<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended May 1, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-7898
LOWE'S COMPANIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0578072
(State or other jurisdiction of (I.R.S. EmployerIdentification No.)
incorporation or organization)
P.O. BOX 1111, NORTH WILKESBORO, N.C. 28656
(Address of principal executive offices)
(Zip Code)
(336) 658-4000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 29, 1998
Common Stock,$.50 par value 351,766,194
12
TOTAL PAGES
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LOWE'S COMPANIES, INC.
- INDEX -
Page No.
PART I - Financial Information:
Consolidated Balance Sheets - May 1, 1998,
May 2, 1997 and January 31, 1997 3
Consolidated Statements of Current and
Retained Earnings - three months
ended May 1, 1998 and May 2, 1997 4
Consolidated Statements of Cash Flows - three
months ended May 1, 1998 and May 2, 1997 5
Notes to Consolidated Financial Statements. 6-7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 8-10
Independent Accountants' Report 11
PART II - Other Information 12
Item 6 (b) - Reports on Form 8-K
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<TABLE>
Lowe's Companies, Inc.
Consolidated Balance Sheets
In Thousands
<CAPTION>
May 1, May 2, January 30,
1998 1997 1998
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $623,406 $47,872 $195,146
Short-term investments 27,781 19,609 16,155
Accounts receivable - net 150,219 147,871 118,408
Merchandise inventory 2,033,143 1,819,125 1,714,592
Other assets 87,214 54,848 65,301
Total current assets 2,921,763 2,089,325 2,109,602
Property, less accumulated depreciation 3,097,253 2,583,027 3,005,199
Long-term investments 39,139 30,519 35,161
Other assets 57,708 46,455 69,315
Total assets $6,115,863 $4,749,326 $5,219,277
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $93,975 $140,717 $98,104
Current maturities of long-term debt 21,745 23,285 12,478
Accounts payable 1,338,833 1,016,173 969,777
Employee retirement plans 63,787 67,857 64,669
Accrued salaries and wages 76,637 65,846 83,377
Other current liabilities 354,754 254,835 220,915
Total current liabilities 1,949,731 1,568,713 1,449,320
Long-term debt, excluding current
maturities 1,331,177 788,637 1,045,570
Deferred income taxes 122,203 103,370 123,778
Total liabilities 3,403,111 2,460,720 2,618,668
Shareholders' equity
Preferred stock - $5 par value,
none issued - - -
Common stock - $.50 par value;
Issued and Outstanding
May 1, 1998 351,456
May 2, 1997 347,258
January 30, 1998 350,632 175,728 173,629 175,316
Capital in excess of par 914,889 825,189 892,666
Retained earnings 1,649,988 1,306,755 1,565,133
Unearned compensation-restricted
stock awards (27,900) (16,779) (32,694)
Unrealized gain (loss) on
available-for-sale securities 47 (188) 188
Total shareholders' equity 2,712,752 2,288,606 2,600,609
Total liabilities and
shareholders' equity $6,115,863 $4,749,326 $5,219,277
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
Lowe's Companies, Inc.
Consolidated Statements of Current and Retained Earnings
In Thousands, Except Per Share Data
<CAPTION>
Quarter Ended
May 1, 1998 May 2, 1997
Current Earnings Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Net sales $2,899,540 100.00 $2,400,754 100.00
Cost of sales 2,139,502 73.79 1,777,051 74.02
Gross margin 760,038 26.21 623,703 25.98
Expenses:
Selling, general and administrative 516,073 17.80 431,480 17.98
Store opening costs 11,365 0.39 8,252 0.34
Depreciation 64,732 2.23 56,712 2.36
Interest 19,663 0.68 17,286 0.72
Total expenses 611,833 21.10 513,730 21.40
Pre-tax earnings 148,205 5.11 109,973 4.58
Income tax provision 53,740 1.85 39,590 1.65
Net earnings $94,465 3.26 $70,383 2.93
Shares outstanding (weighted average) 351,033 346,906
Basic and Diluted Earnings Per Share $0.27 $0.20
Retained Earnings
Balance at beginning of period $1,565,133 $1,245,888
Net earnings 94,465 70,383
Cash dividends (9,610) (9,516)
Balance at end of period $1,649,988 $1,306,755
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
Lowe's Companies, Inc.
Consolidated Statements of Cash Flows
In Thousands
<CAPTION>
For the Three Months Ended
May 1, May 2,
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities:
Net Earnings $94,465 $70,383
Adjustments to Reconcile Net Earnings to Net Cash
Provided By Operating Activities:
Depreciation 64,732 56,712
Amortization of Original Issue Discount 109 28
Increase (Decrease) in Deferred Income Taxes (7,436) 2,613
Loss on Disposition/Writedown of Fixed and
Other Assets 12,197 6,120
Changes in Operating Assets and Liabilities:
Accounts Receivable - Net (31,811) (30,309)
Merchandise Inventory (318,551) (213,245)
Other Operating Assets (15,935) 1,811
Accounts Payable 369,056 102,006
Employee Retirement Plans 17,046 15,587
Other Operating Liabilities 141,340 52,091
Net Cash Provided by Operating Activities 325,212 63,797
Cash Flows from Investing Activities:
(Increase) Decrease in Investment Assets:
Short-Term Investments (7,611) 16,879
Purchases of Long-Term Investments (8,193) (3,012)
Proceeds from Sale/Maturity of Long-Term
Investments - 1,958
Decrease in Other Long-Term Assets 831 315
Fixed Assets Acquired (156,255) (121,539)
Proceeds from the Sale of Fixed and Other
Long-Term Assets 1,927 1,984
Net Cash Used in Investing Activities (169,301) (103,415)
Cash Flows from Financing Activities:
Long-Term Debt Borrowings 296,160 -
Net Increase (Decrease) in Short-Term Borrowings (4,129) 59,812
Proceeds from Stock Options Exercised 4,845 76
Repayment of Long-Term Debt (5,331) (3,269)
Cash Dividend Payments (19,196) (9,516)
Net Cash Provided by Financing Activities 272,349 47,103
Net Increase in Cash and Cash Equivalents 428,260 7,485
Cash and Cash Equivalents, Beginning of Year 195,146 40,387
Cash and Cash Equivalents, End of Period $623,406 $47,872
See accompanying notes to consolidated financial statements.
</TABLE>
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Lowe's Companies, Inc.
Notes to Consolidated Financial Statements
Note 1: The accompanying Consolidated Financial Statements (unaudited)
have been reviewed by an independent certified public accountant, and
in the opinion of management, they contain all adjustments necessary
to present fairly the financial position as of May 1, 1998, and the
results of operations and the cash flows for the three months ended
May 1, 1998 and May 2, 1997.
These interim financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 30, 1998.
On May 29, 1998, the Board of Directors declared a two-for one stock
split on the Company's common stock. One additional share will be
issued on June 26, 1998 for each share held by shareholders of record
on June 12, 1998. Par value will remain unchanged at $.50 and
approximately $87.9 million will be transferred to common stock from
capital in excess of par as of the record date. The accompanying
Consolidated Financial Statements, including per share data, have been
adjusted to reflect the effect of the stock split.
Diluted earnings per share are calculated on the weighted average
shares of common stock as adjusted for the dilutive effects of stock
options outstanding at the balance sheet date. The post-split
equivalents of weighted average shares, as adjusted for dilution, were
352,436,000 and 347,056,000 for the three months ended May 1, 1998 and
May 2, 1997, respectively.
Note 2: The Company has a cash management program which provides for the
investment of excess cash balances in financial instruments which have
maturities of up to five years. Investments with original maturities
of three months or less when purchased are classified as cash
equivalents. Investments with a maturity of between three months and
one year from the balance sheet date are classified as short-term
investments. Investments with maturities greater than one year are
classified as long-term.
At May 1, 1998 and May 2, 1997, the Company had no derivative
financial instruments.
Note 3 Net interest expense is composed of the following (in thousands):
[CAPTION]
Quarter ended
May 1, 1998 May 2,1997
[S] [C] [C]
Long-term debt $15,481 $ 6,576
Capitalized leases 9,967 10,010
Short-term debt 1,429 3,435
Amortization of loan cost 206 89
Short-term interest income (4,938) (1,499)
Interest capitalized on
construction in progress (2,482) (1,325)
Net interest expense $19,663 $17,286
Note 4: Inventory is stated at the lower of cost or market using the last-
in, first-out inventory accounting method. If the first-in, first out
method of inventory accounting had been used, inventories would have
been $67.6 million higher at May 1, 1998 and January 30, 1998 and
$77.2 million higher at May 2, 1997.
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Note 5: Property is shown net of accumulated depreciation of $846.9
million at May 1, 1998, $660.4 million at May 2, 1997 and $789.8
million at January 30, 1998.
Note 6: Supplemental disclosures of cash flow information (in thousands):
[CAPTION]
Quarter ended
May 1, 1998 May 2, 1997
[S] [C] [C]
Cash paid for interest (net of capitalized) $24,305 $22,996
Cash paid for income taxes 6,611 4,982
Non-cash investing and financing activities:
Common stock issued to ESOP 17,928 8,500
Fixed assets acquired under capital lease $ 3,937 $25,260
Note 7: In January 1998, the Board of Directors authorized the funding of the
Fiscal 1997 ESOP contribution primarily with the issuance of new
shares of the Company's common stock. During the first quarter of
Fiscal 1998, the Company issued the post-split equivalent of 548,152
shares, with a market value of $17.9 million.
Note 8: In February 1998, the Company issued $300 million of 6.875% Debentures
due February 2028. The debentures were issued at an original price of
$987.20 per $1,000 principal amount, which represented an original
issue discount of .405% payable at maturity and an underwriters'
discount of .875%. The debentures may not be redeemed prior to
maturity.
Note 9: Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) was issued in June 1997 and became
effective for the Company in the current fiscal year. SFAS 130
requires disclosure of comprehensive income (which is defined as "the
change in equity during a period excluding changes resulting from
investments by shareholders and distributions to shareholders") and
its components. Total comprehensive income, comprised of net earnings
and unrealized holding gains (losses) on available-for-sale
securities, was $94.3 million and $70.5 million for the quarters ended
May 1, 1998 and May 2, 1997, respectively.
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131),
was also issued in June 1997and became effective for the Company in
the current fiscal year. SFAS 131 redefines how operating segments are
determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The
Company has determined that the adoption of SFAS 131 does not require
additional disclosures of its one operating segment, home improvement
retailing.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial statements
and notes thereto included in the Company's most recent Form 10-K.
For the first quarter of fiscal 1998, sales increased 21% to $2.9 billion,
comparable store sales had a 5% gain and net earnings increased 34% to $94.5
million compared to last year's first quarter results. For the large store
group (more than 80,000 square feet), comparable store sales were up 7.4%
compared to last year's first quarter. Diluted earnings per share were $.27
compared to $.20 for the comparable quarter of last year.
The sales increase in the first quarter was partially attributable to the
addition of 6.3 million square feet of retail selling space at new and
existing locations since last year's first quarter. Additionally, sales
performances in our basic businesses were strong for the quarter. The Company
experienced strong sales increases in lawn & garden, tools, outdoor hardlines,
appliances, kitchen cabinets, electrical, home decor, paint and millwork
categories.
Gross margin was 26.21% of sales for the quarter ended May 1, 1998 compared
to 25.98% for last year's comparable quarter. Of the 23 basis point increase
in gross margin rate, 12 basis points were due to favorable changes in product
mix and ongoing store pricing disciplines. The remaining 11 points were due
to no LIFO charge in this year's first quarter compared to a charge of $2.5
million in last year's first quarter.
Selling, general and administrative expenses (SG&A) were 17.80% of sales
versus 17.98% in last year's first quarter. SG&A increased by 20% compared to
the 21% increase in sales for the quarter. Expense controls specifically
relating to store payroll costs and general office expenses contributed to the
positive leverage in SG&A for the quarter.
Store opening costs were $11.4 million for the quarter ended May 1, 1998
compared to $8.3 million last year, representing costs associated with the
opening of 9 stores this year (7 new and 2 relocated) compared to 8 stores
last year (6 new and 2 relocated). Charges in this quarter for future and
prior openings were $4.9 million compared to $2.7 million in 1997's first
quarter. The Company's 1998 expansion plans are discussed under "Liquidity and
Capital Resources" below.
Depreciation was $64.7 million for the quarter ended May 1, 1998. This is
an increase of 14% over the comparable period last year and is due primarily
to buildings, fixtures, displays and computer equipment relating to the
Company's expansion program.
Interest expense increased from $17.3 million to $19.7 million for the
quarter ended May 1, 1998 compared to last year's first quarter. Interest has
primarily increased due to interest expense on medium-term notes and
debentures issued since last year's first quarter.
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The Company's effective income tax rate was 36.26% for the quarter
ended May 1, 1998 and 36.00% for last year's first quarter. The higher rate
in 1998 was primarily due to expansion into states with higher tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Primary sources of liquidity are cash flows from operating activities and
certain financing activities. Net cash provided by operating activities was
$325 million for the quarter ended May 1, 1998 compared to $64 million for
last year's first quarter. The increase in the current quarter resulted
primarily from increased earnings and a $51 million cash addition in 1998
versus a $111 million cash use resulting from the change in expansion related
inventory levels net of the change in accounts payable. The Company's working
capital was $972 million at May 1, 1998 compared to $521 million at May 2,
1997 and $660 million at January 30, 1998.
The primary component of net cash used in investing activities continues to
be new store facilities in connection with the Company's expansion plan. Cash
acquisitions of fixed assets were $156 million and $122 million for the
quarters ended May 1, 1998 and May 2, 1997, respectively. At May 1, 1998, the
Company had 451 stores in 26 states and 37.4 million square feet of retail
selling space, a 20% increase over the selling space at May 2, 1997.
Cash flows provided by financing activities were $272 million for the
quarter ended May 1, 1998 compared to $47 million for last year's first
quarter. Proceeds from borrowings (long-term and short-term) were $292
million in first quarter 1998 versus $60 million in last year's first quarter.
In February 1998, the Company issued $300,000,000 principal amount of 6.875%
Debentures due February 15, 2028. The debentures may not be redeemed prior to
maturity.
Property has increased as a result of the Company's plan to continue
expansion of retail sales floor square footage by expanding into new markets
and relocating from older, smaller stores to larger stores. The Company's
1998 capital budget is approximately $1.4 billion, inclusive of approximately
$400 million in operating or capital leases. More than 80% of this planned
commitment is for store expansion. Expansion plans for 1998 consist of
approximately 75 to 80 new stores with about 60% in new markets and the
balance being relocations of existing stores, the combination of which will
increase retail selling space by approximately 20%. Approximately 30% of the
1998 projects will be leased and 70% will be owned. Expansion in the first
quarter of 1998 included 7 new stores and 2 relocations representing 896
thousand square feet of new incremental retail space.
The Company believes that funds from operations, funds from debt issuances,
leases and existing credit agreements will be adequate to finance the 1998
expansion plan and other operating needs.
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As discussed in the annual report for the year ending January 30, 1998, the
Company's major market risk exposure is the potential loss arising from
changing interest rates and its impact on long-term investments and long-term
debt. The Company's policy is to manage interest rate risks by maintaining a
combination of fixed and variable rate financial instruments. The risks
associated with long-term investments at May 1, 1998 have not changed
materially since January 30, 1998. Long-term debt has increased primarily due
to the issuance of $300,000,000 principal amount of 6.875% Debentures due
February 15, 2028. Disclosures of the Company's principal cash outflows for
long-term debt and related interest rates have changed since January 30, 1998
due to the new fixed rate debt.
FORWARD-LOOKING LANGUAGE
This Securities and Exchange Commission Form 10-Q may include "forward-
looking statements" within the meaning of Section 27A of the Securities Act
and Section 21E of the Exchange Act. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct.
Important factors that could cause actual results to differ from expectations
include, but are not limited to, general economic trends, availability and
development of real estate for expansion, commodity markets, and the nature of
competition and weather conditions, all which are described in detail in the
Company's 1997 Annual Report.
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INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Lowe's Companies, Inc.:
We have reviewed the accompanying consolidated balance sheet of Lowe's
Companies, Inc. and subsidiary companies as of May 1, 1998, and the related
consolidated statements of current and retained earnings and of cash flows for
the three-month periods ended May 1, 1998 and May 2, 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Lowe's Companies, Inc. and
subsidiary companies as of January 30, 1998, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the year then
ended (not presented herein); and in our report dated February 19, 1998, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of January 30, 1998 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
May 29, 1998
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Part II - OTHER INFORMATION
6 (b) - Reports on Form 8-K
A report on Form 8-K was filed on February 20, 1998 by the
registrant. Therein under Item 7, the company filed certain
exhibits in connection with the Registrant's offering of
$300,000,000 principal amount of 6 7/8% Debentures pursuant to its
Shelf Registration Statements on Form S-3 (File No. 333-14257 and
File No. 333-42733).
SIGNATURES
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.
June 12, 1998 /s/ Kenneth W. Black, Jr.
Date __________________ ________________________________________
Kenneth W. Black, Jr.
Vice President and Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-1999
<PERIOD-END> MAY-01-1998
<CASH> 623,406
<SECURITIES> 27,781
<RECEIVABLES> 150,219
<ALLOWANCES> 0
<INVENTORY> 2,033,143
<CURRENT-ASSETS> 2,921,763
<PP&E> 3,097,253
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,115,863
<CURRENT-LIABILITIES> 1,949,731
<BONDS> 0
0
0
<COMMON> 175,728<F1>
<OTHER-SE> 2,537,024<F1>
<TOTAL-LIABILITY-AND-EQUITY> 6,115,863
<SALES> 2,899,540
<TOTAL-REVENUES> 2,899,540
<CGS> 2,139,502
<TOTAL-COSTS> 2,139,502
<OTHER-EXPENSES> 592,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,663
<INCOME-PRETAX> 148,205
<INCOME-TAX> 53,740
<INCOME-CONTINUING> 94,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,465
<EPS-PRIMARY> .27<F1>
<EPS-DILUTED> .27<F1>
<FN>
<F1>On May 29, 1998, the Board of directors declared a two-for-one stock split on
the Company's common stock. One additional share will be issued on June 26,
1998 for each share held by shareholders of record on June 12, 1998. Par value
will remain unchanged at $.50 and approximately $87.9 million will be
transferred to common stock from capital in excess of par as of the record
date. The accompanying Consolidated Financial Statements, including per share
data, have been adjusted to reflect the effect of the stock split.
Prior Financial Data Schedules have not been restated for this
recapitalization.
</FN>
</TABLE>
