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 six months ended August 2, 2019, and August 3, 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:
|
|
•
|
Financial Condition, Liquidity and Capital Resources
|
|
|
•
|
Off-Balance Sheet Arrangements
|
|
|
•
|
Contractual Obligations and Commercial Commitments
|
|
|
•
|
Critical Accounting Policies and Estimates
|
EXECUTIVE OVERVIEW
Net sales and net earnings increased for the second quarter of 2019 by 0.5% to $21.0 billion and 10.2% to $1.7 billion, respectively. Diluted earnings per common share increased 14.9% in the second quarter of 2019 to $2.14 from $1.86 in the second quarter of 2018. During the second quarter of 2019, the Company incurred $14 million of pre-tax operating costs and a $3 million tax benefit associated with the wind-down of our Mexico retail operations. In the second quarter of 2018, the Company recorded $230 million of non-cash pre-tax charges related to long-lived asset impairments and discontinued projects associated with the strategic reassessment of Orchard Supply Hardware (Orchard), which decreased diluted earnings per share by $0.21 for the second quarter of 2018. Excluding the impact of these items, adjusted diluted earnings per common share increased 3.9% to $2.15 in the second quarter of 2019 from adjusted diluted earnings per common share of $2.07 in the second quarter of 2018 (see discussion of non-GAAP financial measures beginning on page 23).
For the first six months of 2019, cash flows from operating activities were approximately $3.6 billion, while $526 million was used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, during the second quarter of 2019, we paid $382 million in dividends and repurchased $2.0 billion of common stock through our share repurchase program.
During the second quarter of 2019, we capitalized on continued Spring demand and executed successful Memorial Day, Father’s Day, and Independence Day events. We experienced comparable sales increase of 2.3% and broad-based growth with all 15 U.S. regions generating positive comparable sales despite weather challenges early in the quarter and lumber deflation. Nine of 13 product categories generated positive comparable sales with particular strength in Paint, Tools, Appliances, Décor, Hardware, Millwork, and Seasonal & Outdoor Living. Weather was challenging early in the quarter; however, as the weather improved, we saw sequential improvement through the quarter.
Our overall performance in the second quarter demonstrates continued momentum executing our retail fundamentals framework. We continue to make steady, deliberate progress to better serve customers, position our business for long-term success, and improve results that have historically performed below the Company average. Our focus on the Pro customer, particularly investments in job lot quantities and our improved service model, led to strong performance in the quarter. In addition, we took steps during the quarter to begin modernizing and transforming our Lowes.com website to improve agility and the customer experience, which we believe are critical to growing our online presence. We also announced plans to open a new global technology center in 2021 that will house additional technology professionals in Charlotte and underscores our commitment to becoming a best-in-class, omni-channel retailer.
While we are pleased with actions taken during the quarter to improve gross margin, we have additional work to modernize our systems and pricing tools. Therefore, over the next year, we plan to deploy a new price management system that we hope will enable us to systematically analyze, prioritize and implement retail changes more timely and will provide merchants more visibility to pricing actions. We also will focus on integrating the Boomerang retail analytics platform, which we acquired this quarter and previously announced, into our core retail business. This platform is expected to strengthen strategic, data-driven pricing and merchandising assortment decisions across the business.
In addition, we also saw growth in our inventory in the first half of fiscal 2019 over the prior year, driven by strategic investments in the first half of the year to drive sales, such as earlier seasonal load-in, resets, increases in presentation minimums, and investments in job lot quantities. In the second half of fiscal year 2019, we expect to focus on reducing inventory in certain areas by rolling out predictable delivery and improving on our demand planning. We believe these measures will help us strategically manage down inventory while protecting our in-stock position and margin.
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
|
|
|
August 2, 2019
|
|
August 3, 2018
|
|
2019 vs. 2018
|
|
|
2019 vs. 2018
|
|
Net sales
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
|
|
0.5
|
%
|
Gross margin
|
32.11
|
|
|
32.96
|
|
|
(85
|
)
|
|
(2.1
|
)
|
Expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
19.29
|
|
|
20.99
|
|
|
(170
|
)
|
|
(7.7
|
)
|
Depreciation and amortization
|
1.48
|
|
|
1.61
|
|
|
(13
|
)
|
|
(7.2
|
)
|
Operating income
|
11.34
|
|
|
10.36
|
|
|
98
|
|
|
10.1
|
|
Interest - net
|
0.80
|
|
|
0.74
|
|
|
6
|
|
|
10.6
|
|
Pre-tax earnings
|
10.54
|
|
|
9.62
|
|
|
92
|
|
|
10.1
|
|
Income tax provision
|
2.56
|
|
|
2.34
|
|
|
22
|
|
|
9.5
|
|
Net earnings
|
7.98
|
%
|
|
7.28
|
%
|
|
70
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Period1
|
|
|
Percentage Increase / (Decrease) in Dollar Amounts from Prior Period1
|
|
|
August 2, 2019
|
|
August 3, 2018
|
|
2019 vs. 2018
|
|
|
2019 vs. 2018
|
|
Net sales
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
|
|
1.3
|
%
|
Gross margin
|
31.81
|
|
|
33.03
|
|
|
(122
|
)
|
|
(2.5
|
)
|
Expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
20.42
|
|
|
21.75
|
|
|
(133
|
)
|
|
(4.9
|
)
|
Depreciation and amortization
|
1.58
|
|
|
1.79
|
|
|
(21
|
)
|
|
(10.4
|
)
|
Operating income
|
9.81
|
|
|
9.49
|
|
|
32
|
|
|
4.7
|
|
Interest - net
|
0.86
|
|
|
0.82
|
|
|
4
|
|
|
5.8
|
|
Pre-tax earnings
|
8.95
|
|
|
8.67
|
|
|
28
|
|
|
4.6
|
|
Income tax provision
|
1.92
|
|
|
2.11
|
|
|
(19
|
)
|
|
(7.6
|
)
|
Net earnings
|
7.03
|
%
|
|
6.56
|
%
|
|
47
|
|
|
8.5
|
%
|
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 six months ended August 3, 2018 reflect adjusted amounts in accordance with this accounting principle change.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Other Metrics
|
August 2, 2019
|
|
August 3, 2018
|
|
August 2, 2019
|
|
August 3, 2018
|
Comparable sales increase 1
|
2.3
|
%
|
|
5.2
|
%
|
|
2.9
|
%
|
|
3.0
|
%
|
Total customer transactions (in millions)
|
269
|
|
|
277
|
|
|
499
|
|
|
508
|
|
Average ticket 2
|
$
|
77.97
|
|
|
$
|
75.53
|
|
|
$
|
77.61
|
|
|
$
|
75.28
|
|
At end of period:
|
|
|
|
|
|
|
|
Number of stores
|
2,003
|
|
|
2,155
|
|
|
|
|
|
Sales floor square feet (in millions)
|
209
|
|
|
215
|
|
|
|
|
|
Average store size selling square feet (in thousands) 3
|
104
|
|
|
100
|
|
|
|
|
|
Net earnings to average debt and equity 4
|
10.0
|
%
|
|
15.2
|
%
|
|
|
|
|
Return on invested capital 4
|
12.3
|
%
|
|
17.4
|
%
|
|
|
|
|
|
|
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 second quarter fiscal 2019 comparable sales by approximately 25 basis points and year-to-date fiscal 2019 comparable sales by approximately 50 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.
The Company previously announced its intention to exit its Mexico retail operations. During the three months ended August 2, 2019, the Company recognized a net loss of $12 million or net $0.01 per share impact associated with losses, net of tax, for the period associated with the wind-down of the Mexico operations (Mexico adjustments).
In the second quarter of 2018, the Company recognized $230 million of non-cash pre-tax charges, consisting of long-lived asset impairments and discontinued projects, as a result of a strategic reassessment of Orchard (Orchard Supply Hardware charges).
Adjusted diluted earnings per share should not be considered an alternative to, or more meaningful indicator of, the Company’s diluted earnings per common share as prepared in accordance with GAAP. The Company’s methods of determining this non-GAAP financial measure may differ from the method used by other companies for this or similar non-GAAP financial measures. Accordingly, these non-GAAP measures may not be comparable to the measures used by other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
August 2, 2019
|
|
August 3, 2018
|
|
Pre-Tax Earnings
|
|
Tax
|
|
Net Earnings
|
|
Pre-Tax Earnings
|
|
Tax
|
|
Net Earnings
|
Diluted earnings per share, as reported
|
|
|
|
|
$
|
2.14
|
|
|
|
|
|
|
$
|
1.86
|
|
Non-GAAP adjustments - per share impacts
|
|
|
|
|
|
|
|
|
|
|
|
Mexico adjustments
|
0.02
|
|
|
(0.01
|
)
|
|
0.01
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Orchard Supply Hardware charges
|
—
|
|
|
—
|
|
|
—
|
|
|
0.28
|
|
|
(0.07
|
)
|
|
0.21
|
|
Adjusted diluted earnings per share
|
|
|
|
|
$
|
2.15
|
|
|
|
|
|
|
$
|
2.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
August 2, 2019
|
|
August 3, 2018
|
Calculation of Return on Invested Capital
|
|
|
|
Numerator
|
|
|
|
Net Earnings
|
$
|
2,527
|
|
|
$
|
3,935
|
|
Plus:
|
|
|
|
Interest expense - net
|
643
|
|
|
627
|
|
Operating lease interest
|
197
|
|
|
212
|
|
Provision for income taxes
|
1,018
|
|
|
1,711
|
|
Lease adjusted net operating profit
|
4,385
|
|
|
6,485
|
|
Less:
|
|
|
|
Income tax adjustment 1
|
1,258
|
|
|
1,966
|
|
Lease adjusted net operating profit after tax
|
$
|
3,127
|
|
|
$
|
4,519
|
|
Denominator
|
|
|
|
Average debt and equity 2
|
$
|
25,395
|
|
|
$
|
25,906
|
|
Net earnings to average debt and equity
|
10.0
|
%
|
|
15.2
|
%
|
Return on invested capital
|
12.3
|
%
|
|
17.4
|
%
|
|
|
1
|
Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 28.70% and 30.30% for the periods ended August 2, 2019 and August 3, 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.
|
Results of Operations
Net Sales – Net sales in the second quarter of 2019 increased 0.5% to $21.0 billion. 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 2.3% over the same period, driven by a 2.0% increase in comparable average ticket and a 0.3% increase in comparable customer transactions. Orchard stores and other closed locations negatively impacted total sales 1.6% for the quarter.
During the second quarter of 2019, we experienced comparable sales increases in nine of 13 product categories. Comparable sales were above the company average in Paint, Tools, Appliances, Decor, Hardware, Millwork, and Seasonal & Outdoor Living. We achieved strong comparable sales in Paint with strength in both interior and exterior paint products due to our improved service model, in-stock position, and compelling offers. Performance in Tools was driven by strength in power tools, tool storage, and mechanics tools as a result of our CRAFTSMAN® reset, as well as key programs, such as Dewalt®
power tools, and innovative and new product offerings. We achieved strong comparable sales in Appliances due to our top brands and breadth of assortment. Décor experienced mid-single digit comparable sales, with double digit comparable sales in Blinds and Shades, driven by job lot quantity investments and improved product offerings in both our private and national brands. We experienced negative comparable sales in Lighting, Kitchens & Bath, Lumber & Building Materials, and Flooring primarily due to the elimination of the Project Specialists Interior position, price increases to offset tariff pressure in Lighting, and commodity lumber price deflation.
Net sales increased 1.3% to $38.7 billion for the first six 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 2.9% over the same period, primarily driven by a 1.7% increase in comparable average ticket and a 1.2% decrease in customer transactions. Orchard stores and other closed locations negatively impacted total sales 1.5% for the year.
Gross Margin – For the second quarter of 2019, gross margin as a percentage of sales decreased 85 basis points. Gross margin was negatively impacted by approximately 50 basis points of rate pressure in the quarter. We also experienced approximately 15 basis points of deleverage from increased distribution and delivery costs primarily associated with new supply chain facilities added to our network, coupled with ongoing increases in transportation costs and customer deliveries. Product mix shifts and inventory shrink each negatively impacted gross margin by 10 basis points in the quarter.
Gross margin as a percentage of sales decreased 122 basis points in the first six months of 2019 compared to 2018. Gross margin was negatively impacted by approximately 65 basis points of rate pressure. Increased distribution and delivery costs due to new supply chain facilities and increases in transportation costs and customer deliveries also led to 30 basis points of gross margin deleverage. Product mix shifts negatively impacted gross margin by 15 basis points. In addition, inventory shrink and increases in anticipated write-offs of inventory each led to 5 basis points of gross margin deleverage.
SG&A – For the second quarter of 2019, SG&A expense leveraged 170 basis points as a percentage of sales compared to the second quarter of 2018. This is primarily driven by 110 basis points of leverage due to long-lived asset impairments and discontinued projects associated with the Company’s strategic reassessment of Orchard in the prior year, and 50 basis points of leverage in retail operating salaries.
SG&A expense as a percentage of sales leveraged 133 basis points in the first six months of 2019 compared to 2018. This was primarily driven by 64 basis points of leverage in retail operating salaries, 60 basis points of leverage associated with long-lived asset impairments and discontinued projects associated with the Company’s strategic reassessment of Orchard in the prior year, 21 basis points of leverage from lease terminations and lease assignments primarily associated with the prior year’s store closing activities, and 16 basis points of leverage in advertising due to improved advertising efficiency. These were partially offset by 14 basis points of deleverage related to severance costs, and 13 basis points of deleverage in incentive compensation.
Depreciation and Amortization – Depreciation and amortization leveraged 13 basis points for the second 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 $18.2 billion at August 2, 2019, compared to $19.2 billion at August 3, 2018. As of August 2, 2019 and August 3, 2018, we owned 83% and 79% of our stores, respectively, which included stores on leased land.
Depreciation and amortization leveraged 21 basis point for the first six months of 2019 compared to 2018 primarily due to the same factors that impacted depreciation and amortization for the second quarter.
Interest – Net – Interest expense for the second 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 six months 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 and by an increase in interest income over the prior year due to higher average interest rates associated with the Company’s cash balances.
Income Tax Provision – Our effective income tax rates were 24.2% and 24.4% for the three months ended August 2, 2019 and August 3, 2018, respectively.
Our effective income tax rates were 21.5% and 24.3% for the six months ended August 2, 2019 and August 3, 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.
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
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions)
|
August 2, 2019
|
|
August 3, 2018
|
Net cash provided by operating activities
|
$
|
3,583
|
|
|
$
|
5,787
|
|
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 six months ended August 2, 2019, versus the six months ended August 3, 2018, was driven primarily by changes in working capital, driven by accounts payable and inventory, which increased operating cash flow for the first six months of 2018 by approximately $1.9 billion, compared to an increase of approximately $50 million for the first six months of 2019.
In the first six months of 2018, the increase in accounts payable exceeded the increase in inventory, driving approximately $1.9 billion of operating cash flow, primarily due to later Spring inventory build in fiscal 2018. In the first six months of 2019, inventory and accounts payable increased at a commensurate rate, resulting in positive impact to cash flow of approximately $50 million, driven by earlier purchases of inventory in preparation for the 2019 Spring season.
Cash Flows Used in Investing Activities
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions)
|
August 2, 2019
|
|
August 3, 2018
|
Net cash used in investing activities
|
$
|
(458
|
)
|
|
$
|
(480
|
)
|
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 six months ended August 2, 2019, and August 3, 2018:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions)
|
August 2, 2019
|
|
August 3, 2018
|
Existing store investments 1
|
$
|
369
|
|
|
$
|
276
|
|
Strategic initiatives 2
|
86
|
|
|
103
|
|
New stores and international 3
|
71
|
|
|
164
|
|
Total capital expenditures
|
$
|
526
|
|
|
$
|
543
|
|
|
|
|
|
|
|
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.
|
Our 2019 capital expenditures forecast is approximately $1.6 billion.
Cash Flows Used in Financing Activities
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions)
|
August 2, 2019
|
|
August 3, 2018
|
Net cash used in financing activities
|
$
|
(1,851
|
)
|
|
$
|
(3,637
|
)
|
Net cash used in financing activities primarily consist of transactions related to our short-term borrowings, long-term debt, 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 six months ended August 2, 2019, and August 3, 2018:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions)
|
August 2, 2019
|
|
August 3, 2018
|
Net proceeds from issuance of long-term debt
|
$
|
2,972
|
|
|
$
|
—
|
|
Repayment of long-term debt
|
$
|
(629
|
)
|
|
$
|
(24
|
)
|
During the six months ended August 2, 2019, we issued $3.0 billion of unsecured notes to finance current year maturities and for other general corporate purposes. During the six months ended August 2, 2019, we also paid $600 million to retire scheduled debts at maturity.
Short-term Borrowing Facilities
We have a five year unsecured revolving credit agreement with a syndicate of banks (the Second Amended and Restated Credit Agreement) which provides for borrowings up to $1.98 billion. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the Second Amended and Restated Credit Agreement, the Company may increase the aggregate availability by an additional $270 million.
In addition, 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 9, 2019). The Company may elect to convert all of the loans outstanding under the 364-Day Credit Agreement on the termination date into a term loan which the Company shall repay in full on the first anniversary date of the termination date.
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. There were no outstanding borrowings under the Second Amended and Restated Credit Agreement or the 364-Day Credit Agreement as of August 2, 2019. There were no outstanding borrowings under the Amended and Restated Credit Agreement as of August 3, 2018. The following table includes additional information related to our short-term borrowings for the six months ended August 2, 2019, and August 3, 2018:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions, except for interest rate data)
|
August 2, 2019
|
|
August 3, 2018
|
Net change in short-term borrowings
|
$
|
(722
|
)
|
|
$
|
(1,137
|
)
|
Amount outstanding at quarter-end
|
$
|
—
|
|
|
$
|
—
|
|
Maximum amount outstanding at any month-end
|
$
|
1,189
|
|
|
$
|
892
|
|
Weighted-average interest rate of short-term borrowings outstanding
|
—
|
%
|
|
—
|
%
|
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 August 2, 2019.
Share Repurchases
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 six months ended August 2, 2019, and August 3, 2018:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions, except per share data)
|
August 2, 2019
|
|
August 3, 2018
|
Total amount paid for share repurchases
|
$
|
2,770
|
|
|
$
|
1,846
|
|
Total number of shares repurchased
|
27.4
|
|
|
20.1
|
|
Average price paid per share
|
$
|
100.98
|
|
|
$
|
91.80
|
|
As of August 2, 2019, we had $11.2 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 six months of fiscal year 2019). See Note 10 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 six months ended August 2, 2019, and August 3, 2018:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions, except per share data)
|
August 2, 2019
|
|
August 3, 2018
|
Total cash dividend payments
|
$
|
767
|
|
|
$
|
678
|
|
Dividends paid per share
|
$
|
0.96
|
|
|
$
|
0.82
|
|
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 September 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. The lowering of our credit ratings in the fourth quarter of fiscal 2018 did not have a material impact on our access to liquidity or interest costs.
|
|
|
|
Debt Ratings
|
S&P
|
Moody’s
|
Commercial Paper
|
A-2
|
P-2
|
Senior Debt
|
BBB+
|
Baa1
|
Senior Debt Outlook
|
Stable
|
Stable
|
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.
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 the net proceeds from the sale of the Notes for the repayment of $600 million aggregate principal amount due April 2019 and intend to use for the repayment of our $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 August 2, 2019. Interest payments included in the table below are calculated based upon the rates in effect at August 2, 2019. The unsecured notes 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)
|
$
|
17,263
|
|
|
$
|
950
|
|
|
$
|
1,776
|
|
|
518
|
|
|
$
|
14,019
|
|
Long-term debt (interest payments)
|
11,444
|
|
|
725
|
|
|
1,366
|
|
|
1,260
|
|
|
8,093
|
|
Total
|
$
|
28,707
|
|
|
$
|
1,675
|
|
|
$
|
3,142
|
|
|
$
|
1,778
|
|
|
$
|
22,112
|
|
As of August 2, 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.