Lowe's 2007 Annual Report Download - page 42

40 |LOWE’S 2007 ANNUAL REPORT
For non-employee directors,these awards vest immediately and are expensed
on the grant date. The weighted-average grant-date fair value per share of
deferred stock units granted was $32.13, $31.02 and $28.58 in 2007, 2006
and 2005, respectively. The total fair value of deferred stock units vested
was approximately $1 million, $5 million and $17 million in 2007, 2006 and
2005, respectively. There were 597,200 deferred stock units outstanding
at February 1, 2008.
Transactions related to deferred stock units issued under the 2001
and Directors’ plans for the year ended February 1, 2008 are summarized
as follows:
Weighted-Average
Grant-Date Fair
Shares Value Per Share
Nonvested at February 2, 2007 380,000 $19.65
Granted 36,000 32.13
Vested (36,000) 32.13
Nonvested at February 1, 2008 380,000 $19.65
ESPP
The purchase price of the shares under the ESPP equals 85% of the closing
price on the date of purchase.The Company’s share-based payment expense
is equal to 15% of the closing price on the date of purchase. The ESPP is
considered a liability award and is measured at fair value at each reporting
date, and the share-based payment expense is recognized over the six-month
offering period. The Company issued 3,366,031 shares of common stock
pursuant to this plan during the year ended February 1, 2008.
NOTE 9 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 180
days after their original date of service. Participants are allowed to choose from
a group of mutual funds in order to designate 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 participants’ 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 (baseline match).
In 2005 and 2006, the Company also offered a performance match to eligible
401(k) Plan participants, based on growth of Company earnings before taxes
for the fiscal year. Effective May 2007, the Company increased the amount
of the baseline match to a maximum of 4.25% (up from 2.25%) but will no
longer offer a performance match. Plan participants are eligible to receive the
baseline match after completing 180 days of continuous service.The Company’s
contributions to the 401(k) Plan vest immediately in the participant accounts.
Once participants reach age 59 ½, they may elect to withdraw their entire 401(k)
Plan balance. This is a one-time, in-service distribution option. Participants
may also withdraw contributions and rollover contributions for reasons of hard-
ship, while still actively employed. In addition, participants with 20 or more years
of service who have an Employee Stock Ownership Plan carryforward 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 supplement
benefits provided under the 401(k) Plan to 401(k) Plan participants whose benefits
are restricted as a result of certain provisions of the Internal Revenue Code of
1986. This plan provides for employer contributions in the form of a baseline
match. In 2005 and 2006, it also provided for a performance match.
The Company maintains a non-qualified deferred compensation program
called the Lowe’s Cash Deferral Plan.This plan is designed to permit certain
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.
The Company recognized SG&A expense associated with employee
retirement plans of $91 million, $42 million and $136 million in 2007, 2006
and 2005, respectively.
NOTE 10 INCOME TAXES
The following is a reconciliation of the effective tax rate to the federal statutory
tax rate:
2007 2006 2005
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal
tax benefit 3.0 3.3 3.6
Other, net (0.3) (0.4) (0.1)
Effective tax rate 37.7% 37.9% 38.5%
The components of the income tax provision are as follows:
(In millions) 2007 2006 2005
Current
Federal $1,495 $1,657 $1,514
State 207 242 254
Total current 1,702 1,899 1,768
Deferred
Federal (1) (11) (31)
State 1 5 (6)
Total deferred – (6) (37)
Total income tax provision $1,702 $1,893 $1,731
The tax effect of cumulative temporary differences that gave rise to the
deferred tax assets and liabilities was as follows:
February 1, February 2,
2008 2007
Deferred tax assets:
Self-insurance $ 189 $ 129
Share-based payment expense 81 59
Other, net 205 108
Total deferred tax assets $ 475 $ 296
Valuation allowance (22) (4)
Net deferred tax assets $ 453 $ 292
Deferred tax liabilities:
Fixed assets (834) (837)
Other, net (42) (29)
Total deferred tax liabilities $(876) $ (866)
Net deferred tax liability $(423) $ (574)
The Company operates as a branch in various foreign jurisdictions and
incurred net operating losses of $63 million and $12 million as of February 1,
2008 and February 2, 2007, respectively.The net operating losses are subject
to expiration in 2017 through 2027. Deferred tax assets have been established
for these net operating losses in the accompanying consolidated balance sheets.
Given the uncertainty regarding the realization of the foreign net deferred tax
assets,the Company recorded valuation allowances of $22 million and $4 million
as of February 1, 2008 and February 2, 2007, respectively.
The Company adopted FASB Interpretation (FIN) No. 48,“Accounting for
Uncertainty in Income Taxes,” effective February 3, 2007.The cumulative effect
of applying this interpretation was recorded as a decrease of $8 million to
retained earnings, a decrease of $158 million to the net deferred tax liability,
an increase of $146 million to the reserve for unrecognized tax benefits, an
increase of $13 million to accrued interest and an increase of $7 million to
accrued penalties.
The Company had approximately $186 million of total unrecognized tax
benefits,$7 million of penalties and $21 million of interest as of February 3,2007.