Lowe's 2010 Annual Report Download - page 26

22 LOWE’S 2010 ANNUAL REPORT
Income tax provision
Our฀effective฀income฀tax฀rate฀was฀36.9%฀in฀2009฀versus฀37.4%฀in฀2008.฀
The฀decrease฀in฀the฀effective฀tax฀rate฀was฀primarily฀due฀to฀favorable฀state฀
tax฀settlements.฀
LOWE’S BUSINESS OUTLOOK
As of February 23, 2011, the date of our fourth quarter 2010 earnings
release,฀we฀expected฀total฀sales฀in฀2011฀to฀increase฀approximately฀5%,฀
which฀includes฀the฀53rd฀week.฀The฀53rd฀week฀was฀expected฀to฀increase฀
total฀sales฀by฀approximately฀1.6%.฀We฀expected฀comparable฀store฀sales฀
to฀increase฀1%฀to฀2%฀in฀2011.฀We฀expected฀to฀open฀25฀to฀30฀stores฀
during฀2011,฀resulting฀in฀total฀square฀footage฀growth฀of฀approximately฀
1.5%.฀Earnings฀before฀interest฀and฀taxes฀as฀a฀percentage฀of฀sales฀
(operating฀margin)฀was฀expected฀to฀increase฀approximately฀30฀basis฀
points.฀In฀addition,฀depreciation฀expense฀was฀expected฀to฀be฀approxi-
mately฀$1.48฀billion.฀Diluted฀earnings฀per฀share฀of฀$1.60฀to฀$1.72฀were฀
expected฀for฀the฀scal฀year฀ending฀February฀3,฀2012.฀Our฀guidance฀
assumed฀approximately฀$2.4฀billion฀in฀share฀repurchases฀during฀2011฀
spread evenly across the four quarters.
FINANCIAL CONDITION, LIQUIDITY AND
CAPITAL RESOURCES
Cash Flows
Cash฀ows฀from฀operating฀activities฀continued฀to฀provide฀the฀primary฀
source of our liquidity. The decrease in net cash provided by operating
activities for 2010 versus 2009 was driven by changes in working capital,
primarily฀related฀to฀accounts฀payable฀and฀income฀tax฀payments.฀The฀
increase in net cash used in investing activities for 2010 versus 2009
was driven by increased purchases of investments, partially offset by
a฀decline฀in฀property฀acquired฀due฀to฀a฀reduction฀in฀our฀store฀expansion฀
program. The decrease in net cash used in financing activities for 2010
versus 2009 was attributable to an increase in cash from the issuances
of long-term debt in 2010 and lower debt repayments, offset by
share repurchases.
Sources of Liquidity
In฀addition฀to฀our฀cash฀ows฀from฀operations,฀liquidity฀is฀provided฀by฀our฀
short-term borrowing facilities and through the issuance of long-term
debt.฀We฀have฀a฀$1.75฀billion฀senior฀credit฀facility฀that฀expires฀in฀June฀
2012. The senior credit facility supports our commercial paper program.
The฀senior฀credit฀facility฀has฀a฀$500฀million฀letter฀of฀credit฀sublimit.฀Letters฀
of credit issued pursuant to the senior credit facility reduce the amount
available for borrowing under the senior credit facility. Borrowings made
are฀unsecured฀and฀are฀priced฀at฀xed฀rates฀based฀upon฀market฀condi-
tions at the time of funding in accordance with the terms of the senior
credit facility. The senior credit facility contains certain restrictive covenants,
which include maintenance of a debt leverage ratio, as defined by the
senior credit facility. We were in compliance with those covenants at
January 28, 2011. Seventeen banking institutions are participating in the
senior credit facility. There were no outstanding borrowings or letters
of credit under the senior credit facility and no outstanding borrowings
under the commercial paper program at January 28, 2011 or during 2010.
฀ We฀also฀have฀a฀Canadian฀dollar฀(C$)฀denominated฀credit฀facility฀in฀
the฀amount฀of฀C$50฀million฀that฀provides฀revolving฀credit฀support฀for฀our฀
Canadian operations. This uncommitted credit facility provides us with
the฀ability฀to฀make฀unsecured฀borrowings,฀which฀are฀priced฀at฀xed฀rates฀
based upon market conditions at the time of funding in accordance
with the terms of the credit facility. As of January 28, 2011, there were
no borrowings outstanding under this credit facility.
฀ We฀expect฀to฀continue฀to฀have฀access฀to฀the฀capital฀markets฀on฀both฀
short- and long-term bases when needed for liquidity purposes by
issuing commercial paper or new long-term debt. The availability and the
borrowing costs of these funds could be adversely affected, however,
by a downgrade of our debt ratings or a deterioration of certain financial
ratios.฀The฀table฀below฀reects฀our฀debt฀ratings฀by฀Standard฀&฀Poor’s฀
(S&P)฀and฀Moody’s฀as฀of฀March฀28,฀2011,฀which฀we฀are฀disclosing฀to฀
enhance understanding of our sources of liquidity and the effect of our
ratings฀on฀our฀cost฀of฀funds.฀Although฀we฀currently฀do฀not฀expect฀a฀
downgrade in our debt ratings, our commercial paper and senior debt
ratings may be subject to revision or withdrawal at any time by the
assigning rating organization, and each rating should be evaluated
independently of any other rating.
Debt Ratings S&P฀ Moody’s
Commercial Paper A1 P1
Senior Debt A A1
Outlook Stable Stable
We believe that net cash provided by operating and financing
activities฀will฀be฀adequate฀for฀our฀expansion฀plans฀and฀our฀other฀
operating฀requirements฀over฀the฀next฀12฀months.฀There฀are฀no฀provisions฀
in฀any฀agreements฀that฀would฀require฀early฀cash฀settlement฀of฀existing฀
debt or leases as a result of a downgrade in our debt rating or a decrease
in our stock price. In addition, we do not have a significant amount of
cash held in foreign affiliates.
Cash Requirements
Capital expenditures
Our฀scal฀2011฀capital฀budget฀is฀approximately฀$1.8฀billion,฀inclusive฀
of฀approximately฀$100฀million฀of฀lease฀commitments,฀resulting฀in฀a฀
planned฀net฀cash฀outow฀of฀$1.7฀billion.฀Approximately฀45%฀of฀the฀
planned฀net฀cash฀outow฀is฀for฀store฀expansion.฀Our฀expansion฀plans฀
for฀2011฀consist฀of฀25฀to฀30฀new฀stores฀and฀are฀expected฀to฀increase฀
sales฀oor฀square฀footage฀by฀approximately฀1.5%.฀All฀of฀the฀2011฀
projects฀are฀expected฀to฀be฀owned,฀which฀includes฀approximately฀
20%฀of฀the฀stores฀on฀leased฀land.฀In฀addition,฀approximately฀30%฀
of฀the฀planned฀net฀cash฀outow฀is฀for฀investment฀in฀our฀existing฀
stores.฀Other฀planned฀capital฀expenditures฀include฀investing฀in฀our฀
distribution and corporate infrastructure, including enhancements
in information technology.
During 2009, we entered into a joint venture agreement with
Australian retailer Woolworths Limited, to develop a chain of home
improvement฀stores฀in฀Australia.฀We฀expect฀to฀contribute฀approximately฀
$400฀million฀over฀four฀years฀to฀the฀joint฀venture,฀of฀which฀we฀are฀a฀one-
third฀owner.฀As฀of฀January฀28,฀2011,฀we฀had฀contributed฀approximately฀
$140฀million.฀The฀joint฀venture฀expects฀to฀open฀its฀rst฀stores฀in฀2011.
Debt and capital
In฀April฀2010,฀we฀issued฀$1.0฀billion฀of฀unsecured฀notes฀in฀two฀tranches:฀
$500฀million฀of฀4.625%฀notes฀maturing฀in฀April฀2020฀and฀$500฀million฀
of 5.8% notes maturing in April 2040. Net proceeds from the 4.625%
and฀5.8%฀notes,฀excluding฀issuance฀costs,฀were฀$497฀million฀and฀
$495฀million,฀respectively.฀During฀the฀second฀quarter฀of฀2010,฀we฀