Lowe's 2005 Annual Report Download - page 36

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฀ L O W E ’ S ฀ ฀2 0 0 5 ฀ ฀A N N U A L ฀ ฀R E P O RT
expenses฀and฀advertising฀expenses฀are฀expensed฀as฀incurred.฀Deferred฀reve-
nues฀related฀to฀the฀Company’s฀extended฀warranty฀sales฀were฀$206฀million฀at฀
February฀3,฀2006,฀$39฀million฀of฀which฀were฀included฀in฀current฀liabilities฀as฀
deferred฀revenue.฀Extended฀warranty฀deferred฀revenues฀were฀$86฀million฀at฀
January฀28,฀2005,฀$10฀million฀of฀which฀were฀included฀in฀current฀liabilities฀as฀
deferred฀revenue.฀The฀long-term฀portion฀of฀the฀Company’s฀extended฀warranty฀
deferred฀revenue฀is฀included฀in฀other฀long-term฀liabilities฀in฀the฀accompanying฀
consolidated฀balance฀sheets.฀The฀change฀in฀the฀extended฀warranty฀deferred฀
revenue฀balance฀from฀January฀28,฀2005฀to฀February฀3,฀2006฀was฀primarily฀due฀
to฀additional฀warranties฀issued฀during฀the฀period.฀Reductions฀in฀the฀extended฀
warranty฀liability฀for฀payments฀made฀under฀the฀extended฀warranties฀and฀aggre-
gate฀changes฀in฀the฀liability฀for฀accruals฀related฀to฀preexisting฀warranties฀were฀
not฀significant฀during฀the฀period,฀as฀the฀program฀is฀still฀in฀its฀beginning฀stages.฀
฀Cost฀of฀Sales฀and฀Selling,฀General฀and฀Administrative฀Expenses฀–฀
The฀following฀lists฀the฀primary฀costs฀classified฀in฀each฀major฀expense฀category:
Cost฀of฀Sales฀
•฀ ฀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฀services฀provided;
•฀ ฀Costs฀associated฀with฀delivery฀from฀vendors฀to฀customers฀by฀third฀parties;
•฀ ฀Costs฀associated฀with฀inventory฀shrinkage฀and฀obsolescence.
Selling,฀General฀and฀Administrative
•฀ ฀Payroll฀and฀benefit฀costs,฀including฀incentives,฀for฀retail฀and฀฀
corporate฀employees;
•฀ ฀Occupancy฀costs฀of฀retail฀and฀corporate฀facilities;
•฀ ฀Advertising;
•฀ ฀Costs฀associated฀with฀delivery฀from฀stores฀to฀customers฀by฀the฀Company;
•฀ ฀Third-party฀in-store฀service฀costs;
•฀ ฀Bank฀charges,฀including฀costs฀associated฀with฀credit฀card฀interchange฀fees;
•฀ ฀Costs฀associated฀with฀self-insured฀plans฀and฀premium฀costs฀for฀stop-loss฀
coverage฀and฀fully-insured฀plans;
•฀ ฀Long-lived฀asset฀impairment฀charges฀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฀operations฀
as฀incurred.฀Gross฀advertising฀expenses฀were฀$812฀million,฀$740฀million฀and฀
$682฀million฀in฀2005,฀2004฀and฀2003,฀respectively.฀Cooperative฀advertising฀
vendor฀funds฀of฀$0,฀$2฀million฀and฀$673฀million฀in฀2005,฀2004฀and฀2003,฀
respectively,฀were฀recorded฀as฀a฀reduction฀of฀these฀expenses฀with฀the฀net฀amount฀
included฀in฀SG&A.฀The฀reduction฀of฀the฀amount฀of฀cooperative฀advertising฀ven-
dor฀funds฀recorded฀as฀a฀reduction฀of฀advertising฀expenses฀in฀2004฀is฀a฀result฀of฀
the฀implementation฀of฀Emerging฀Issues฀Task฀Force฀Issue฀No.฀02-16฀(EITF฀02-16),฀
“Accounting฀by฀a฀Customer฀(Including฀a฀Reseller)฀for฀Certain฀Consideration฀
Received฀from฀a฀Vendor.”฀See฀further฀discussion฀of฀cooperative฀advertising฀
allowances฀and฀the฀impact฀of฀the฀implementation฀of฀EITF฀02-16฀in฀Vendor฀Funds.
฀Vendor฀Funds฀–฀The฀Company฀receives฀funds฀from฀vendors฀in฀the฀normal฀
course฀of฀business฀for฀a฀variety฀of฀reasons,฀including฀purchase-volume-related฀
discounts฀and฀rebates,฀advertising฀allowances,฀reimbursement฀for฀third-party฀
in-store฀service฀related฀costs,฀defective฀merchandise฀allowances฀and฀reimburse-
ment฀for฀selling฀expenses฀and฀display฀costs.฀Management฀uses฀projected฀pur-
chase฀volumes฀to฀estimate฀accrual฀rates,฀validates฀those฀projections฀based฀on฀
actual฀purchase฀trends฀and฀applies฀those฀rates฀to฀actual฀purchase฀volumes฀to฀
determine฀the฀amount฀of฀funds฀accrued฀by฀the฀Company฀and฀receivable฀from฀
the฀vendor.฀Amounts฀accrued฀could฀be฀impacted฀if฀actual฀purchase฀volumes฀
differ฀from฀projected฀purchase฀volumes.
฀ The฀Company฀historically฀treated฀purchase-volume-related฀discounts฀or฀
rebates฀as฀a฀reduction฀of฀inventory฀cost฀and฀reimbursements฀of฀operating฀
expenses฀received฀from฀vendors฀as฀a฀reduction฀of฀those฀specific฀expenses.฀The฀
Company’s฀historical฀accounting฀treatment฀for฀these฀vendor-provided฀funds฀was฀
consistent฀with฀EITF฀02-16฀with฀the฀exception฀of฀certain฀cooperative฀advertising฀
and฀third-party฀in-store฀services฀for฀which฀the฀costs฀are฀ultimately฀funded฀by฀ven-
dors.฀The฀Company฀previously฀treated฀the฀cooperative฀advertising฀allowances฀
and฀third-party฀in-store฀service฀funds฀as฀a฀reduction฀of฀the฀related฀expense.
฀ Under฀EITF฀02-16,฀vendor฀funds฀are฀treated฀as฀a฀reduction฀of฀inventory฀
cost,฀unless฀they฀represent฀a฀reimbursement฀of฀specific,฀incremental฀and฀
identifiable฀costs฀incurred฀by฀the฀customer฀to฀sell฀the฀vendor’s฀product.฀Sub-
stantially฀all฀of฀the฀vendor฀funds฀that฀the฀Company฀receives฀do฀not฀meet฀the฀
specific,฀incremental฀and฀identifiable฀criteria฀in฀EITF฀02-16.฀Therefore,฀for฀ven-
dor฀fund฀agreements฀entered฀into฀after฀December฀31,฀2002,฀which฀was฀the฀
effective฀date฀of฀the฀related฀provision฀of฀EITF฀02-16,฀the฀Company฀treats฀funds฀
that฀do฀not฀meet฀the฀specific,฀incremental฀and฀identifiable฀criteria฀as฀a฀reduction฀
in฀the฀cost฀of฀inventory฀and฀recognizes฀these฀funds฀as฀a฀reduction฀of฀cost฀of฀
sales฀when฀the฀inventory฀is฀sold.฀There฀is฀no฀impact฀to฀the฀timing฀of฀when฀the฀
funds฀are฀received฀from฀vendors฀or฀the฀associated฀cash฀flows.
฀ Third-party฀in-store฀service฀costs฀are฀included฀in฀SG&A฀expense฀and฀the฀
funds฀received฀from฀vendors฀are฀recorded฀as฀a฀reduction฀of฀inventory฀cost฀in฀
2005฀and฀2004.฀Third-party฀in-store฀service฀costs฀for฀2003฀are฀presented฀net฀
of฀vendor฀funds฀of฀$175฀million.
฀ This฀accounting฀change฀did฀not฀have฀a฀material฀impact฀on฀the฀2003฀
financial฀statements฀since฀substantially฀all฀of฀the฀vendor฀fund฀agreements฀for฀
2003฀were฀entered฀into฀prior฀to฀December฀31,฀2002,฀the฀effective฀date฀of฀the฀
related฀provision฀of฀EITF฀02-16.฀This฀accounting฀change฀reduced฀diluted฀earn-
ings฀per฀share฀by฀approximately฀$0.16฀in฀2004,฀but฀did฀not฀have฀a฀material฀
impact฀on฀diluted฀earnings฀per฀share฀in฀2005.
฀Comprehensive฀Income฀–฀The฀Company฀reports฀comprehensive฀income฀
in฀its฀consolidated฀statements฀of฀shareholders’฀equity.฀Comprehensive฀income฀
represents฀changes฀in฀shareholders’฀equity฀from฀non-owner฀sources฀and฀is฀
comprised฀primarily฀of฀net฀earnings฀plus฀or฀minus฀unrealized฀gains฀or฀losses฀on฀
available-for-sale฀securities,฀as฀well฀as฀foreign฀currency฀translation฀adjustments.฀
For฀the฀year฀ended฀February฀3,฀2006,฀foreign฀currency฀translation฀adjustments฀
were฀approximately฀$1฀million฀and฀unrealized฀holding฀gains/losses฀on฀available-
for-sale฀securities฀were฀insignificant.฀For฀the฀year฀ended฀January฀28,฀2005,฀
unrealized฀holding฀losses฀on฀available-for-sale฀securities฀were฀approximately฀
$1฀million฀and฀there฀were฀no฀foreign฀currency฀translation฀adjustments.฀For฀the฀
year฀ended฀January฀30,฀2004,฀unrealized฀holding฀gains/losses฀on฀available-for-
sale฀securities฀were฀insignificant฀and฀there฀were฀no฀foreign฀currency฀translation฀
adjustments.฀The฀reclassification฀adjustments฀for฀gains/losses฀included฀in฀net฀
earnings฀for฀2005,฀2004฀and฀2003฀were฀also฀insignificant.
฀Stock-Based฀Compensation฀–฀Effective฀February฀1,฀2003,฀the฀Company฀
adopted฀the฀fair฀value฀recognition฀provisions฀of฀Statement฀of฀Financial฀Accounting฀
Standards฀(SFAS)฀No.฀123,฀“Accounting฀for฀Stock-Based฀Compensation,”฀pro-
spectively฀for฀all฀employee฀awards฀granted฀or฀modified฀after฀January฀31,฀2003.฀
Therefore,฀in฀accordance฀with฀the฀requirements฀of฀SFAS฀No.฀148,฀“Accounting฀
for฀Stock-Based฀Compensation-Transition฀and฀Disclosure,”฀the฀cost฀related฀to฀
stock-based฀employee฀compensation฀included฀in฀the฀determination฀of฀net฀earn-
ings฀for฀years฀ended฀February฀3,฀2006,฀January฀28,฀2005฀and฀January฀30,฀2004฀
is฀less฀than฀that฀which฀would฀have฀been฀recognized฀if฀the฀fair-value-based฀