Accounting
jiang
NYSE_LOWES_2016extract.pdf
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville, North Carolina
We have audited the accompanying consolidated balance sheets of Lowe’s Companies, Inc. and subsidiaries (the “Company”)
as of February 3, 2017 and January 29, 2016, and the related consolidated statements of earnings, comprehensive income,
shareholders’ equity, and cash flows for each of the three fiscal years in the period ended February 3, 2017. Our audits also
included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the
Company at February 3, 2017 and January 29, 2016, and the results of its operations and its cash flows for each of the three
fiscal years in the period ended February 3, 2017, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of February 3, 2017, based on the criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated April 3, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
April 3, 2017
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville, North Carolina
We have audited the internal control over financial reporting of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as
of February 3, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control over
Financial Reporting, management excluded from its assessment the internal control over financial reporting at RONA Inc.
(“RONA”), which was acquired on May 20, 2016 and whose financial statements constitute 8.9% and 3.4% of the Company’s
consolidated total assets and consolidated net sales, respectively, as of and for the fiscal year ended February 3, 2017.
Accordingly, our audit did not include the internal control over financial reporting at RONA. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
February 3, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements and financial statement schedule as of and for the fiscal year ended February 3, 2017 of
the Company and our report dated April 3, 2017 expressed an unqualified opinion on those financial statements and financial
statement schedule.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
April 3, 2017
35
Lowe’s Companies, Inc.
Consolidated Statements of Earnings
(In millions, except per share and percentage data)
February 3, 2017 % Sales
January 29, 2016 % Sales
January 30, 2015 % Sales Fiscal years ended on
Net sales $ 65,017 100.00 % $ 59,074 100.00 % $ 56,223 100.00 %
Cost of sales 42,553 65.45 38,504 65.18 36,665 65.21
Gross margin 22,464 34.55 20,570 34.82 19,558 34.79
Expenses:
Selling, general and administrative 15,129 23.27 14,105 23.88 13,272 23.60
Depreciation and amortization 1,489 2.29 1,494 2.53 1,494 2.66
Operating income 5,846 8.99 4,971 8.41 4,792 8.53
Interest - net 645 0.99 552 0.93 516 0.92
Pre-tax earnings 5,201 8.00 4,419 7.48 4,276 7.61
Income tax provision 2,108 3.24 1,873 3.17 1,578 2.81
Net earnings $ 3,093 4.76 % $ 2,546 4.31 % $ 2,698 4.80 %
Basic earnings per common share $ 3.48 $ 2.73 $ 2.71
Diluted earnings per common share $ 3.47 $ 2.73 $ 2.71
Cash dividends per share $ 1.33 $ 1.07 $ 0.87
Lowe’s Companies, Inc.
Consolidated Statements of Comprehensive Income
(In millions, except percentage data)
February 3, 2017 % Sales
January 29, 2016 % Sales
January 30, 2015 % Sales Fiscal years ended on
Net earnings $ 3,093 4.76 % $ 2,546 4.31 % $ 2,698 4.80 %
Foreign currency translation adjustments - net of tax 154
0.23
(291 ) (0.49 ) (86 ) (0.15 )
Other comprehensive income/(loss) 154 0.23 (291 ) (0.49 ) (86 ) (0.15 )
Comprehensive income $ 3,247 4.99 % $ 2,255 3.82 % $ 2,612 4.65 %
See accompanying notes to consolidated financial statements.
36
Lowe’s Companies, Inc.
Consolidated Balance Sheets
(In millions, except par value and percentage data)
February 3, 2017 % Total
January 29, 2016 % Total
Assets
Current assets:
Cash and cash equivalents $ 558 1.6 % $ 405 1.3 %
Short-term investments 100 0.3 307 1.0
Merchandise inventory - net 10,458 30.4 9,458 30.3
Other current assets 884 2.6 391 1.3
Total current assets 12,000 34.9 10,561 33.9
Property, less accumulated depreciation 19,949 58.0 19,577 62.6
Long-term investments 366 1.1 222 0.7
Deferred income taxes - net 222 0.6 241 0.8
Goodwill 1,082 3.1 154 0.5
Other assets 789 2.3 511 1.5
Total assets $ 34,408 100.0 % $ 31,266 100.0 %
Liabilities and shareholders’ equity
Current liabilities:
Short-term borrowings $ 510 1.5 % $ 43 0.1 %
Current maturities of long-term debt 795 2.3 1,061 3.4
Accounts payable 6,651 19.3 5,633 18.0
Accrued compensation and employee benefits 790 2.3 820 2.6
Deferred revenue 1,253 3.6 1,078 3.4
Other current liabilities 1,975 5.7 1,857 6.1
Total current liabilities 11,974 34.7 10,492 33.6
Long-term debt, excluding current maturities 14,394 41.8 11,545 36.9
Deferred revenue - extended protection plans 763 2.2 729 2.3
Other liabilities 843 2.6 846 2.7
Total liabilities 27,974 81.3 23,612 75.5
Commitments and contingencies
Shareholders’ equity:
Preferred stock - $5 par value, none issued — — — —
Common stock - $.50 par value;
Shares issued and outstanding
February 3, 2017 866
January 29, 2016 910 433 1.3 455 1.5
Capital in excess of par value — — — —
Retained earnings 6,241 18.1 7,593 24.3
Accumulated other comprehensive loss (240 ) (0.7 ) (394 ) (1.3 )
Total shareholders’ equity 6,434 18.7 7,654 24.5
Total liabilities and shareholders’ equity $ 34,408 100.0 % $ 31,266 100.0 %
See accompanying notes to consolidated financial statements.
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38
Lowe’s Companies, Inc.
Consolidated Statements of Cash Flows
(In millions)
February 3, 2017
January 29, 2016
January 30, 2015 Fiscal years ended on
Cash flows from operating activities:
Net earnings $ 3,093 $ 2,546 $ 2,698
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 1,590 1,587 1,586
Deferred income taxes 28 (68 ) (124 )
Loss on property and other assets – net 143 30 25
Loss on cost method and equity method investments 302 594 57
Share-based payment expense 90 117 119
Changes in operating assets and liabilities:
Merchandise inventory – net (178 ) (582 ) 170
Other operating assets (183 ) (34 ) 83
Accounts payable 653 524 127
Other operating liabilities 79 70 188
Net cash provided by operating activities 5,617 4,784 4,929
Cash flows from investing activities:
Purchases of investments (1,192 ) (934 ) (820 )
Proceeds from sale/maturity of investments 1,254 884 805
Capital expenditures (1,167 ) (1,197 ) (880 )
Contributions to equity method investments – net — (125 ) (241 )
Proceeds from sale of property and other long-term assets 37 57 52
Purchases of derivative instruments (103 ) — —
Proceeds from settlement of derivative instruments 179 — —
Acquisition of business - net (2,356 ) — —
Other – net (13 ) (28 ) (4 )
Net cash used in investing activities (3,361 ) (1,343 ) (1,088 )
Cash flows from financing activities:
Net change in short-term borrowings 466 43 (386 )
Net proceeds from issuance of long-term debt 3,267 1,718 1,239
Repayment of long-term debt (1,173 ) (552 ) (48 )
Proceeds from issuance of common stock under share-based payment plans 139 125 137
Cash dividend payments (1,121 ) (957 ) (822 )
Repurchase of common stock (3,595 ) (3,925 ) (3,905 )
Other – net (75 ) 55 24
Net cash used in financing activities (2,092 ) (3,493 ) (3,761 )
Effect of exchange rate changes on cash (11 ) (9 ) (5 )
Net increase/(decrease) in cash and cash equivalents 153 (61 ) 75
Cash and cash equivalents, beginning of year 405 466 391
Cash and cash equivalents, end of year $ 558 $ 405 $ 466
See accompanying notes to consolidated financial statements.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 3, 2017, JANUARY 29, 2016 AND JANUARY 30, 2015
NOTE 1: Summary of Significant Accounting Policies
Lowe’s Companies, Inc. and subsidiaries (the Company) is the world’s second-largest home improvement retailer and operated
2,129 stores in the United States, Canada, and Mexico at February 3, 2017. Below are those accounting policies considered by
the Company to be significant.
Fiscal Year - The Company’s fiscal year ends on the Friday nearest the end of January. Fiscal 2016 contained 53 weeks, and
fiscal years 2015 and 2014 each contained 52 weeks. All references herein for the years 2016, 2015, and 2014 represent the
fiscal years ended February 3, 2017, January 29, 2016, and January 30, 2015, respectively.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-
owned or controlled operating subsidiaries. All intercompany accounts and transactions have been eliminated.
Foreign Currency - The functional currencies of the Company’s international subsidiaries are generally the local currencies of
the countries in which the subsidiaries are located. Foreign currency denominated assets and liabilities are translated into U.S.
dollars using the exchange rates in effect at the consolidated balance sheet date. Results of operations and cash flows are
translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of
assets and liabilities is included as a component of shareholders’ equity in accumulated other comprehensive loss. Gains and
losses from foreign currency transactions are included in selling, general and administrative (SG&A) expense.
Use of Estimates - The preparation of the Company’s financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make estimates that affect the reported amounts of assets,
liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. The Company bases these estimates
on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates
concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may
differ from these estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, demand deposits, and short-term investments
with original maturities of three months or less when purchased. Cash and cash equivalents are carried at amortized cost on the
consolidated balance sheets. The majority of payments due from financial institutions for the settlement of credit card and
debit card transactions process within two business days and are, therefore, classified as cash and cash equivalents.
Investments - As of February 3, 2017, investments consisted primarily of money market funds, municipal obligations,
certificates of deposit, and municipal floating rate obligations, all of which are classified as available-for-sale. Available-for-
sale securities are recorded at fair value, and unrealized gains and losses are recorded, net of tax, as a component of
accumulated other comprehensive income. Gross unrealized gains and losses were insignificant at February 3, 2017 and
January 29, 2016.
The proceeds from sales of available-for-sale securities were $505 million, $394 million, and $283 million for 2016, 2015, and
2014, respectively. Gross realized gains and losses on the sale of available-for-sale securities were not significant for any of the
periods presented.
Investments with a stated maturity date of one year or less from the balance sheet date or that are expected to be used in current
operations are classified as short-term investments. All other investments are classified as long-term. Investments classified as
long-term at February 3, 2017, will mature in one to 38 years, based on stated maturity dates.
The Company classifies as investments restricted balances primarily pledged as collateral for the Company’s extended
protection plan program. Restricted balances included in short-term investments were $81 million at February 3, 2017, and
$234 million at January 29, 2016. Restricted balances included in long-term investments were $354 million at February 3,
2017, and $202 million at January 29, 2016.
Merchandise Inventory - The majority of the Company’s inventory is stated at the lower of cost or market using the first-in,
first-out method of inventory accounting. Inventory for certain subsidiaries representing approximately 8% of the consolidated
inventory balance as of February 3, 2017, is stated at lower of cost or market using other inventory methods, including the
weighted average cost method and the retail inventory method. The cost of inventory includes certain costs associated with the
preparation of inventory for resale, including distribution center costs, and is net of vendor funds.
40
The Company records an inventory reserve for the anticipated loss associated with selling inventories below cost. This reserve
is based on management’s current knowledge with respect to inventory levels, sales trends, and historical
experience. Management does not believe the Company’s merchandise inventories are subject to significant risk of
obsolescence in the near term, and management has the ability to adjust purchasing practices based on anticipated sales trends
and general economic conditions. However, changes in consumer purchasing patterns could result in the need for additional
reserves. The Company also records an inventory reserve for the estimated shrinkage between physical inventories. This
reserve is based primarily on actual shrink results from previous physical inventories. Changes in the estimated shrink reserve
are made based on the timing and results of physical inventories.
The Company receives funds from vendors in the normal course of business, principally as a result of purchase volumes, sales,
early payments, or promotions of vendors’ products. Generally, these vendor funds do not represent the reimbursement of
specific, incremental, and identifiable costs incurred by the Company to sell the vendor’s product. Therefore, the Company
treats these funds as a reduction in the cost of inventory as the amounts are accrued, and are recognized as a reduction of cost of
sales when the inventory is sold. Funds that are determined to be reimbursements of specific, incremental, and identifiable
costs incurred to sell vendors’ products are recorded as an offset to the related expense. The Company develops accrual rates
for vendor funds based on the provisions of the agreements in place. Due to the complexity and diversity of the individual
vendor agreements, the Company performs analyses and reviews historical trends throughout the year and confirms actual
amounts with select vendors to ensure the amounts earned are appropriately recorded. Amounts accrued throughout the year
could be impacted if actual purchase volumes differ from projected annual purchase volumes, especially in the case of
programs that provide for increased funding when graduated purchase volumes are met.
Credit Programs - The Company has an agreement with Synchrony Bank (Synchrony), formerly GE Capital Retail, under
which Synchrony purchases at face value commercial business accounts receivable originated by the Company and services
these accounts. This agreement expires in December 2023, unless terminated sooner by the parties. The Company primarily
accounts for these transfers as sales of the accounts receivable. When the Company transfers its commercial business accounts
receivable, it retains certain interests in those receivables, including the funding of a loss reserve and its obligation related to
Synchrony’s ongoing servicing of the receivables sold. Any gain or loss on the sale is determined based on the previous
carrying amounts of the transferred assets allocated at fair value between the receivables sold and the interests retained. Fair
value is based on the present value of expected future cash flows, taking into account the key assumptions of anticipated credit
losses, payment rates, late fee rates, Synchrony’s servicing costs, and the discount rate commensurate with the uncertainty
involved. Due to the short-term nature of the receivables sold, changes to the key assumptions would not materially impact the
recorded gain or loss on the sales of receivables or the fair value of the retained interests in the receivables.
Total commercial business accounts receivable sold to Synchrony were $2.8 billion in 2016, $2.6 billion in 2015, and $2.4
billion in 2014. The Company recognized losses of $32 million in 2016, $36 million in 2015, and $38 million in 2014 on these
receivable sales as SG&A expense, which primarily relates to the fair value of obligations related to servicing costs that are
remitted to Synchrony monthly. At February 3, 2017 and January 29, 2016, the fair value of the retained interests was
determined based on the present value of expected future cash flows and was insignificant.
Sales generated through the Company’s proprietary credit cards are not reflected in receivables. Under an agreement with
Synchrony, credit is extended directly to customers by Synchrony. All credit program-related services are performed and
controlled directly by Synchrony. The Company has the option, but no obligation, to purchase the receivables at the end of the
agreement in December 2023. Tender costs, including amounts associated with accepting the Company’s proprietary credit
cards, are included in SG&A expense in the consolidated statements of earnings.
The total portfolio of receivables held by Synchrony, including both receivables originated by Synchrony from the Company’s
proprietary credit cards and commercial business accounts receivable originated by the Company and sold to Synchrony,
approximated $9.6 billion at February 3, 2017, and $8.8 billion at January 29, 2016.
Property and Depreciation - Property is recorded at cost. Costs associated with major additions are capitalized and
depreciated. Capital assets are expected to yield future benefits and have original useful lives which exceed one year. The total
cost of a capital asset generally includes all applicable sales taxes, delivery costs, installation costs, and other appropriate costs
incurred by the Company, including interest in the case of self-constructed assets. Upon disposal, the cost of properties and
related accumulated depreciation is removed from the accounts, with gains and losses reflected in SG&A expense in the
consolidated statements of earnings.
Property consists of land, buildings and building improvements, equipment, and construction in progress. Buildings and
building improvements includes owned buildings, as well as buildings under capital lease and leasehold improvements.
41
Equipment primarily includes store racking and displays, computer hardware and software, forklifts, vehicles, and other store
equipment.
Depreciation is provided over the estimated useful lives of the depreciable assets. Assets are depreciated using the straight-line
method. Leasehold improvements and assets under capital lease are depreciated over the shorter of their estimated useful lives
or the term of the related lease, which may include one or more option renewal periods where failure to exercise such options
would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to be reasonably
assured. During the term of a lease, if leasehold improvements are placed in service significantly after the inception of the
lease, the Company depreciates these leasehold improvements over the shorter of the useful life of the leasehold assets or a
term that includes lease renewal periods deemed to be reasonably assured at the time the leasehold improvements are placed
into service. The amortization of these assets is included in depreciation expense in the consolidated financial statements.
Long-Lived Asset Impairment/Exit Activities - The carrying amounts of long-lived assets are reviewed whenever certain
events or changes in circumstances indicate that the carrying amounts may not be recoverable. A potential impairment has
occurred for long-lived assets held-for-use if projected future undiscounted cash flows expected to result from the use and
eventual disposition of the assets are less than the carrying amounts of the assets. An impairment loss is recorded for long-
lived assets held-for-use when the carrying amount of the asset is not recoverable and exceeds its fair value.
Excess properties that are expected to be sold within the next 12 months and meet the other relevant held-for-sale criteria are
classified as long-lived assets held-for-sale. Excess properties consist primarily of retail outparcels and property associated
with relocated or closed locations. An impairment loss is recorded for long-lived assets held-for-sale when the carrying amount
of the asset exceeds its fair value less cost to sell. A long-lived asset is not depreciated while it is classified as held-for-sale.
For long-lived assets to be abandoned, the Company considers the asset to be disposed of when it ceases to be used. Until it
ceases to be used, the Company continues to classify the asset as held-for-use and tests for potential impairment accordingly. If
the Company commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, its
depreciable life is re-evaluated.
The Company recorded long-lived asset impairment losses of $43 million during 2016, including $34 million for operating
locations and $9 million for excess properties classified as held-for-use. The Company recorded impairment losses of $10
million during 2015, including $8 million for operating locations and $2 million for excess properties classified as held-for-
use. The Company recorded long-lived asset impairment of $28 million during 2014, including $26 million for operating
locations and $2 million for excess properties classified as held-for-use. Impairment losses are included in SG&A expense in
the consolidated statements of earnings. Fair value measurements associated with long-lived asset impairments are further
described in Note 4 to the consolidated financial statements.
The net carrying amount of excess properties that do not meet the held-for-sale criteria is included in other assets (noncurrent)
on the consolidated balance sheets and totaled $174 million and $131 million at February 3, 2017 and January 29, 2016,
respectively.
When locations under operating leases are closed, a liability is recognized for the fair value of future contractual obligations,
including future minimum lease payments, property taxes, utilities, common area maintenance, and other ongoing expenses, net
of estimated sublease income and other recoverable items. When the Company commits to an exit plan and communicates that
plan to affected employees, a liability is recognized in connection with one-time employee termination benefits. Subsequent
changes to the liabilities, including a change resulting from a revision to either the timing or the amount of estimated cash
flows, are recognized in the period of change. Expenses associated with exit activities are included in SG&A expense in the
consolidated statement of earnings.
Goodwill - Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired, less liabilities
assumed, in a business combination. The Company reviews goodwill for impairment at the reporting unit level, which is one
level below the operating segment level. Goodwill is not amortized but is evaluated for impairment at least annually on the
first day of the fourth quarter or whenever events or changes in circumstances indicate that it is more likely than not that the
carrying amount may not be recoverable.
The first step of the goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit
with its carrying amount, including goodwill. Fair value represents the price a market participant would be willing to pay in a
potential sale of the reporting unit and is based on discounted future cash flows. If the fair value exceeds carrying value, then
no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required
to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible
42
assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the
implied fair value of the reporting unit’s goodwill is compared to the carrying value of that goodwill. If the carrying valu e of
the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amo unt
equal to the excess, not to exceed the carrying value.
A reporting unit is an operating segment or a business unit one level below that operating segment, for which discrete financial
information is prepared and regularly reviewed by segment management. During fiscal year 2016, goodwill was allocated to
the following reporting units: U.S. Home Improvement, Orchard Supply Hardware (Orchard), Canada - Retail, and Canada -
Distribution.
During the third quarter of fiscal year 2016, due to a strategic reassessment of the Orchard operations, the Company determined
potential indicators of impairment within the reporting unit existed, and quantitatively evaluated the Orchard reporting unit for
impairment. The Company classified this fair value measurement as Level 3. See Note 4 for additional information on the
Company’s fair value measurements. The Company performed a discounted cash flow analysis for the Orchard reporting unit.
The discounted cash flow model included management assumptions for expected sales growth, expansion plans, capital
expenditures, and overall operational forecasts. The analysis led to the conclusion that the goodwill allocated to the Orchard
reporting unit had no implied value. Accordingly, the full carrying value of $46 million relating to Orchard goodwill was
impaired during the third quarter.
The changes in the carrying amount of goodwill for 2016, 2015, and 2014 were as follows:
(In millions) 2016 2015 2014
Goodwill, balance at beginning of year $ 154 $ 154 $ 155
Acquisitions 1,015 — —
Impairment (46 ) — (1 )
Foreign currency translation adjustments (41 ) — —
Goodwill, balance at end of year $ 1,082 $ 154 $ 154
In May 2016, the Company completed its acquisition of RONA inc. (RONA). As a result of the acquisition, goodwill increased
$976 million which was allocated to the Canada - Retail and Canada - Distribution reporting units. See Note 2 for additional
information on the RONA acquisition.
Gross carrying amounts and cumulative goodwill impairment losses are as follows:
February 3, 2017 January 29, 2016
(In millions) Gross Carrying
Amount Cumulative Impairment
Gross Carrying Amount
Cumulative Impairment
Goodwill $ 1,129 $ (47 ) $ 155 $ (1 )
Equity Method Investments - The Company’s investments in certain unconsolidated entities are accounted for under the
equity method. The balance of these investments is included in other assets (noncurrent) in the accompanying consolidated
balance sheets. The balance is increased to reflect the Company’s capital contributions and equity in earnings of the
investees. The balance is decreased for its equity in losses of the investees, for distributions received that are not in excess of
the carrying amount of the investments, and for any other than temporary impairment losses recognized. The Company’s
equity in earnings and losses of the investees and other than temporary impairment losses are included in SG&A expense.
Equity method investments are evaluated for impairment whenever events or changes in circumstances indicate that a decline
in value has occurred that is other than temporary. Evidence considered in this evaluation includes, but would not necessarily
be limited to, the financial condition and near-term prospects of the investee, recent operating trends and forecasted
performance of the investee, market conditions in the geographic area or industry in which the investee operates and the
Company’s strategic plans for holding the investment in relation to the period of time expected for an anticipated recovery of
its carrying value. Investments that are determined to have a decline in value deemed to be other than temporary are written
down to estimated fair value. See Note 3 for additional information on the investment in the Australian joint venture.
Leases - For lease agreements that provide for escalating rent payments or free-rent occupancy periods, the Company
recognizes rent expense on a straight-line basis over the non-cancellable lease term and option renewal periods where failure to
exercise such options would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to
43
be reasonably assured. The lease term commences on the date that the Company takes possession of or controls the physical
use of the property. Deferred rent is included in other liabilities (noncurrent) on the consolidated balance sheets.
When the Company renegotiates and amends a lease to extend the non-cancellable lease term prior to the date at which it would
have been required to exercise or decline a term extension option, the amendment is treated as a new lease. The new lease
begins on the date the lease amendment is entered into and ends on the last date of the non-cancellable lease term, as adjusted
to include any option renewal periods where failure to exercise such options would result in an economic penalty in such
amount that renewal appears, at the inception of the lease amendment, to be reasonably assured. The new lease is classified as
operating or capital under the authoritative guidance through use of assumptions regarding residual value, economic life,
incremental borrowing rate, and fair value of the leased asset(s) as of the date of the amendment.
Accounts Payable - The Company has an agreement with a third party to provide an accounts payable tracking system which
facilitates participating suppliers’ ability to finance payment obligations from the Company with designated third-party
financial institutions. Participating suppliers may, at their sole discretion, make offers to finance one or more payment
obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The
Company’s goal in entering into this arrangement is to capture overall supply chain savings, in the form of pricing, payment
terms, or vendor funding, created by facilitating suppliers’ ability to finance payment obligations at more favorable discount
rates, while providing them with greater working capital flexibility.
The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by
suppliers’ decisions to finance amounts under this arrangement. However, the Company’s right to offset balances due from
suppliers against payment obligations is restricted by this arrangement for those payment obligations that have been financed
by suppliers. As of February 3, 2017 and January 29, 2016, $1.6 billion and $1.3 billion, respectively, of the Company’s
outstanding payment obligations had been placed on the accounts payable tracking system, and participating suppliers had
financed $1.0 billion and $921 million, respectively, of those payment obligations to participating financial institutions.
Other Current Liabilities - Other current liabilities on the consolidated balance sheets consist of:
(In millions) February 3, 2017 January 29, 2016
Self-insurance liabilities $ 327 $ 343
Accrued dividends 304 255
Sales tax liabilities 210 140
Accrued interest 194 179
Accrued property taxes 108 111
Other 832 829
Total $ 1,975 $ 1,857
Self-Insurance - The Company is self-insured for certain losses relating to workers’ compensation, automobile, property, and
general and product liability claims. The Company has insurance coverage to limit the exposure arising from these
claims. The Company is also self-insured for certain losses relating to extended protection plan and medical and dental
claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management’s estimates of the
discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and
historical experience. Although management believes it has the ability to reasonably estimate losses related to claims, it is
possible that actual results could differ from recorded self-insurance liabilities. The total self-insurance liability, including the
current and non-current portions, was $831 million and $883 million at February 3, 2017, and January 29, 2016, respectively.
The Company provides surety bonds issued by insurance companies to secure payment of workers’ compensation liabilities as
required in certain states where the Company is self-insured. Outstanding surety bonds relating to self-insurance were $243
million and $240 million at February 3, 2017, and January 29, 2016, respectively.
Income Taxes - The Company establishes deferred income tax assets and liabilities for temporary differences between the tax
and financial accounting bases of assets and liabilities. The tax effects of such differences are reflected in the consolidated
balance sheets at the enacted tax rates expected to be in effect when the differences reverse. A valuation allowance is recorded
to reduce the carrying amount of deferred tax assets if it is more likely than not that all or a portion of the asset will not be
realized. The tax balances and income tax expense recognized by the Company are based on management’s interpretation of
the tax statutes of multiple jurisdictions.
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The Company establishes a liability for tax positions for which there is uncertainty as to whether or not the position will be
ultimately sustained. The Company includes interest related to tax issues as part of net interest on the consolidated financial
statements. The Company records any applicable penalties related to tax issues within the income tax provision.
Shareholders’ Equity - The Company has a share repurchase program that is executed through purchases made from time to
time either in the open market or through private market transactions. Shares purchased under the repurchase program are
retired and returned to authorized and unissued status. Any excess of cost over par value is charged to additional paid-in capital
to the extent that a balance is present. Once additional paid-in capital is fully depleted, remaining excess of cost over par value
is charged to retained earnings.
Revenue Recognition - The Company recognizes revenues, net of sales tax, when sales transactions occur and customers take
possession of the merchandise. A provision for anticipated merchandise returns is provided through a reduction of sales and
cost of sales in the period that the related sales are recorded. Revenues from product installation services are recognized when
the installation is completed. Deferred revenues associated with amounts received for which customers have not yet taken
possession of merchandise or for which installation has not yet been completed were $755 million and $619 million at
February 3, 2017, and January 29, 2016, respectively.
Revenues from stored-value cards, which include gift cards and returned merchandise credits, are deferred and recognized
when the cards are redeemed. The liability associated with outstanding stored-value cards was $498 million and $459 million
at February 3, 2017, and January 29, 2016, respectively, and these amounts are included in deferred revenue on the
consolidated balance sheets. The Company recognizes income from unredeemed stored-value cards at the point at which
redemption becomes remote. The Company’s stored-value cards have no expiration date or dormancy fees. Therefore, to
determine when redemption is remote, the Company analyzes an aging of the unredeemed cards based on the date of last
stored-value card use. The amount of revenue recognized from unredeemed stored-value cards for which redemption was
deemed remote was not significant for 2016, 2015, and 2014.
Extended Protection Plans - The Company sells separately-priced extended protection plan contracts under a Lowe’s-branded
program for which the Company is ultimately self-insured. The Company recognizes revenue from extended protection plan
sales on a straight-line basis over the respective contract term. Extended protection plan contract terms primarily range from
one to four years from the date of purchase or the end of the manufacturer’s warranty, as applicable. Changes in deferred
revenue for extended protection plan contracts are summarized as follows:
(In millions) 2016 2015 2014
Deferred revenue - extended protection plans, beginning of year $ 729 $ 730 $ 730
Additions to deferred revenue 387 350 318
Deferred revenue recognized (353 ) (351 ) (318 )
Deferred revenue - extended protection plans, end of year $ 763 $ 729 $ 730
Incremental direct acquisition costs associated with the sale of extended protection plans are also deferred and recognized as
expense on a straight-line basis over the respective contract term. Deferred costs associated with extended protection plan
contracts were $18 million and $20 million at February 3, 2017, and January 29, 2016, respectively. The Company’s extended
protection plan deferred costs are included in other assets (noncurrent) on the consolidated balance sheets. All other costs, such
as costs of services performed under the contract, general and administrative expenses, and advertising expenses are expensed
as incurred.
The liability for extended protection plan claims incurred is included in other current liabilities on the consolidated balance
sheets and was not material in any of the years presented. Expenses for claims are recognized when incurred and totaled $141
million, $127 million, and $123 million for 2016, 2015, and 2014, respectively.
45
Cost of Sales and Selling, General and Administrative Expenses - The following lists the primary costs classified in each
major expense category:
Cost of Sales Selling, General and Administrative
Total cost of products sold, including:
- Purchase costs, net of vendor funds;
- Freight expenses associated with moving merchandise inventories from vendors to retail stores;
- Costs associated with operating the Company’s distribution network, including payroll and benefit costs and occupancy costs;
Costs of installation services provided;
Costs associated with delivery of products directly from vendors to customers by third parties;
Costs associated with inventory shrinkage and obsolescence;
Costs of services performed under the extended protection plan.
Payroll and benefit costs for retail and corporate employees;
Occupancy costs of retail and corporate facilities;
Advertising;
Costs associated with delivery of products from stores and distribution centers to customers;
Third-party, in-store service costs;
Tender costs, including bank charges, costs associated with credit card interchange fees and amounts associated with accepting the Company’s proprietary credit cards;
Costs associated with self-insured plans, and premium costs for stop-loss coverage and fully insured plans;
Long-lived asset impairment losses and gains/losses on disposal of assets;
Other administrative costs, such as supplies, and travel and entertainment.
Advertising - Costs associated with advertising are charged to expense as incurred. Advertising expenses were $893 million,
$769 million, and $819 million in 2016, 2015, and 2014, respectively.
Shipping and Handling Costs - The Company includes shipping and handling costs relating to the delivery of products
directly from vendors to customers by third parties in cost of sales. Shipping and handling costs, which include third-party
delivery costs, salaries, and vehicle operations expenses relating to the delivery of products from stores and distribution centers
to customers, are classified as SG&A expense. Shipping and handling costs included in SG&A expense were $700 million,
$607 million and $548 million in 2016, 2015, and 2014, respectively.
Store Opening Costs - Costs of opening new or relocated retail stores, which include payroll and supply costs incurred prior to
store opening and grand opening advertising costs, are charged to expense as incurred.
Comprehensive Income - The Company reports comprehensive income in its consolidated statements of comprehensive
income and consolidated statements of shareholders’ equity. Comprehensive income represents changes in shareholders’ equity
from non-owner sources and is comprised of net earnings adjusted primarily for foreign currency translation adjustments. Net
foreign currency translation losses, net of tax, classified in accumulated other comprehensive loss were $240 million, $394
million, and $103 million at February 3, 2017, January 29, 2016, and January 30, 2015, respectively.
Segment Information - The Company’s home improvement retail operations represent a single reportable segment. Key
operating decisions are made at the Company level in order to maintain a consistent retail store presentation. The Company’s
home improvement retail stores sell similar products and services, use similar processes to sell those products and services, and
sell their products and services to similar classes of customers. In addition, the Company’s operations exhibit similar long-term
economic characteristics. The amounts of long-lived assets and net sales outside of the U.S. were approximately 8.7% and
5.7%, respectively, at February 3, 2017 and were not significant at January 29, 2016, and January 30, 2015.
Reclassifications - Certain prior period amounts have been reclassified to conform to current classifications.
Recent Accounting Pronouncements - In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2017-04, Intangibles-Goodwill and Other (Topic 350). The ASU eliminates Step 2 of the goodwill
impairment test, which requires determining the fair value of assets acquired or liabilities assumed in a business combination.
Under the amendments in this update, a goodwill impairment test is performed by comparing the fair value of the reporting unit
with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to
that reporting unit. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within
those annual periods, with early adoption permitted. The adoption of this guidance by the Company is not expected to have a
material impact on its consolidated financial statements.
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In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting. The ASU eliminates the APIC pool concept and requires that excess tax benefits and tax
deficiencies be recorded in the income statement when awards are settled. The pronouncement also addresses simplifications
related to statement of cash flows classification, accounting for forfeitures, and minimum statutory tax withholding
requirements. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods, with early adoption permitted. We plan to adopt this ASU in the first quarter of fiscal year 2017. The primary
impact of adopting the ASU will be the recognition of excess tax benefits and deficiencies within income taxes, which will
increase the volatility within our provision for income taxes as these excess amounts are dependent on our stock price at the
date the awards vest or are exercised. The Company has elected to continue estimating forfeitures of share-based awards when
determining compensation cost to be recognized each period. The Company does not expect the other provisions within the
ASU to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing
guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on
the balance sheet for those leases previously classified as operating leases. For leases with a term of 12 months or less, a lessee
is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.
If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease
term. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years,
with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated
financial statements but expects the ASU to have a material impact on its financial position, as a result of the requirement to
recognize right-of-use assets and lease liabilities on the Company’s consolidated balance sheets.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. The ASU
requires, among other things, that entities measure equity investments (except those accounted for under the equity method of
accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in net
income. Under this ASU, entities will no longer be able to recognize unrealized holding gains and losses on available-for-sale
equity securities in other comprehensive income, and they will no longer be able to use the cost method of accounting for
equity securities that do not have readily determinable fair values. The guidance for classifying and measuring investments in
debt securities and loans is not impacted. ASU 2016-01 eliminates certain disclosure requirements related to financial
instruments measured at amortized cost and adds disclosures related to the measurement categories of financial assets and
financial liabilities. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is
permitted for only certain portions of the ASU. The adoption of this guidance by the Company is not expected to have a
material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The ASU requires entities using the
first-in, first-out (FIFO) inventory costing method to subsequently value inventory at the lower of cost and net realizable value.
The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. This ASU requires prospective application and is effective for
fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted.
The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial
statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The ASU is a comprehensive new
revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the ASU to fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for fiscal years
beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to
adopt this ASU. The Company continues to evaluate the adoption of this standard and its subsequent related amendments and
interpretations. However, based on our preliminary assessment, we do not expect the standard to materially affect our
consolidated financial statements. We have determined the adoption of the guidance will impact the timing of recognition of
our stored value card breakage. Currently, breakage is recognized using the remote method and will be recognized using the
proportional method upon adoption of the guidance We do not intend to early adopt the guidance, and based on our initial
assessment of potential impacts to our consolidated financial statements, we expect to use a modified retrospective approach to
adoption.
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NOTE 2: Acquisitions
On May 20, 2016, the Company acquired all of the issued and outstanding common shares of RONA for C$24 per share in
cash. In addition, as part of the transaction, borrowings under RONA’s revolving credit facility were settled in full at the
closing of the acquisition, and the facility was eliminated. Total cash consideration to acquire the equity and settle the debt was
C$3.1 billion ($2.4 billion) and is included in the investing section of the consolidated statements of cash flows. RONA is one
of Canada’s largest retailers and distributors of hardware, building materials, home renovation, and gardening products. The
acquisition is expected to enable the Company to accelerate its growth strategy by significantly expanding its presence in the
Canadian home improvement market. Acquisition-related costs were expensed as incurred and were not significant. The
following represents the aggregate purchase price allocation which includes purchase accounting adjustments made during the
measurement period:
(In millions) May 20, 2016
Purchase price:
Cash paid to common shareholders $ 1,999
Cash paid to debt holders 368
Total cash paid $ 2,367
Allocation:
Cash acquired $ 83
Accounts receivable 260
Merchandise inventory 814
Property 886
Amortizable intangible assets:
Trademarks 204
Dealer relationships 106
Other assets 127
Goodwill 976
Current liabilities assumed (619 )
Long-term liabilities assumed (361 )
Noncontrolling interest (109 )
Total net assets acquired $ 2,367
The intangible assets acquired include trademarks of $204 million with a weighted average useful life of 15 years and dealer
relationships of $106 million with a weighted average useful life of 20 years, which are included in other assets in the
accompanying consolidated balance sheets. The goodwill of $976 million is primarily attributable to the synergies expected to
arise after the acquisition. Goodwill of approximately $107 million is expected to be deductible for tax purposes.
The transaction included the assumption by Lowe’s of unsecured debentures held by RONA of approximately C$118 million
($91 million) as of the acquisition date. The debentures matured and were settled in October 2016.
As of the acquisition date, 6.9 million preferred shares of RONA remained outstanding. The total fair value of the shares and
Lowe’s corresponding noncontrolling interest was $109 million, which was determined based on the closing market price of
RONA’s preferred shares on the acquisition date. During the fourth fiscal quarter of 2016, the Company acquired all of the
remaining noncontrolling interest in RONA by paying RONA’s preferred shareholders approximately $127 million, which
represented an $18 million premium in excess of the carrying amount of the noncontrolling interest. See Note 13 to the
consolidated financial statements for information regarding the impact of this transaction to the Company’s earnings per share
calculation.
Pro forma and historical financial information has not been provided as the acquisition was not material to the consolidated
financial statements. In addition, net earnings attributable to the noncontrolling interest was not significant for any of the
reporting periods presented.
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NOTE 3: Investment in Australian Joint Venture
In the fourth quarter of fiscal year 2015, the Company announced its decision to exit the Australian joint venture investment
with Woolworths Limited (Woolworths) and recorded a $530 million impairment of its equity method investment due to a
determination that there was a decrease in value that was other than temporary. The Company owns a one-third share in the
joint venture, Hydrox Holdings Pty Ltd. (Hydrox), which operated Masters Home Improvement stores and Home Timber and
Hardware Group’s retail stores and wholesale distribution in Australia. As a result of this decision to exit, Woolworths is
required to purchase the Company’s one-third share at its fair value as of January 18, 2016. The process for the two parties
agreeing on fair value is prescribed in the Joint Venture Agreement. The $530 million non-cash impairment charge recorded in
fiscal 2015 was based on the Company’s estimate of the value of its portion of the overall joint venture fair value as of
January 18, 2016, and the Company’s estimate of this value has not changed.
During the third quarter of fiscal year 2016, Woolworths claimed a unilateral termination of the joint venture agreement, and
executed other agreements to initiate the wind down of Hydrox without the Company’s approval as required under the joint
venture agreement. Due to this, Lowe’s has concluded that under applicable accounting standards, the investment should be
accounted for as a cost method investment going forward. As a result of this determination, accumulated foreign currency
translation adjustments of $208 million were reclassified from accumulated other comprehensive loss into the carrying value of
the cost method investment. In addition, the unilateral actions of Woolworths to begin the liquidation of Hydrox, represented a
triggering event requiring the Company to evaluate the cost method investment for impairment. Management determined that
the requirements for determining impairment were met, and leveraged wind down cash flow projections in determining the
estimated fair value of the entity as of October 28, 2016. The value was determined using an income approach based upon the
expected future cash flows generated from the settlement of assets and liabilities inclusive of inventory, property, payables,
lease liabilities and employee entitlements. As a result, the Company recorded a $290 million non-cash impairment charge
during the third quarter of fiscal 2016 to reflect its estimated portion of the overall joint venture fair value in wind down. The
Company classified this fair value measurement as Level 3. See Note 4 for additional information on the Company’s fair value
measurements.
The Company continues to maintain that amounts due under the joint venture agreement are to be based on fair value as of
January 18, 2016 under a going concern basis. The determination of this amount is currently in arbitration. The recorded value
of the investment is not reflective of this estimated value as the current operations are no longer deemed a going concern as a
result of the unilateral actions taken by Woolworths. The Company will treat its claims for additional value under the joint
venture agreement, above and beyond any amounts expected to be received through the wind down process, as a contingent
asset and will recognize these amounts as they are realized.
NOTE 4: Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transac tion
between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a
three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows:
• Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities
• Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or
liabilities, either directly or indirectly
• Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The Company’s available-for-sale securities represented the only significant assets measured at fair value on a recurring basis
for the fiscal years ended February 3, 2017 and January 29, 2016. The following table presents the Company’s financial assets
measured at fair value on a recurring basis. The fair values of these instruments approximated amortized costs.
49
Fair Value Measurements at
(In millions) Measurement Level February 3, 2017 January 29, 2016
Available-for-sale securities:
Money market funds Level 1 $ 81 $ 192
Certificates of deposit Level 1 15 56
Municipal obligations Level 2 4 38
Municipal floating rate obligations Level 2 — 21
Total short-term investments $ 100 $ 307
Available-for-sale securities:
Municipal floating rate obligations Level 2 $ 359 $ 212
Municipal obligations Level 2 5 5
Certificates of deposit Level 1 2 5
Total long-term investments $ 366 $ 222
There were no transfers between Levels 1, 2 or 3 during any of the periods presented.
When available, quoted prices were used to determine fair value. When quoted prices in active markets were available,
investments were classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not
available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable
market inputs. The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer
spreads and benchmark securities, among others.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
For the fiscal years ended February 3, 2017, and January 29, 2016, the Company’s only significant assets or liabilities measured
at fair value on a nonrecurring basis subsequent to their initial recognition were goodwill (see Note 1 to the consolidated
financial statements included herein for additional information regarding this fair value measurement), certain cost and equity
method investments (see Note 3 to the consolidated financial statements included herein for additional information regarding
this fair value measurement), and certain long-lived assets.
Long-lived assets
The Company reviews the carrying amounts of long-lived assets whenever certain events or changes in circumstances indicate
that the carrying amounts may not be recoverable. With input from retail store operations, the Company’s accounting and
finance personnel that organizationally report to the chief financial officer, assess the performance of retail stores quarterly
against historical patterns and projections of future profitability for evidence of possible impairment. An impairment loss is
recognized when the carrying amount of the asset (disposal) group is not recoverable and exceeds its fair value. The Company
estimated the fair values of assets subject to long-lived asset impairment based on the Company’s own judgments about the
assumptions that market participants would use in pricing the assets and on observable market data, when available. The
Company classified these fair value measurements as Level 3.
In the determination of impairment for operating locations, the Company determined the fair values of individual operating
locations using an income approach, which required discounting projected future cash flows. When determining the stream of
projected future cash flows associated with an individual operating location, management made assumptions, incorporating
local market conditions and inputs from retail store operations, the highest and best use, and about key variables including the
following unobservable inputs: sales growth rates, gross margin, controllable expenses, such as payroll and occupancy expense,
and asset residual values. In order to calculate the present value of those future cash flows, the Company discounted cash flow
estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows. In general, the
selected market participants represented a group of other retailers with a location footprint similar in size to the Company’s.
During 2016, 14 operating locations experienced a triggering event and were evaluated for recoverability. Eleven of the 14
operating locations were determined to be impaired due to a decline in recent cash flow trends and an unfavorable sales
outlook, resulting in an impairment loss of $34 million. The discounted cash flow model used to estimate the fair value of the
impaired operating locations assumed average annual sales growth rates ranging from 2.0% to 3.7% over the remaining life of
the locations and applied a discount rate of approximately 8.0%.
50
Three of the 14 operating locations that experienced a triggering event during 2016 were determined to be recoverable and,
therefore, were not impaired. A 10% reduction in projected sales used to estimate future cash flows for these operating
locations would not have had a significant impact to impairment losses recognized during 2016.
In the determination of impairment for excess properties held-for-use and held-for-sale, which consisted of retail outparcels and
property associated with relocated or closed locations, the fair values were determined using a market approach based on
estimated selling prices. The Company determined the estimated selling prices by obtaining information from property brokers
or appraisers in the specific markets being evaluated or negotiated non-binding offers to purchase. The information obtained
from property brokers or appraisers included comparable sales of similar assets and assumptions about demand in the market
for these assets.
During 2016, the Company incurred total impairment charges of $9 million for 13 excess property locations. A 10% reduction
in the estimated selling prices for these excess properties at the dates the locations were evaluated for impairment would have
increased impairment losses by an insignificant amount.
The following table presents the Company’s assets measured at estimated fair value on a nonrecurring basis and the resulting
impairment losses included in earnings, excluding costs to sell for excess properties held-for-sale. Because these assets subject
to impairment were not measured at fair value on a recurring basis, certain fair value measurements presented in the table ma y
reflect values at earlier measurement dates and may no longer represent the fair values at February 3, 2017 and January 29,
2016.
Fair Value Measurements - Nonrecurring Basis
February 3, 2017 January 29, 2016
(In millions) Fair Value
Measurements Impairment
Losses Fair Value
Measurements Impairment
Losses
Assets-held-for-use:
Operating locations $ 3 $ (34 ) $ 4 $ (8 )
Excess properties 18 (9 ) 4 (2 )
Goodwill (Note 1) — (46 ) — —
Other assets:
Cost method investments (Note 3) 103 (290 ) — —
Equity method investments (Note 3) — — 393 (530 )
Total $ 124 $ (379 ) $ 401 $ (540 )
Fair Value of Financial Instruments
The Company’s financial instruments not measured at fair value on a recurring basis include cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, and long-term debt and are reflected in the financial statements at
cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature. The fair
values of the Company’s unsecured notes were estimated using quoted market prices. The fair values of the Company’s
mortgage notes were estimated using discounted cash flow analyses, based on the future cash outflows associated with these
arrangements and discounted using the applicable incremental borrowing rate.
Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding capitalized lease
obligations, are as follows:
February 3, 2017 January 29, 2016
(In millions) Carrying Amount Fair Value
Carrying Amount Fair Value
Unsecured notes (Level 1) $ 14,321 $ 15,305 $ 12,073 $ 13,292
Mortgage notes (Level 2) 7 7 7 8
Long-term debt (excluding capitalized lease obligations) $ 14,328 $ 15,312 $ 12,080 $ 13,300
51
NOTE 5: Property and Accumulated Depreciation
Property is summarized by major class in the following table:
(In millions)
Estimated Depreciable
Lives, In Years February 3,
2017 January 29,
2016
Cost:
Land N/A $ 7,329 $ 7,086
Buildings and building improvements 5-40 18,147 17,451
Equipment 2-15 10,978 10,863
Construction in progress N/A 464 513
Total cost 36,918 35,913
Accumulated depreciation (16,969 ) (16,336 )
Property, less accumulated depreciation $ 19,949 $ 19,577
Included in net property are assets under capital lease of $696 million, less accumulated depreciation of $269 million, at
February 3, 2017, and $617 million, less accumulated depreciation of $400 million, at January 29, 2016. The related
amortization expense for assets under capital lease is included in depreciation expense. The Company recognized depreciation
expense of $1.5 billion in 2016, 2015, and 2014.
NOTE 6: Exit Activities
When locations under operating leases are closed, the Company recognizes a liability for the fair value of future contractual
obligations, including future minimum lease payments, property taxes, utilities, common area maintenance and other ongoing
expenses, net of estimated sublease income and other recoverable items. During 2016, the Company closed or relocated 10
locations subject to an operating lease. In 2015, the Company closed or relocated two locations subject to operating leases. In
2014, the Company did not close or relocate any locations subject to operating leases.
Subsequent changes to the liabilities, including changes resulting from revisions to either the timing or the amount of estimated
cash flows, are recognized in the period of change. Changes to the accrual for exit activities for 2016, 2015, and 2014 are
summarized as follows:
(In millions) 2016 2015 2014
Accrual for exit activities, balance at beginning of year $ 67 $ 53 $ 54
Additions to the accrual - net 47 34 14
Cash payments (48 ) (20 ) (15 )
Accrual for exit activities, balance at end of year $ 66 $ 67 $ 53
NOTE 7: Short-Term Borrowings and Lines of Credit
In November 2016, the Company entered into an amended and restated credit agreement (the Amended Facility) with a
syndicate of banks to modify the Company’s credit agreement dated August 29, 2014 (the 2014 Credit Facility), which
provided for borrowings up to $1.75 billion through August 2019. The Amended Facility extends the maturity date to
November 2021 and continues to provide for borrowings of up to $1.75 billion. Subject to obtaining commitments from the
lenders and satisfying other conditions specified in the Amended Facility, we may increase the aggregate availability by an
additional $500 million. The Amended Facility supports our commercial paper program and has a $500 million letter of credit
sublimit. Letters of credit issued pursuant to the facility reduce the amount available for borrowing under its terms.
Borrowings made are unsecured and are priced at fixed rates based upon market conditions at the time of funding in accordance
with the terms of the facility. The Amended Facility contains customary representations, warranties, and covenants for a
transaction of this type. The Company was in compliance with those covenants at February 3, 2017. As of February 3, 2017,
there were $510 million of outstanding borrowings under the Company’s commercial paper program with a weighted average
interest rate of 1.01% and no outstanding borrowings or letters of credit under the Amended Facility. As of January 29, 2016,
there were $43 million of outstanding borrowings under the Company’s commercial paper program and no outstanding
borrowings or letters of credit under the 2014 Credit Facility.
52
NOTE 8: Long-Term Debt
Debt Category (In millions)
Weighted-Average Interest Rate at
February 3, 2017 February 3, 2017 January 29, 2016
Secured debt:
Mortgage notes due through fiscal 2027 1 5.44 % $ 7 $ 7
Unsecured debt:
Notes due through fiscal 2021 2.87 % 3,567 3,990
Notes due fiscal 2022-2026 3.07 % 3,783 2,443
Notes due fiscal 2027-2031 6.76 % 814 813
Notes due fiscal 2032-2036 5.64 % 941 941
Notes due fiscal 2037-2041 2 5.94 % 1,585 1,585
Notes due fiscal 2042-2046 4.26 % 3,631 2,301
Capitalized lease obligations due through fiscal 2037 861 526
Total long-term debt 15,189 12,606
Less current maturities (795 ) (1,061 )
Long-term debt, excluding current maturities $ 14,394 $ 11,545
1 Real properties with an aggregate book value of $28 million were pledged as collateral at February 3, 2017, for secured
debt. 2
Amount includes $100 million of notes issued in 1997 that may be put at the option of the holder on the 20th anniversary of
the issue at par value. None of these notes are currently puttable.
Debt maturities, exclusive of unamortized original issue discounts, unamortized debt issuance costs, and capitalized lease
obligations, for the next five years and thereafter are as follows: 2017, $751 million; 2018, $251 million; 2019, $1.1 billio n;
2020, $500 million; 2021, $1.0 billion; thereafter, $10.9 billion.
The Company’s unsecured notes are issued under indentures that generally have similar terms and, therefore, have been
grouped by maturity date for presentation purposes in the table above. The notes contain certain restrictive covenants, none of
which are expected to impact the Company’s capital resources or liquidity. The Company was in compliance with all
covenants of these agreements at February 3, 2017.
Unsecured notes issued during 2014 were as follows:
Issue Date Principal Amount
(in millions) Maturity Date Fixed vs. Floating Interest Rate
Discount (in millions)
September 2014 $ 450 September 2019 Floating Floating $ 2
September 2014 $ 450 September 2024 Fixed 3.125% $ 6
September 2014 $ 350 September 2044 Fixed 4.250% $ 4
The floating rate notes issued in 2014 will bear interest at a floating rate, reset quarterly, equal to the three-month LIBOR plus
0.420% (1.373% as of February 3, 2017). Interest on these floating rate notes is payable quarterly in arrears in March, June,
September, and December of each year until maturity. Interest on the fixed rate notes issued in 2014 is payable semiannually in
arrears in March and September of each year until maturity.
Unsecured notes issued during 2015 were as follows:
Issue Date Principal Amount
(in millions) Maturity Date Fixed vs. Floating Interest Rate
Discount (in millions)
September 2015 $ 250 September 2018 Floating Floating $ 1
September 2015 $ 750 September 2025 Fixed 3.375% $ 8
September 2015 $ 750 September 2045 Fixed 4.375% $ 24
53
The floating rate notes issued in 2015 will bear interest at a floating rate, reset quarterly, equal to the three-month LIBOR plus
0.600% (1.559% as of February 3, 2017). Interest on these floating rate notes is payable quarterly in arrears in March, June,
September, and December of each year until maturity. Interest on the fixed rate notes issued in 2015 is payable semiannually in
arrears in March and September of each year until maturity.
Unsecured notes issued during 2016 were as follows:
Issue Date Principal Amount
(in millions) Maturity Date Fixed vs. Floating Interest Rate
Discount (in millions)
April 2016 $ 250 April 2019 Floating Floating $ 1
April 2016 $ 350 April 2019 Fixed 1.150% $ 1
April 2016 $ 1,350 April 2026 Fixed 2.500% $ 12
April 2016 $ 1,350 April 2046 Fixed 3.700% $ 19
The floating rate notes issued in 2016 will bear interest at a floating rate, reset quarterly, equal to the three-month LIBOR plus
0.240% (1.262% as of February 3, 2017). Interest on these floating rate notes is payable quarterly in arrears in April, July,
October, and January of each year until maturity. Interest on the fixed rate notes issued in 2016 is payable semiannually in
arrears in April and October of each year until maturity.
The discounts associated with these issuances, which include the underwriting and issuance discounts, are recorded in long-
term debt and are being amortized over the respective terms of the notes using the effective interest method.
The indentures governing the fixed rate notes issued in 2016, 2015, and 2014, contain a provision that allows the Company to
redeem the notes at any time, in whole or in part, at specified redemption prices plus accrued interest to the date of redemption.
We do not have the right to redeem the floating rate notes issued in 2016, 2015, and 2014, prior to maturity. The indentures
also contain a provision that allows the holders of the notes to require the Company to repurchase all or any part of their notes
if a change of control triggering event (as defined in the indentures) occurs. If elected under the change of control provisions,
the repurchase of the notes will occur at a purchase price of 101% of the principal amount, plus accrued and unpaid interest on
such notes to the date of purchase, if any. The indentures governing the notes do not limit the aggregate principal amount of
debt securities that the Company may issue and do not require the Company to maintain specified financial ratios or levels of
net worth or liquidity. However, the indenture includes various restrictive covenants, none of which is expected to impact the
Company’s liquidity or capital resources.
NOTE 9: Shareholders’ Equity
Authorized shares of preferred stock were 5.0 million ($5 par value) at February 3, 2017, and January 29, 2016, none of which
have been issued. The Board of Directors may issue the preferred stock (without action by shareholders) in one or more series,
having such voting rights, dividend and liquidation preferences, and such conversion and other rights as may be designated by
the Board of Directors at the time of issuance.
Authorized shares of common stock were 5.6 billion ($.50 par value) at February 3, 2017, and January 29, 2016.
The Company has a share repurchase program that is executed through purchases made from time to time either in the open
market or through private off-market transactions. Shares purchased under the repurchase program are retired and returned to
authorized and unissued status. On March 20, 2015, the Company’s Board of Directors authorized a $5.0 billion share
repurchase under the program with no expiration, which was announced on the same day. On January 27, 2017, the Company’s
Board of Directors authorized an additional $5.0 billion share repurchase under the program with no expiration, which was
announced on the same day. As of February 3, 2017, the Company had $5.1 billion remaining under the program.
During the year ended February 3, 2017, the Company entered into Accelerated Share Repurchase (ASR) agreements with
third-party financial institutions to repurchase a total of 19.1 million shares of the Company’s common stock for $1.4 billion.
At inception, the Company paid the financial institutions using cash on hand and took initial delivery of shares. Under the
terms of the ASR agreements, upon settlement, the Company would either receive additional shares from the financial
institution or be required to deliver additional shares or cash to the financial institution. The Company controlled its election to
either deliver additional shares or cash to the financial institution and was subject to provisions which limited the number of
shares the Company would be required to deliver.
54
The final number of shares received upon settlement of each ASR agreement was determined with reference to the volume-
weighted average price of the Company’s common stock over the term of the ASR agreement. The initial repurchase of shares
under these agreements resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average
common shares outstanding for basic and diluted earnings per share.
These ASR agreements were accounted for as treasury stock transactions and forward stock purchase contracts. The par value
of the shares received was recorded as a reduction to common stock with the remainder recorded as a reduction to capital in
excess of par value and retained earnings. The forward stock purchase contracts were considered indexed to the Company’s
own stock and were classified as equity instruments.
During the year ended February 3, 2017, the Company also repurchased shares of its common stock through the open market
totaling 27.6 million shares for a cost of $2.1 billion.
The Company also withholds shares from employees to satisfy either the exercise price of stock options exercised or the
statutory withholding tax liability resulting from the vesting of restricted stock awards and performance share units.
Shares repurchased for 2016 and 2015 were as follows:
2016 2015
(In millions) Shares Cost 1 Shares Cost
1
Share repurchase program 46.7 $ 3,500 53.6 $ 3,811
Shares withheld from employees 1.0 77 0.9 67
Total share repurchases 47.7 $ 3,577 54.5 $ 3,878
1 Reductions of $3.3 billion and $3.6 billion were recorded to retained earnings, after capital in excess of par value was
depleted, for 2016 and 2015, respectively.
NOTE 10: Accounting for Share-Based Payments
Overview of Share-Based Payment Plans
The Company has a number of active and inactive equity incentive plans (the Incentive Plans) under which the Company has
been authorized to grant share-based awards to key employees and non-employee directors. The Company also has an
employee stock purchase plan (the ESPP) that allows employees to purchase Company shares at a discount through payroll
deductions. All of these plans contain a nondiscretionary anti-dilution provision that is designed to equalize the value of an
award as a result of any stock dividend, stock split, recapitalization, or any other similar equity restructuring.
A total of 199.0 million shares have been previously authorized for grant to key employees and non-employee directors under
all of the Company’s Incentive Plans, but only 80.0 million of those shares were authorized for grants of share -based awards
under the Company’s currently active Incentive Plans. In addition, a total of 70.0 million shares have been previously
authorized for purchases by employees participating in the ESPP.
At February 3, 2017, there were 34.4 million shares remaining available for grants under the currently active Incentive Plans
and 23.0 million shares remaining available for purchases under the ESPP.
The Company recognized share-based payment expense within SG&A expense in the consolidated statements of earnings of
$90 million, $117 million, and $119 million in 2016, 2015 and 2014 respectively. The total associated income tax benefit
recognized was $29 million, $38 million and $39 million in 2016, 2015 and 2014, respectively.
Total unrecognized share-based payment expense for all share-based payment plans was $159 million at February 3, 2017, of
which $88 million will be recognized in 2017, $51 million in 2018 and $20 million thereafter. This results in these amounts
being recognized over a weighted-average period of 2.0 years.
For all share-based payment awards, the expense recognized has been adjusted for estimated forfeitures where the requisite
service is not expected to be provided. Estimated forfeiture rates are developed based on the Company’s analysis of historical
forfeiture data for homogeneous employee groups.
55
General terms and methods of valuation for the Company’s share-based awards are as follows:
Stock Options
Stock options have terms of seven or 10 years, with one-third of each grant vesting each year for three years, and are assigned
an exercise price equal to the closing market price of a share of the Company’s common stock on the date of grant. Options are
expensed on a straight-line basis over the grant vesting period, which is considered to be the requisite service period.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. When
determining expected volatility, the Company considers the historical volatility of the Company’s stock price, as well as
implied volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, based on
the options’ expected term. The expected term of the options is based on the Company’s evaluation of option holders’ exercise
patterns and represents the period of time that options are expected to remain unexercised. The Company uses historical data to
estimate the timing and amount of forfeitures. The weighted average assumptions used in the Black-Scholes option-pricing
model and weighted-average grant date fair value for options granted in 2016, 2015, and 2014 are as follows:
2016 2015 2014
Weighted-average assumptions used:
Expected volatility 24.0 % 31.3 % 34.2 %
Dividend yield 1.66 % 1.69 % 1.73 %
Risk-free interest rate 1.42 % 1.99 % 2.26 %
Expected term, in years 6.44 7.00 7.00
Weighted-average grant date fair value $ 15.00 $ 20.27 $ 17.00
The total intrinsic value of options exercised, representing the difference between the exercise price and the market price on the
date of exercise, was approximately $73 million, $68 million and $62 million in 2016, 2015 and 2014, respectively.
Transactions related to stock options for the year ended February 3, 2017 are summarized as follows:
Shares
(In thousands)
Weighted- Average
Exercise Price Per Share
Weighted- Average
Remaining Term (In years)
Aggregate Intrinsic Value (In thousands)
Outstanding at January 29, 2016 5,431 $ 42.18
Granted 822 71.47
Canceled, forfeited or expired (306 ) 64.52
Exercised (1,708 ) 33.26
Outstanding at February 3, 2017 4,239 $ 49.84 6.34 $ 99,479
Vested and expected to vest at February 3, 2017
1 4,166
$ 49.50
6.29 $ 99,190
Exercisable at February 3, 2017 2,693 $ 40.35 4.92 $ 88,714
1 Includes outstanding vested options as well as outstanding nonvested options after a forfeiture rate is applied.
Restricted Stock Awards
Restricted stock awards are valued at the market price of a share of the Company’s common stock on the date of grant. In
general, these awards vest at the end of a three year period from the date of grant and are expensed on a straight-line basis over
that period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and
amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock awards granted was $71.35,
$69.44 and $53.13 in 2016, 2015, and 2014, respectively. The total fair value of restricted stock awards vesting was
approximately $151 million, $144 million and $114 million in 2016, 2015 and 2014, respectively.
56
Transactions related to restricted stock awards for the year ended February 3, 2017 are summarized as follows:
Shares
(In thousands)
Weighted- Average Grant- Date Fair Value
Per Share
Nonvested at January 29, 2016 4,211 $ 51.06
Granted 935 71.35
Vested (2,142 ) 42.18
Canceled or forfeited (323 ) 59.47
Nonvested at February 3, 2017 2,681 $ 64.22
Deferred Stock Units
Deferred stock units are valued at the market price of a share of the Company’s common stock on the date of grant. For non-
employee Directors, these awards vest immediately and are expensed on the grant date. During 2016, 2015 and 2014, each
non-employee Director was awarded a number of deferred stock units determined by dividing the annual award amount by the
fair market value of a share of the Company’s common stock on the award date and rounding up to the next 100 units. The
annual award amount used to determine the number of deferred stock units granted to each Director was $150,000 for 2016,
2015, and 2014. During 2016, 19,000 deferred stock units were granted and immediately vested for non-employee
Directors. The weighted-average grant-date fair value per share of deferred stock units granted was $80.35, $69.98 and $47.08
in 2016, 2015 and 2014, respectively. The total fair value of deferred stock units vested was $1.5 million in 2016, 2015, and
2014. During 2016, 0.1 million of fully vested deferred stock units were released as a result of termination of service. At
February 3, 2017, there were 0.4 million deferred stock units outstanding, all of which were vested.
Performance Share Units
The Company has issued two types of performance share units - those classified as equity awards and those classified as
liability awards. Expense is recognized on a straight-line basis over the requisite service period, based on the probability of
achieving the performance condition, with changes in expectations recognized as an adjustment to earnings in the period of the
change. Compensation cost is not recognized for performance share units that do not vest because service or performance
conditions are not satisfied and any previously recognized compensation cost is reversed. Performance share units do not have
dividend rights. The Company uses historical data to estimate the timing and amount of forfeitures.
Awards Classified as Equity
The Company’s performance share units classified as equity contain performance and service conditions that must be satisfied
for an employee to earn the right to benefit from the award. The performance condition is primarily based on the achievement
of the Company’s target return on non-cash average assets (RONCAA). These awards are valued at the market price of a share
of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service
period.
In fiscal 2016, the Company began issuing performance share units that contain a market condition modifier, in addition to
having a performance and service condition. The performance condition for these awards continues to be based primarily on
the achievement of the Company’s RONCAA targets. The market condition is based on the Company’s total shareholder return
(TSR) compared to the median TSR of companies listed in the S&P 500 Index over a three year performance period. The
Company used a Monte-Carlo simulation to determine the grant date fair value for these awards, which takes into consideration
the possible outcomes pertaining to the TSR market condition. The following weighted-average assumptions were used in the
Monte Carlo simulations for these awards granted in 2016: expected volatility of 21.4%, dividend yield of 1.53%, risk-free
interest rate of 0.88%, and an expected term of 2.82 years.
In general, 0% to 200% of the Company’s performance share units vest at the end of a three year service period from the date
of grant based upon achievement of the performance condition, or a combination of the performance and market conditions,
specified in the performance share unit agreement.
The weighted-average grant-date fair value per unit of performance share units classified as equity awards granted was $77.58,
$71.52 and $47.05 in 2016, 2015 and 2014, respectively. The total fair value of performance share units vesting was
approximately $24 million and $25 million in 2016 and 2015, respectively. No performance share units vested in 2014.
57
Transactions related to performance share units classified as equity awards for the year ended February 3, 2017 are summarized
as follows:
Units
(In thousands) 1
Weighted- Average Grant- Date Fair Value
Per Unit
Nonvested at January 29, 2016 792 $ 50.93
Granted 339 77.58
Vested (256 ) 36.52
Canceled or forfeited (152 ) 66.33
Nonvested at February 3, 2017 723 $ 65.30
¹ The number of units presented is based on achieving the targeted performance goals as defined in the performance share unit
agreements. As of February 3, 2017, the maximum number of nonvested units that could vest under the provisions of the
agreements was 1.2 million for the RONCAA awards.
Awards Classified as Liabilities
Performance share units classified as liability awards are based on targeted Company improvement in brand differentiation,
which is not considered a market, performance, or service related condition, are measured at fair value at each reporting
date. No performance share units classified as liability awards were granted in 2016, 2015, or 2014. The total fair value of
performance share units vesting was approximately $14 million in 2016. No performance share units vested in 2015 or
2014. No performance share units were classified as liability awards at February 3, 2017.
Transactions related to performance share units classified as liability awards for the year ended February 3, 2017 are
summarized as follows:
Units
(In thousands) 1
Weighted- Average Grant- Date Fair Value
Per Unit
Nonvested at January 29, 2016 127 $ 36.47
Vested (126 ) 36.47
Canceled or forfeited (1 ) 36.47
Nonvested at February 3, 2017 — $ —
¹ The number of units presented is based on achieving the targeted performance goals as defined in the performance share unit
agreements. For the year ended February 3, 2017, the actual number of units that vested under the provisions of the
agreements was 0.2 million units for the brand differentiation awards.
Restricted Stock Units
Restricted stock units do not have dividend rights and are valued at the market price of a share of the Company’s common
stock on the date of grant less the present value of dividends expected during the requisite service period. In general, these
awards vest at the end of a three year period from the date of grant and are expensed on a straight-line basis over that period,
which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of
forfeitures. The weighted-average grant-date fair value per share of restricted stock units granted was $67.26, $66.24 and
$50.48 in 2016, 2015 and 2014, respectively. The total fair value of restricted stock units vesting was approximately $7.7
million, $3.5 million, and $1.6 million in 2016, 2015 and 2014, respectively.
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Transactions related to restricted stock units for the year ended February 3, 2017 are summarized as follows:
Shares
(In thousands)
Weighted- Average Grant- Date Fair Value
Per Share
Nonvested at January 29, 2016 314 $ 52.52
Granted 178 67.26
Vested (107 ) 41.80
Canceled or forfeited (62 ) 59.68
Nonvested at February 3, 2017 323 $ 62.85
ESPP
The purchase price of the shares under the ESPP equals 85% of the closing price on the date of purchase. The Company’s
share-based payment expense per share is equal to 15% of the closing price on the date of purchase. The ESPP is considered a
liability award and is measured at fair value at each reporting date, and the share-based payment expense is recognized over the
six-month offering period. During 2016, the Company issued 1.3 million shares of common stock and recognized $15 million
of share-based payment expense pursuant to the plan.
NOTE 11: Employee Retirement Plans
The Company maintains a defined contribution retirement plan for eligible employees (the 401(k) Plan). Eligible employees
may participate in the 401(k) Plan six months after their original date of service. Eligible employees hired or rehired prior to
November 1, 2012, were automatically enrolled in the 401(k) Plan at a contribution rate of 1% of their pre-tax annual
compensation unless they elected otherwise. Eligible employees hired or rehired November 1, 2012, or later must make an
active election to participate in the 401(k) Plan. The Company makes contributions to the 401(k) Plan each payroll period,
based upon a matching formula applied to employee deferrals (the Company Match). Participants are eligible to receive the
Company Match pursuant to the terms of the 401(k) Plan. The Company Match varies based on how much the employee elects
to defer up to a maximum of 4.25% of eligible compensation. The Company Match is invested identically to employee
contributions and is immediately vested.
The Company maintains a Benefit Restoration Plan to supplement benefits provided under the 401(k) Plan to participants
whose benefits are restricted as a result of certain provisions of the Internal Revenue Code of 1986. This plan provides for
employee salary deferrals and employer contributions in the form of a Company Match.
The Company maintains a non-qualified deferred compensation program called the Lowe’s Cash Deferral Plan. This plan is
designed to permit certain employees to defer receipt of portions of their compensation, thereby delaying taxation on the
deferral amount and on subsequent earnings until the balance is distributed. This plan does not provide for Company
contributions.
The Company recognized expense associated with employee retirement plans of $180 million, $155 million and $154 million
in 2016, 2015 and 2014, respectively.
NOTE 12: Income Taxes
The following is a reconciliation of the federal statutory tax rate to the effective tax rate:
2016 2015 2014
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
State income taxes, net of federal tax benefit 3.6 3.6 3.3
Valuation allowance - impairment 2.0 4.2 —
Other, net (0.1 ) (0.4 ) (1.4 )
Effective tax rate 40.5 % 42.4 % 36.9 %
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The components of the income tax provision are as follows:
(In millions) 2016 2015 2014
Current:
Federal $ 1,824 $ 1,688 $ 1,475
State 275 248 221
Total current 1 2,099 1,936 1,696
Deferred:
Federal 6 (59 ) (112 )
State 3 (4 ) (6 )
Total deferred 1 9 (63 ) (118 )
Total income tax provision $ 2,108 $ 1,873 $ 1,578
1 Amounts applicable to foreign income taxes were insignificant for all periods presented.
The tax effects of cumulative temporary differences that gave rise to the deferred tax assets and liabilities were as follows:
(In millions) February 3,
2017 January 29,
2016
Deferred tax assets:
Self-insurance $ 352 $ 369
Share-based payment expense 69 83
Deferred rent 78 91
Impairment of investment 381 270
Foreign currency translation — 107
Net operating losses 174 159
Other, net 175 156
Total deferred tax assets 1,229 1,235
Valuation allowance (578 ) (447 )
Net deferred tax assets 651 788
Deferred tax liabilities:
Property (417 ) (507 )
Other, net (34 ) (40 )
Total deferred tax liabilities (451 ) (547 )
Net deferred tax asset $ 200 $ 241
As of February 3, 2017, the Company reported a deferred tax asset of $381 million related to its intention to exit from the
Company’s joint venture investment in Australia. The Company established a full valuation allowance against the deferred tax
asset related to these losses generated from impairments and equity method losses. These losses are collectively considered
capital losses, having a five year carryforward period, once realized, and can only be used to offset capital gain income. No
present or future capital gains have been identified through which this deferred tax asset can be realized.
In December 2016, the U.S. Treasury Department and the U.S. Internal Revenue Service issued final and temporary regulations
under Internal Revenue Code Section 987 (the Regulations). The Regulations provide guidance on the taxation of foreign
currency gains and losses arising from qualified business units that operate in a currency other than the currency of their o wner.
As a result of the newly enacted guidance, net deferred tax assets were reduced by $33 million as of February 3, 2017.
The Company operates as a branch in various foreign jurisdictions and cumulatively has incurred net operating losses of $640
million and $580 million as of February 3, 2017, and January 29, 2016, respectively. These net operating losses are subject to
expiration in 2017 through 2036. Deferred tax assets have been established for these foreign net operating losses in the
accompanying consolidated balance sheets. Given the uncertainty regarding the realization of the foreign net deferred tax
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assets, the Company recorded cumulative valuation allowances of $197 million and $177 million as of February 3, 2017, and
January 29, 2016, respectively.
The Company has not provided for deferred income taxes on accumulated but undistributed earnings of the Company’s foreign
operations of approximately $163 million and $153 million as of February 3, 2017, and January 29, 2016, respectively, due to
its intention to permanently reinvest these earnings outside the U.S. It is not practicable to determine the income tax liability
that would be payable on these earnings. The Company will provide for deferred or current income taxes on such earnings in
the period it determines it is necessary to remit those earnings.
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
(In millions) 2016 2015 2014
Unrecognized tax benefits, beginning of year $ 3 $ 7 $ 62
Additions for tax positions of prior years 3 — 2
Reductions for tax positions of prior years — (2 ) (57 )
Settlements — (2 ) —
Unrecognized tax benefits, end of year $ 6 $ 3 $ 7
The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $5 million and
$2 million as of February 3, 2017, and January 29, 2016, respectively.
The Company recognized $2 million of interest expense related to uncertain tax positions during 2016. The Company
recognized $1 million of interest income related to uncertain tax positions during 2015 and 2014. As of February 3, 2017 and
January 29, 2016, the Company had accrued interest related to uncertain tax positions of $3 million and $1 million,
respectively. Penalties recognized related to uncertain tax positions were insignificant for 2016, 2015, and 2014. Accrued
penalties were also insignificant as of February 3, 2017 and January 29, 2016.
The Company is subject to examination by various foreign and domestic taxing authorities. It is reasonably possible that the
Company will resolve $3 million in state related audit items within the next 12 months. There are ongoing U.S. state audits
covering tax years 2008 to 2015. An audit of the Company’s Canadian operations by the Canada Revenue Agency for fiscal
years 2011 and 2012 was started during 2016. The Company remains subject to income tax examinations for international
income taxes for fiscal years 2007 through 2015. The Company believes appropriate provisions for all outstanding issues have
been made for all jurisdictions and all open years.
Note 13: Earnings Per Share
The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class
method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the
period had been distributed. The Company’s participating securities consist of share-based payment awards that contain a
nonforfeitable right to receive dividends and, therefore, are considered to participate in undistributed earnings with common
shareholders.
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Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by
the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated
by dividing net earnings allocable to common shares by the weighted-average number of common shares as of the balance
sheet date, as adjusted for the potential dilutive effect of non-participating share-based awards. The following table reconciles
earnings per common share for 2016, 2015 and 2014:
(In millions, except per share data) 2016 2015 2014
Basic earnings per common share:
Net earnings attributable to Lowe's Companies, Inc. $ 3,091 $ 2,546 $ 2,698
Less: Net earnings allocable to participating securities (11 ) (12 ) (16 )
Less: Premium paid to acquire noncontrolling interest (18 ) — —
Net earnings allocable to common shares, basic $ 3,062 $ 2,534 $ 2,682
Weighted-average common shares outstanding 880 927 988
Basic earnings per common share $ 3.48 $ 2.73 $ 2.71
Diluted earnings per common share:
Net earnings attributable to Lowe's Companies, Inc. $ 3,091 $ 2,546 $ 2,698
Less: Net earnings allocable to participating securities (11 ) (12 ) (16 )
Less: Premium paid to acquire noncontrolling interest (18 ) — —
Net earnings allocable to common shares, diluted $ 3,062 $ 2,534 $ 2,682
Weighted-average common shares outstanding 880 927 988
Dilutive effect of non-participating share-based awards 1 2 2
Weighted-average common shares, as adjusted 881 929 990
Diluted earnings per common share $ 3.47 $ 2.73 $ 2.71
As discussed in Note 2 to the consolidated financial statements, the Company paid RONA’s preferred shareholders a premium
to acquire the remaining noncontrolling interest in RONA during the fourth quarter of fiscal 2016. The premium paid was
accounted for as a capital transaction and as such, no loss was recognized in the Company’s consolidated financial statements.
However, the premium paid represents a return on investment to RONA’s preferred shareholders and is not available to
common shareholders. Therefore, the premium paid to acquire the remaining noncontrolling interest is reflected in the table
above as a deduction from net earnings to compute net earnings allocable to common shares.
Stock options to purchase 1.0 million, 0.3 million and 0.6 million shares of common stock for 2016, 2015 and 2014,
respectively, were excluded from the computation of diluted earnings per common share because their effect would have been
anti-dilutive.
NOTE 14: Leases
The Company leases facilities and land for certain facilities under agreements with original terms generally of 20 years. The
leases generally contain provisions for four to six renewal options of five years each. Some lease agreements also provide for
contingent rentals based on sales performance in excess of specified minimums or on changes in the consumer price
index. Contingent rentals were not significant for any of the periods presented. The Company subleases certain properties that
are not used in its operations. Sublease income was not significant for any of the periods presented.
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The future minimum rental payments required under operating leases and capitalized lease obligations having initial or
remaining non-cancelable lease terms in excess of one year are summarized as follows:
(In millions) Fiscal Year
Operating Leases
Capitalized Lease
Obligations Total
2017 $ 617 $ 87 $ 704
2018 590 102 692
2019 550 158 708
2020 508 81 589
2021 466 84 550
Later years 3,122 942 4,064
Total minimum lease payments $ 5,853 $ 1,454 $ 7,307
Less amount representing interest (593 )
Present value of minimum lease payments 861
Less current maturities (46 )
Present value of minimum lease payments, less current maturities $ 815
Rental expenses under operating leases were $549 million, $473 million and $445 million in 2016, 2015 and 2014,
respectively, and were recognized within SG&A expense. Excluded from these amounts are rental expenses associated with
closed locations which were recognized as exit costs in the period of closure.
NOTE 15: Commitments and Contingencies
The Company is, from time to time, party to various legal proceedings considered to be in the normal course of business, none
of which, individually or in the aggregate, are expected to be material to the Company’s financial statements. In evaluating
liabilities associated with its various legal proceedings, the Company has accrued for probable liabilities associated with these
matters. The amounts accrued were not material to the Company’s consolidated financial statements in any of the years
presented. Reasonably possible losses for any of the individual legal proceedings which have not been accrued were not
material to the Company’s consolidated financial statements.
As of February 3, 2017, the Company had non-cancelable commitments of $1.4 billion related to certain marketing and
information technology programs, and purchases of merchandise inventory. Payments under these commitments are scheduled
to be made as follows: 2017, $876 million; 2018, $255 million; 2019, $138 million; 2020, $94 million; 2021, $45 million;
thereafter, $1 million.
At February 3, 2017, the Company held standby and documentary letters of credit issued under banking arrangements which
totaled $67 million. The majority of the Company’s letters of credit were issued for insurance contracts.
NOTE 16: Related Parties
A member of the Company’s Board of Directors also serves on the Board of Directors of a vendor that provides branded
consumer packaged goods to the Company. The Company purchased products from this vendor in the amount of $124 million
in 2016, $153 million in 2015, and $151 million in 2014. Amounts payable to this vendor were insignificant at February 3,
2017 and January 29, 2016.
A member of the Company’s Board of Directors also serves on the Board of Directors of a vendor that provides certain services
to the Company related to health and welfare benefit plans. The Company made payments to this vendor in the amount of $59
million in 2016, $58 million in 2015, and $56 million in 2014. Amounts payable to this vendor were insignificant at
February 3, 2017 and January 29, 2016.
A brother-in-law of the Company’s former Chief Customer Officer was a senior officer and shareholder of a vendor that
provides millwork and other building products to the Company. This was no longer considered a related party relationship in
2015. The Company purchased products from this vendor in the amount of $80 million in 2014.
