Lowe's 2005 Annual Report Download - page 37

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method฀had฀been฀applied฀to฀all฀awards฀since฀the฀original฀effective฀date฀of฀SFAS฀
No.฀123.฀The฀Company฀recognized฀stock฀compensation฀expense฀in฀2005,฀2004฀
and฀2003฀totaling฀$76฀million,฀$70฀million฀and฀$51฀million,฀respectively,฀for฀
stock฀options฀and฀awards฀granted฀or฀modified฀during฀the฀year.
฀ The฀following฀table฀illustrates฀the฀effect฀on฀net฀earnings฀and฀earnings฀per฀
share฀if฀the฀fair-value-based฀method฀had฀been฀applied฀to฀all฀outstanding฀and฀
unvested฀awards฀in฀each฀period:
(In฀millions,฀except฀per฀share฀data)฀ ฀ 2005฀ 2004฀ 2003
Net฀earnings฀as฀reported฀ ฀ $฀2,771฀ $฀2,176฀ $฀1,844
Add:฀stock-based฀compensation฀฀
฀ ฀expense฀included฀in฀net฀earnings,฀฀
net฀of฀related฀tax฀effects฀ ฀ 47฀ 43฀ 32
Deduct:฀total฀stock-based฀compensation฀฀
฀ ฀expense฀determined฀under฀the฀฀
fair-value-based฀method฀for฀all฀฀
awards,฀net฀of฀related฀tax฀effects฀ ฀ (49)฀ (85)฀ (93)
Pro฀forma฀net฀earnings฀ ฀ $฀2,769฀ $฀฀2,134฀ $฀฀1,783
Earnings฀per฀share:
Basic฀–฀as฀reported฀ ฀ $฀฀ 3.56฀ $฀฀ 2.80฀ $฀฀ 2.35
Basic฀–฀pro฀forma฀ ฀ $฀฀ 3.56฀ $฀฀ 2.75฀ $฀฀ 2.26
Diluted฀–฀as฀reported฀ ฀ $฀฀ 3.46฀ $฀฀ 2.71฀ $฀฀ 2.28
Diluted฀–฀pro฀forma฀ ฀ $฀฀ 3.46฀ $฀฀ 2.66฀ $฀฀ 2.20
฀ The฀fair฀value฀of฀each฀option฀grant฀is฀estimated฀on฀the฀date฀of฀grant฀
using฀the฀Black-Scholes฀option-pricing฀model฀with฀the฀assumptions฀listed฀in฀
the฀following฀table:
฀฀฀฀฀ ฀ 2005฀ 2004฀ 2003
Weighted฀average฀fair฀value฀per฀option ฀฀ $฀15.62฀ $฀16.56฀ $฀17.64
Assumptions฀used:
฀ Weighted฀average฀expected฀volatility฀ ฀ 31.4%฀ 38.3%฀ 44.0%
฀ Weighted฀average฀expected฀dividend฀yield฀ 0.24%฀ 0.22%฀ 0.26%
฀ Weighted฀average฀risk-free฀interest฀rate฀ 3.81%฀ 2.39%฀ 2.89%
฀ Weighted฀average฀expected฀life,฀in฀years฀ 3.2฀ 3.3฀ 5.5
฀Shipping฀and฀Handling฀Costs฀–฀The฀Company฀includes฀shipping฀and฀
handling฀costs฀relating฀to฀the฀shipment฀of฀products฀to฀customers฀by฀third฀par-
ties฀in฀cost฀of฀sales.฀Shipping฀and฀handling฀costs,฀which฀include฀salaries฀and฀
vehicle฀operations฀expenses฀relating฀to฀the฀delivery฀of฀products฀to฀customers฀
by฀the฀Company,฀are฀classified฀as฀SG&A฀expenses.฀Shipping฀and฀handling฀
costs฀included฀in฀SG&A฀expenses฀were฀$312฀million,฀$255฀million,฀and฀$216฀
million฀during฀2005,฀2004฀and฀2003,฀respectively.
฀ Recent฀Accounting฀Pronouncements฀–฀In฀December฀2004,฀the฀Financial฀
Accounting฀Standards฀Board฀(FASB)฀issued฀SFAS฀No.฀123฀(revised),฀“Share-
Based฀Payment.”฀This฀statement฀eliminates฀the฀alternative฀to฀account฀for฀share-
based฀compensation฀transactions฀using฀Accounting฀Principles฀Board฀(APB)฀
Opinion฀No.฀25฀and฀will฀require฀that฀compensation฀expense฀be฀measured฀based฀
on฀the฀grant-date฀fair฀value฀of฀the฀award฀and฀recognized฀over฀the฀requisite฀
service฀period฀for฀awards฀that฀vest.฀SFAS฀No.฀123฀(revised)฀will฀also฀require฀฀
a฀change฀in฀the฀classification฀of฀the฀benefits฀of฀tax฀deductions฀in฀excess฀of฀
recognized฀compensation฀cost฀to฀a฀reduction฀in฀operating฀cash฀flows฀and฀an฀
increase฀in฀financing฀cash฀flows฀in฀periods฀after฀adoption.฀The฀Company฀will฀
adopt฀SFAS฀No.฀123฀(revised)฀at฀the฀beginning฀of฀2006.฀The฀adoption฀of฀SFAS฀
No.฀123฀(revised)฀is฀not฀expected฀to฀have฀a฀material฀impact฀on฀the฀Company’s฀
consolidated฀financial฀statements.
฀ In฀March฀2005,฀the฀FASB฀issued฀Interpretation฀No.฀47,฀“Accounting฀for฀
Conditional฀Asset฀Retirement฀Obligations.”฀This฀interpretation฀clarifies฀that฀
the฀term฀“conditional฀asset฀retirement฀obligation,”฀as฀used฀in฀SFAS฀No.฀143,฀
“Accounting฀for฀Asset฀Retirement฀Obligations,”฀refers฀to฀a฀legal฀obligation฀to฀
perform฀an฀asset฀retirement฀activity฀in฀which฀the฀timing฀and฀(or)฀method฀of฀
settlement฀are฀conditional฀on฀a฀future฀event฀that฀may฀or฀may฀not฀be฀within฀the฀
control฀of฀the฀Company.฀The฀interpretation฀was฀effective฀no฀later฀than฀the฀end฀of฀
fiscal฀years฀ending฀after฀December฀15,฀2005.฀The฀adoption฀of฀this฀interpretation฀
did฀not฀have฀an฀impact฀on฀the฀Company’s฀consolidated฀financial฀statements.
฀ In฀May฀2005,฀the฀FASB฀issued฀SFAS฀No.฀154,฀“Accounting฀Changes฀and฀
Error฀Corrections,฀a฀Replacement฀of฀APB฀Opinion฀No.฀20฀and฀FASB฀Statement฀
No.฀3.”฀This฀statement฀changes฀the฀requirements฀for฀the฀accounting฀for฀and฀
reporting฀of฀a฀change฀in฀accounting฀principle.฀Rather฀than฀recognizing฀in฀net฀
income฀a฀cumulative฀effect฀adjustment,฀this฀statement฀generally฀requires฀
retrospective฀application฀of฀a฀change฀in฀accounting฀principle฀to฀prior฀periods’฀
financial฀statements.฀This฀statement฀is฀effective฀for฀accounting฀changes฀and฀
corrections฀of฀errors฀made฀in฀fiscal฀years฀beginning฀after฀December฀15,฀2005.
฀Segment฀Information฀–฀The฀Company’s฀operating฀segments,฀represent-
ing฀the฀Company’s฀home฀improvement฀retail฀stores,฀are฀aggregated฀within฀one฀
reportable฀segment฀based฀on฀the฀way฀the฀Company฀manages฀its฀business.฀This฀
is฀due฀to฀the฀fact฀that฀the฀Company’s฀home฀improvement฀retail฀stores฀sell฀sim-
ilar฀products฀and฀services฀that฀exhibit฀similar฀economic฀characteristics,฀use฀
similar฀processes฀in฀selling฀products฀and฀services,฀and฀sell฀their฀products฀and฀
services฀to฀similar฀classes฀of฀customers.
฀Reclassifications฀–฀Certain฀prior฀period฀amounts฀have฀been฀reclassified฀
to฀conform฀to฀current฀classifications.฀Self฀insurance฀liabilities฀and฀deferred฀
revenues฀are฀separately฀presented฀on฀the฀consolidated฀balance฀sheets฀and฀
were฀reclassified฀from฀other฀current฀liabilities.฀The฀Company฀also฀reclassified฀
depreciation฀expense฀associated฀with฀its฀distribution฀network฀from฀deprecia-
tion฀expense฀to฀cost฀of฀sales฀on฀the฀consolidated฀statements฀of฀earnings฀for฀
all฀periods฀presented.
Note฀2฀DISCONTINUED฀OPERATIONS
During฀the฀fourth฀quarter฀of฀2003,฀the฀Company฀sold฀26฀commodity-focused฀
locations฀operating฀under฀The฀Contractor฀Yard฀name฀(the฀“Contractor฀Yards”).฀
This฀sale฀was฀effected฀to฀allow฀the฀Company฀to฀continue฀to฀focus฀on฀its฀retail฀
and฀commercial฀business.฀The฀Company฀has฀reported฀the฀results฀of฀operations฀
of฀the฀Contractor฀Yards฀as฀discontinued฀operations฀for฀2003.฀Those฀results฀
were฀as฀follows:
฀ Year฀Ended฀On
(In฀millions)฀ January฀30,฀2004
Net฀sales฀from฀discontinued฀operations฀฀ ฀ ฀ $425
Pre-tax฀earnings฀from฀discontinued฀operations฀ ฀ ฀ 20
Gain฀on฀sale฀of฀Contractor฀Yards฀ ฀ ฀ ฀ 5
Income฀tax฀provision฀ ฀ ฀ ฀ 10
Earnings฀from฀discontinued฀operations,฀net฀of฀tax฀ ฀ ฀ $฀ 15
The฀Company฀has฀revised฀the฀fiscal฀2003฀presentation฀of฀the฀statement฀cash฀
flows฀to฀include฀the฀operating฀and฀investing฀portions฀of฀the฀cash฀flows฀
attributable฀to฀the฀discontinued฀operations฀in฀their฀respective฀captions,฀
totaling฀$85฀million฀and฀$23฀million,฀respectively.฀These฀amounts,฀totaling฀
$112฀million,฀were฀previously฀reported฀on฀a฀combined฀basis฀on฀the฀state-
ment฀of฀cash฀flows,฀separate฀from฀continuing฀operations.