What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-21 compared with 2021-03-22 · 110 added, 218 removed, 250 unchanged (57% of the section changed)

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period ended January 29, 2021 (our fiscal years 2020, 2019, and 2018).

Unless otherwise noted, all references herein for the years 2020, 2019, and 2018 represent the fiscal years ended January 29, 2021, January 31, 2020, and February 1, 2019, respectively.

The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the two-year period ended January 28, 2022 (our fiscal years 2021 and 2020).

Unless otherwise noted, all references herein for the years 2021, 2020, and 2019 represent the fiscal years ended January 28, 2022, January 29, 2021, and January 31, 2020, respectively.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.

This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report that have been prepared in accordance with accounting principles generally accepted in the United States of America.

This discussion and analysis is presented in six sections:

This discussion and analysis is presented in four sections:

• Executive Overview

• Financial Condition, Liquidity and Capital Resources

• Off-Balance Sheet Arrangements

• Contractual Obligations and Commercial Commitments

• Critical Accounting Policies and Estimates

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Net sales for fiscal 2021 increased 7.4% over fiscal year 2020 to $96.3 billion.

The increase in total sales was driven by an increase in comparable sales, primarily offset by a decrease in sales due to closed stores.

Comparable sales increased 26.1% over fiscal year 2019, driven by an increase in comparable transactions of 14.0% and an increase in comparable average ticket of 12.1%.

The increase in total sales was primarily driven by comparable sales growth.

Comparable sales increased 6.9% over fiscal year 2020, driven by an 11.1% increase in comparable average ticket, partially offset by a 4.2% decrease in comparable customer transactions.

Net earnings for fiscal 2021 increased 44.7% to $8.4 billion.

Diluted earnings per common share increased 55.3% in fiscal year 2021 to $12.04 from $7.75 in 2020.

Included in the fiscal 2020 results is a $1.1 billion pre-tax loss on extinguishment of debt from cash tender offers to purchase and retire an aggregate principal amount of $3.0 billion in outstanding notes with a weighted average interest rate of 4.80%.

The Company funded the cash tender offers with a $4.0 billion issuance of unsecured notes with a weighted average interest rate of 2.17%.

These efforts took advantage of a favorable interest rate environment to reduce our long-term interest expense.

Also included in the results for fiscal 2020 and 2019 are operating costs related to the Canada restructuring actions.

Adjusting 2020 and 2019 amounts for these discrete items not contemplated in the business outlooks for those respective years, adjusted diluted earnings per common share increased 54.4% in fiscal year 2020 to $8.86 from $5.74 in 2019 (see the non-GAAP financial measures discussion).

Included in the fiscal 2020 results are a $1.1 billion pre-tax loss on extinguishment of debt from cash tender offers to purchase and retire an aggregate principal amount of $3.0 billion in outstanding notes, as well as operating costs related to the Canada restructuring actions.

Adjusting for these items, diluted earnings per common share increased 35.9% to $12.04 in 2021 from adjusted diluted earnings per common share of $8.86 in 2020 (see the non-GAAP financial measures discussion).

For 2021, cash flows from operating activities were $10.1 billion, with $1.9 billion used for capital expenditures.

Continuing to deliver on our commitment to return excess cash to shareholders, the Company repurchased $13.1 billion of common stock and paid $2.0 billion in dividends during the year.

In 2020, we experienced unprecedented customer demand as the consumer mindset turned its focus to the function and enjoyment of their home.

During the COVID-19 pandemic, the home has become a residence, a home school, a home office and the primary location for recreation and entertainment.

Due to our execution of the Company’s retail fundamentals strategy announced in 2018, which focused on merchandising excellence, supply chain transformation, operational efficiency, and customer engagement, we leveraged our improved operating capabilities to quickly respond to the global health crisis and meet customer demands.

The COVID-19 pandemic changed the way customers shop with Lowe’s.

In an effort to enhance our omni-channel capabilities and to offer options to meet our customer’s needs, we rapidly rolled out curbside pickup in the first quarter.

We then launched mobile check-in for curbside pickup along with an internal order picking app to improve associates’ speed and accuracy in fulfilling orders, and began the launch of touchless buy online pickup in store (BOPIS) lockers.

We also continue to enhance our mobile app to improve the customer pickup experience, including geofencing technology that alerts our stores when customers are on their way to pick up their orders.

In addition, we completed the re-platforming of Lowes.com to the cloud which greatly improved site stability and functionality allowing us to achieve triple-digit online sales growth for the year.

To provide customers with a more intuitive shopping experience and better align our product adjacencies, especially for Pro customers, we made a significant merchandising investment to reset the layout of our U.S.

Stores Reset).

Stores Reset provides a faster shopping experience, increases localized product assortments by eliminating unproductive bays

which opens up space for new products better tailored to the local market, and drives more transactions by moving the basket-building category of cleaning products to the main power aisle of the store.

The Company incurred approximately $260 million of incremental expense in 2020, which is reflected within selling, general and administrative (SG&A) expenses in the consolidated statement of earnings, with approximately 95% of the resets complete as of the end of the fiscal year.

In addition, throughout 2020, we continued to focus on gaining market share with the Pro customer.

We continue to elevate our brand and product offerings in the job lot quantities they need.

During the fourth quarter, we launched our new Pro customer relationship management (CRM) tool which provides our Pro Desk with tools to manage, grow and retain our Pro customers through consistent and data-driven selling actions.

COVID-19 Response

We began the year focused on executing our retail strategy;

however, we rapidly re-prioritized our objectives to address the impacts of COVID-19.

Our Company has been committed to the following priorities while navigating the COVID-19 pandemic:

Protecting the health and safety of our associates and customers through a safe store environment and shopping experience,

Financially supporting our associates during this challenging time, and

Providing support for our community, including healthcare providers and first responders.

We implemented a number of initiatives to facilitate a safer store environment throughout the year, including supporting social distancing by adding signage and floor markers, installing plexiglass shields at the point-of-sale areas, and designating social distancing ambassadors to monitor customer flow traffic;

enhancing cleaning procedures;

and adopted a requirement for all front-line associates to wear masks and a nationwide standard for all customers to wear masks.

For the year, we invested nearly $1.3 billion in COVID-related support for our associates, store safety and communities.

As part of our commitment to provide financial assistance to our associates, this investment was inclusive of $915 million of expense to support our associates, which included seven discretionary payments for our hourly associates, a $2 per hour temporary wage increase for hourly associates during the month of April, and emergency paid leave for all associates who needed it.

In addition, our support included $109 million in pandemic relief to support our communities, including grants to support minority-owned and rural small businesses.

In 2021, we experienced comparable sales increases in eleven of fifteen product categories and all fifteen U.S.

Our Total Home strategy continues to gain momentum as we provide a one-stop solution for both DIY and Pro customers.

Throughout fiscal 2021, we maintained focus on the Pro customer with improved in-stock inventory levels and store layout, enhanced service offerings, and expanded brand and product offerings that meet their project needs.

We enhanced the customer online shopping experience with improved search and navigation functionality and expanded on-trend inventory assortments.

Our private brand product assortment has also elevated our performance with the DIY customer, especially in Home Décor.

In addition, we have expanded our omnichannel fulfillment capabilities.

During 2021, we converted three geographic areas to our market-based delivery model for big and bulky product.

In this new model, product flows directly to customer homes from our distribution network, bypassing stores altogether.

As part of our fulfillment capabilities, our customers can also now track appliance deliveries in real time and we continue to expand our same-day and next-day fulfillment options.

In the stores, our disciplined focus on driving operating leverage through our Perpetual Productivity Improvement (PPI) initiatives resulted in operational process improvements that reduced the amount of time our associates spend on tasking activities and can instead focus on serving our customers.

As part of these initiatives, we recently launched a new store inventory management system that provides associates real-time visibility to inventory in their store and reduces non-productive hours spent looking for product.

In addition, we expanded our simplified user interface introduced earlier in the year across the sales floor which accelerates the associate training process and allows associates to focus on customer service while reducing customer wait times.

Looking Forward

In late 2020, after a period of time spent focusing on improving our retail fundamentals, we unveiled our Total Home strategy, which is our commitment to providing a full complement of products and services for Pros and Consumers alike, enabling a Total Home solution for every need in the home.

We believe our Total Home strategy will enhance customer engagement and grow market share by intensifying our focus on the Pro customer, expanding our online business, modernizing installation services, improving localization efforts, and elevating our product assortment.

In the coming year, we remain focused on growing market share, improving operating profitability, and driving sustainable growth.

While there is uncertainty in the market and the home improvement sector, we believe we have the flexibility to manage and adapt our business in a dynamic economic environment.

As part of our continued efforts around our Total Home strategy, we are focused on further enhancing our omnichannel capabilities in 2022 across three key areas:

expanding our online assortment, enhancing the user experience, and improving

We will continue to expand our Lowes.com assortment to meet our customers’ design and lifestyle needs, while at the same time, enhancing the user experience with upgrades to the visualization and configuration tools we offer online.

As we head into spring, we have leveraged our expanded supply chain network to position our in-stock inventory for our heavy selling season.

While there is uncertainty in the economy with rising interest rates and inflation, our outlook for the home improvement industry remains robust, and we believe we are well-positioned to accelerate our market share gains through our Total Home strategy.

The following tables set forth the percentage relationship to net sales of each line item of the consolidated statements of earnings, as well as the percentage change in dollar amounts from the prior year.

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Interest – net 0.92 0.95 (3) 4.4

Loss on extinguishment of debt 1.18 — 118 N/A

Loss on extinguishment of debt — 1.18 (118) (100.0)

Pre-tax earnings 11.64 8.64 300 44.8

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Interest – net 0.95 0.96 (1) 22.9

Loss on extinguishment of debt 1.18 — 118 N/A

Pre-tax earnings 8.64 7.79 85 37.6

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This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements, including the related notes to the consolidated financial statements.

Beginning on February 1, 2020, the Company changed the basis in which it presents the comparable sales metric.

The current metric is presented on a transacted basis when tender is accepted from a customer.

Prior to this change, the Company’s comparable sales metric was based on when control of the good or service passed to the customer, which included timing impacts of deferred sales.

The purpose of the change was to align the metric with how the Lowe’s management team evaluates the business throughout the year and views performance relative to peers.

For the fiscal year ended January 29, 2021, the impact of excluding deferred sales increased the comparable sales metric by 62 basis points.

For the fiscal year ended January 31, 2020, the impact of excluding deferred sales decreased the comparable sales metric by 7 basis points.

For the fiscal year ended February 1, 2019, the impact of excluding deferred sales decreased the comparable sales metric by 20 basis points.

The comparable sales metric for the fiscal years ended January 31, 2020 and February 1, 2019, has been recast to conform to the current year presentation.

Other Metrics 2021 2020 2019

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17.5 % 12.4 % 10.8 %

Return on average shareholders’ equity 5

215.2 % 153.4 % 43.8 %

Net earnings to average debt and equity 6

Net earnings to average debt and shareholders’ (deficit)/equity 5

32.3 % 21.9 % 17.2 %

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A location we have decided to close is no longer considered comparable as of the beginning of the month in which we announce its closing.

Comparable sales include online sales, which positively impacted fiscal 2020, fiscal 2019, and fiscal 2018 by approximately 565 basis points, 25 basis points, and 80 basis points, respectively.

Comparable sales include online sales, which positively impacted the comparable sales increase in fiscal 2021, fiscal 2020, and fiscal 2019 by approximately 150 basis points, 565 basis points, and 25 basis points, respectively.

2 Average ticket is defined as net sales divided by the total number of customer transactions.

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4 Return on average assets is defined as net earnings divided by average total assets for the last five quarters.

5 Return on average shareholders’ equity is defined as net earnings divided by average shareholders’ equity for the last five quarters.

5 Return on invested capital is calculated using a non-GAAP financial measure.

Net earnings to average debt and equity is the most comparable GAAP ratio.

Net earnings to average debt and shareholders’ (deficit)/equity is the most comparable GAAP ratio.

See below for additional information and reconciliations of non-GAAP measures.

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Adjusted Diluted Earnings Per Share

Adjusted diluted earnings per share is considered a non-GAAP financial measure.

Adjusted diluted earnings per share is a non-GAAP financial measure.

Management believes this non-GAAP financial measure provides useful insight for analysts and investors in evaluating what management considers the Company’s core financial performance.

Adjusted diluted earnings per share excludes the impact of certain discrete items not contemplated in the Company’s business outlooks for 2020 and 2019.

Unless otherwise noted, the income tax effect of these adjustments is calculated using the marginal rates for the respective periods.

Adjusted diluted earnings per share excludes the impact of discrete items, further described below, not contemplated in the Company’s business outlook for fiscal 2020.

Unless otherwise noted, the income tax effect of these adjustments is calculated using the marginal rate for the period.

There were no non-GAAP adjustments in fiscal 2021.

Fiscal 2020 Impacts

• In the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations, and in the fourth quarter of fiscal 2019, the Company announced additional restructuring actions to improve future performance and profitability of its Canadian operations.

As a result of these actions, the Company recognized pre-tax operating costs of $45 million related to inventory write-downs and other closing costs in fiscal 2020 (Canada restructuring).

• In the third quarter of fiscal 2020, the Company recognized a $1.1 billion loss on extinguishment of debt in connection with the cash tender offers on an aggregate principal amount of $3.0 billion in outstanding notes (Loss on extinguishment of debt).

Fiscal 2019 Impacts

• Prior to the beginning of fiscal 2019, the Company announced its intention to exit its Mexico retail operations and had planned to sell the operating business.

However, in the first quarter of fiscal 2019, after an extensive market evaluation, the decision was made to instead sell the assets of the business.

That decision resulted in an $82 million tax benefit.

Additionally, the Company recognized $35 million of pre-tax operating costs associated with the exit and ongoing wind-down of the Mexico retail operations in fiscal 2019 (Mexico adjustments).

• During the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations resulting in pre-tax charges of $53 million associated with long-lived asset impairment.

In the fourth quarter, the Company recognized pre-tax operating costs and charges of $176 million related to inventory liquidation, accelerated depreciation and amortization, severance, and other costs, as well as a net $26 million impact to income tax expense

related to income tax valuation allowance.

Total pre-tax operating costs and charges for fiscal 2019 were $230 million (Canada restructuring).

• Beginning in the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations, and in the fourth quarter of fiscal 2019, the Company announced additional actions to improve future performance and profitability of its Canadian operations.

As a result of this review and related actions, the Company recognized pre-tax operating costs of $45 million related to inventory write-downs and other closing costs in fiscal 2020 (Canada restructuring).

Adjusted diluted earnings per share should not be considered an alternative to, or more meaningful indicator of, the Company’s diluted earnings per common share as prepared in accordance with GAAP.

The Company’s methods of determining this non-GAAP financial measure may differ from the method used by other companies and may not be comparable.

Pre-Tax Earnings Tax Net Earnings Pre-Tax Earnings Tax Net Earnings

Pre-Tax Earnings Tax Net Earnings

Diluted earnings per share, as reported $ 7.75

$ 7.75 $ 5.49

Non-GAAP adjustments – per share impacts

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Canada restructuring 0.06 — 0.06

Mexico adjustments — — — 0.05 (0.11) (0.06)

Adjusted diluted earnings per share $ 8.86

$ 8.86 $ 5.74

Return on Invested Capital

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We encourage you to understand the methods used by another company to calculate ROIC before comparing its ROIC to ours.

We define ROIC as the rolling 12 months’ lease adjusted net operating profit after tax (Lease adjusted NOPAT) divided by the average of current year and prior year ending debt and equity.

We define ROIC as the rolling 12 months’ lease adjusted net operating profit after tax (Lease adjusted NOPAT) divided by the average of current year and prior year ending debt and shareholders’ (deficit)/equity.

Lease adjusted NOPAT is a non-GAAP financial measure, and net earnings is considered to be the most comparable GAAP financial measure.

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Lease adjusted net operating profit after tax $ 9,229 $ 7,402 $ 4,955

Average debt and equity 2

Average debt and shareholders’ (deficit)/equity 2

$ 26,109 $ 26,686 $ 24,950

Net earnings to average debt and equity 21.9 % 17.2 % 9.0 %

Net earnings to average debt and shareholders’ (deficit)/equity 32.3 % 21.9 % 17.2 %

Return on invested capital 35.3 % 27.7 % 19.9 %

1 Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 24.7%, 24.6%, and 23.9% for 2021, 2020, and 2019, respectively.

2 Average debt and equity is defined as average current year and prior year ending debt, including current maturities, short-term borrowings, and operating lease liabilities, plus the average current year and prior year ending total equity.

2 Average debt and shareholders’ (deficit)/equity is defined as average current year and prior year ending debt, including current maturities, short-term borrowings, and operating lease liabilities, plus the average current year and prior year ending total shareholders’ (deficit)/equity.

Fiscal 2021 Compared to Fiscal 2020

Net Sales – Net sales increased 7.4% to $96.3 billion in 2021.

The increase in total sales was driven primarily by comparable sales growth.

Comparable sales increased 26.1% over the same period, driven by a 14.0% increase in comparable customer transactions and a 12.1% increase in comparable average ticket.

Comparable sales increases during each quarter of the fiscal year, as reported, were 11.2% in the first quarter, 34.2% in the second quarter, 30.1% in the third quarter, and 28.1% in the fourth quarter.

During 2020, we experienced comparable sales increases in all 15 product categories, and broad-based growth with both DIY and Pro customers.

Comparable sales were above the Company average in Lumber, Lawn & Garden, Paint, Seasonal & Outdoor Living, Tools, and Décor.

Lumber experienced strong performance driven by strong unit demand from both DIY and Pro customers, as well as benefits from improved investments in job lot quantities and commodity inflation.

As customers focused on the home this year, Lawn & Garden, Paint, and Tools experienced significant increases from indoor and outdoor DIY friendly home projects and improvements.

Lawn & Garden also saw benefit due to COVID-19 preparation in cleaning.

Seasonal & Outdoor Living saw increased sales driven by favorable weather, and Décor delivered strong performance in home accents and home organization as customers continue to look for impactful DIY projects.

Geographically, all 15 U.S.

regions experienced positive comparable sales of at least 20%, while Canada delivered comparable sales of 15%.

During the fourth quarter of 2020, we also experienced comparable sales increases in all 15 product categories.

Comparable sales increases were above the company average in Lumber, Seasonal & Outdoor Living, Lawn & Garden, Paint, Building Materials, Electrical, and Décor.

Lumber led the sales performance due to strong demand with Pro and DIY customers as well as commodity inflation.

Seasonal & Outdoor Living experienced strong performance during the holiday season with a holiday trim-a-tree program that exceeded the customer’s expectations.

Lawn & Garden and Paint benefited from consumers’ continued focus on the home.

Building Materials saw strong demand with the Pro customer, particularly in roofing and gutters.

Geographically, all 15 U.S.

regions experienced increases in fourth quarter comparable sales of at least 19%, and Canada delivered increased comparable sales of 18%.

The increase in total sales was driven by comparable sales growth.

Comparable sales increased 6.9% over the same period, driven by an 11.1% increase in comparable average ticket, partially offset by a 4.2% decline in comparable customer transactions.

Comparable sales change during each quarter of the

fiscal year, as reported, were an increase of 25.9% in the first quarter, decline of 1.7% in the second quarter, increase of 2.2% in the third quarter, and increase of 5.0% in the fourth quarter.

During 2021, we experienced comparable sales increases in eleven of fifteen product categories, led by Electrical, Lumber, and Flooring.

We delivered strong comparable sales in Electrical and Lumber due to strong unit demand from Pro customers, as well as unit price increases driven by inflation.

New product offerings drove strong sales in Flooring, led by Vinyl Flooring.

We experienced lower comparable sales in Paint, Hardware, and Lighting due to cycling prior year DIY demand at the onset of the COVID-19 pandemic.

Geographically, all fifteen U.S.

regions and Canada experienced positive comparable sales.

Gross Margin – Gross margin as a percentage of sales for 2021 increased 29 basis points compared to 2020.

Gross margin was positively impacted by approximately 235 basis points of total rate improvement driven by continued improvements in our pricing and promotional strategies as well as approximately 20 basis points of leverage due to prior year impact of store closures and inventory liquidation associated with the Canadian restructuring.

These benefits were partially offset by 25 basis points of deleverage from supply chain costs, 25 basis points of deleverage from lower credit revenue, 25 basis points of deleverage due to product mix, 20 basis points of deleverage from inventory shrink, and 20 basis points of deleverage due to tariff pressure.

During the fourth quarter of 2020, gross margin increased 70 basis points as a percentage of sales.

Gross margin was positively impacted by approximately 145 basis points of total rate improvement driven by continued improvements in our pricing, cost management, and promotional strategies as well as 80 basis points of leverage due to prior year impact of store closures and inventory liquidation associated with the Canadian restructuring.

These benefits were partially offset by 40 basis points of deleverage related to supply chain costs, 40 basis points of deleverage from inventory shrink, 35 basis points of deleverage due to product mix, and 20 basis points of deleverage from lower credit revenue.

Gross margin was positively impacted by approximately 65 basis points of total rate improvement driven by continued improvement in managing product costs and disciplined pricing strategies, as well as approximately 25 basis points of leverage from higher credit revenue.

These benefits were partially offset by 35 basis points of deleverage due to product mix and 30 basis points of deleverage from supply chain costs.

SG&A – SG&A expense for 2021 leveraged 167 basis points as a percentage of sales compared to 2020.

This was primarily driven by 115 basis points of leverage in retail operating salaries due to increased sales and improved store operating efficiencies, 30 basis points of leverage in advertising, 30 basis point of leverage in occupancy related to increased sales and decreased lease expenses, and 15 basis points of leverage related to the Company’s Canadian restructuring, which included prior year long-lived asset impairment, severance and other costs as well as current year closing costs.

These were partially offset by 135 deleverage due to COVID-19 related expenses, including discretionary bonuses paid to hourly front-line employees, emergency paid leave, and increased cleaning costs and other safety-related programs, and 30 basis points of deleverage due to our U.S.

Stores Reset.

For the fourth quarter of 2020, SG&A expense leveraged 63 basis points as a percentage of sales compared to the fourth quarter of 2019.

This was primarily driven by 130 basis points of leverage in retail operating salaries due to increased sales and improved store operating efficiencies, 30 basis points of leverage in occupancy related to increased sales and decreased lease expense, 25 basis points of leverage in advertising, 20 basis points of leverage related to the Company’s Canadian restructuring, which included prior year long-lived asset impairment, severance and other costs as well as current year closing costs, and 15 basis points of leverage in utilities related to efficiency upgrades.

These were partially offset by 80 basis points deleverage due

to COVID-19 related expenses, including hourly front-line employee bonus, emergency paid leave, and increased cleaning costs and other safety-related programs, and 75 basis points deleverage due to our U.S.

Stores Reset.

Depreciation and Amortization – Depreciation and amortization expense leveraged 19 basis points for 2020 as a percentage of sales compared to 2019, driven by increased sales in the current year.

Depreciation and amortization expense increased year over year due to incremental depreciation related to investments in the business.

Property, less accumulated depreciation, increased to $19.2 billion at January 29, 2021, compared to $18.8 billion at January 31, 2020.

As of January 29, 2021, and January 31, 2020, we owned 84% of our stores, which included stores on leased land.

This was primarily driven by 115 basis points of leverage due to lower COVID-19 related expenses, including additional compensation to hourly front-line associates, emergency paid leave, and cleaning costs;

45 basis points of leverage in retail operating salaries due to increased sales and improved operating efficiencies as a result of our PPI initiatives;

and 30 basis points of leverage due to costs associated with the reset of the layout of our U.S.

stores in the prior year.

These benefits were partially offset by 20 basis points of deleverage due to the fourth quarter discretionary bonus to front-line associates.

Depreciation and Amortization – Depreciation and amortization expense deleveraged 17 basis points for 2021 as a percentage of sales compared to 2020, driven by ongoing capital investments in store environment, store equipment, and technology projects.

Property, less accumulated depreciation, decreased to $19.1 billion at January 28, 2022, compared to $19.2 billion at January 29, 2021.

Interest – Net – Net interest expense is comprised of the following:

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Amortization of original issue discount and loan costs 16 13

Interest on tax uncertainties 12 —

Interest income (12) (24)

Interest – net $ 885 $ 848

Net interest expense in 2020 leveraged one basis point primarily as a result of increased sales in the current year, offset by interest expense related to the issuance of $4.0 billion unsecured notes in March 2020 and $4.0 billion unsecured notes in October 2020.

Net interest expense in 2021 leveraged three basis points primarily as a result of increased sales in the current year, offset by interest expense related to the issuance of $2.0 billion unsecured notes in March 2021 and $2.0 billion unsecured notes in September 2021.

Loss on Extinguishment of Debt – During the third quarter of 2020, we repurchased and retired $3.0 billion aggregate principal amount of our outstanding debt resulting in a loss on extinguishment of debt of $1.1 billion.

Income Tax Provision – Our effective income tax rate was 24.7% in 2021 compared to 24.6% in 2020.

For 2019, the rate was favorably impacted by the tax benefit associated with the Company’s decision to sell the assets of the Mexico business, which was offset by a valuation allowance established for the Company’s RONA inc.

entity in Canada.

Our effective income tax rates were 25.9% and 34.3% for the three months ended January 29, 2021 and January 31, 2020, respectively.

Our effective income tax rate for the fourth quarter of 2019 was negatively impacted by the valuation allowance established for the Company’s RONA inc.

entity in Canada.

Fiscal 2020 Compared to Fiscal 2019

For a comparison of our results of operations for the fiscal years ended January 31, 2020 and February 1, 2019, see “Part II, Item 7.

For a comparison of our results of operations, financial condition, liquidity, and capital resources for the fiscal years ended January 29, 2021 and January 31, 2020, see “ Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations ” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2021, filed with the SEC on March 22, 2021.

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Sources of Liquidity

Significant customer demand and operating performance for the fiscal year drove a substantial increase in cash flows from operations.

These increases, supplemented with our short-term and long-term borrowings, have provided ample liquidity to fund our operations while allowing us to make strategic investments in our omni-channel capabilities to support long-term growth and return excess cash to shareholders in the form of dividends and share repurchases.

Cash flows from operations supplemented with our short-term and long-term borrowings, remain sufficient to fund our operations while allowing us to make strategic investments to support long-term growth and return excess cash to shareholders in the form of dividends and share repurchases.

As of January 28, 2022, we held $1.1 billion of cash and cash equivalents, as well as $4.0 billion in undrawn capacity on our revolving credit facilities.

We believe that our sources of liquidity will continue to be adequate to fund our operations and investments to grow our business, repay our debt as it becomes due, pay dividends, and fund our share repurchases over the next 12 months.

We believe these sources of liquidity and our continued access to the capital markets on both a short-term and long-term basis, as needed, are adequate to fund our operations and investments to grow our business, repay our debt as it becomes due, pay dividends, and fund our share repurchases over the next twelve months.

As of January 28, 2022, our material contractual obligations and commercial commitments consist of leases, long-term debt, purchase obligations, and letters of credit.

See Note 6 , Note 8 , and Note 15 of the Notes to the Consolidated Financial Statements in Item 8 , “Financial Statements and Supplementary Data”, of this Annual Report for amounts outstanding related to leases, long-term debt, and commitments, respectively, as of January 28, 2022.

Cash Flows Provided by Operating Activities

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Cash flows from operating activities continued to provide the primary source of our liquidity.

The increase in net cash provided by operating activities for the year ended January 29, 2021 versus the year ended January 31, 2020, was due primarily to higher net earnings and changes in working capital.

Accounts payable increased for fiscal 2020 by $3.2 billion compared to a decrease of $637 million in fiscal 2019, driving an additional $3.8 billion in operating cash flows for fiscal 2020.

The increase in accounts payable was driven by higher sustained inventory purchase volume in 2020 as compared to 2019.

Other operating liabilities increased $813 million for fiscal 2020 compared to a decrease of $639 million in fiscal 2019.

The increase in other operating liabilities in the current year is primarily driven by increases in accrued compensation and employee benefits, and increased accrued payroll taxes due to the deferral of qualifying employer payroll taxes in accordance with the Coronavirus, Aid, Relief, and Economic Securities Act (the CARES Act).

Inventory decreased operating cash flow for fiscal 2020 by approximately $3.0 billion compared to a decrease of $600 million for fiscal 2019, primarily due to higher inventory purchases to meet sustained customer demand in 2020, as well as build-up of inventory for the spring selling season.

The decrease in net cash provided by operating activities for the year ended January 28, 2022, versus the year ended January 29, 2021, was due primarily to changes in working capital, partially offset by higher net earnings.

Accounts payable increased for fiscal 2021 by $466 million compared to an increase of $3.2 billion in fiscal 2020, driving a reduction of $2.7 billion in operating cash flows for fiscal 2021.

Inventory decreased operating cash flow for fiscal 2021 by approximately $1.4 billion compared to a decrease of $3.0 billion for fiscal 2020.

The increase in accounts payable and inventory in the prior year was driven by a ramp up in inventory purchase volume to meet sustained customer demand at the beginning of the COVID-19 pandemic.

In the current year, we have continued to experience sustained demand levels and maintained a higher level of inventory and related accounts payable.

Other operating liabilities decreased $570 million for fiscal 2021 compared to an increase of $813 million in fiscal 2020.

The decrease in other operating liabilities in the current year compared to the prior year is primarily driven by COVID-related accrued discretionary compensation for hourly associates in the prior year and timing of tax payments.

Cash Flows Used in Investing Activities

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Our capital expenditures generally consist of investments in our strategic initiatives to enhance our ability to serve customers, improve existing stores, and support expansion plans.

Capital expenditures were $1.8 billion in 2020, $1.5 billion in 2019, and $1.2 billion in 2018.

Capital expenditures were $1.9 billion in 2021 and $1.8 billion in 2020.

The following table provides the allocation of capital expenditures for 2021 and 2020:

2020 2019 2018

Existing store investments ¹ 75 % 85 %

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New stores, new corporate facilities and international 3

5 % 10 % 20 %

Total capital expenditures 100 % 100 %

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3 Represents expenditures primarily related to land purchases, buildings, and personal property for new store projects and new corporate facilities projects as well as expenditures related to our international operations.

Our 2021 capital expenditures forecast is approximately $2.0 billion.

For 2022, our capital expenditures forecast is approximately $2.0 billion.

The following table provides the allocation of our fiscal 2022 capital expenditures forecast:

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Net cash used in financing activities $ (12,016) $ (5,191)

Net cash used in financing activities primarily consist of transactions related to our short-term borrowings, long-term debt, share repurchases, and cash dividend payments.

Short-term Borrowing Facilities

In March 2020, we entered into a $1.02 billion five-year unsecured revolving credit agreement (the 2020 Credit Agreement) with a syndicate of banks.

In addition, we have a $1.98 billion five-year unsecured revolving second amended and restated

credit agreement (the Second Amended and Restated Credit Agreement) with a syndicate of banks.

Subject to obtaining commitments from the lenders and satisfying other conditions specified in the 2020 Credit Agreement and the Second Amended and Restated Credit Agreement, the Company may increase the combined aggregate availability of both agreements by an additional $520 million.

In January 2020, we entered into a $1 billion unsecured 364-day term loan facility (the “Term Loan”).

The Company repaid the Term Loan during fiscal 2020.

In September 2019, we entered into a $250 million unsecured 364-day credit agreement (the 2019 Credit Agreement) with a syndicate of banks.

In connection with the 2020 Credit Agreement, the Company refinanced the 2019 Credit Agreement and terminated any commitments under the 2019 Credit Agreement as of March 23, 2020.

The 2020 Credit Agreement and the Second Amended and Restated Credit Agreement support our commercial paper program.

The amount available to be drawn under the 2020 Credit Agreement and the Second Amended and Restated Credit Agreement is reduced by the amount of borrowings under our commercial paper program.

There were no outstanding borrowings under the Company’s commercial paper program, the 2020 Credit Agreement, or the Second Amended and Restated Credit Agreement as of January 29, 2021.

Outstanding borrowings under the Company’s commercial paper program were $941 million, with a weighted average interest rate of 2.10%, as of January 31, 2020.

There was $1.0 billion in outstanding borrowings under the Term Loan, with a weighted average interest rate of 2.29%, and no borrowings outstanding under the Second Amended and Restated Credit Agreement or the 2019 Credit Agreement as of January 31, 2020.

Total combined availability under the 2020 Credit Agreement and the Second Amended and Restated Credit Agreement as of January 29, 2021, was $3.0 billion.

Our commercial paper program, along with cash flows generated from operations, is typically utilized during our fourth fiscal quarter to build inventory in anticipation of the spring selling season.

The following table includes additional information related to our short-term borrowings for 2020, 2019, and 2018:

Net cash used in financing activities primarily consist of transactions related to our debt, share repurchases, and cash dividend payments.

In 2021, we issued $4.0 billion of unsecured notes.

This is comprised of $2.0 billion of unsecured notes issued in March 2021 and $2.0 billion of unsecured notes issued in September 2021, the proceeds of which were designated for general corporate purposes.

In April 2021, we also entered into a $1.0 billion unsecured 364-day term loan facility (the 2021 Term Loan), which was repaid during fiscal 2021.

In 2021, we also paid approximately $1.0 billion to retire scheduled debts at maturity.

In December 2021, we entered into a $2.0 billion five-year unsecured revolving third amended and restated credit agreement (the Third Amended and Restated Credit Agreement) with a syndicate of banks.

The Third Amended and Restated Credit Agreement amends and restates the Company’s amended and restated credit agreement, dated September 10, 2018 (the Second Amended and Restated Credit Agreement), to among other things (i) extend the maturity date of the revolving credit facility to December 2026 and (ii) increase the aggregate availability to a total of $2.0 billion.

Also in December 2021, we amended the five-year unsecured revolving credit agreement dated March 23, 2020 (the 2020 Credit Agreement) with a syndicate of banks.

The amendment, among other things, increased the availability of the unsecured revolving credit agreement to $2.0 billion, maturing in March 2025.

Subject to obtaining commitments from the lenders and satisfying other conditions specified in the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement, the Company may increase the combined aggregate availability of both agreements by an additional $1.0 billion.

The Third Amended and Restated Credit Agreement and the 2020 Credit Agreement (collectively, the Credit Agreements) support our commercial paper program.

The amount available to be drawn under the Credit Agreements is reduced by the amount of borrowings under our commercial paper program.

There were no outstanding borrowings under the Company’s commercial paper program, the 2020 Credit Agreement, or the Third Amended and Restated Credit Agreement as of January 28, 2022.

There were no outstanding borrowings under the commercial paper program, the 2020 Credit Agreement, or the Second Amended and Restated Credit Agreement as of January 29, 2021.

Total combined availability under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement as of January 28, 2022, was $4.0 billion.

The Third Amended and Restated Credit Agreement and the 2020 Credit Agreement contain customary representations, warranties, and covenants.

We were in compliance with those covenants at January 28, 2022.

Our ratio of debt to capital (shareholder’s (deficit)/equity plus debt) was 124.2% and 93.8% as of January 28, 2022 and January 29, 2021, respectively.

The following table includes additional information related to our debt for 2021 and 2020:

(In millions, except for interest rate data) 2021 2020

Net proceeds from issuance of debt $ 4,972 $ 7,929

Repayment of debt $ (2,118) $ (5,618)

Net change in commercial paper $ — $ (941)

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Weighted-average interest rate of short-term borrowings outstanding — % — %

The Second Amended and Restated Credit Agreement and the 2020 Credit Agreement contain customary representations, warranties, and covenants.

We were in compliance with those covenants at January 29, 2021.

Long-term Debt

The following table includes additional information related to the Company’s long-term debt for 2020, 2019, and 2018:

(In millions) 2020 2019 2018

Net proceeds from issuance of debt $ 7,929 $ 3,972 $ —

Repayment of debt $ (5,618) $ (1,113) $ (326)

In 2020, we issued $8.0 billion of unsecured notes.

This is comprised of $4.0 billion of unsecured notes issued in March 2020 to finance current year maturities and for other general corporate purposes and $4.0 billion of unsecured notes issued in October 2020 to fund the 2020 cash tender offers to purchase existing unsecured notes and for other general corporate purposes.

We completed the tender offers in October 2020 in which we purchased and retired an aggregate principal amount of $3.0 billion of our higher coupon notes prior to maturity to take advantage of a favorable interest rate environment to reduce our long-term interest expense.

As part of this transaction, we incurred $1.1 billion of debt extinguishment costs which included premium to noteholders and the cost of reverse treasury lock derivative contracts associated with the tender offers.

In 2020, we paid $500 million to repay scheduled long-term debts at maturity.

In 2019, we issued $3.0 billion of unsecured notes to finance 2019 maturities and for other general corporate purposes, which included share repurchases, capital expenditures, strategic investments, and working capital needs.

In 2019, we paid approximately $1.1 billion to retire scheduled debts at maturity.

Our ratio of debt to capital (equity plus debt) was 93.8% and 90.7% as of January 29, 2021 and January 31, 2020, respectively.

Share Repurchases

We have an ongoing share repurchase program, authorized by the Company’s Board of Directors, that is executed through purchases made from time to time either in the open market or through private off-market transactions.

We also withhold shares from employees to satisfy tax withholding liabilities.

Shares repurchased are retired and returned to authorized and unissued status.

We also withhold shares from employees to satisfy tax withholding liabilities on share-based payments.

Shares repurchased are returned to authorized and unissued status.

The following table provides, on a settlement date basis, the total number of shares repurchased, average price paid per share, and the total amount paid for share repurchases for 2021 and 2020:

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As of January 28, 2022, we had $19.7 billion remaining under our share repurchase program with no expiration date.

We expect to repurchase shares totaling approximately $9.0 billion in 2021.

In 2020, we increased our quarterly dividend payment by 9% to $0.60 per share.

For 2022, we expect to repurchase shares totaling approximately $12.0 billion, subject to market conditions.

In the third quarter of 2021, we increased our quarterly dividend payment by 33% to $0.80 per share.

Our dividend payment dates are established such that dividends are paid in the quarter immediately following the quarter in which they are declared.

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We expect to continue to have access to the capital markets on both short-term 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 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 reflects our debt ratings by Standard & Poor’s (S&P) and Moody’s as of March 21, 2022, which is disclosed to provide an enhanced understanding of our sources of liquidity and the effect of our ratings on our cost of funds.

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In addition, we do not believe it will be necessary to repatriate significant cash and cash equivalents and short-term investments held in foreign affiliates to fund domestic operations.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet financing that has, or is reasonably likely to have, a current or future material effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table summarizes our significant contractual obligations at January 29, 2021:

Payments Due by Period

Contractual Obligations

(in millions)

Total Less Than 1 Year

After 5 Years

Long-term debt (principal amounts, excluding discount and debt issuance costs) $ 21,312 $ 1,025 $ 1,268 $ 1,950 $ 17,069

Long-term debt (interest payments) 19,390 774 1,458 1,377 15,781

Finance lease obligations 1, 2

796 113 231 195 257

Operating leases 1, 2

5,519 684 1,413 1,122 2,300

Purchase obligations 3

1,118 654 364 100 —

Total contractual obligations $ 48,135 $ 3,250 $ 4,734 $ 4,744 $ 35,407

Amount of Commitment Expiration by Period

Commercial Commitments

(in millions)

Total Less Than 1 Year

After 5 Years

Letters of Credit 4

$ 61 $ 4 $ 57 $ — $ —

1 Amounts do not include taxes, common area maintenance, insurance, or contingent rent because these amounts have historically been insignificant.

2 Amounts include imputed interest.

3 Purchase obligations include agreements to purchase goods or services that are enforceable, are legally binding, and specify all significant terms, including fixed or minimum quantities to be purchased;

fixed, minimum or variable price provisions;

and the approximate timing of the transaction.

Our purchase obligations include firm commitments related to certain marketing and information technology programs, as well as purchases of merchandise inventory.

4 Letters of credit are issued primarily for insurance and construction contracts.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience.

During 2020, our reserve increased approximately $77 million to $182 million as of January 29, 2021.

During 2021, our reserve decreased approximately $14 million to $168 million as of January 28, 2022.

We also record an inventory reserve for the estimated shrinkage between physical inventories.

This reserve is based primarily on actual shrinkage results from previous physical inventories.

Due to COVID-19, the Company did not complete physical inventories for approximately 7% of retail locations originally planned in 2020.

For those locations where physical inventories were not completed, the Company recorded an immaterial adjustment for its estimate of shrinkage as of January 29, 2021, and these locations will have physical inventories completed by March 31, 2021.

This reserve is based primarily on actual shrink results from previous physical inventories.

During 2021, the inventory shrink reserve increased approximately $49 million to $414 million as of January 28, 2022, in response to higher volumes and estimated shrinkage rates based on results from previous physical inventories.

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For vendor funds, we develop accrual rates based on the provisions of the agreements in place.

Due to the complexity and diversity of the individual vendor agreements, we perform analyses and review historical purchase trends and volumes throughout the year, adjust accrual rates as appropriate and confirm actual amounts with select vendors to ensure the amounts earned are appropriately recorded.

Due to the diversity of the individual vendor agreements, we perform analyses and review historical purchase trends and volumes throughout the year, adjust accrual rates as appropriate and confirm actual amounts with select vendors to ensure the amounts earned are

appropriately recorded.

Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met.

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Cash flows for individual locations do not include an allocation of corporate overhead.

We evaluate locations for triggering events relating to long-lived asset impairment on a quarterly basis to determine when a location’s asset may not be recoverable.

For operating locations, our primary indicator that assets may not be recoverable is consistently negative cash flow for a 12-month period for those locations that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results.

We evaluate locations for triggering events relating to long-lived asset impairment on a quarterly basis to determine when a location’s assets may not be recoverable.

For operating locations, our primary indicator that assets may not be recoverable is consistently negative cash flow for a twelve month period for those locations that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results.

Management also monitors other factors when evaluating operating locations for impairment, including individual locations’ execution of their operating plans and local market conditions, including incursion, which is the opening of either other Lowe’s locations or those of a direct competitor within the same market.

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The carrying value of a location’s asset group includes inventory, property, operating and finance lease right-of-use assets and operating liabilities including inventory payables, salaries payable and operating lease liabilities.

Financial and nonoperating liabilities are excluded from the carrying

value of the asset group.

Financial and nonoperating liabilities are excluded from the carrying value of the asset group.

When determining the stream of projected future cash flows associated with an individual operating location, management makes assumptions, incorporating local market conditions, about key store variables including sales growth rates, gross margin and controllable expenses, such as store payroll and operating expense, as well as asset residual values or lease rates.

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Self-insurance claims filed and claims incurred but not reported are accrued based upon our estimates of the discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience.

During 2020, our self-insurance liabilities decreased approximately $11 million to $1.1 billion as of January 29, 2021.

During 2021, our self-insurance liabilities increased approximately $23 million to $1.1 billion as of January 28, 2022.

Judgments and uncertainties involved in the estimate

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis