Lowe's 2005 Annual Report Download - page 26

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฀ L O W E ’ S ฀ ฀2 0 0 5 ฀ ฀A N N U A L ฀ ฀R E P O RT
฀ Cash฀flows฀from฀operating฀activities฀provide฀a฀significant฀source฀of฀our฀
liquidity.฀The฀increase฀in฀cash฀provided฀by฀operating฀activities฀during฀2005฀
resulted฀primarily฀from฀increased฀net฀earnings฀as฀well฀as฀a฀lower฀investment฀
in฀inventory฀compared฀to฀2004.฀The฀increase฀in฀cash฀provided฀by฀operating฀
activities฀during฀2004฀resulted฀primarily฀from฀increased฀net฀earnings,฀offset฀฀
by฀our฀investment฀in฀inventory฀as฀a฀part฀of฀the฀R3฀initiative.฀Working฀capital฀at฀
February฀3,฀2006,฀was฀$2.0฀billion฀compared฀to฀$1.3฀billion฀at฀January฀28,฀
2005.฀The฀increase฀in฀working฀capital฀was฀due฀primarily฀to฀our฀October฀2005฀
$1฀billion฀debt฀issuance฀and฀increased฀net฀earnings,฀offset฀by฀the฀$600฀million฀
repayment฀of฀notes฀that฀matured฀in฀December฀2005.
฀ The฀primary฀component฀of฀net฀cash฀used฀in฀investing฀activities฀continues฀
to฀be฀new฀store฀and฀distribution฀facilities฀and฀the฀infrastructure฀and฀technology฀
needed฀to฀support฀this฀growth.฀Cash฀acquisitions฀of฀fixed฀assets฀were฀$3.4฀bil-
lion฀for฀2005,฀$2.9฀billion฀in฀2004฀and฀$2.3฀billion฀in฀2003.฀The฀February฀3,฀
2006,฀retail฀selling฀space฀of฀140฀million฀square฀feet฀represented฀a฀13%฀increase฀
over฀January฀28,฀2005.฀The฀January฀28,฀2005,฀retail฀selling฀space฀of฀124฀mil-
lion฀square฀feet฀represented฀a฀14%฀increase฀over฀January฀30,฀2004.
฀ Cash฀flows฀used฀in฀financing฀activities฀decreased฀significantly฀in฀2005฀
compared฀to฀2004,฀primarily฀as฀a฀result฀of฀proceeds฀from฀the฀October฀2005฀
issuance฀of฀$1฀billion฀in฀senior฀notes฀and฀fewer฀repurchases฀of฀common฀stock฀
under฀our฀share฀repurchase฀program,฀offset฀by฀greater฀scheduled฀debt฀repay-
ments.฀Financing฀uses฀of฀cash฀in฀2004฀were฀primarily฀the฀result฀of฀our฀share฀
repurchase฀program.฀Financing฀uses฀of฀cash฀in฀2003฀primarily฀consisted฀of฀
cash฀dividend฀payments,฀repayment฀of฀short-term฀borrowings฀and฀scheduled฀
debt฀repayments.฀These฀uses฀were฀partially฀offset฀by฀proceeds฀generated฀from฀
stock฀option฀exercises฀and฀cash฀proceeds฀from฀the฀employee฀stock฀purchase฀
plan.฀The฀ratio฀of฀debt฀to฀equity฀plus฀debt฀was฀19.8%,฀24.2%,฀and฀26.9%฀as฀
of฀the฀years฀ended฀2005,฀2004฀and฀2003,฀respectively.
Sources฀of฀Liquidity
In฀addition฀to฀our฀cash฀flows฀from฀operations,฀we฀have฀a฀$1฀billion฀senior฀credit฀
facility฀that฀expires฀in฀July฀2009฀that฀also฀provides฀a฀source฀of฀liquidity.฀The฀facil-
ity฀is฀available฀to฀support฀our฀$1฀billion฀commercial฀paper฀program฀and฀for฀
direct฀borrowings.฀Borrowings฀made฀are฀priced฀based฀upon฀market฀conditions฀
at฀the฀time฀of฀funding฀in฀accordance฀with฀the฀terms฀of฀the฀senior฀credit฀facility.฀
The฀senior฀credit฀facility฀contains฀certain฀restrictive฀covenants,฀which฀include฀
maintenance฀of฀a฀specific฀financial฀ratio.฀We฀were฀in฀compliance฀with฀those฀
covenants฀at฀February฀3,฀2006,฀and฀January฀28,฀2005.฀Fifteen฀banking฀insti-
tutions฀are฀participating฀in฀the฀$1฀billion฀senior฀credit฀facility.฀As฀of฀February฀3,฀
2006,฀and฀January฀28,฀2005,฀there฀were฀no฀outstanding฀borrowings฀under฀the฀
facility฀or฀under฀our฀commercial฀paper฀program.
฀ Four฀banks฀have฀extended฀lines฀of฀credit฀aggregating฀$420฀million฀for฀the฀
purpose฀of฀issuing฀documentary฀letters฀of฀credit฀and฀standby฀letters฀of฀credit.฀
These฀lines฀do฀not฀have฀termination฀dates฀and฀are฀reviewed฀periodically.฀Com-
mitment฀fees฀ranging฀from฀.25%฀to฀.50%฀per฀annum฀are฀paid฀on฀the฀letters฀of฀
credit฀amounts฀outstanding.฀Outstanding฀letters฀of฀credit฀totaled฀$316฀million฀
as฀of฀February฀3,฀2006,฀and฀$304฀million฀as฀of฀January฀28,฀2005.
Cash฀Requirements
In฀January฀2005,฀the฀Board฀of฀Directors฀authorized฀up฀to฀$1฀billion฀in฀share฀
repurchases฀through฀2006.฀This฀program฀is฀intended฀to฀be฀implemented฀
through฀purchases฀made฀from฀time฀to฀time฀either฀in฀the฀open฀market฀or฀through฀
private฀transactions.฀Shares฀purchased฀under฀the฀share฀repurchase฀program฀
are฀retired฀and฀returned฀to฀authorized฀and฀unissued฀status.฀During฀2005,฀we฀
repurchased฀12.5฀million฀shares฀at฀a฀total฀cost฀of฀$774฀million.฀In฀January฀2006,฀
the฀Board฀of฀Directors฀authorized฀up฀to฀an฀additional฀$1฀billion฀in฀share฀repur-
chases฀through฀2007.฀As฀of฀February฀3,฀2006,฀the฀total฀remaining฀authorization฀
was฀$1.2฀billion.
฀ Our฀quarterly฀cash฀dividend฀per฀share฀was฀increased฀in฀2004฀to฀$0.04฀
and฀again฀in฀2005฀to฀$0.06.฀This฀increased฀cash฀paid฀for฀dividends฀in฀2005฀
as฀compared฀to฀2004.
฀ Our฀2006฀capital฀budget฀is฀$4.2฀billion,฀inclusive฀of฀approximately฀$387฀
million฀of฀leases.฀Approximately฀79%฀of฀this฀planned฀commitment฀is฀for฀store฀
expansion฀and฀new฀distribution฀centers.฀Expansion฀plans฀for฀2006฀consist฀of฀
155฀stores,฀including฀five฀relocations฀of฀older฀stores.฀This฀planned฀expansion฀
is฀expected฀to฀increase฀sales฀floor฀square฀footage฀by฀approximately฀12%.฀
Approximately฀63%฀of฀the฀2006฀projects฀will฀be฀owned฀and฀37%฀will฀be฀
ground-leased฀properties.
฀ At฀February฀3,฀2006,฀we฀owned฀and฀operated฀11฀regional฀distribution฀
centers.฀We฀expect฀to฀open฀additional฀RDCs฀in฀Rockford,฀Illinois฀and฀Lebanon,฀
Oregon฀in฀2007.฀In฀addition,฀we฀plan฀to฀expand฀three฀existing฀distribution฀cen-
ters฀in฀Valdosta,฀Georgia;฀Statesville,฀North฀Carolina;฀and฀North฀Vernon,฀Indiana฀
by฀spring฀2006.฀We฀also฀owned฀and฀operated฀10฀flatbed฀distribution฀centers฀
and฀leased฀and฀operated฀two฀flatbed฀distribution฀centers฀for฀the฀handling฀of฀
lumber,฀building฀materials฀and฀other฀long-length฀items.฀We฀expect฀to฀open฀four฀
additional฀flatbed฀distribution฀centers฀in฀2006.
฀ We฀believe฀that฀net฀cash฀provided฀by฀operating฀activities฀and฀financing฀
activities฀will฀be฀adequate฀for฀our฀expansion฀plans฀and฀other฀operating฀require-
ments฀over฀the฀next฀12฀months.฀However,฀the฀availability฀of฀funds฀through฀the฀
issuance฀of฀commercial฀paper฀and฀new฀debt฀could฀be฀adversely฀affected฀due฀
to฀a฀debt฀rating฀downgrade฀or฀a฀deterioration฀of฀certain฀financial฀ratios.฀There฀
are฀no฀provisions฀in฀any฀agreements฀that฀would฀require฀early฀cash฀settlement฀
of฀existing฀debt฀or฀leases฀as฀a฀result฀of฀a฀downgrade฀in฀our฀debt฀rating฀or฀a฀
decrease฀in฀our฀stock฀price.฀
฀ Holders฀of฀the฀Senior฀Convertible฀Notes฀may฀convert฀their฀notes฀into฀
17.212฀shares฀of฀the฀company’s฀common฀stock฀only฀if:฀the฀sale฀price฀of฀the฀
company’s฀common฀stock฀reaches฀specified฀thresholds,฀or฀the฀credit฀rating฀฀
of฀the฀notes฀is฀below฀a฀specified฀level,฀or฀the฀notes฀are฀called฀for฀redemption,฀
or฀specified฀corporate฀transactions฀representing฀a฀change฀in฀control฀have฀
occurred.฀There฀is฀no฀indication฀that฀we฀will฀not฀be฀able฀to฀maintain฀the฀mini-
mum฀investment฀grade฀rating.฀During฀the฀fourth฀quarter฀of฀2005,฀our฀closing฀
share฀prices฀reached฀the฀specified฀threshold฀such฀that฀the฀Senior฀Convertible฀
Notes฀would฀become฀convertible฀at฀the฀option฀of฀each฀holder฀into฀shares฀of฀
common฀stock฀in฀the฀first฀quarter฀of฀2006.฀Therefore,฀through฀May฀5,฀2006,฀
holders฀may฀elect฀to฀convert฀each฀such฀note฀into฀17.212฀shares฀of฀common฀
stock.฀In฀addition,฀if฀a฀change฀in฀control฀of฀the฀company฀occurs฀on฀or฀before฀
October฀2006,฀each฀holder฀of฀the฀Senior฀Convertible฀Notes฀may฀require฀us฀to฀
purchase฀for฀cash฀all฀or฀a฀portion฀of฀such฀holder’s฀notes.฀We฀may฀redeem฀for฀
cash฀all฀or฀a฀portion฀of฀the฀notes฀at฀any฀time฀beginning฀October฀2006,฀at฀a฀
price฀equal฀to฀the฀sum฀of฀the฀issue฀price฀plus฀accrued฀original฀issue฀discount฀
and฀accrued฀cash฀interest,฀if฀any,฀on฀the฀redemption฀date.฀
฀ Our฀debt฀ratings฀at฀February฀3,฀2006,฀were฀as฀follows:
Current฀Debt฀Ratings฀ ฀ S&P฀ Moody’s฀ Fitch
Commercial฀paper฀ ฀ A1฀ P1฀ F1+
Senior฀debt฀฀ ฀ A+฀ A2฀ A+
Outlook฀ ฀ ฀ ฀ Stable฀ Positive฀ Stable
OFF-BALANCE฀SHEET฀ARRANGEMENTS
Other฀than฀in฀connection฀with฀executing฀operating฀leases,฀we฀do฀not฀have฀any฀
off-balance฀sheet฀financing฀that฀has,฀or฀is฀reasonably฀likely฀to฀have,฀a฀material,฀
current฀or฀future฀effect฀on฀our฀financial฀condition,฀change฀in฀financial฀condi-
tion,฀results฀of฀operations,฀liquidity,฀capital฀expenditures฀or฀capital฀resources.