<PAGE> -1-
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 October 29, 1999
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. Employer Identification No.)
incorporation or organization)
1605 CURTIS BRIDGE ROAD, WILKESBORO, N.C. 28697
(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 November 26, 1999
Common Stock, $.50 par value 382,321,824
17
TOTAL PAGES
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LOWE'S COMPANIES, INC.
- INDEX -
Page No.
PART I - Financial Information:
Consolidated Balance Sheets - October 29, 1999,
October 30, 1998 and January 29, 1999 3
Consolidated Statements of Current and
Retained Earnings - quarter and nine months
ended October 29, 1999 and October 30, 1998 4
Consolidated Statements of Cash Flows - nine
months ended October 29, 1999 and October 30, 1998 5
Notes to Consolidated Financial Statements 6-7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-13
Independent Accountants' Report 14
PART II - Other Information 15
Item 6 (a) - Exhibits
Item 6 (b) - Reports on Form 8-K
EXHIBIT INDEX 16
<PAGE> -3-
Lowe's Companies, Inc.
Consolidated Balance Sheets
In Thousands
<TABLE>
<CAPTION>
October 29, October 30, January 29,
1999 1998 1999
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $623,426 $352,180 $228,874
Short-term investments 81,668 36,190 20,343
Accounts receivable - net 177,705 159,877 143,928
Merchandise inventory 2,820,000 2,489,037 2,384,700
Deferred income taxes 47,004 20,879 39,994
Other assets 127,403 75,181 49,021
Total current assets 3,877,206 3,133,344 2,866,860
Property, less
accumulated depreciation 4,851,439 3,844,820 4,085,798
Long-term investments 32,404 34,065 28,716
Other assets 98,709 88,780 105,508
Total assets $8,859,758 $7,101,009 $7,086,882
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $92,475 $93,975 $117,075
Current maturities
of long-term debt 98,990 66,583 107,893
Accounts payable 1,549,447 1,359,410 1,220,543
Employee retirement plans 71,335 60,285 85,466
Accrued salaries and wages 172,481 126,688 123,545
Other current liabilities 406,746 342,794 269,734
Total current liabilities 2,391,474 2,049,735 1,924,256
Long-term debt, excluding
current maturities 1,733,312 1,471,922 1,364,278
Deferred income taxes 184,838 144,283 175,372
Other long-term liabilities 4,468 3,362 3,209
Total liabilities 4,314,092 3,669,302 3,467,115
Shareholders' equity
Preferred stock - $5 par value,
none issued - - -
Common stock - $.50 par value;
Issued and Outstanding
October 29, 1999 382,276
October 30, 1998 371,324
January 29, 1999 374,388 191,138 185,662 187,194
Capital in excess of par 1,745,958 1,232,436 1,325,816
Retained earnings 2,626,367 2,048,335 2,136,727
Unearned compensation-
restricted stock awards (17,549) (35,083) (30,387)
Accumulated other
comprehensive income (loss) (248) 357 417
Total shareholders' equity 4,545,666 3,431,707 3,619,767
Total liabilities and
shareholders' equity $8,859,758 $7,101,009 $7,086,882
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> -4-
Lowe's Companies, Inc.
Consolidated Statements of Current and Retained Earnings
In Thousands, Except Per Share Data
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
October 29, 1999 October 30, 1998 October 29, 1999 October 30, 1998
Current Earnings Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $3,909,188 100.00 $3,278,298 100.00 $12,116,326 100.00 $10,161,719 100.00
Cost of sales 2,819,639 72.13 2,396,163 73.09 8,832,401 72.90 7,462,204 73.43
Gross margin 1,089,549 27.87 882,135 26.91 3,283,925 27.10 2,699,515 26.57
Expenses:
Selling, general
and administrative 692,394 17.71 578,362 17.64 2,061,566 17.02 1,749,971 17.22
Store opening costs 25,722 0.66 20,345 0.62 59,397 0.49 47,693 0.47
Depreciation 86,440 2.21 72,848 2.22 246,083 2.03 212,151 2.09
Interest 18,921 0.48 19,282 0.59 64,324 0.53 59,731 0.59
Nonrecurring merger costs - - - - 24,378 0.20 - -
Total expenses 823,477 21.06 690,837 21.07 2,455,748 20.27 2,069,546 20.37
Pre-tax earnings 266,072 6.81 191,298 5.84 828,177 6.83 629,969 6.20
Income tax provision 97,384 2.49 69,406 2.12 304,314 2.51 228,513 2.25
Net earnings $168,688 4.32 $121,892 3.72 $523,863 4.32 $401,456 3.95
Shares outstanding - Basic 382,168 371,268 380,869 370,505
Basic earnings per share $0.44 $0.33 $1.38 $1.08
Shares outstanding - Diluted 384,348 376,022 383,542 375,378
Diluted earnings per share $0.44 $0.33 $1.37 $1.08
Retained Earnings
Balance at beginning
of period $2,469,102 $1,936,966 $2,136,728 $1,677,523
Net earnings 168,688 121,892 523,863 401,456
Cash dividends (11,423) (10,523) (34,224) (30,644)
Balance at end
of period $2,626,367 $2,048,335 $2,626,367 $2,048,335
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> -5-
Lowe's Companies, Inc.
Consolidated Statements of Cash Flows
In Thousands
<TABLE>
<CAPTION>
For the Nine Months Ended
October 29, October 30,
1999 1998
<S> <C> <C>
Cash Flows From Operating Activities:
Net Earnings $523,863 $401,456
Adjustments to Reconcile
Net Earnings to Net Cash Provided By
Operating Activities:
Depreciation 246,083 212,151
Amortization of Original Issue Discount 467 330
Increase (Decrease) in Deferred Income Taxes 4,505 (1,897)
Loss on Disposition/Writedown
of Fixed and Other Assets 43,252 16,641
Changes in Operating Assets and Liabilities:
Accounts Receivable - Net (33,777) (41,469)
Merchandise Inventory (435,300) (503,996)
Other Operating Assets (77,872) (41,605)
Accounts Payable 328,905 323,527
Employee Retirement Plans 45,381 50,243
Other Operating Liabilities 199,733 162,737
Net Cash Provided by Operating Activities 845,240 578,118
Cash Flows from Investing Activities:
(Increase) Decrease in Investment Assets:
Short-Term Investments (55,989) (2,774)
Purchases of Long-Term Investments (12,447) (16,489)
Proceeds from Sale/Maturity
of Long-Term Investments 2,531 602
Increase in Other Long-Term Assets (12,152) (12,191)
Fixed Assets Acquired (1,045,897) (747,266)
Proceeds from the Sale of Fixed
and Other Long-Term Assets 34,685 18,429
Net Cash Used in Investing Activities (1,089,269) (759,689)
Cash Flows from Financing Activities:
Net Decrease in Short-Term Borrowings (24,600) (4,129)
Long-Term Debt Borrowings 394,590 328,159
Repayment of Long-Term Debt (62,487) (17,861)
Proceeds from Stock Offering 348,299 -
Proceeds from Stock Options Exercised 17,003 9,109
Cash Dividend Payments (34,224) (40,230)
Net Cash Provided by Financing Activities 638,581 275,048
Net Increase in Cash and Cash Equivalents 394,552 93,477
Cash and Cash Equivalents, Beginning of Period 228,874 258,703
Cash and Cash Equivalents, End of Period $623,426 $352,180
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> -6-
Lowe's Companies, Inc.
Notes to Consolidated Financial Statements
Note 1: The accompanying Consolidated Financial Statements (unaudited) have
been reviewed by independent certified public accountants, and in
the opinion of management, they contain all adjustments necessary to
present fairly the financial position as of October 29, 1999, and the
results of operations for the quarters and nine months ended October
29, 1999 and October 30, 1998, and the cash flows for the nine months
ended October 29, 1999 and October 30, 1998.
These interim financial statements should be read in conjunction with
the financial statements and notes thereto included in the Lowe's
Companies, Inc. (the Company) Annual Report on Form 10-K for the
fiscal year ended January 29, 1999. The financial results for the
interim periods may not be indicative of the financial results for
the entire fiscal year.
Note 2: The Company completed its merger with Eagle Hardware & Garden, Inc.
(Eagle) on April 2, 1999. The transaction, which is valued at
approximately $1.3 billion, was structured as a tax-free exchange
of the Company's common stock for Eagle's common stock, and was
accounted for as a pooling of interests. The financial statements
and notes presented provide information on a combined basis for the
quarters and nine months periods ended October 29, 1999, October 30,
1998 and as of January 29, 1999.
Note 3: The Company changed its method of accounting for inventories from
the Last-In-First-Out (LIFO) method to the First-In-First-Out (FIFO)
method effective as of July 31, 1999. The Company has been
experiencing reduced costs in most product categories resulting from
a combination of better buying, increased imports, and logistics
efficiencies. Therefore, management believes the FIFO method
provides a better measurement of operating results. The change will
also aid in financial statement comparability within the home
improvement retail industry segment.
Prior period consolidated financial statements have been restated for
the retroactive effect of the change in accounting principle. The
effect of the restatement was to decrease net earnings and retained
earnings by $5.2 million ($.01 per share) and $7.1 million
($.02 per share) for the quarter and nine months ended October 30,
1998, respectively. There was no LIFO adjustment required during
the first two quarters of Fiscal 1999; therefore there was no effect
on current year earnings as previously reported. The effect of this
change on the Company's net earnings and retained earnings for the
years ended January 29, 1999 and January 30, 1998 was a decrease of
$18.4 million ($.05 per share) and $4.4 million ($.01 per share),
respectively.
Note 4: Diluted earnings per share are calculated on the weighted average
shares of common stock as adjusted for the dilutive effect of stock
options at the balance sheet date. The weighted average number of
shares, as adjusted for dilution, were 384,348,000 and 376,022,000
for the quarters ended October 29, 1999 and October 30, 1998,
respectively, and 383,542,000 and 375,378,000 for the nine months
ended October 29, 1999 and October 30, 1998, respectively.
<PAGE> -7-
Note 5: Net interest expense is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Quarter ended Nine months ended
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Long-term debt $ 23,673 $ 19,313 $ 70,139 $ 57,163
Capitalized leases 10,511 9,665 31,674 29,424
Short-term debt 1,311 1,382 4,387 4,198
Amortization of loan cost 236 187 730 581
Short-term interest income (11,592) (6,073) (29,367) (19,759)
Interest capitalized on
construction in progress (5,218) (5,192) (13,239) (11,876)
Net interest expense $ 18,921 $ 19,282 $ 64,324 $ 59,731
</TABLE>
Note 6: Property is shown net of accumulated depreciation of $1.2 billion at
October 29, 1999, $1.0 billion at October 30, 1998 and $1.0 billion
at January 29, 1999.
Note 7: Supplemental disclosures of cash flow information (in thousands):
Nine months ended
Oct. 29, 1999 Oct. 30, 1998
Cash paid for interest
(net of capitalized) $ 116,712 $ 96,080
Cash paid for income taxes 289,677 206,805
Non-cash investing and financing activities:
Common stock issued to ESOP 59,691 60,158
Fixed assets acquired under
capital lease 27,561 24,822
Note 8: In January 1999, the Board of Directors authorized the funding of
the Fiscal 1998 ESOP contribution primarily with the issuance of new
shares of the Company's common stock. During the first nine months
of Fiscal 1999, the Company issued 1,077,620 shares, with a market
value of $59.7 million.
Note 9: In February 1999, the Company issued $400 million of 6.5% Debentures
due March 15, 2029 in a private offering. The debentures were
registered in July 1999 with the Securities and Exchange Commission.
The debentures were issued at an original price of $986.47 per $1,000
principal amount, net of the original issue discount and
underwriters' discount. The debentures may not be redeemed prior to
maturity. In March 1999, the Company issued 6,206,895 shares of
common stock in a public offering. The net proceeds from the
offering were $348.3 million.
Note 10: Total comprehensive income, comprised of net earnings and unrealized
holding gains (losses) on available-for-sale securities, was $168.5
and $122.1 million for the quarters ended October 29, 1999 and
October 30, 1998, respectively, compared to reported net earnings of
$168.7 and $121.9 million for the third quarter of 1999 and 1998.
Total comprehensive income was $523.2 and $401.6 million for the
nine months ended October 29, 1999 and October 30, 1998,
respectively, compared to reported net earnings of $523.9 and $401.5
million for the first nine months of 1999 and 1998.
<PAGE> -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion summarizes the significant factors affecting the Company's
consolidated operating results and liquidity and capital resources during the
quarter and nine months ended October 29, 1999. This discussion should be
read in conjunction with the financial statements and related footnotes
included in the Company's most recent Form 10-K.
The Company completed its merger with Eagle Hardware & Garden, Inc. (Eagle)
on April 2, 1999. The transaction, which was valued at approximately $1.3
billion, was structured as a tax-free exchange of the Company's common stock
for Eagle's common stock, and was accounted for as a pooling of interests. As
a result, all current and historical financial information is presented on a
combined basis.
The Company changed its method of accounting for inventories from the
Last-In-First-Out (LIFO) method to the First-In-First-Out (FIFO) method as of
July 31, 1999. The Company has been experiencing reduced costs in most
product categories resulting from a combination of better buying, increased
imports, and logistics efficiencies. Therefore, management believes the FIFO
method provides a better measurement of operating results. The change will
also aid in financial statement comparability within the home improvement
retail industry segment. Prior period consolidated financial statements have
been restated for the retroactive effect of the change in accounting principle.
OPERATIONS
For the third quarter of fiscal 1999, sales increased 19% to $3.9 billion,
comparable store sales increased 6.3% and net earnings rose 38% to $168.7
million compared to last year's third quarter results. Diluted earnings per
share were $.44 compared to $.33 for the comparable quarter of last year. For
the nine months ended October 29, 1999, sales increased 19% to $12.1 billion,
comparable store sales increased 6.2% and net earnings increased 30% to $523.9
million compared to the first nine months of 1998. Diluted earnings per share
were $1.37 compared to $1.08 for the first nine months of last year. Pretax
earnings for the first nine months of 1999 were reduced by a nonrecurring
charge of $24.4 million relating to the Company's merger with Eagle. Excluding
the one-time charge, diluted earnings per share would have been $1.41 for the
first nine months of 1999.
The sales increase in the third quarter was attributable to an additional
8.8 million square feet of retail selling space relating to new and relocated
stores opening since last year's third quarter and the 6.3% comparable store
sales gain. Sales in the Company's core businesses performed well during the
third quarter. The Company experienced its strongest sales increases in
appliances, kitchen cabinets, tools, hardware and home decor categories.
Gross margin was 27.87% of sales for the quarter ended October 29, 1999
compared to 26.91% for last year's comparable quarter. Gross margin for the
nine months ended October 29, 1999 was 27.10% versus 26.57% in the first nine
months of 1998. The increase in margin rate for the third quarter and first
nine months of 1999 results primarily from lower product costs, controls
relating to inventory shrinkage, favorable changes in product mix and
leveraging of distribution facilities.
<PAGE> -9-
Selling, general and administrative expenses (SG&A) were 17.71% of sales
versus 17.64% in last year's third quarter. SG&A increased by 20% compared to
the 19% increase in sales for the quarter. The increase as a percentage of
sales primarily related to store payroll expense and Eagle integration costs.
These increased expenses were offset by lower net advertising expense,
increased credit card program income and lower expenses in general due to
better controls. SG&A was 17.02% of sales for the nine months ended October
29, 1999 compared to 17.22% for the same period last year. SG&A increased by
18% compared to the 19% increase in sales for the first nine months of 1999.
Lower net advertising expense, increased credit card program income and
controls relating to other expenses contributed to the positive leverage in
SG&A for the nine months ended October 29, 1999.
Store opening costs were $25.7 million for the quarter ended October 29,
1999 compared to $20.3 million last year, representing costs associated with
the opening of 21 stores during the current year's third quarter (13 new and
8 relocated). This compares to 16 stores for the comparable period last year
(10 new and 6 relocated). Charges in this quarter for future and prior
openings were $7.3 million compared to $7.5 million in last year's third
quarter. Charges totaling $2.6 and $2.7 million related to stores opening in
the third quarter of 1999 and 1998, respectively, were expensed prior to the
respective quarters. Store opening costs for the nine months ended October
29, 1999 were $59.4 million compared to $47.7 million last year. These costs
were associated with the opening of 55 stores during the first nine months of
1999 (29 new and 26 relocated) compared to 41 stores (25 new and 16 relocated)
opened during the first nine months of last year. For the nine months ended
October 29, 1999, store opening costs also included a $2.2 million charge
relating to Eagle's adoption of the American Institute of Certified Public
Accountants' Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". These expenses were previously capitalized and written off after
stores were opened. Currently, these costs are expensed as incurred. The
Company's 1999 expansion plans are discussed under "Liquidity and Capital
Resources" below.
Depreciation was $86.4 million for the quarter ended October 29, 1999 and
$246.1 million for the nine months then ended. This represents an increase of
18.7% and 16.0% over the respective comparable periods last year. The increase
is due primarily to additions of buildings, fixtures, displays and computer
equipment relating to the Company's expansion program.
Interest expense decreased from $19.3 million in last year's third quarter
to $18.9 million for the quarter ended October 29, 1999. The decrease
occurred primarily as a result of higher levels of interest income generated
from investments being offset against interest expense in the current year's
third quarter. Interest expense for the nine months ended October 29, 1999
increased to $64.3 million compared to $59.7 million for the first nine months
of 1998. Interest for the first nine months of 1999 has increased primarily
due to interest expense on debentures issued since last year's third quarter.
In the first quarter of 1999, the Company recorded nonrecurring costs of
$24.4 million relating to the merger with Eagle which consisted of $15.7
million relating to the writeoff of nonusable Eagle properties, $1.5 million
for severance obligations to former Eagle executives and $7.2 million in
direct merger costs such as accounting, legal, investment banker and other
miscellaneous fees.
The Company's effective income tax rate was 36.60% for the quarter ended
October 29, 1999 and 36.28% for last year's third quarter. The effective rate
was 36.75% compared to 36.27% for the nine months ended October 29, 1999 and
October 30, 1998, respectively. The higher rate in 1999 is primarily related
to the expansion into states with higher income tax rates and the impact of
non-deductible merger expenses.
<PAGE> -10-
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
$845 million for the nine months ended October 29, 1999 compared to $578
million for the first nine months of 1998. The $267 million increase in the
current year resulted primarily from increased earnings, an increase in other
liabilities due to payment timing differences and a smaller increase in
merchandise inventory as compared to the prior period. The Company's working
capital was $1.5 billion at October 29, 1999 compared to $1.1 billion at
October 30, 1998 and $943 million at January 29, 1999.
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 $1.0 billion for the nine months ended
October 29, 1999 compared to $747 million for the first nine months of 1998.
At October 29, 1999, the Company had 544 stores in 37 states and 52.8 million
square feet of retail selling space, a 20% increase over the selling space as
of October 30, 1998.
Cash flows provided by financing activities were $639 million for the nine
months ended October 29, 1999 compared to $275 million for the nine months
ended October 30, 1998. The major cash components of financing activities in
the first nine months of 1999 included the issuance of $400 million principal
of 6.5% debentures and $348.3 million in net proceeds from a common stock
offering.
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
1999 capital budget is approximately $1.7 billion, inclusive of approximately
$214 million in operating or capital leases. More than 80% of this planned
commitment is for store expansion. Expansion plans for 1999 consist of
approximately 90 stores (including the relocation of 31 older, smaller format
stores). This planned expansion is expected to increase sales floor square
footage by approximately 18%. Approximately 15% of the 1999 projects will be
leased and 85% will be owned. Expansion in the first nine months of fiscal
1999 included 29 new stores and 26 relocations representing 4.2 million square
feet of new incremental retail space.
The Company believes that funds from operations, debt and equity issuances,
leases and existing credit agreements will be adequate to finance the 1999
expansion plan and other operating needs.
As discussed in the annual report for the year ending January 29, 1999,
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 October 29, 1999 have not changed
materially since January 29, 1999. Long-term debt has increased primarily due
to the issuance of $400 million principal amount of 6.5% Debentures due March
15, 2029.
<PAGE> -11-
YEAR 2000
The Year 2000 problem arose because many existing computer programs and
embedded computer chips use only the last two digits to refer to a year. If
not addressed, computer programs that are date sensitive may not have the
ability to properly recognize dates in year 2000 and beyond. The result could
be a disruption of operations and the processing of transactions.
In 1997 and 1998, the Company completed an analysis of the impact and costs
relating to the Year 2000 problem and developed an implementation plan to
address information technology (IT), non-information technology (non-IT) and
third party readiness issues.
In preparing IT systems for the Year 2000, the Company has utilized both
internal and external resources. Contracted programming costs to convert the
Company's IT systems during 1997, 1998 and 1999 are estimated to total
approximately $5 million and are being expensed as incurred, the majority of
which had been incurred through the first quarter. Currently, all of the
programs appear to have been remediated. In addition, approximately $19
million of computer hardware has been purchased to replace non-compliant
computer hardware. The cost of new hardware is being capitalized and
depreciated over useful lives ranging from 3 to 5 years. Cash flow from
operations is the Company's source of funding all Year 2000 costs. The
incremental cost to convert systems has been mitigated by substantial
investments in new computer systems over the past six years. During this
period, new computer systems have been developed or purchased including, but
not limited to, these applications: Distribution, Electronic Data Interchange,
Payroll and Human Resources, General Ledger, Accounts Payable, Forecasting
and Replenishment and Supply Services. All of these new systems are Year 2000
compliant. The Company's conversion of internally developed legacy systems
was completed by the end of fiscal 1998. The first stage of certification
testing was completed in September, 1999 with stage two planned to be
completed by December 17, 1999. The objective of both stages of the testing
and certification is to demonstrate that the tested systems operate without
significant error after setting system clocks to several critical dates. The
second stage of testing is required to test and certify new applications and
upgrades that were installed since the beginning of the first stage of testing.
With respect to non-IT related risks, each functional area of the Company
is responsible for identifying these issues. Within each business function,
objectives have been prioritized and evaluated for risk of Year 2000 problems.
The assessment phase was completed in April 1999. Based on those assessments,
contingency plans for high priority and critical business functions were
developed and reviewed by the Company's senior management. The contingency
plans approved by senior management are being implemented and revised during
the remainder of calendar year 1999. Examples of potential non-IT risks of
Year 2000 problems would be power outages and failures of communication
systems, bar code readers and security devices. Over half of the Company's
stores have generators in place that would mitigate most problems associated
with a temporary power outage, while the remaining stores have the capability
to continue operations on a curtailed basis until power is restored.
In regards to third party readiness, the Company mailed Year 2000
questionnaires to all identified third parties (merchandise vendors and other
entities with which the Company conducts business) in order to assess whether
they are Year 2000 compliant or have adequately addressed their system
conversion requirements. Of the approximate eight thousand questionnaires
mailed, 60% of the recipients have currently responded. The Company has
identified and contacted critical merchandise vendors, all of which have
responded, and confirmed their Year 2000 readiness. The Company cannot
predict how many of the responses received may prove later to be inaccurate
or overly optimistic. To address this uncertainty, the Company has developed
contingency plans to address unanticipated interruptions or down time in both
the Company's and third parties' systems and services. These plans
<PAGE> -12-
call for shifting additional business to vendors that are able to timely
perform and/or identifying new alternate vendors.
The Company is continuing to execute its Year 2000 implementation plan and
is currently satisfied with the Company's progress. For the remainder of the
year, the Company's efforts will be devoted to three primary areas:
(1) Ongoing certification testing of IT systems to ensure Year 2000
compliance,
(2) contingency plan implementation, and
(3) continued follow-up with our external suppliers.
Following completion of the merger on April 2, 1999, the Company began a
review of the Eagle Hardware and Garden subsidiary preparedness for the Year
2000. The findings indicated that the Eagle computer systems are substantially
Year 2000 ready. Contengency plans for Eagle operations have been incorporated
into Lowe's contingency plans.
The Company believes that its contingency plans should mitigate any adverse
effect on its business from the Year 2000 problem. However, if:
(1) the Company has failed to identify and fix material non-complying equipment
or software, or
(2) third parties are unable to fulfill significant commitments to the Company
as a result of their failure to effectively address their Year 2000
problems,
the Company's ability to carry out its business could be adversely affected.
For example, the Company believes that its most likely worst case scenarios
would involve the inability of the Company's IT and non-IT systems to process
transactions in the stores or on a regional or company-wide basis. If that
were to occur, the Company could be forced to process these transactions
manually. The volume of business the Company could transact, and its sales
and income, would be reduced until it was able to develop alternatives to
defective systems or non-complying vendors. These reductions could occur at
individual stores or in clusters of stores sharing defective systems or
non-complying vendors. The effect of any failures on the Company's results of
operations would depend, of course, upon the extent of any non-compliance and
its impact on critical business systems and sources of supply, but could be
significant.
In order to be able to respond to any adverse affects that may arise, the
Company plans to activate its command center on December 31, 1999. The center
will be staffed with and supported by personnel from various disciplines of
the Company 24 hours a day through January 4th or as long as necessary. The
purpose of the command center and the additional departmental staffing is to
promptly identify any potential business interruptions and to mitigate any
possible problems as quickly as possible.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. SFAS 133 is effective for the Company in the year beginning January 26,
2001. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. Management is currently evaluating the impact of the adoption of
SFAS 133 and its effect on the Company's financial statements.
<PAGE> -13-
FORWARD-LOOKING STATEMENTS
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,
the nature of competition, vendor supply, and weather conditions, all which
are described in detail in the Company's 1998 Annual Report.
<PAGE> -14-
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
Lowe's Companies, Inc.:
We have reviewed the accompanying consolidated balance sheet of Lowe's
Companies, Inc. and subsidiary companies (the "Company") as of October 29,
1999, and the related consolidated statements of current and retained earnings
for the three-month and nine-month periods ended October 29, 1999 and October
30, 1998 and statements of cash flows for the nine months ended October 29,
1999 and October 30, 1998. These financial statements are the responsibility
of the Company's management. The accompanying consolidated financial
statements give retroactive effect to the 1999 merger of the Company and Eagle
Hardware & Garden, Inc., which has been accounted for as a pooling of
interests as described in Note 2 to the consolidated financial statements.
We were furnished with the reports of other accountants on their review of the
interim financial information of Eagle Hardware and Garden, Inc., whose total
revenues constituted 8% of consolidated total revenues for both the three-month
and nine-month periods ended October 30, 1998.
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 and the reports of other accountants, 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 29, 1999 prior to the restatement for the
1999 pooling of interests (not presented herein); and in our report dated
February 19, 1999, we expressed an unqualified opinion on those consolidated
financial statements. The financial statements of Eagle Hardware & Garden,
Inc. for the year ended January 29, 1999, were audited by other auditors whose
report, dated March 10, 1999, expressed an unqualified opinion on those
financial statements (not presented herein). We also audited the adjustments
to the consolidated financial statements that were applied to restate the
January 29, 1999 consolidated balance sheet of the Company (not presented
herein). In our opinion, such adjustments are appropriate and have been
properly applied and the information set forth in the accompanying consolidated
balance sheet as of January 29, 1999 is fairly stated, in all material
respects, in relation to the restated consolidated balance sheet from which
it has been derived.
As discussed in Note 3 to the consolidated financial statements, effective
July 31, 1999, the Company changed its method of accounting for costing a
substantial portion its inventories from the LIFO (last-in, first-out) method
to the FIFO (first-in, first-out) method, and retroactively restated the
accompanying financial statements for this change.
/s/ Deloitte & Touche, LLP
Charlotte, North Carolina
November 10, 1999
<PAGE> -15-
Part II - OTHER INFORMATION
Item 6 (a) - Exhibits
(18) Letter Regarding Change in Accounting Method Dated November 10, 1999
Refer to the Exhibit Index on page 16
Item 6 (b) - Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
October 29, 1999.
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.
December 13, 1999 /s/ Kenneth W. Black, Jr.
Date________________ _________________________________________
Kenneth W. Black, Jr.
Senior Vice President
and Chief Accounting Officer
<PAGE> -16-
EXHIBIT INDEX
Page No.
Exhibit 18 - Letter Regarding Change in Accounting Method
Dated November 10, 1999 17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-28-2000
<PERIOD-END> OCT-29-1999
<CASH> 623,426
<SECURITIES> 81,668
<RECEIVABLES> 177,705
<ALLOWANCES> 0
<INVENTORY> 2,820,000
<CURRENT-ASSETS> 3,877,206
<PP&E> 4,851,439
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,859,758
<CURRENT-LIABILITIES> 2,391,474
<BONDS> 0
0
0
<COMMON> 191,138
<OTHER-SE> 4,354,528
<TOTAL-LIABILITY-AND-EQUITY> 8,859,758
<SALES> 12,116,326
<TOTAL-REVENUES> 12,116,326
<CGS> 8,832,401
<TOTAL-COSTS> 8,832,401
<OTHER-EXPENSES> 2,391,424
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,324
<INCOME-PRETAX> 828,177
<INCOME-TAX> 304,314
<INCOME-CONTINUING> 523,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 523,863
<EPS-BASIC> 1.38
<EPS-DILUTED> 1.37
</TABLE>
November 10, 1999
Lowe's Companies, Inc.
Post Office Box 1111
North Wilkesboro, NC 28656
Dear Sirs/Madams:
At your request, we have read the description included in your Quarterly
Report on Form 10-Q to the Securities and Exchange Commission for the quarter
ended October 29, 1999, of the facts relating to the change in the method of
inventory pricing, from the last-in, first-out (LIFO) method to the first-in,
first-out (FIFO) method. We believe, on the basis of the facts so set forth
and other information furnished to us by appropriate officials of the Company,
that the accounting change described in your Form 10-Q is to an alternative
accounting principle that is preferable under the circumstances.
We have not audited any consolidated financial statements of Lowe's Companies,
Inc. and subsidiaries as of any date or for any period subsequent to January
29, 1999. Therefore, we are unable to express, and we do not express, an
opinion on the facts set forth in the above-mentioned Form 10-Q, on the
related information furnished to us by officials of the Company, or on the
financial position, results of operations, or cash flows of Lowe's Companies,
Inc. and subsidiaries as of any date or for any period subsequent to January
29, 1999.
Yours truly,
/s/ Deloitte & Touche, LLP
