Lowe's 2004 Annual Report Download - page 42

Page 40 Lowe’s 2004 Annual Report
compensation expense recognized in 2004 and 2003, respectively. No
compensation expense was recorded in 2002 related to the Employee
Stock Purchase Plan, as the Plan qualified as non-compensatory under
the intrinsic value method of accounting.
NOTE 13 Leases
The Company leases certain store facilities and land for certain store
facilities under agreements with original terms generally of 20 years.
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-cancelable lease term and any option
renewal period where failure to exercise such option would result in an
economic penalty in such amount that renewal appears, at the incep-
tion of the lease, to be reasonably assured. The lease term commences
on the date when all conditions precedent to the Company’s obligation
to pay rent are satisfied. The leases generally contain provisions for
four to six renewal options of five years each.
Some agreements also provide for contingent rental based on sales
performance in excess of specified minimums. In 2004, 2003 and
2002, contingent rentals have been nominal.
Certain equipment is also leased by the Company under agree-
ments ranging from two to five years. These agreements typically con-
tain renewal options providing for a renegotiation of the lease, at the
Company’s option, based on the fair market value at that time.
The future minimum rental payments required under capital and
operating leases having initial or remaining non-cancelable lease terms
in excess of one year are summarized as follows:
(In Millions) Operating Leases Capital Leases
––––––––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––––––
Fiscal Year Real Estate Equipment Real Estate Equipment Total
2005 $ 248 $ 1 $ 59 $ 1 $ 309
2006 246 1 58 1 306
2007 245 1 59 – 305
2008 244 – 59 – 303
2009 243 – 58 – 301
Later Years 2,614 – 393 – 3,007
Total Minimum
Lease Payments $3,840 $3 $686 $2 $4,531
Total Minimum Capital Lease Payments $ 688
Less Amount
Representing Interest 265
Present Value of Minimum Lease Payments 423
Less Current Maturities 22
Present Value of Minimum Lease Payments,
Less Current Maturities $ 401
Rental expenses under operating leases for real estate and equip-
ment were $271 million, $238 million and $226 million in 2004, 2003
and 2002, respectively.
NOTE 14 Employee retirement plans
The Company maintains a defined contribution retirement plan for its
employees (the 401(k) Plan). Employees are eligible to participate in the
401(k) Plan after completing 90 days of continuous service. Participants
are allowed to choose from a group of mutual funds in order to desig-
nate how both employer and employee contributions are to be invested.
The Company’s common stock is also one of the investment options for
contributions to the 401(k) Plan. Company shares held on the partici-
pants’ behalf by the 401(k) Plan are voted by the participants. The
Company makes contributions to the 401(k) Plan each payroll period
based upon a matching formula applied to employee contributions. In
addition, beginning in 2002, the Company offers a performance match
to eligible 401(k) Plan participants based on growth of earnings before
taxes for the fiscal year. 401(k) Plan participants must have three or
more years of employment service and be actively employed on the last
day of the fiscal year to be eligible for the performance match. The per-
formance match is funded in participant accounts in April of the fol-
lowing year. The Company’s contributions to the 401(k) Plan vest
immediately in the participant accounts. Once participants reach age
59 1/2, they may elect to withdraw their entire 401(k) Plan balance. This
is a one-time, in-service distribution option. Participants may also with-
draw contributions and rollover contributions while still actively
employed for reasons of hardship. In addition, participants with 20 or
more years of service, who have an Employee Stock Ownership Plan car-
ryforward account balance within the 401(k) Plan, can elect to receive a
one-time, in-service distribution of 50% of this account balance.
The Company maintains a Benefit Restoration Plan (BRP) to pro-
vide benefits in addition to those provided under the 401(k) Plan to
401(k) Plan participants whose benefits are restricted as a result of cer-
tain provisions of the Internal Revenue Code of 1986.
The Company recognized expense associated with contributions to
employee retirement plans of $68 million, $83 million and $115 mil-
lion in 2004, 2003 and 2002, respectively.
In fiscal 2003, the Company implemented a non-qualified deferred
compensation program called the Lowe’s Cash Deferral Plan. This
plan is designed to permit highly compensated 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 employer contributions.
NOTE 15 Income taxes
The following is a reconciliation of the effective tax rate to the federal
statutory tax rate for continuing operations.
2004 2003 2002
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
State Income Taxes—Net of Federal
Tax Benefit 3.5 3.1 3.3
Stock-Based Compensation
Expense 0.2 0.2 0.0
Other, Net (0.2) (0.4) (0.7)
Effective Tax Rate 38.5% 37.9% 37.6%
Components of Income Tax Provision
(In Millions) for Continuing Operations
Current
Federal $ 1,077 $ 834 $ 590
State 174 124 82
Total Current 1,251 958 672
Deferred
Federal 86 143 183
State 23 14 38
Total Deferred 109 157 221
Total Income Tax Provision $ 1,360 $ 1,115 $ 893