Lowe's 2005 Annual Report Download - page 40

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฀ L O W E ’ S ฀ ฀2 0 0 5 ฀ ฀A N N U A L ฀ ฀R E P O RT
฀ The฀Company฀has฀$155.4฀million฀aggregate฀principal฀of฀convertible฀notes฀
issued฀in฀February฀2001฀at฀an฀issue฀price฀of฀$608.41฀per฀note.฀Interest฀will฀
not฀be฀paid฀on฀the฀notes฀prior฀to฀maturity฀in฀February฀2021,฀at฀which฀time฀the฀
holders฀will฀receive฀$1,000฀per฀note,฀representing฀a฀yield฀to฀maturity฀of฀2.5%.฀
Holders฀of฀the฀notes฀had฀the฀right฀to฀require฀the฀Company฀to฀purchase฀all฀or฀a฀
portion฀of฀their฀notes฀in฀February฀2004฀at฀a฀price฀of฀$655.49฀per฀note฀and฀will฀
have฀the฀right฀in฀February฀2011฀to฀require฀the฀Company฀to฀purchase฀all฀or฀a฀
portion฀of฀their฀notes฀at฀a฀price฀of฀$780.01฀per฀note.฀The฀Company฀may฀choose฀
to฀pay฀the฀purchase฀price฀of฀the฀notes฀in฀cash฀or฀common฀stock,฀or฀a฀combi-
nation฀of฀cash฀and฀common฀stock.฀Holders฀of฀an฀insignificant฀number฀of฀notes฀
exercised฀their฀right฀to฀require฀the฀Company฀to฀purchase฀their฀notes฀during฀
2004,฀all฀of฀which฀were฀purchased฀in฀cash.
฀ Holders฀may฀convert฀their฀notes฀at฀any฀time฀on฀or฀before฀the฀maturity฀date,฀
unless฀the฀notes฀have฀been฀previously฀purchased฀or฀redeemed,฀into฀16.448฀
shares฀of฀the฀Company’s฀common฀stock฀per฀note.฀The฀conversion฀ratio฀of฀
16.448฀shares฀per฀note฀is฀only฀adjusted฀based฀on฀normal฀antidilution฀provi-
sions฀designed฀to฀protect฀the฀value฀of฀the฀conversion฀option.฀During฀2005,฀
holders฀of฀$839฀million฀principal฀amount,฀$565฀million฀carrying฀amount,฀of฀the฀
Company’s฀convertible฀notes฀issued฀in฀February฀2001฀exercised฀their฀right฀to฀
convert฀their฀notes฀into฀13.8฀million฀shares฀of฀the฀Company’s฀common฀stock฀
at฀the฀rate฀of฀16.448฀shares฀per฀note.฀During฀2004,฀holders฀of฀$10฀million฀
principal฀amount,฀$6฀million฀carrying฀amount฀of฀the฀Company’s฀convertible฀
notes฀issued฀in฀February฀2001฀exercised฀their฀right฀to฀convert฀their฀notes฀into฀
0.2฀million฀shares฀of฀the฀Company’s฀common฀stock.
฀ Upon฀the฀issuance฀of฀each฀of฀the฀series฀of฀convertible฀notes฀previously฀
described,฀we฀evaluated฀the฀optionality฀features฀embedded฀in฀the฀notes฀and฀
concluded฀that฀these฀features฀do฀not฀require฀bifurcation฀from฀the฀host฀contracts฀
and฀separate฀accounting฀as฀derivative฀instruments.
Note฀8฀ FINANCIAL฀INSTRUMENTS
Cash฀and฀cash฀equivalents,฀accounts฀receivable,฀trade฀accounts฀payable฀and฀
accrued฀liabilities฀are฀reflected฀in฀the฀financial฀statements฀at฀cost,฀which฀
approximates฀fair฀value฀due฀to฀their฀short-term฀nature.฀Short-฀and฀long-term฀
investments฀classified฀as฀available-for-sale฀securities,฀which฀include฀restricted฀
balances,฀are฀reflected฀in฀the฀financial฀statements฀at฀fair฀value.฀Estimated฀fair฀
values฀for฀long-term฀debt฀have฀been฀determined฀using฀available฀market฀infor-
mation฀and฀appropriate฀valuation฀methodologies.฀However,฀considerable฀
judgment฀is฀required฀in฀interpreting฀market฀data฀to฀develop฀the฀estimates฀of฀
fair฀value.฀Accordingly,฀the฀estimates฀presented฀herein฀are฀not฀necessarily฀
indicative฀of฀the฀amounts฀that฀the฀Company฀could฀realize฀in฀a฀current฀market฀
exchange.฀The฀use฀of฀different฀market฀assumptions฀and/or฀estimation฀meth-
odologies฀may฀have฀a฀material฀effect฀on฀the฀estimated฀fair฀value฀amounts.฀
The฀fair฀value฀of฀the฀Company’s฀long-term฀debt฀excluding฀capital฀leases฀and฀
other฀is฀as฀follows:
฀ February฀3,฀2006฀ January฀28,฀2005
฀ ฀ ฀ ฀ ฀ Carrying฀ Fair฀ Carrying฀ Fair฀
(In฀millions)฀ ฀ Amount฀ Value฀ Amount฀ Value
Liabilities:
Long-term฀debt
฀ ฀(excluding฀capital฀leases฀฀
and฀other)฀ $฀3,107฀ $฀3,578฀ $฀3,267฀ $฀3,974
฀ Interest฀rates฀that฀are฀currently฀available฀to฀the฀Company฀for฀issuance฀of฀
debt฀with฀similar฀terms฀and฀remaining฀maturities฀are฀used฀to฀estimate฀fair฀
value฀for฀debt฀issues฀that฀are฀not฀quoted฀on฀an฀exchange.
Note฀9฀ EARNINGS฀PER฀SHARE
Basic฀earnings฀per฀share฀(EPS)฀excludes฀dilution฀and฀is฀computed฀by฀dividing฀
the฀applicable฀net฀earnings฀by฀the฀weighted฀average฀number฀of฀common฀shares฀
outstanding฀for฀the฀period.฀Diluted฀earnings฀per฀share฀is฀calculated฀based฀on฀the฀
weighted฀average฀shares฀of฀common฀stock฀as฀adjusted฀for฀the฀potential฀dilutive฀
effect฀of฀stock฀options฀and฀convertible฀notes฀as฀of฀the฀balance฀sheet฀date.฀The฀
following฀table฀reconciles฀EPS฀for฀2005,฀2004฀and฀2003:
(In฀millions,฀except฀per฀share฀data)฀ ฀ 2005฀ 2004฀ 2003
Basic฀earnings฀per฀share:
Earnings฀from฀continuing฀operations฀ ฀ $฀2,771฀ $฀2,176฀ $฀1,829
Earnings฀from฀discontinued฀operations,฀฀
฀ net฀of฀tax฀ ฀ –฀ –฀ 15
Net฀earnings฀ ฀ $฀2,771฀ $฀2,176฀ $฀1,844
Weighted฀average฀shares฀outstanding฀ ฀ 777฀ 777฀ 785
Basic฀earnings฀per฀share:฀฀
฀ continuing฀operations฀ ฀ $฀฀ 3.56฀ $฀฀ 2.80฀ $฀฀ 2.33
Basic฀earnings฀per฀share:฀฀
฀ discontinued฀operations฀ ฀ –฀ –฀ 0.02
Basic฀earnings฀per฀share฀ ฀ $ ฀฀ 3.56฀ $ ฀฀ 2.80฀ $ ฀฀ 2.35
Diluted฀earnings฀per฀share:
Net฀earnings฀ ฀ $฀2,771฀ $฀2,176฀ $฀1,844
Net฀earnings฀adjustment฀for฀interest฀฀
฀ on฀convertible฀debt,฀net฀of฀tax฀ ฀ 11฀ 14฀ 14
Net฀earnings,฀as฀adjusted฀ ฀ $ ฀ 2,782฀ $ ฀ 2,190฀ $ ฀ 1,858
Weighted฀average฀shares฀outstanding฀ ฀ 777฀ 777฀ 785
Dilutive฀effect฀of฀stock฀options฀ ฀ 5฀ 5฀ 4
Dilutive฀effect฀of฀convertible฀debt฀ ฀ 21฀ 26฀ 27
Weighted฀average฀shares,฀as฀adjusted฀ ฀ 803฀ 808฀ 816
Diluted฀earnings฀per฀share:฀฀
฀ continuing฀operations฀ ฀ $฀฀ 3.46฀ $฀฀ 2.71฀ $฀฀ 2.26
Diluted฀earnings฀per฀share:฀฀
฀ discontinued฀operations฀ ฀ –฀ –฀ 0.02
Diluted฀earnings฀per฀share฀ ฀ $ ฀฀ 3.46฀ $ ฀฀ 2.71฀ $ ฀฀ 2.28
Note฀10฀ SHAREHOLDERS’฀EQUITY
Authorized฀shares฀of฀common฀stock฀were฀2.8฀billion฀at฀February฀3,฀2006,฀
and฀January฀28,฀2005.
฀ The฀Company฀has฀five฀million฀authorized฀shares฀of฀preferred฀stock฀($5฀par),฀
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.
฀ 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,฀the฀
Company฀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฀repurchases฀through฀2007.฀As฀of฀February฀3,฀2006,฀the฀total฀remaining฀
authorization฀was฀$1.2฀billion.
฀ The฀Company฀granted฀restricted฀stock฀awards฀of฀988,000฀shares฀with฀a฀
per฀share฀weighted฀average฀fair฀value฀of฀$62.54฀in฀2005.฀The฀Company฀granted฀
restricted฀stock฀awards฀of฀346,000฀shares฀with฀a฀per฀share฀weighted฀average฀
fair฀value฀of฀$56.75฀in฀2004.฀The฀Company฀also฀granted฀deferred฀stock฀units,฀
which฀represent฀non-vested฀stock,฀of฀550,000฀units฀with฀a฀per฀share฀weighted฀