Lowe's 2007 Annual Report Download - page 43

LOWE’S 2007 ANNUAL REPORT |41
A reconciliation of the beginning and ending balances of unrecognized tax
benefits is as follows:
(In millions)
Balance at February 3, 2007 $186
Additions for tax positions of prior years 11
Reductions for tax positions of prior years (81)
Additions based on tax positions related to the current year 23
Reductions based on tax positions related to the current year –
Settlements (1)
Reductions due to a lapse in applicable statute of limitations –
Balance at February 1, 2008 $138
The amounts of unrecognized tax benefits that, if recognized, would impact
the effective tax rate were $46 million and $34 million as of February 1, 2008
and February 3, 2007, respectively.
The Company includes interest related to tax issues as part of net interest
in the consolidated financial statements. The Company records any applicable
penalties related to tax issues within the income tax provision. The Company
recognized $3 million of interest expense and $5 million of penalties related to
uncertain tax positions in the consolidated statement of earnings in 2007.
The Company had $24 million accrued for interest and $12 million accrued for
penalties as of February 1, 2008.
The Company does not expect any changes in unrecognized tax benefits over
the next 12 months to have a significant impact on the results of operations,
the financial position or the cash flows of the Company.
During 2006,the Company reached a settlement with the Internal Revenue
Service (IRS) covering the tax years 2002 and 2003. Under the settlement
agreement, the Company paid the IRS $17 million, plus $3 million in interest.
The Company is subject to examination in the U.S.federal tax jurisdiction for fiscal
years 2004 forward.The Company is subject to examination in major state tax
jurisdictions for the fiscal years 2002 forward.We believe appropriate provisions
for all outstanding issues have been made for all jurisdictions and all open years.
Prior to the adoption of FIN No. 48, the Company accrued for probable
liabilities resulting from potential assessments by taxing authorities. The
Company recorded these tax contingencies to address the potential exposures
that could result from the diverse interpretations of tax statutes, rules and
regulations. The amounts accrued were not material to the Company’s
consolidated financial statements in 2006.
NOTE 11 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 share-based awards and convertible notes as of the balance
sheet date. The following table reconciles EPS for 2007, 2006 and 2005:
(In millions, except per share data) 2007 2006 2005
Basic earnings per share:
Net earnings $2,809 $3,105 $2,765
Weighted-average shares outstanding 1,481 1,535 1,555
Basic earnings per share $ 1.90 $ 2.02 $ 1.78
Diluted earnings per share:
Net earnings $2,809 $3,105 $2,765
Net earnings adjustment for interest
on convertible notes, net of tax 4 4 11
Net earnings, as adjusted $2,813 $3,109 $2,776
Weighted-average shares outstanding 1,481 1,535 1,555
Dilutive effect of share-based awards 8 9 10
Dilutive effect of convertible notes 21 22 42
Weighted-average shares, as adjusted 1,510 1,566 1,607
Diluted earnings per share $ 1.86 $ 1.99 $ 1.73
Stock options to purchase 7.8 million, 6.8 million and 5.6 million shares
of common stock for 2007, 2006 and 2005, respectively, were excluded from
the computation of diluted earnings per share because their effect would have
been antidilutive.
NOTE 12 LEASES
The Company leases store facilities and land for certain store facilities under
agreements with original terms generally of 20 years.For lease agreements that
provide for escalating rent payments or free-rent occupancy periods, the Company
recognizes rent expense on a straight-line basis over the non-cancelable lease
term and any option renewal period where failure to exercise such option would
result in an economic penalty in such amount that renewal appears, at the
inception of the lease, to be reasonably assured. The lease term commences
on the date that the Company takes possession of or controls the physical use
of the property.The leases generally contain provisions for four to six renewal
options of five years each.
Some agreements also provide for contingent rentals based on sales
performance in excess of specified minimums. In 2007, 2006 and 2005,
contingent rentals were insignificant.
The Company subleases certain properties that are no longer held for use in
operations. Sublease income was not significant for any of the periods presented.
Certain equipment is also leased by the Company under agreements
ranging from three to five years. These agreements typically contain renewal
options providing for a renegotiation of the lease, at the Company’s option,
based on the fair market value at that time.
The future minimum rental payments required under capital and operating
leases having initial or remaining non-cancelable lease terms in excess of one
year are summarized as follows:
Operating Leases Capital Leases
(In millions) Real Real
Fiscal Year Estate Equipment Estate Equipment Total
2008 362 $1 $61 $1 $ 425
2009 359 – 61 – 420
2010 359 – 61 – 420
2011 358 – 61 – 419
2012 355 – 60 – 415
Later years 4,131 – 281 – 4,412
Total minimum
lease payments $5,924 $1 $585 $1 $6,511
Total minimum capital lease payments $586
Less amount representing interest 215
Present value of minimum lease payments 371
Less current maturities 30
Present value of minimum lease payments,
less current maturities $341
Rental expenses under operating leases for real estate and equipment
were $369 million, $318 million and $301 million in 2007, 2006 and 2005,
respectively and were recognized in SG&A expense.
NOTE 13 COMMITMENTS AND CONTINGENCIES
The Company is a defendant in legal proceedings considered to be in the normal
course of business, none of which, individually or collectively, are believed to
have a risk of having a material impact on the Company’s financial statements.
In evaluating liabilities associated with its various legal proceedings, the
Company has accrued for probable liabilities associated with these matters.
The amounts accrued were not material to the Company’s consolidated
financial statements in any of the years presented.