:       
Preferred stock - $5 par value, none issued  
 
 
Common stock - $0.50 par value;       
Shares issued and outstanding       
November 1, 2019768
      
November 2, 2018806
      
February 1, 2019801
 384
 403
 401
Capital in excess of par value  
 
 
Retained earnings  2,238
 5,156
 3,452
Accumulated other comprehensive loss  (164) (165) (209)
Total shareholders' equity  2,458
 5,394
 3,644
Total liabilities and shareholders' equity  $39,764
 $36,713
 $34,508
  
  
  
  
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 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Current EarningsAmount % Sales Amount % Sales Amount % Sales Amount % Sales
Net sales$17,388
 100.00 $17,415
 100.00 $56,121
 100.00 $55,662
 100.00
Cost of sales11,748
 67.56 12,038
 69.12 38,159
 67.99 37,653
 67.64
Gross margin5,640
 32.44 5,377
 30.88 17,962
 32.01 18,009
 32.36
Expenses:               
Selling, general and administrative3,772
 21.69 3,997
 22.95 11,682
 20.82 12,315
 22.13
Depreciation and amortization310
 1.79 423
 2.43 924
 1.65 1,108
 1.99
Operating income1,558
 8.96 957
 5.50 5,356
 9.54 4,586
 8.24
Interest - net177
 1.02 153
 0.88 508
 0.90 467
 0.84
Pre-tax earnings1,381
 7.94 804
 4.62 4,848
 8.64 4,119
 7.40
Income tax provision332
 1.90 175
 1.01 1,077
 1.92 981
 1.76
Net earnings$1,049
 6.04 $629
 3.61 $3,771
 6.72 $3,138
 5.64
                
                
Weighted average common shares outstanding - basic769
   806
   782
   815
  
Basic earnings per common share$1.36
   $0.78
   $4.81
   $3.84
  
Weighted average common shares outstanding - diluted770
   807
   783
   816
  
Diluted earnings per common share$1.36
   $0.78
   $4.80
   $3.83
  
Cash dividends per share$0.55
   $0.48
   $1.58
   $1.37
  
                
Retained Earnings               
Balance at beginning of period$2,439
   $5,517
   $3,452
   $5,425
  
Cumulative effect of accounting change
   
   (263)   33
  
Net earnings1,049
   629
   3,771
   3,138
  
Cash dividends declared(423)   (387)   (1,233)   (1,115)  
Share repurchases(827)   (603)   (3,489)   (2,325)  
Balance at end of period$2,238
   $5,156
   $2,238
   $5,156
  
                
See accompanying notes to the consolidated financial statements (unaudited).

Lowe’s Companies, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
In Millions, Except Percentage Data
 Three Months Ended Nine Months Ended
 November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
 Amount % Sales Amount % Sales Amount % Sales Amount % Sales
Net earnings$1,049
 6.04 $629
 3.61
 $3,771
 6.72
 $3,138
 5.64
Foreign currency translation adjustments - net of tax24
 0.13 (21) (0.13) 60
 0.11
 (176) (0.32)
Other(1)  (1) 
 (15) (0.03) (1) 
Other comprehensive income/(loss)23
 0.13 (22) (0.13) 45
 0.08
 (177) (0.32)
Comprehensive income$1,072
 6.17 $607
 3.48
 $3,816
 6.80
 $2,961
 5.32
                
See accompanying notes to the consolidated financial statements (unaudited).

4


Lowe’s Companies, Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
In Millions, Except Per Share Data
 Three Months Ended November 1, 2019
 Common Stock Capital in Excess
of Par Value
 Retained Earnings Accumulated Other Comprehensive
Income/(Loss)
 Total Shareholders’ Equity
 Shares Amount    
Balance August 2, 2019776
 $388
 $
 $2,439
 $(187) $2,640
Net earnings      1,049
   1,049
Other comprehensive income        23
 23
Cash dividends declared, $0.55 per share      (423)   (423)
Share-based payment expense    20
     20
Repurchase of common stock(8) (4) (27) (827)   (858)
Issuance of common stock under share-based payment plans
 
 7
��    7
Balance November 1, 2019768
 $384
 $
 $2,238
 $(164) $2,458
            
 Nine Months Ended November 1, 2019
 Common Stock Capital in Excess
of Par Value
 Retained Earnings Accumulated Other Comprehensive
Income/(Loss)
 Total Shareholders’ Equity
 Shares
 Amount
    
Balance February 1, 2019801
 $401
 $
 $3,452
 $(209) $3,644
Cumulative effect of accounting change      (263)   (263)
Net earnings      3,771
   3,771
Other comprehensive income        45
 45
Cash dividends declared, $1.58 per share      (1,233)   (1,233)
Share-based payment expense    72
     72
Repurchase of common stock(36) (18) (148) (3,489)   (3,655)
Issuance of common stock under share-based payment plans3
 1
 76
     77
Balance November 1, 2019768
 $384
 $
 $2,238
 $(164) $2,458
See accompanying notes to the consolidated financial statements (unaudited).


5


Lowe’s Companies, Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
In Millions, Except Per Share Data
 Three Months Ended November 2, 2018
 Common Stock Capital in Excess
of Par Value
 Retained Earnings Accumulated Other Comprehensive
Income/(Loss)
 Total Shareholders’ Equity
 Shares Amount    
Balance August 3, 2018811
 $406
 $
 $5,517
 $(142) $5,781
Net earnings      629
   629
Other comprehensive loss        (23) (23)
Cash dividends declared, $0.48 per share      (387)   (387)
Share-based payment expense    15
     15
Repurchase of common stock(6) (3) (38) (603)   (644)
Issuance of common stock under share-based payment plans1
 
 23
     23
Balance November 2, 2018806
 $403
 $
 $5,156
 $(165) $5,394
            
 Nine Months Ended November 2, 2018
 Common Stock Capital in Excess
of Par Value
 Retained Earnings Accumulated Other Comprehensive
Income/(Loss)
 Total Shareholders’ Equity
 Shares
 Amount
    
Balance February 2, 2018830
 $415
 $22
 $5,425
 $11
 $5,873
Cumulative effect of accounting change      33
   33
Net earnings      3,138
   3,138
Other comprehensive loss        (176) (176)
Cash dividends declared, $1.37 per share      (1,115)   (1,115)
Share-based payment expense    77
     77
Repurchase of common stock(26) (13) (170) (2,325)   (2,508)
Issuance of common stock under share-based payment plans2
 1
 71
     72
Balance November 2, 2018806
 $403
 $
 $5,156
 $(165) $5,394
See accompanying notes to the consolidated financial statements (unaudited).

6


Lowe’s Companies, Inc.
Consolidated Statements of Cash Flows (Unaudited)
In Millions
 Nine Months Ended
 November 1, 2019 November 2, 2018
Cash flows from operating activities:   
Net earnings$3,771
 $3,138
Adjustments to reconcile net earnings to net cash provided by operating activities:   
Depreciation and amortization1,029
 1,206
Noncash lease expense341
 
Deferred income taxes(88) (139)
Loss on property and other assets - net93
 400
Loss on cost method and equity method investments12
 6
Share-based payment expense75
 79
Changes in operating assets and liabilities:   
Merchandise inventory - net(1,129) (1,030)
Other operating assets(108) (94)
Accounts payable523
 2,708
Other operating liabilities(408) 524
Net cash provided by operating activities4,111
 6,798
    
Cash flows from investing activities:   
Purchases of investments(563) (1,298)
Proceeds from sale/maturity of investments556
 1,309
Capital expenditures(927) (846)
Proceeds from sale of property and other long-term assets71
 50
Other - net
 (3)
Net cash used in investing activities(863) (788)
    
Cash flows from financing activities:   
Net change in short-term borrowings(85) (1,137)
Net proceeds from issuance of long-term debt2,972
 
Repayment of long-term debt(1,092) (288)
Proceeds from issuance of common stock under share-based payment plans78
 73
Cash dividend payments(1,195) (1,068)
Repurchase of common stock(3,649) (2,498)
Other - net(7) (3)
Net cash used in financing activities(2,978) (4,921)
    
Effect of exchange rate changes on cash1
 (9)
    
Net increase in cash and cash equivalents, including cash classified within current assets
   held for sale
271
 1,080
Less: Net decrease in cash classified within current assets held for sale12
 
Net increase in cash and cash equivalents283
 1,080
Cash and cash equivalents, beginning of period511
 588
Cash and cash equivalents, end of period$794
 $1,668
    
See accompanying notes to the consolidated financial statements (unaudited).

7


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). The consolidated financial statements (unaudited), in the opinion of management, contain all adjustments necessary to present fairly the financial position as of November 1, 2019, and November 2, 2018, the results of operations, comprehensive income, and shareholders’ equity for the three and nine months ended November 1, 2019, and November 2, 2018, and cash flows for the nine months ended November 1, 2019 and November 2, 2018.

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 1, 2019 (the Annual Report). The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.

Reclassifications

Certain prior period amounts have been reclassified to conform to current classifications.

Accounting Pronouncements Recently Adopted

Effective February 2, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), and all related amendments, using the optional transition approach and recognized the cumulative impact of adoption in the opening balance of retained earnings. Under ASU 2016-02, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The Company adopted the standard utilizing the transition election to not restate comparative periods for the impact of adopting the standard and recognizing the cumulative impact of adoption in the opening balance of retained earnings. The Company elected the package of transition expedients available for expired or existing contracts, which allowed the carry-forward of historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. Adoption of the standard resulted in the recording of additional net lease-related assets and lease-related liabilities of approximately $3.6 billion and $3.9 billion, respectively, as of February 2, 2019. The difference between the additional lease assets and lease liabilities, net of the $87 million deferred tax impact, was $263 million and was recorded as an adjustment to retained earnings. This adjustment to retained earnings primarily represents the write-off of right-of-use assets associated with closed locations, net of previously established store closing lease obligations as well as the derecognition of build-to-suit leases. The adoption of this standard by the Company did not have a material impact on its consolidated statements of earnings, comprehensive income or cash flows and will have no impact on the Company’s debt covenant compliance under its current agreements. See Note 3 for additional details of the Company’s leases.

Accounting Pronouncements Not Yet Adopted

Recent accounting pronouncements pending adoption not discussed in this Form 10-Q or in the 2018 Form 10-K are either not applicable to the Company or are not expected to have a material impact on the Company.

Note 2: Change in Accounting Principle - During the fourth quarter of fiscal 2018, the Company changed its method of accounting for shipping and handling costs from the Company’s stores, distribution centers, and other locations to customers. Under the new accounting principle, shipping and handling costs related to the delivery of products from the Company to customers are included in costs of sales, whereas previously, they were included in SG&A expense as well as depreciation and amortization. In connection with the change in presentation, the Company also changed its definition of shipping and handling costs to include all direct and indirect costs associated with delivering product to a customer, including expenses associated with the central delivery terminals and depreciation and amortization of delivery assets. Under the previous definition of shipping and handling costs, the Company only included third-party delivery costs, salaries, and vehicle operations expenses relating to the delivery of product from stores and distribution centers to customers. The impact of this change in definition was not material.

8



The Company believes including these expenses in cost of sales is preferable, as it better aligns these costs with the related revenue in the gross profit calculation and is consistent with the practices of other retailers. This change in accounting principle has been applied retrospectively, and the consolidated statements of earnings reflect the effect of this accounting principle change in all years presented. This reclassification had no impact on operating income, net earnings or diluted earnings per share. The consolidated balance sheets, the consolidated statements of comprehensive income, consolidated statements of shareholders’ equity, and the consolidated statements of cash flows were not impacted by this accounting principle change.

The consolidated statements of earnings for the three and nine months ended November 2, 2018 have been adjusted to reflect this change in accounting principle. The impact of the adjustment for the three months ended November 2, 2018 was an increase of $283 million to cost of sales and a corresponding decrease to SG&A expense of $273 million and depreciation and amortization expense of $10 million. The impact of the adjustment for the nine months ended November 2, 2018 was an increase of $862 million to cost of sales and a corresponding decrease to SG&A expense for $832 million and depreciation and amortization expense of $30 million.

Note 3: Leases - During the first quarter of fiscal 2019, the Company adopted ASU 2016-02, Leases (Topic 842), which requires leases to be recognized on the balance sheet. Leases with an original term of 12 months or less are not recognized on the Company’s balance sheet, and the lease expense related to those short-term leases is recognized over the lease term. The Company does not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class.

The Company leases certain retail stores, warehouses, distribution centers, office space, land and equipment under finance and operating leases. Lease commencement occurs on the date the Company takes possession or control of the property or equipment. Original terms for our facility-related leases are generally between five and 20 years.  These leases generally contain provisions for four to six renewal options of five years each. Original terms for equipment-related leases, primarily material handling equipment and vehicles, are generally between one and seven years. Some of the Company’s leases also include rental escalation clauses and/or termination provisions. Renewal options and termination options are included in the determination of lease payments when management determines the options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital.

If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of the Company’s leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable, the Company’s estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on information available at lease commencement.

Some lease agreements also provide for contingent rentals based on sales performance in excess of specified minimums or on changes in the consumer price index.  Contingent rentals, which are based on future performance or changes in indices, are excluded from the determination of lease payments and were not significant for any of the periods presented.  The Company’s lease agreements do not contain any material restrictions, covenants or any material residual value guarantees.

The Company subleases certain properties that are not used in its operations.  Sublease income was not significant for any of the periods presented.


9


The table below presents the lease-related assets and liabilities recorded on the balance sheet.
Leases
(In millions)
ClassificationNovember 1, 2019
Assets  
Operating lease assetsOperating lease right-of-use assets$3,873
Finance lease assets
Property, less accumulated depreciation 1
403
Total lease assets 4,276
   
Liabilities  
Current  
OperatingCurrent operating lease liabilities499
FinanceCurrent maturities of long-term debt49
Noncurrent  
OperatingNoncurrent operating lease liabilities3,942
FinanceLong-term debt, excluding current maturities481
Total lease liabilities $4,971
1 
Finance lease assets are recorded net of accumulated amortization of $27 million as of November 1, 2019.

The table below presents the lease costs for finance and operating leases for the three and nine months ended November 1, 2019:
Lease Cost
(In millions)
Three Months Ended November 1, 2019Nine Months Ended November 1, 2019
Finance lease cost  
Amortization of leased assets$11
$28
Interest on lease liabilities7
21
Operating lease cost 1
185
524
Total lease cost$203
$573
1 
Includes short-term leases, variable lease costs, and sublease income, which are immaterial.

The future minimum rental payments required under operating and finance lease obligations as of November 1, 2019 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:
Maturity of lease liabilities
(In millions)
Operating Leases 1
Finance
Leases 2
Total
2019$124
$15
$139
2020668
78
746
2021652
77
729
2022661
80
741
2023571
75
646
After 20233,006
381
3,387
Total lease payments5,682
706
6,388
Less: interest 3
(1,241)(176)(1,417)
Present value of lease liabilities 4
$4,441
$530
$4,971
1 
Operating lease payments include $249 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $299 million of minimum lease payments for leases signed but not yet commenced.
2 
Finance lease payments include $11 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $233 million of minimum lease payments for leases signed but not yet commenced.
3 
Calculated using the lease-specific incremental borrowing rate.
4 
Includes the current portion of $499 million for operating leases and $49 million for finance leases.


10


Lease Term and Discount RateNovember 1, 2019
Weighted-average remaining lease term (years) 
Operating leases10.64
Finance leases10.00
Weighted-average discount rate 
Operating leases4.26%
Finance leases6.42%

Other Information
(In millions)
Nine Months Ended November 1, 2019
Cash paid for amounts included in the measurement of lease liabilities 
Operating cash flows used for operating leases$629
Operating cash flows used for finance leases22
Financing cash flows used for finance leases37
Leased assets obtained in exchange for new finance lease liabilities156
Leased assets obtained in exchange for new operating lease liabilities374


Prior Period Disclosures

As a result of the adoption of ASC 842, Leases, on February 2, 2019, the Company is required to present future minimum lease payments for operating and finance lease obligations having initial or remaining non-cancelable lease terms in excess of one year. These future minimum lease payments were previously disclosed in our 2018 Annual Report on Form 10-K and accounted for under previous lease guidance. Commitments as of February 1, 2019 were as follows:

 February 1, 2019
Fiscal Year
(In millions)
Operating Leases
Capitalized Lease Obligations
Total
2019$595
$133
$728
2020605
87
692
2021564
90
654
2022519
87
606
2023473
86
559
Later years2,609
783
3,392
Total minimum lease payments$5,365
$1,266
$6,631
Less amount representing interest (492) 
Present value of minimum lease payments 774
 
Less current maturities (65) 
Present value of minimum lease payments, less current maturities $709
 


Note 4: Revenue Recognition - 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.


11


The following table presents the Company’s sources of revenue:
(In millions)Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Products$16,379
 $16,293
 $53,259
 $52,527
Services545
 665
 1,690
 1,999
Other464
 457
 1,172
 1,136
Net sales$17,388
 $17,415
 $56,121
 $55,662


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. This occurs 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.  The merchandise return reserve is presented on a gross basis, with a separate asset and liability included in the consolidated balance sheets. Anticipated sales returns reflected in other current liabilities were $227 million at November 1, 2019 and $229 million at November 2, 2018. The associated right of return assets reflected in other current assets were $148 million at November 1, 2019 and $151 million at November 2, 2018.
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 $778 million at November 1, 2019 and $945 million at November 2, 2018. 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 $444 million and $411 million at November 1, 2019, and November 2, 2018, respectively, and these amounts are included in deferred revenue on the consolidated balance sheets. 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 1, 2019 and November 2, 2018.
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 $103 million and $303 million for the three and nine months ended November 1, 2019, respectively, and $97 million and $293 million for the three and nine months ended November 2, 2018, 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 1, 2019 and November 2, 2018, 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 $45 million and $141 million for the three and nine months ended November 1, 2019, respectively, and $47 million and $141 million for the three and nine months ended November 2, 2018, respectively.


12


Disaggregation of Revenues

The following table presents the Company’s net sales disaggregated by merchandise division:
 Three Months Ended Nine Months Ended
 November 1, 2019 November 2, 2018 November��1, 2019 November 2, 2018
(In millions)Total Sales % Total Sales % Total Sales % Total Sales %
Home Décor ¹$6,374
 37 $6,230
 36 $19,639
 35 $19,239
 35
Building Products ²5,961
 34 5,939
 34 17,865
 32 17,913
 32
Hardlines ³4,515
 26 4,399
 25 17,134
 30 16,392
 29
Other538
 3 847
 5 1,483
 3 2,118
 4
Total$17,388
 100 $17,415
 100 $56,121
 100 $55,662
 100
Note: Net sales for certain merchandise divisions were reclassified in the third quarter of fiscal year 2019. As a result, prior periods have been reclassified to conform to the current quarter presentation.
1 
Home Décor includes the following product categories: Appliances, Décor, Flooring, Kitchens & Bath, and Paint
2 
Building Products includes the following product categories: Lighting, Lumber & Building Materials, Millwork, and Rough Plumbing & Electrical
3 
Hardlines includes the following product categories: Hardware, Lawn & Garden, Seasonal & Outdoor Living, and Tools


The following table presents the Company’s net sales disaggregated by geographical area:
(In millions)Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
United States$16,131
 $15,991
 $52,225
 $51,319
International1,257
 1,424
 3,896
 4,343
Net Sales$17,388
 $17,415
 $56,121
 $55,662


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


13


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 1, 2019, November 2, 2018, and February 1, 2019. The fair values of these instruments approximated amortized costs.
   Fair Value Measurements at
(In millions)Measurement Level November 1, 2019 November 2, 2018 February 1, 2019
Short-term investments:       
Available-for-sale securities       
Money market fundsLevel 1 $83
 $181
 $207
Agency securitiesLevel 2 19
 10
 10
U.S. Treasury securitiesLevel 1 13
 
 
Corporate debt securitiesLevel 2 12
 
 1
Certificates of depositLevel 1 
 17
 
Total short-term investments  $127
 $208
 $218
Long-term investments:       
Available-for-sale securities       
U.S. Treasury securitiesLevel 1 $258
 $
 $
Corporate debt securitiesLevel 2 75
 224
 191
Agency securitiesLevel 2 30
 66
 65
Total long-term investments  $363
 $290
 $256


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 1, 2019, and 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.

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

14


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

During the three months ended November 1, 2019, the Company began a strategic review of its Canadian operations, and it was determined to be more likely than not the assets associated with certain Canadian stores 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. Based on this evaluation, certain long-lived assets were written down to their fair value of $40 million resulting in impairment charges of $53 million. These non-cash impairment charges are included in selling, general and administrative expense in the accompanying consolidated statements of current and retained earnings.

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 serviced 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 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 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 fiscal year 2018 as part of the Company’s strategic reassessment of the business as well as the Company’s strategic review of its Canadian operations in fiscal year 2019.

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 1, 2019 and November 2, 2018.

 Fair Value Measurements
 Impairment Losses
(In millions)November 1, 2019
 Three Months Ended November 1, 2019
 Nine Months Ended November 1, 2019
Assets-held-for-use:     
Operating locations$46
 $53
 $61
Total$46
 $53
 $61


15


 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.

Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding finance and capitalized lease obligations, are as follows:
 November 1, 2019 November 2, 2018 February 1, 2019
(In millions)Carrying Amount
 Fair Value
 Carrying Amount
 Fair Value
 Carrying Amount
 Fair Value
Unsecured notes (Level 1)$16,646
 $18,184
 $14,718
 $14,430
 $14,721
 $14,473
Mortgage notes (Level 2)5
 5
 6
 6
 6
 6
Long-term debt (excluding finance and capitalized lease obligations)$16,651
 $18,189
 $14,724
 $14,436
 $14,727
 $14,479


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 $127 million at November 1, 2019, $191 million at November 2, 2018, and $218 million at February 1, 2019.

Restricted balances included in long-term investments were $363 million at November 1, 2019, $255 million at November 2, 2018, and $256 million at February 1, 2019.

Note 7: Property and Accumulated Depreciation - Property is shown net of accumulated depreciation of $17.3 billion at November 1, 2019, $17.7 billion at November 2, 2018, and $17.4 billion at February 1, 2019. The Company recognized depreciation expense, inclusive of amounts presented in cost of sales and depreciation and amortization, of $325 million and $968 million for the three and nine months ended November 1, 2019 and $444 million and $1.2 billion for the three and nine months ended November 2, 2018.

Note 8: Exit Activities - During fiscal years 2018 and 2019, the Company has incurred costs associated with an ongoing strategic reassessment of its business to drive an increased focus on its core home improvement operations and to improve overall operating performance and profitability. As a result of this reassessment, the Company decided to exit certain activities and close certain locations as further described below. Expenses associated with long-lived asset impairment, accelerated depreciation, 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.

2019 Canada Restructuring

During the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations, and as a result, recognized pre-tax charges of $53 million associated with long-lived asset impairment. Subsequent to the end of the Company’s third quarter of fiscal 2019, a decision was made to close 34 under-performing stores in Canada and take additional restructuring actions to improve future sales and profitability of the Canadian operations. See Note 15 for additional information regarding the decision and associated impacts.

16



A summary of the significant charges associated with the 2019 strategic review of the Canadian operations, are as follows:
 Costs Incurred
 Three Months Ended Nine Months Ended Cumulative Amount
(In millions)November 1, 2019 November 1, 2019 November 1, 2019
Long-lived asset impairment$53
 $53
 $53
Total$53
 $53
 $53


Orchard Supply Hardware (Orchard)

On August 17, 2018, the Company approved plans to exit its Orchard operations by closing all 99 Orchard stores, which were located in California, Oregon and Florida, as well as the distribution facility that serviced the Orchard stores, and the Orchard corporate office. All facilities were closed by the end of fiscal year 2018. A summary of the significant charges associated with the exit of the Orchard operations is as follows:
 Costs Incurred
 Three Months Ended Nine Months Ended Cumulative Amount
(In millions)November 2, 2018 November 2, 2018 November 1, 2019
Long-lived asset impairment$
 $206
 $206
Accelerated depreciation and amortization103
 103
 103
Discontinued project write-offs
 24
 24
Severance costs11
 11
 11
Lease obligation costs for closed locations9
 9
 217
Total$123
 $353
 $561


U.S. and Canada Location Closings
 
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 were completed by the end of fiscal year 2018. A summary of the significant charges associated with the closure of these stores is as follows:

 Costs Incurred
 Three Months Ended Nine Months Ended Cumulative Amount
(In millions)November 2, 2018 November 2, 2018 November 1, 2019
Long-lived asset impairment$90
 $90
 $90
Severance costs21
 21
 32
Discontinued project write-offs10
 10
 10
Lease obligation costs for closed locations
 
 89
Accelerated depreciation and amortization
 
 50
Total$121
 $121
 $271



17


Other Non-Core Activities

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. A summary of the significant charges incurred as a result of these decisions is as follows:
 Costs Incurred
 Three Months Ended Nine Months Ended Cumulative Amount
(In millions)November 2, 2018 November 2, 2018 November 1, 2019
Long-lived asset impairment$9
 $9
 $9
Inventory adjustments to net realizable value5
 5
 7
Other closing costs
 
 27
Severance costs
 
 16
Total$14
 $14
 $59


Mexico 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 operations. A summary of the significant charges incurred as a result of the exit of the Company’s Mexico operations is as follows:
 Costs Incurred
 Three Months Ended Nine Months Ended Cumulative Amount
(In millions)November 2, 2018 November 2, 2018 November 1, 2019
Long-lived asset impairment$22
 $22
 $244
Total$22
 $22
 $244


Note 9: Long-Term Debt - During the first quarter of fiscal 2019, the Company issued $3.0 billion of unsecured notes as follows:
Issue Date Principal Amount (in millions) Maturity Date Fixed vs. Floating Interest Rate Discount (in millions)
April 5, 2019 $1,500
 April 2029 Fixed 3.650% $9
April 5, 2019 $1,500
 April 2049 Fixed 4.550% $19


Interest on the notes issued in 2019 is payable semiannually in arrears in April and October of each year until maturity.

The indenture governing the notes issued in 2019 contains a provision that allows the Company to redeem these notes at any time, in whole or in part, at specified redemption prices, plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption. The indenture also contains a provision that allows the holders of the notes to require the Company to repurchase all or any part of their notes if a change of control triggering event 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, if any, on such notes up to, but excluding, the date of purchase. 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: Short-Term Borrowings - In September 2019, 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-

18


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 8, 2020). 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 1, 2019.
The 364-Day Credit Agreement, along with the $1.98 billion five year unsecured second amended and restated credit agreement (Second Amended and Restated Credit Agreement), support our commercial paper program.  The amount available to be drawn under the 364-Day Credit Agreement and the Second Amended and Restated Credit Agreement is reduced by the amount of borrowings under our commercial paper program. Outstanding borrowings under the Company’s commercial paper program were $637 million, with a weighted average interest rate of 1.97%, as of November 1, 2019. As of November 2, 2018, there were 0 outstanding borrowings under the Second Amended and Restated Credit Agreement, the 364-Day Credit Agreement, or our commercial paper program.
Note 11: 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. On December 12, 2018, the Company’s Board of Directors authorized an additional $10.0 billion share repurchase program with no expiration, which was announced on the same day. As of November 1, 2019, the Company had $10.3 billion remaining in its share repurchase program.

In November 2018, the Company entered into an Accelerated Share Repurchase (ASR) agreement with a third-party financial institution to repurchase $270 million of the Company’s common stock. At inception, pursuant to the agreement, the Company paid $270 million to the financial institution using cash on hand and took delivery of 2.6 million shares. The Company finalized the transaction and received an additional 0.3 million shares in February 2019.

In March 2019, the Company entered into a variable notional ASR agreement with a third-party financial institution to repurchase $350 million to $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 2.9 million shares. The Company finalized the transaction to receive an additional 0.3 million shares prior to the end of the first quarter. Subsequent to the end of the first quarter, the Company received a $150 million cash payment from the third-party financial institution, which is equal to the difference between the $500 million payment made at inception and the final notional amount of $350 million.

In May 2019, the Company entered into a variable notional ASR agreement with a third-party financial institution to repurchase $990 million to $1.4 billion of the Company’s common stock. At inception, pursuant to the agreement, the Company paid $1.4 billion to the financial institution using cash on hand and took delivery of 8.9 million shares. The Company finalized the transaction and received an additional 1.0 million shares and a $420 million cash payment from the third-party financial institution prior to the end of the second quarter. The cash payment received is equal to the difference between the $1.4 billion payment made at inception and the final notional amount of $990 million.

In August 2019, the Company entered into a variable notional ASR agreement with a third-party financial institution to repurchase $350 million to $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 2.8 million shares. The Company finalized the transaction and received an additional 0.8 million shares and a $103 million cash payment from the third-party financial institution prior to the end of the third quarter. The cash payment received is equal to the difference between the $500 million payment made at inception and the final notional amount of $397 million.

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 the election to either deliver additional shares or cash to the financial institution, if required, and the ASR agreements were 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

19


repurchase of shares under the 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.

Each ASR agreement was 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.

In addition, during the three and nine months ended November 1, 2019, the Company repurchased shares of its common stock through the open market totaling 4.1 million and 18.1 million shares, respectively, for a cost of $438 million and $1.9 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 1, 2019 and November 2, 2018 were as follows:
 Three Months Ended
 November 1, 2019 November 2, 2018
(In millions)Shares
 
Cost 1

 Shares
 
Cost 1

Share repurchase program7.7
 $835
 5.7
 $620
Shares withheld from employees0.2
 23
 0.2
 25
Total share repurchases7.9
 $858
 5.9
 $645
1 
Reductions of $827 million and $603 million were recorded to retained earnings, after capital in excess of par value was depleted, for the three months ended November 1, 2019 and November 2, 2018, respectively.

 Nine Months Ended
 November 1, 2019 November 2, 2018
(In millions)Shares
 
Cost 2

 Shares
 
Cost 2

Share repurchase program35.3
 $3,618
 25.9
 $2,470
Shares withheld from employees0.3
 36
 0.3
 38
Total share repurchases35.6
 $3,654
 26.2
 $2,508
2 
Reductions of $3.5 billion and $2.3 billion were recorded to retained earnings, after capital in excess of par value was depleted, for the nine months ended November 1, 2019 and November 2, 2018, respectively.

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 November 1, 2019 and November 2, 2018:

20


 Three Months Ended Nine Months Ended
(In millions, except per share data)November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Basic earnings per common share:       
Net earnings$1,049
 $629
 $3,771
 $3,138
Less: Net earnings allocable to participating securities(3) (1) (11) (10)
Net earnings allocable to common shares, basic$1,046
 $628
 $3,760
 $3,128
Weighted-average common shares outstanding769
 806
 782
 815
Basic earnings per common share$1.36
 $0.78
 $4.81
 $3.84
Diluted earnings per common share:     
  
Net earnings$1,049
 $629
 $3,771
 $3,138
Less: Net earnings allocable to participating securities(3) (1) (11) (10)
Net earnings allocable to common shares, diluted$1,046
 $628
 $3,760
 $3,128
Weighted-average common shares outstanding769
 806
 782
 815
Dilutive effect of non-participating share-based awards1
 1
 1
 1
Weighted-average common shares, as adjusted770
 807
 783
 816
Diluted earnings per common share$1.36
 $0.78
 $4.80
 $3.83


Stock options to purchase 0.9 million and 0.9 million shares of common stock were anti-dilutive for the three and nine months ended November 1, 2019, respectively. 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.

Note 13: Income Taxes - The Company’s effective income tax rates were 24.0% and 22.2% for the three and nine months ended November 1, 2019, respectively, and 21.8% and 23.8% for the three and nine months ended November 2, 2018, respectively. The increase in the effective tax rate for the quarter is primarily due to an increase in pre-tax earnings as compared to the three months ended November 2, 2018, as well as the favorable discrete event related to stock compensation

21


was smaller in 2019 as compared to 2018. The lower effective income tax rate for the nine months ended November 1, 2019 is primarily due to a favorable tax benefit recorded during the first quarter associated with the planned exit of the Mexico retail operations. In fiscal 2018, the Company announced its intention to exit its Mexico retail operations and had planned to sell the operating business. However, in the first quarter of 2019, after an extensive market evaluation, the decision was made to instead sell the assets of the business through liquidation, which resulted in a more favorable tax treatment.

Note 14: Supplemental Disclosure

Net interest expense is comprised of the following:
 Three Months Ended Nine Months Ended
(In millions)November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Long-term debt$171
 $145
 $498
 $437
Finance lease obligations7
 
 21
 
Capitalized lease obligations
 15
 
 44
Interest income(5) (9) (24) (21)
Interest capitalized
 
 (1) (2)
Interest on tax uncertainties
 
 (2) 
Other4
 2
 16
 9
Interest - net$177
 $153
 $508
 $467


Supplemental disclosures of cash flow information:
 Nine Months Ended
(In millions)November 1, 2019 November 2, 2018
Cash paid for interest, net of amount capitalized$647
 $555
Cash paid for income taxes - net$1,029
 $1,069
Non-cash investing and financing activities:   
Non-cash property acquisitions 1
$251
 $42
Cash dividends declared but not paid$423
 $387
1 See Note 3 for supplemental cash flow disclosures related to finance and operating leases.

Note 15: Subsequent Events - As part of a strategic review of Canadian operations, subsequent to the end of the Company’s third quarter of fiscal 2019, the Company decided to close 34 under-performing stores in Canada and execute additional restructuring actions to improve future sales and profitability of the remaining Canadian operations. As a result of these actions, the Company expects additional operating costs and pre-tax charges during the fourth quarter of 2019 of $175 to $225 million associated with inventory liquidation, accelerated depreciation and amortization, severance, and other costs.
 

22


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 1, 2019 and November 2, 2018, the related consolidated statements of current and retained earnings, comprehensive income, and shareholders’ equity for the fiscal three-month and nine-month periods ended November 1, 2019 and November 2, 2018, and of cash flows for the nine-month periods ended November 1, 2019 and November 2, 2018, 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 1, 2019, 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 1, 2019, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the reclassification of shipping and handling costs relating to the delivery of products to customers from selling, general and administrative and depreciation and amortization to cost of sales. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 1, 2019, 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 3, 2019

23


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 1, 2019, and November 2, 2018. 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 1, 2019 (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 2018. 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

Net earnings in the third quarter of 2019 increased 66.8% to $1.0 billion compared to net earnings of $629 million in the third quarter of 2018. Diluted earnings per common share increased 74.9% in the third quarter of 2019 to $1.36 from $0.78 in the third quarter of 2018. Included in the third quarter of 2019 results is $53 million of non-cash pre-tax charges related to long-lived asset impairments associated with a strategic review of the Canadian business, discussed further below, which decreased diluted earnings per share by $0.05. The third quarter of 2018 included $280 million of pre-tax charges related to the Company’s prior year strategic reassessment of the business including cost related to long-lived asset impairments, accelerated depreciation and amortization, severance, discontinued project write-offs, lease obligation costs for closed locations and inventory adjustments to net realizable value. Excluding the impact of these items, adjusted diluted earnings per common share increased 35.6% to $1.41 in the third quarter of 2019 from adjusted diluted earnings per common share of $1.04 in the third quarter of 2018 (see discussion of non-GAAP financial measures beginning on page 27).

For the first nine months of 2019, cash flows from operating activities were approximately $4.1 billion, while $927 million was used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, during the first nine months of 2019, we repurchased $3.6 billion of common stock through our share repurchase program and paid $1.2 billion in dividends.

During the third quarter of 2019, we capitalized on robust customer demand, which drove strong traffic to our stores and improved on store execution. We experienced comparable sales increase of 2.2% and broad-based growth with all 15 U.S. regions generating positive comparable sales for the second consecutive quarter, despite low single-digit online growth and higher than expected lumber deflation. Nine of 13 product categories generated positive comparable sales with particular strength in Tools, Décor, Lawn & Garden, Appliances, Millwork, Paint, Hardware, Rough Plumbing & Electrical, and Lumber & Building Materials.

Our overall performance in the third quarter demonstrates continued momentum executing our retail fundamentals framework. Our initiatives to improve in-stock levels and provide a better customer service experience, along with our advances in serving the Pro customer, contributed to strong execution in the quarter. Our success focusing on retail fundamentals is evident as we drove strong performance in merchandising departments that have historically underperformed. Our continued focus on the Pro customer, including increased job lot quantities, department supervisors, and improved in-store experience, led to strong sales performance with our Pro customer in the third quarter. We are now transitioning from retail fundamentals to other initiatives to deepen our relationship and continue to grow sales with the Pro customer. We plan to roll-out dedicated point-of-sale terminals at the Pro desk in the fourth quarter of 2019 and launch our Pro loyalty program nationally in the first half of 2020.

In addition, as we noted in the prior quarter, we are modernizing and transforming our e-commerce business as we address legacy issues with the Lowes.com website platform. We are working to improve the foundation of the platform to provide stability and increase our agility, which we believe are critical to growing our online presence. We expect to have the entire Lowes.com site on the cloud in the first quarter of 2020. With a modernized platform in place, we expect to have the ability to address capability gaps to provide a better experience for our customers.

24



During the third quarter, we initiated a strategic review of our Canadian business, inclusive of leadership changes, with a focus on improving execution and profitability. Based on this review, subsequent to the end of the third quarter of fiscal 2019, the Company decided to close 34 under-performing stores in Canada and execute additional restructuring actions to improve execution and profitability of the Canadian operations. As a result of these actions, the Company expects additional operating costs and pre-tax charges during the fourth quarter of 2019 of $175 to $225 million associated with inventory liquidation, accelerated depreciation and amortization, severance, and other costs.

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 Period1

 
Percentage Increase / (Decrease) in Dollar Amounts from Prior Period1

 November 1, 2019 November 2, 2018 2019 vs. 2018
 2019 vs. 2018
Net sales100.00% 100.00% N/A
 (0.2)%
Gross margin32.44
 30.88
 156
 4.9
Expenses:       
Selling, general and administrative21.69
 22.95
 (126) (5.6)
Depreciation and amortization1.79
 2.43
 (64) (26.7)
Operating income8.96
 5.50
 346
 62.7
Interest - net1.02
 0.88
 14
 14.9
Pre-tax earnings7.94
 4.62
 332
 71.8
Income tax provision1.90
 1.01
 89
 89.7
Net earnings6.04% 3.61% 243
 66.8 %


25


 Nine Months Ended 
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Period1

 
Percentage Increase / (Decrease) in Dollar Amounts from Prior Period1

 November 1, 2019 November 2, 2018 2019 vs. 2018
 2019 vs. 2018
Net sales100.00% 100.00% N/A
 0.8 %
Gross margin32.01
 32.36
 (35) (0.3)
Expenses:       
Selling, general and administrative20.82
 22.13
 (131) (5.1)
Depreciation and amortization1.65
 1.99
 (34) (16.6)
Operating income9.54
 8.24
 130
 16.8
Interest - net0.90
 0.84
 6
 8.8
Pre-tax earnings8.64
 7.40
 124
 17.7
Income tax provision1.92
 1.76
 16
 9.7
Net earnings6.72% 5.64% 108
 20.2 %
1 In the fourth quarter of fiscal 2018, we changed our method of accounting for shipping and handling costs from the Company’s stores, distribution centers, and other locations to customers. Under this new accounting principle, shipping and handling costs related to the delivery of products from the Company to customers are included in costs of sales, whereas they were previously included in selling, general, and administrative expense, and depreciation and amortization. Amounts presented for the three and nine months ended November 2, 2018 reflect adjusted amounts in accordance with this accounting principle change.

 Three Months Ended Nine Months Ended
Other MetricsNovember 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Comparable sales increase 1
2.2% 1.5% 2.7% 2.6%
Total customer transactions (in millions)221
 229
 720
 738
Average ticket 2
$78.71
 $75.89
 $77.95
 $75.47
At end of period:       
Number of stores2,004
 2,133
    
Sales floor square feet (in millions)209
 215
    
Average store size selling square feet (in thousands) 3
104
 101
    
Net earnings to average debt and equity 4
11.7% 14.3%    
Return on invested capital 4
14.2% 16.7%    
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 2019 comparable sales by approximately 15 basis points and year-to-date fiscal 2019 comparable sales by approximately 30 basis points. The comparable store sales calculation included in the preceding table was calculated using comparable 13-week and 26-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 calculated using a non-GAAP financial measure. Net earnings to average debt and equity is the most comparable GAAP ratio. See below for additional information and reconciliations of non-GAAP measures.

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 outlook for fiscal 2019. Unless otherwise noted, the income tax effect of these adjustments is calculated using the marginal rates for the respective periods.

During the three months ended November 1, 2019, the Company began a strategic review of its Canadian operations, and as a result, recognized pre-tax charges of $53 million associated with long-lived asset impairment (2019 Canada restructuring).

During the three months ended November 2, 2018, the Company recognized the following pre-tax charges resulting from the strategic reassessment of its business:
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).
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).
The Company recognized $22 million of pre-tax charges, consisting of long-lived asset impairments, associated with its Mexico retail operations (Mexico impairment charge).
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 charge).


26


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 1, 2019 November 2, 2018
 Pre-Tax Earnings Tax Net Earnings Pre-Tax Earnings Tax Net Earnings
Diluted earnings per share, as reported    $1.36
     $0.78
Non-GAAP adjustments - per share impacts           
2019 Canada restructuring0.07
 (0.02) 0.05
 
 
 
Orchard Supply Hardware charges
 
 
 0.15
 (0.03) 0.12
U.S. and Canada closing charges
 
 
 0.15
 (0.04) 0.11
Mexico impairment charges
 
 
 0.02
 
 0.02
Non-core activities charges
 
 
 0.02
 (0.01) 0.01
Adjusted diluted earnings per share    $1.41
     $1.04

Return on Invested Capital

Return on Invested Capital (ROIC) is calculated using a non-GAAP financial measure. We believe ROIC is a meaningful metric for investors because it represents management’s measure of how effectively the Company is using capital to generate profits. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC.  Accordingly, the method used by our management to calculate ROIC may differ from the methods other companies use to calculate their ROIC.  We encourage you to understand the methods used by another company to calculate its ROIC before comparing its ROIC to ours.

We define ROIC as rolling 12 months’ lease adjusted net operating profit after tax (Lease adjusted NOPAT) divided by the average of current year and prior year ending debt and equity. Lease adjusted NOPAT is a non-GAAP financial measure, and net earnings is considered to be the most comparable GAAP financial measure. The calculation of ROIC, together with a reconciliation of net earnings to Lease adjusted NOPAT, is as follows:
 For the Periods Ended
(In millions, except percentage data)November 1, 2019 November 2, 2018
Calculation of Return on Invested Capital   
Numerator 
   
Net Earnings$2,947
 $3,692
Plus:   
Interest expense - net665
 620
Operating lease interest186
 214
Provision for income taxes1,177
 1,371
Lease adjusted net operating profit4,975
 5,897
Less:   
Income tax adjustment 1
1,414
 1,597
Lease adjusted net operating profit after tax$3,561
 $4,300
Denominator   
Average debt and equity 2
$25,106
 $25,734
Net earnings to average debt and equity11.7% 14.3%
Return on invested capital14.2% 16.7%
1 
Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 28.4% and 27.1% for the periods ended November 1, 2019 and November 2, 2018, respectively.
2 
Average debt and equity is defined as average current year and prior year ending debt, including current maturities, short-term borrowings, and operating lease liabilities, plus the average current year and prior year ending total equity.

27



Results of Operations

Net Sales – Net sales in the third quarter of 2019 decreased 0.2% to $17.4 billion. The decrease in sales is driven by the impact of previous store closures and the exit of Orchard, partially offset by comparable sales growth. Comparable sales increased 2.2% over the same period, driven by a 2.4% increase in comparable average ticket, partially offset by a 0.1% decrease in comparable customer transactions.

During the third quarter of 2019, we experienced comparable sales increases in nine of 13 product categories. Comparable sales were above the company average in Tools, Décor, Lawn & Garden, Appliances, Millwork, Paint, Hardware, and Rough Plumbing & Electrical. Performance in Tools led the merchandising department growth with a continued strong customer response to our CRAFTSMAN® reset, as well as sales with our key Pro brands, such as DeWalt® power tools. Décor experienced mid-single digit comparable sales, with strong double-digit comparable sales in Blinds and Shades. We experienced strength in Lawn & Garden, driven by double-digit comparable sales in live goods and landscape products. Appliances delivered strong sales during Labor Day and with great values and special buys in refrigerators and freezers. For the second consecutive quarter, Millwork performed above the company average driven by our focus on the Pro customer, an investment in job lot quantities, an improved localized assortment approach, and an updated and refreshed department. Paint outperformed the company average driven by our improved service model, better in-stock position, strength in the exterior project categories, and our compelling offers. We saw positive comparable sales in Hardware supported by investments in job-lot quantities and increased Pro demand.
  
Net sales increased 0.8% to $56.1 billion for the first nine months of 2019 compared to 2018. The increase in total sales was driven primarily by an increase in comparable sales, partially offset by the closure of Orchard, as well as other closed locations. Comparable sales increased 2.7% over the same period, primarily driven by a 1.9% increase in comparable average ticket and a 0.8% increase in customer transactions.

Gross Margin – For the third quarter of 2019, gross margin as a percentage of sales increased 156 basis points. The gross margin increase for the quarter resulted from our prior year inventory rationalization efforts to eliminate less productive SKUs

28


and reduce clutter in our stores, which negatively impacted the prior year gross margin and drove approximately 170 basis points of improvement, and product mix, which increased margin approximately 35 basis points. Gross margin was negatively impacted approximately 40 basis points due to tariff pressure, 20 basis points due to supply chain costs associated with new facilities, transportation and customer deliveries, and 20 basis points associated with increased inventory shrink.

Gross margin as a percentage of sales decreased 35 basis points in the first nine months of 2019 compared to 2018. Gross margin was negatively impacted approximately 35 basis points due to tariff pressure, 30 basis points from supply chain costs associated with new facilities, transportation and customer deliveries, and 10 basis points due to higher inventory shrink. This was partially offset by a gross margin increase of approximately 50 basis points due to our prior year inventory rationalization efforts to eliminate less productive SKUs and reduce clutter in our stores.

SG&A – For the third quarter of 2019, SG&A expense leveraged 126 basis points as a percentage of sales compared to the third quarter of 2018. This is primarily driven by 104 basis points of leverage due to long-lived asset impairments and discontinued projects associated with the Company’s prior year strategic reassessment of Orchard, USHI, Canada, and Mexico locations. There was an additional 43 basis points of leverage in salaries expenses and 10 basis points of leverage due to optimizing the channel mix for advertising. This was partially offset by 31 basis points of deleverage associated with long-lived asset impairment due to the company’s strategic review of the Canadian operations initiated during the third quarter.

SG&A expense as a percentage of sales leveraged 131 basis points in the first nine months of 2019 compared to 2018. This was primarily driven by 73 basis points of leverage due to prior year long-lived asset impairments and discontinued projects associated with the Company’s prior year strategic reassessment of Orchard, USHI, Canada, and Mexico locations, 54 basis points of leverage in salaries expenses, 16 basis points of leverage from lease terminations and lease assignments primarily associated with the prior year’s store closing activities, and 14 basis points of leverage in advertising due to improved advertising efficiency. These were partially offset by 19 basis points of deleverage in incentive compensation, 10 basis points of deleverage associated with long-lived asset impairment due to the company’s strategic review of the Canadian operations, and 10 basis points of deleverage related to severance costs.

Depreciation and Amortization – Depreciation and amortization leveraged 64 basis points for the third quarter of 2019 compared to the prior year primarily due to store closures in 2018, and assets becoming fully depreciated. Property, less accumulated depreciation, decreased to $18.4 billion at November 1, 2019, compared to $18.9 billion at November 2, 2018. As of November 1, 2019 and November 2, 2018, we owned 83% and 80% of our stores, respectively, which included stores on leased land.

Depreciation and amortization leveraged 34 basis points for the first nine months of 2019 compared to 2018 primarily due to the same factors that impacted depreciation and amortization for the third quarter.

Interest – Net – Interest expense for the third quarter of 2019 increased primarily as a result of the issuance of $3.0 billion unsecured notes in April 2019, partially offset by a decrease in expense associated with the adoption of ASU 2016-02, Leases (Topic 842), in the first quarter of 2019.

Interest expense for the first nine months of 2019 increased compared to 2018 primarily due to the same factors that impacted interest expense for the third quarter.

Income Tax Provision – Our effective income tax rates were 24.0% and 21.8% for the three months ended November 1, 2019 and November 2, 2018, respectively. The increase in the effective tax rate for the quarter is primarily due to an increase in pre-tax earnings as compared to the three months ended November 2, 2018, as well as the favorable discrete event related to stock compensation was smaller in 2019 as compared to 2018.

Our effective income tax rates were 22.2% and 23.8% for the nine months ended November 1, 2019 and November 2, 2018, respectively. The decrease in the effective tax rate is primarily due to a favorable tax benefit recorded during the first quarter of 2019 associated with the planned exit of the Mexico retail operations. In fiscal 2018, the Company announced its intention to exit its Mexico retail operations and had planned to sell the operating business. However, in the first quarter of 2019, after an extensive market evaluation, the decision was made to sell the assets of the business through liquidation, which results in a more favorable tax treatment.


29


FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

Cash flows from operations, supplemented with our short-term and long-term borrowings, have been sufficient to fund our operations while allowing us to make strategic investments that will grow our business, and to return excess cash to shareholders in the form of dividends and share repurchases. We believe that our sources of liquidity will continue to be adequate to fund our operations and investments to grow our business, repay our debt as it becomes due, pay dividends, and fund our share repurchases over the next 12 months.

Cash Flows Provided by Operating Activities
 Nine Months Ended
(In millions)November 1, 2019 November 2, 2018
Net cash provided by operating activities$4,111
 $6,798

Cash flows from operating activities continued to provide the primary source of our liquidity.  The decrease in net cash provided by operating activities for the nine months ended November 1, 2019, versus the nine months ended November 2, 2018, was driven primarily by changes in working capital, driven by accounts payable and other operating liabilities, which increased operating cash flow for the first nine months of 2018 by approximately $3.2 billion, compared to an increase of approximately $115 million for the first nine months of 2019.

In the first nine months of 2018, the increase in accounts payable exceeded the increase in inventory, driving approximately $1.7 billion of operating cash flow, primarily due to later spring inventory build in fiscal 2018. In the first nine months of 2019, the increase in inventory exceeded the increase in accounts payable, resulting in negative impact to cash flow of approximately $600 million, driven by timing of inventory purchases and related payments. In addition, other operating liabilities decreased approximately $400 million in the first nine months of 2019 and increased approximately $500 million in the first nine months of 2018, primarily related to deferred revenue and timing of payments related to exit activities and other expenses.

Cash Flows Used in Investing Activities
 Nine Months Ended
(In millions)November 1, 2019 November 2, 2018
Net cash used in investing activities$(863) $(788)

Net cash used in investing activities primarily consists of transactions related to capital expenditures and investments.

Capital expenditures

Our capital expenditures generally consist of investments in our strategic initiatives to enhance our ability to serve customers, existing stores, and expansion plans. The following table provides our capital expenditures for the nine months ended November 1, 2019, and November 2, 2018:
 Nine Months Ended
(In millions)November 1, 2019 November 2, 2018
Existing store investments 1
$694
 $490
Strategic initiatives 2
127
 145
New stores and international 3
106
 211
Total capital expenditures$927
 $846
1 
Includes merchandising resets, facility repairs, replacements of IT and store equipment, among other specific efforts.
2 
Represents investments related to our strategic focus areas aimed at improving customers’ experience and driving improved performance in the near and long term.
3 
Represents expenditures primarily related to land purchases, buildings, and personal property for new store projects as well as expenditures related to our international operations.

30



Our 2019 capital expenditures forecast is approximately $1.6 billion.

Cash Flows Used in Financing Activities
 Nine Months Ended
(In millions)November 1, 2019 November 2, 2018
Net cash used in financing activities$(2,978) $(4,921)

Net cash used in financing activities primarily consists of transactions related to our long-term debt, short-term borrowings, share repurchases, and cash dividend payments.

Long-Term Debt

The following table includes additional information related to the Company’s long-term debt for the nine months ended November 1, 2019, and November 2, 2018:

 Nine Months Ended
(In millions)November 1, 2019 November 2, 2018
Net proceeds from issuance of long-term debt$2,972
 $
Repayment of long-term debt$(1,092) $(288)

During the nine months ended November 1, 2019, we issued $3.0 billion of unsecured notes to finance current year maturities and for other general corporate purposes. During the nine months ended November 1, 2019, we also paid $1.1 billion to retire scheduled debts at maturity.

Short-term Borrowing Facilities

We have an unsecured 364-day credit agreement (the 364-Day Credit Agreement) with a syndicate of banks which provides for borrowings up to $250 million. 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 8, 2020). 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.

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 Credit Agreement is reduced by the amount of borrowings under our commercial paper program. Outstanding borrowings under the Company’s commercial paper program were $637 million, with a weighted average interest rate of 1.97%, as of November 1, 2019. There were no outstanding borrowings under the Second Amended and Restated Credit Agreement or the 364-Day Credit Agreement as of November 1, 2019 and as of November 2, 2018. The following table includes additional information related to our short-term borrowings for the nine months ended November 1, 2019, and November 2, 2018:
 Nine Months Ended
(In millions, except for interest rate data)November 1, 2019 November 2, 2018
Net change in short-term borrowings$(85) $(1,137)
Amount outstanding at quarter-end$637
 $
Maximum amount outstanding at any month-end$1,189
 $892
Weighted-average interest rate of short-term borrowings outstanding1.97% %

The Second Amended and Restated Credit Agreement and the 364-Day Credit Agreement contains customary representations, warranties, and covenants. We were in compliance with those covenants at November 1, 2019.

Share Repurchases

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We have an ongoing share repurchase program, authorized by the Company’s Board of Directors, that is executed through purchases made from time to time either in the open market or through private off-market transactions. We also withhold shares from employees to satisfy tax withholding liabilities. Shares repurchased are retired and returned to authorized and unissued status. The following table provides, on a settlement date basis, the total number of shares repurchased, average price paid per share, and the total amount paid for share repurchases for the nine months ended November 1, 2019, and November 2, 2018:
 Nine Months Ended
(In millions, except per share data)November 1, 2019 November 2, 2018
Total amount paid for share repurchases$3,649
 $2,498
Total number of shares repurchased35.6
 26.1
Average price paid per share$102.59
 $95.67

As of November 1, 2019, we had $10.3 billion remaining available under our share repurchase program with no expiration date. We expect to repurchase shares totaling $4.0 billion in 2019 (including the amount repurchased during the first nine months of fiscal year 2019). See Note 11 to the consolidated financial statements included herein for additional information regarding share repurchases.

Dividends

Our dividend payment dates are established such that dividends are paid in the quarter immediately following the quarter in which they are declared. The following table provides additional information related to our dividend payments for the nine months ended November 1, 2019, and November 2, 2018:
 Nine Months Ended
(In millions, except per share data)November 1, 2019 November 2, 2018
Total cash dividend payments$1,195
 $1,068
Dividends paid per share$1.51
 $1.30

Capital Resources

We expect to continue to have access to the capital markets on both short-term and long-term bases when needed for liquidity purposes by issuing commercial paper or new long-term debt. The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios.  The table below reflects our debt ratings by Standard & Poor’s (S&P) and Moody’s as of December 3, 2019, which we are disclosing to enhance understanding of our sources of liquidity and the effect of our ratings on our cost of funds.  Our debt ratings have enabled, and should continue to enable, us to refinance our debt as it becomes due at favorable rates in capital markets. Our commercial paper and senior debt ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.
Debt RatingsS&PMoody’s
Commercial PaperA-2P-2
Senior DebtBBB+Baa1
Senior Debt OutlookStableStable

There are no provisions in any agreements that would require early cash settlement of existing debt or leases as a result of a downgrade in our debt rating or a decrease in our stock price.  In addition, we do not believe it will be necessary to repatriate significant cash and cash equivalents and short-term investments held in foreign affiliates to fund domestic operations.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet financing that has, or is reasonably likely to have, a material, current or future effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.


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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

During the first quarter of 2019, we issued $3.0 billion of unsecured notes in the ordinary course of business and used a portion of the net proceeds from the sale of the Notes for the repayment of $600 million aggregate principal amount due April 2019 and $450 million aggregate principal amount due September 2019. The table below summarizes our contractual obligations relating to long-term debt, excluding operating and finance lease obligations, at November 1, 2019. Interest payments included in the table below are calculated based upon the rates in effect at November 1, 2019. The unsecured notes issued in the first quarter of fiscal 2019 are further described in Note 9 to the consolidated financial statements included herein.

 Payments Due by Period
   Less Than 1-3 4-5 After 5
(In millions)Total 1 Year Years Years Years
Long-term debt (principal amounts, excluding discounts and debt issuance costs)$16,813
 $500
 $1,786
 958
 $13,569
Long-term debt (interest payments)10,740
 667
 1,259
 1,164
 7,650
Total$27,553
 $1,167
 $3,045
 $2,122
 $21,219

As of November 1, 2019, other than changes related to the adoption of the new lease accounting standard as described in Note 1 and Note 3 to the consolidated financial statements, there were no other material changes to our contractual obligations and commercial commitments outside the ordinary course of business since the end of 2018. Refer to the Annual Report on Form 10-K for additional information regarding our contractual obligations and commercial commitments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are described in Note 1 to the consolidated financial statements presented in the Annual Report. Our critical accounting policies and estimates are described in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report. Our significant and critical accounting policies have not changed significantly since the filing of the Annual Report.

FORWARD-LOOKING STATEMENTS

This Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements including words such as “believe”, “expect”, “anticipate”, “plan”, “desire”, “project”, “estimate”, “intend”, “will”, “should”, “could”, “would”, “may”, “strategy”, “potential”, “opportunity” and similar expressions are forward-looking statements. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. Forward-looking statements include, but are not limited to, statements about future financial and operating results, Lowe’s plans, objectives, business outlook, priorities, expectations and intentions, expectations for sales growth, comparable sales, earnings and performance, shareholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for services, share repurchases, Lowe’s strategic initiatives, including those relating to acquisitions and dispositions by Lowe’s and the expected impact of such transactions on our strategic and operational plans and financial results, and any statement of an assumption underlying any of the foregoing and other statements that are not historical facts. Although we believe that the expectations, opinions, projections and comments reflected in these forward-looking statements are reasonable, such statements involve risks and uncertainties and we can give no assurance that such statements will prove to be correct. Actual results may differ materially from those expressed or implied in such statements.

A wide variety of potential risks, uncertainties and other factors could materially affect our ability to achieve the results either expressed or implied by these forward-looking statements including, but not limited to, changes in general economic conditions, such as the rate of unemployment, interest rate and currency fluctuations, fuel and other energy costs, slower growth in personal income, changes in consumer spending, changes in the rate of housing turnover, the availability of consumer credit and of mortgage financing, inflation or deflation of commodity prices, recently enacted or proposed tariffs, any disruptions caused by our recent management and key personnel changes, and other factors that can negatively affect our customers, as well as our ability to: (i) respond to adverse trends in the housing industry, a reduced rate of growth in household formation, and slower rates of growth in housing renovation and repair activity, as well as uneven recovery in commercial building activity; (ii) secure, develop, and otherwise implement new technologies and processes necessary to realize the benefits of our strategic initiatives focused on omni-channel sales and marketing presence and enhance our efficiency and otherwise successfully execute on our strategy and implement our strategic initiatives, including acquisitions, dispositions and
the closing of certain stores and facilities; (iii) attract, train, and retain highly-qualified associates; (iv) manage our business effectively as we adapt our operating model to meet the changing expectations of our customers; (v) maintain, improve, upgrade and protect our critical information systems from system outages, data security breaches, ransomware and other cyber threats; (vi) respond to fluctuations in the prices and availability of services, supplies, and products; (vii) respond to the growth and impact of competition; (viii) address changes in existing or new laws or regulations that affect consumer credit, employment/labor, trade, product safety, transportation/logistics, energy costs, health care, tax, environmental issues or privacy and data protection; (ix) positively and effectively manage our public image and reputation and respond appropriately to unanticipated failures to maintain a high level of product and service quality that could result in a negative impact on customer confidence and adversely affect sales; and (x) effectively manage our relationships with selected suppliers of brand name products and key vendors and service providers, including third-party installers. In addition, we could experience impairment losses and other charges if either the actual results of our operating stores are not consistent with the assumptions and judgments we have made in estimating future cash flows and determining asset fair values, or we are required to reduce the carrying amount of our investment in certain unconsolidated entities. With respect to acquisitions and dispositions, potential risks include the effect of such transactions on Lowe’s and the target company’s or operating business’s strategic relationships, operating results and businesses generally; our ability to integrate or divest personnel, labor models, financial, IT and other systems successfully; disruption of our ongoing business and distraction of management; hiring additional management and other critical personnel; increasing or decreasing the scope, geographic diversity, and complexity of our operations; significant integration or disposition costs or unknown liabilities; and failure to realize the expected benefits of the transaction. For more information about these and other risks and uncertainties that we are exposed to, you should read “Item 1A - Risk Factors” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” included in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the SEC) and the description of material changes thereto, if any, included in our Quarterly Reports on Form 10-Q or subsequent filings with the SEC.

The forward-looking statements contained in this Form 10-Q are expressly qualified in their entirety by the foregoing cautionary statements. The foregoing list of important factors that may affect future results is not exhaustive. When relying on forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. All such forward-looking statements are based upon data available as of the date of this Form 10-Q or other specified date and speak only as of such date.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf about any of the matters covered in this Form 10-Q are qualified by these cautionary statements and the risk factors disclosed in “Item 1A - Risk Factors” in the Annual Report and the description of material changes thereto, if any, included in our Quarterly Reports on Form 10-Q or subsequent filings with the SEC. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, change in circumstances, future events or otherwise, except as may be required by law.

Item 3. - Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to certain market risks, including changes in foreign currency exchange rates related to our international operations, interest rates, and commodity prices. The Company’s market risks have not changed materially from that disclosed in the Annual Report for the fiscal year ended February 1, 2019.

Item 4. - Controls and Procedures

The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” (as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of November 1, 2019, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In addition, no change in the Company’s internal control over financial reporting occurred during the quarter ended November 1, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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Part II – OTHER INFORMATION

Item 1. - Legal Proceedings

The Company is from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to such lawsuits, claims and proceedings, the Company records reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on its results of operations, financial position or cash flows. The Company maintains liability insurance for certain risks that are subject to certain self-insurance limits.

As previously reported, in May 2019, the Company received a letter from the California South Coast Air Quality Management District ("SCAQMD") regarding allegations that the Company sold denatured alcohol since 2015 in a manner that is not compliant with applicable rules. The Company is currently in discussions with SCAQMD. Although the Company cannot predict the outcome of this matter, the Company does not expect the outcome to have a material adverse effect on its consolidated financial condition, results of operations, or cash flows.

Item 1A. - Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in “Item 1A - Risk Factors” in the Annual Report.

Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds    

Issuer Purchases of Equity Securities

The following table sets forth information with respect to purchases of the Company’s common stock made during the third quarter of fiscal 2019:
 
Total Number of Shares Purchased 1

 Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 2

 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs 2

August 3, 2019 - August 30, 2019 3
4,075,074
 $106.21
 4,074,119
 $10,633,132,657
August 31, 2019 - October 4, 20191,722,158
 111.55
 1,518,990
 10,464,045,888
October 5, 2019 - November 1, 2019 3
2,119,679
 110.10
 2,118,262
 10,327,247,150
As of November 1, 20197,916,911
 $108.41
 7,711,371
 $10,327,247,150
1 
The total number of shares repurchased includes shares withheld from employees to satisfy either the exercise price of stock options or the statutory withholding tax liability upon the vesting of share-based awards.
2 
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. On December 12, 2018, the Company’s Board of Directors authorized an additional $10.0 billion share repurchase program with no expiration, which was announced on the same day.
3 
In August 2019, the Company entered into a variable notional Accelerated Share Repurchase (ASR) agreement with a third-party financial institution to repurchase between $350 million and $500 million of the Company’s common stock. At inception, pursuant to the agreement, the Company paid $500 million to the financial institution and received an initial delivery of 2.8 million shares. In October, prior to the end of the third quarter, the Company finalized the transaction for $397 million and received an additional 0.8 million shares and a $103 million cash payment from the financial institution, which is equal to the difference between the $500 million payment made at inception and the final notional amount. The average price paid per share in settlement of the ASR agreement included in the table above was determined with reference to the volume-weighted average price of the Company’s common stock over the term of the ASR agreement. See Note 11 to the consolidated financial statements included herein for additional information regarding share repurchases.


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Item 6. - Exhibits

Exhibit
Number
   Incorporated by Reference
 Exhibit Description Form File No. Exhibit Filing Date
           
3.1  10-Q 001-07898 3.1 September 1, 2009
           
3.2  8-K 001-07898 3.1 January 28, 2019
           
15.1         
           
31.1         
           
31.2         
           
32.1         
           
32.2         
           
101.INS XBRL Instance Document.‡        
           
101.SCH XBRL Taxonomy Extension Schema Document.‡        
           
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.‡        
           
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.‡        
           
101.LAB XBRL Taxonomy Extension Label Linkbase Document.‡        
           
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.‡        
           
104 Cover Page Interactive Data File (formatted as Inline XBRL document and included in Exhibit 101).‡        
           
           
* Indicates a management contract or compensatory plan or arrangement.        
 Filed herewith.        
 Furnished herewith.        

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SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  LOWE’S COMPANIES, INC.
  (Registrant)
   
December 3, 2019 By: /s/ David M. Denton
Date 
David M. Denton
Executive Vice President, Chief Financial Officer

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