LOWES COMPANIES INC 10-K

Item 8 - Financial Statements and Supplementary Data Table of Contents Page No. Management’s Report on Internal Control over Financial Reporting 34 Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 35 Consolidated Statements of Earnings 38 Consolidated Statements of Comprehensive Income 38 Consolidated Balance Sheets 39 Consolidated Statements of Shareholders’ (Deficit)/ Equity 40 Consolidated Statements of Cash Flows 41 Notes to Consolidated Financial Statements 42 Note 1: Summary of Significant Accounting Policies 42 Note 2: Revenue 48 Note 3: Fair Value Measurements 50 Note 4: Property and Accumulated Depreciation 52 Note 5 : Goodwill and Intangible Assets 52 Note 6 : Leases 53 Note 7 : Exit Activities 54 Note 8 : D ebt 55 Note 9 : Derivative Instruments 57 Note 1 0 : Shareholders’ (Deficit)/ Equity 58 Note 1 1 : Share-Based Payments 59 Note 1 2 : Employee Retirement Plans 63 Note 1 3 : Income Taxes 64 Note 1 4 : Earnings Per Share 65 Note 1 5: Commitments and Contingencies 66 Note 1 6 : Related Parties 66 Note 1 7 : Other Information 67 33 Table of Contents MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Lowe’s Companies, Inc. and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting (Internal Control) as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our Internal Control was designed to provide reasonable assurance to our management and the Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness may vary over time. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our Internal Control as of January 28, 2022. In evaluating our Internal Control, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on our management’s assessment, we have concluded that, as of January 28, 2022, our Internal Control is effective. Deloitte & Touche LLP, the independent registered public accounting firm that audited the financial statements contained in this Annual Report, was engaged to audit our Internal Control. Their report appears on page 37 . 34 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Lowe’s Companies, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as of January 28, 2022 and January 29, 2021, the related consolidated statements of earnings, comprehensive income, shareholders’ (deficit)/equity, and cash flows, for each of the three fiscal years in the period ended January 28, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 28, 2022 and January 29, 2021, and the results of its operations and its cash flows for each of the three fiscal years in the period ended January 28, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 28, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 21, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Merchandise Inventory – Vendor Funds – Refer to Note 1 to the financial statements Critical Audit Matter Description The Company receives funds from its vendors in the normal course of business, principally as a result of purchase volumes and sales. In the fiscal year ended January 28, 2022, the Company purchased inventory from a significant number of vendors. Many of the vendor funds associated with these purchases are earned under agreements that are negotiated on an annual basis or shorter. The funds are recorded as a reduction to the cost of inventory as they are earned. As the related inventory is sold, the amounts are recorded as a reduction to cost of sales. We identified vendor funds as a critical audit matter because of the volume and varying terms of the individual vendor agreements. This required an increased extent of effort when performing audit procedures to evaluate whether the vendor funds were recorded in accordance with the terms of the vendor agreements. How the Critical Audit Matter Was Addressed in the Audit 35 Table of Contents Our audit procedures related to whether the vendor funds were recorded in accordance with the terms of the vendor agreements included the following, among others: • We tested the effectiveness of controls over vendor funds, including management’s controls over the accrual and recording of vendor funds as a reduction to the cost of inventory or cost of sales in accordance with the terms of the vendor agreements. • We selected a sample of vendor funds and recalculated the amount earned using the terms of the vendor agreement, including the amount recorded as a reduction to the cost of inventory and/or the amount recorded as a reduction to cost of sales. • We selected a sample of vendor funds and confirmed the amount earned and terms of the agreement directly with the vendor. /s/ Deloitte & Touche LLP Charlotte, North Carolina March 21, 2022 We have served as the Company's auditor since 1962. 36 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Lowe’s Companies, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as of January 28, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the fiscal year ended January 28, 2022, of the Company and our report dated March 21, 2022, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Charlotte, North Carolina March 21, 2022 37 Table of Contents Lowe’s Companies, Inc. Consolidated Statements of Earnings (In millions, except per share and percentage data) Fiscal Years Ended January 28, 2022 January 29, 2021 January 31, 2020 Current Earnings Amount % Sales Amount % Sales Amount % Sales Net sales $ 96,250 100.00 % $ 89,597 100.00 % $ 72,148 100.00 % Cost of sales 64,194 66.70 60,025 66.99 49,205 68.20 Gross margin 32,056 33.30 29,572 33.01 22,943 31.80 Expenses: Selling, general and administrative 18,301 19.01 18,526 20.68 15,367 21.30 Depreciation and amortization 1,662 1.73 1,399 1.56 1,262 1.75 Operating income 12,093 12.56 9,647 10.77 6,314 8.75 Interest – net 885 0.92 848 0.95 691 0.96 Loss on extinguishment of debt — — 1,060 1.18 — — Pre-tax earnings 11,208 11.64 7,739 8.64 5,623 7.79 Income tax provision 2,766 2.87 1,904 2.13 1,342 1.86 Net earnings $ 8,442 8.77 % $ 5,835 6.51 % $ 4,281 5.93 % Basic earnings per common share $ 12.07 $ 7.77 $ 5.49 Diluted earnings per common share $ 12.04 $ 7.75 $ 5.49 Lowe’s Companies, Inc. Consolidated Statements of Comprehensive Income (In millions, except percentage data) Fiscal Years Ended January 28, 2022 January 29, 2021 January 31, 2020 Amount % Sales Amount % Sales Amount % Sales Net earnings $ 8,442 8.77 % $ 5,835 6.51 % $ 4,281 5.93 % Foreign currency translation adjustments – net of tax ( 4 ) — 78 0.09 94 0.13 Cash flow hedges – net of tax 109 0.11 ( 79 ) ( 0.09 ) ( 22 ) ( 0.03 ) Other ( 5 ) ( 0.01 ) 1 — 1 — Other comprehensive income 100 0.10 — — 73 0.10 Comprehensive income $ 8,542 8.87 % $ 5,835 6.51 % $ 4,354 6.03 % See accompanying notes to consolidated financial statements. 38 Table of Contents Lowe’s Companies, Inc. Consolidated Balance Sheets (In millions, except par value) January 28, 2022 January 29, 2021 Assets Current assets: Cash and cash equivalents $ 1,133 $ 4,690 Short-term investments 271 506 Merchandise inventory – net 17,605 16,193 Other current assets 1,051 937 Total current assets 20,060 22,326 Property, less accumulated depreciation 19,071 19,155 Operating lease right-of-use assets 4,108 3,832 Long-term investments 199 200 Deferred income taxes – net 164 340 Other assets 1,038 882 Total assets $ 44,640 $ 46,735 Liabilities and shareholders’ (deficit)/equity Current liabilities: Current maturities of long-term debt $ 868 $ 1,112 Current operating lease liabilities 636 541 Accounts payable 11,354 10,884 Accrued compensation and employee benefits 1,561 1,350 Deferred revenue 1,914 1,608 Other current liabilities 3,335 3,235 Total current liabilities 19,668 18,730 Long-term debt, excluding current maturities 23,859 20,668 Noncurrent operating lease liabilities 4,021 3,890 Deferred revenue – Lowe’s protection plans 1,127 1,019 Other liabilities 781 991 Total liabilities 49,456 45,298 Commitments and contingencies Shareholders’ (deficit)/equity: Preferred stock – $ 5 par value: Authorized – 5.0 million shares; Issued and outstanding – none — — Common stock – $ 0.50 par value: Authorized – 5.6 billion shares; Issued and outstanding – 670 million and 731 million, respectively 335 366 Capital in excess of par value — 90 (Accumulated deficit)/retained earnings ( 5,115 ) 1,117 Accumulated other comprehensive loss ( 36 ) ( 136 ) Total shareholders’ (deficit)/equity ( 4,816 ) 1,437 Total liabilities and shareholders’ (deficit)/equity $ 44,640 $ 46,735 See accompanying notes to consolidated financial statements. 39 Table of Contents Lowe’s Companies, Inc. Consolidated Statements of Shareholders’ (Deficit)/Equity (In millions, except per share data) Common Stock Capital in Excess of Par Value Retained Earnings/(Accumulated Deficit) Accumulated Other Comprehensive Loss Total Shares Amount Balance February 1, 2019 801 $ 401 $ — $ 3,452 $ ( 209 ) $ 3,644 Cumulative effect of accounting change — — — ( 263 ) — ( 263 ) Net earnings — — — 4,281 — 4,281 Other comprehensive income — — — — 73 73 Cash dividends declared, $ 2.13 per share — — — ( 1,653 ) — ( 1,653 ) Share-based payment expense — — 98 — — 98 Repurchases of common stock ( 41 ) ( 21 ) ( 214 ) ( 4,090 ) — ( 4,325 ) Issuance of common stock under share-based payment plans 3 1 116 — — 117 Balance January 31, 2020 763 $ 381 $ — $ 1,727 $ ( 136 ) $ 1,972 Net earnings — — — 5,835 — 5,835 Cash dividends declared, $ 2.30 per share — — — ( 1,724 ) — ( 1,724 ) Share-based payment expense — — 155 — — 155 Repurchases of common stock ( 34 ) ( 16 ) ( 214 ) ( 4,721 ) — ( 4,951 ) Issuance of common stock under share-based payment plans 2 1 149 — — 150 Balance January 29, 2021 731 $ 366 $ 90 $ 1,117 $ ( 136 ) $ 1,437 Net earnings — — — 8,442 — 8,442 Other comprehensive income — — — — 100 100 Cash dividends declared, $ 3.00 per share — — — ( 2,081 ) — ( 2,081 ) Share-based payment expense — — 228 — — 228 Repurchases of common stock ( 63 ) ( 32 ) ( 449 ) ( 12,593 ) — ( 13,074 ) Issuance of common stock under share-based payment plans 2 1 131 — — 132 Balance January 28, 2022 670 $ 335 $ — $ ( 5,115 ) $ ( 36 ) $ ( 4,816 ) See accompanying notes to consolidated financial statements. 40 Table of Contents Lowe’s Companies, Inc. Consolidated Statements of Cash Flows (In millions) Fiscal Years Ended January 28, 2022 January 29, 2021 January 31, 2020 Cash flows from operating activities: Net earnings $ 8,442 $ 5,835 $ 4,281 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,882 1,594 1,410 Noncash lease expense 517 479 468 Deferred income taxes 135 ( 108 ) 177 Loss on property and other assets – net 34 139 117 Loss on extinguishment of debt — 1,060 — Share-based payment expense 230 155 98 Changes in operating assets and liabilities: Merchandise inventory – net ( 1,413 ) ( 2,967 ) ( 600 ) Other operating assets ( 23 ) 326 ( 364 ) Accounts payable 466 3,211 ( 637 ) Deferred revenue 413 512 ( 15 ) Other operating liabilities ( 570 ) 813 ( 639 ) Net cash provided by operating activities 10,113 11,049 4,296 Cash flows from investing activities: Purchases of investments ( 3,065 ) ( 3,094 ) ( 743 ) Proceeds from sale/maturity of investments 3,293 2,926 695 Capital expenditures ( 1,853 ) ( 1,791 ) ( 1,484 ) Proceeds from sale of property and other long-term assets 113 90 163 Other – net ( 134 ) ( 25 ) — Net cash used in investing activities ( 1,646 ) ( 1,894 ) ( 1,369 ) Cash flows from financing activities: Net change in commercial paper — ( 941 ) 220 Net proceeds from issuance of debt 4,972 7,929 3,972 Repayment of debt ( 2,118 ) ( 5,618 ) ( 1,113 ) Proceeds from issuance of common stock under share-based payment plans 132 152 118 Cash dividend payments ( 1,984 ) ( 1,704 ) ( 1,618 ) Repurchases of common stock ( 13,012 ) ( 4,971 ) ( 4,313 ) Other – net ( 6 ) ( 38 ) ( 1 ) Net cash used in financing activities ( 12,016 ) ( 5,191 ) ( 2,735 ) Effect of exchange rate changes on cash ( 8 ) 10 1 Net (decrease)/increase in cash and cash equivalents, including cash classified within current assets held for sale ( 3,557 ) 3,974 193 Less: Net decrease in cash classified within current assets held for sale — — 12 Net (decrease)/increase in cash and cash equivalents ( 3,557 ) 3,974 205 Cash and cash equivalents, beginning of year 4,690 716 511 Cash and cash equivalents, end of year $ 1,133 $ 4,690 $ 716 See accompanying notes to consolidated financial statements. 41 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 28, 2022, JANUARY 29, 2021, AND JANUARY 31, 2020 NOTE 1: Summary of Significant Accounting Policies Lowe’s Companies, Inc. and subsidiaries (the Company) is the world’s second-largest home improvement retailer and operated 1,971 stores in the United States and Canada at January 28, 2022. Below are those accounting policies considered by the Company to be significant. Fiscal Year - The Company’s fiscal year ends on the Friday nearest the end of January. Each of the fiscal years presented contained 52 weeks. 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. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All intercompany accounts and transactions have been eliminated. Impacts of COVID-19 - On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a pandemic and recommended containment and mitigation measures worldwide. In response to the COVID-19 pandemic, restrictions were put in place in an attempt to control the spread of the disease. At the onset of the pandemic, the Company implemented a number of measures to facilitate a safer store environment and to provide support for its associates, customers and community. Beginning in fiscal 2020, the Company expanded associate benefits in response to COVID-19 to provide additional paid time off, special payments to hourly associates, temporary wage increases and other benefits, which continued through 2021. The Company also continued enhanced cleaning protocols. These actions resulted in $ 162 million and $ 1.2 billion of expense included in selling, general and administrative (SG&A) expense in the consolidated statements of earnings for the fiscal years ended January 28, 2022 and January 29, 2021, respectively. In addition, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which was enacted on March 27, 2020, included measures to assist companies in response to the COVID-19 pandemic. In accordance with the CARES Act, the Company deferred the payments of qualifying employer payroll taxes which were required to be paid over two years , with half due by December 31, 2021, and the other half due by December 31, 2022. These amounts are included in cash flows from other operating liabilities in the accompanying consolidated statements of cash flows. The following table presents the qualifying employer payroll taxes deferred in accordance with the CARES Act along with the location in the consolidated balance sheets: (In millions) January 28, 2022 January 29, 2021 Accrued compensation and employee benefits $ 240 $ 241 Other liabilities — 240 Total deferred qualified employer payroll taxes $ 240 $ 481 Foreign Currency - The functional currencies of the Company’s international subsidiaries are generally the local currencies of the countries in which the subsidiaries are located. Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is included as a component of shareholders’ (deficit)/equity in accumulated other comprehensive loss. Gains and losses from foreign currency transactions are included in SG&A expense. Use of Estimates - The preparation of the Company’s financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with original maturities of three months or less when purchased. Cash and cash equivalents are carried at amortized cost on the consolidated balance sheets. The majority of payments due from financial institutions for the settlement of credit card and debit card transactions process within two business days and are, therefore, classified as cash and cash equivalents. 42 Table of Contents Investments - Investments generally consist of agency securities, commercial paper, corporate debt securities, governmental securities, and money market funds, which are classified as available-for-sale. Available-for-sale debt securities are recorded at fair value, and unrealized gains and losses are recorded, net of tax, as a component of accumulated other comprehensive loss. The proceeds from sales of available-for-sale debt securities were $ 308 million, $ 42 million, and $ 121 million for 2021, 2020, and 2019, respectively. Gross realized gains and losses on the sale of available-for-sale debt securities were not significant for any of the periods presented. Investments with a stated maturity date of one year or less from the balance sheet date or that are expected to be used in current operations are classified as short-term investments. All other investments are classified as long-term. Investments classified as long-term at January 28, 2022, will mature in one to three years , based on stated maturity dates. The Company classifies as investments restricted balances primarily pledged as collateral for the Company’s extended protection plan program. Restricted balances included in short-term investments were $ 271 million at January 28, 2022, and $ 506 million at January 29, 2021. Restricted balances included in long-term investments were $ 199 million at January 28, 2022, and $ 200 million at January 29, 2021. Merchandise Inventory - The majority of the Company’s inventory is stated at the lower of cost and net realizable value using the first-in, first-out method of inventory accounting. Inventory for certain subsidiaries representing approximately 7 % of the consolidated inventory balances as of January 28, 2022 and January 29, 2021, are stated at lower of cost and net realizable value using the weighted average cost method. The cost of inventory includes certain costs associated with the preparation of inventory for resale, including distribution center costs, and is net of vendor funds. The Company records an inventory reserve for the anticipated loss associated with selling inventories below cost. This reserve is based on management’s current knowledge with respect to inventory levels, sales trends, and historical experience. Management does not believe the Company’s merchandise inventories are subject to significant risk of obsolescence in the near term, and management has the ability to adjust purchasing patterns based on anticipated sales trends and general economic conditions. However, changes in consumer purchasing patterns could result in the need for additional reserves. The Company also records an inventory reserve for the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrink results from previous physical inventories. Changes in the estimated shrink reserve are made based on the timing and results of physical inventories. The Company receives funds from vendors in the normal course of business, principally as a result of purchase volumes, sales, early payments, or promotions of vendors’ products. Generally, these vendor funds do not represent the reimbursement of specific, incremental, and identifiable costs incurred by the Company to sell the vendor’s product. Therefore, the Company treats these funds as a reduction in the cost of inventory and are recognized as a reduction of cost of sales when the inventory is sold. Funds that are determined to be reimbursements of specific, incremental, and identifiable costs incurred to sell vendors’ products are recorded as an offset to the related expense. The Company develops accrual rates for vendor funds based on the provisions of the agreements in place. Due to the diversity of the individual vendor agreements, the Company performs analyses and reviews historical trends throughout the year and confirms 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 annual purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met. Derivative Financial Instruments - The Company is exposed to the impact of changes in foreign currency exchange rates, benchmark interest rates, and the prices of commodities used in the normal course of business. The Company occasionally utilizes derivative financial instruments to manage certain business risks. All derivative financial instruments are recognized at their fair values as either assets or liabilities at the balance sheet date and reported on a gross basis. The Company held forward interest rate swap agreements to hedge its exposure to changes in benchmark interest rates on forecasted debt issuances as of January 28, 2022 and January 29, 2021. The cash flows related to forward interest rate swap agreements are included within operating activities in the consolidated statements of cash flows. The Company accounts for these contracts as cash flow hedges, thus the effective portion of gains and losses resulting from changes in fair value are recognized in other comprehensive income, net of tax effects, in the consolidated statements of comprehensive income and are recognized in earnings when the underlying hedged transaction impacts the consolidated statements of earnings. The Company held fixed-to-floating interest rate swap agreements as fair value hedges on certain debt as of January 28, 2022. The Company evaluates the effectiveness of the fair value hedges using the shortcut method of accounting under which the hedges are assumed to be perfectly effective. Thus, the change in fair value of the derivative instruments offsets the change in 43 Table of Contents fair value on the hedged debt, and there is no net impact in the consolidated statements of earnings from the fair value of the derivatives. To hedge the economic risk of changes in value of the October 2020 cash tender offers prior to its pricing date, the Company entered into reverse treasury lock derivative contracts which were not designated as hedging instruments. The cash flows related to these contracts are included within financing activities in the consolidated statements of cash flows. Credit Programs and Sale of Business Accounts Receivable - The Company has branded and private label proprietary credit cards which generate sales that are not reflected in receivables. Under an agreement with Synchrony Bank (Synchrony), credit is extended directly to customers by Synchrony. All credit program-related services are performed and controlled directly by Synchrony. The Company has the option, but no obligation, to purchase the receivables at the end of the agreement. The Company also has an agreement with Synchrony under which Synchrony purchases at face value commercial business accounts receivable originated by the Company and services these accounts. The Company primarily accounts for these transfers as sales of the accounts receivable. When the Company transfers its commercial business accounts receivable, it retains certain interests in those receivables, including the funding of a loss reserve and its obligation related to Synchrony’s ongoing servicing of the receivables sold. Any gain or loss on the sale is determined based on the previous carrying amounts of the transferred assets allocated at fair value between the receivables sold and the interests retained. Fair value is based on the present value of expected future cash flows, taking into account the key assumptions of anticipated credit losses, payment rates, late fee rates, Synchrony’s servicing costs, and the discount rate commensurate with the uncertainty involved. Due to the short-term nature of the receivables sold, changes to the key assumptions would not materially impact the recorded gain or loss on the sales of receivables or the fair value of the retained interests in the receivables. Total commercial business accounts receivable sold to Synchrony were $ 4.3 billion in 2021, $ 3.3 billion in 2020, and $ 3.2 billion in 2019. The Company recognized losses of $ 50 million in 2021, $ 54 million in 2020, and $ 41 million in 2019 on these receivable sales, which primarily relates to servicing costs that are remitted to Synchrony monthly. Property and Depreciation - Property is recorded at cost. Costs associated with major additions are capitalized and depreciated. Capital assets are expected to yield future benefits and have original useful lives which exceed one year. The total cost of a capital asset generally includes all applicable sales taxes, delivery costs, installation costs, and other appropriate costs incurred by the Company, including interest in the case of self-constructed assets. Upon disposal, the cost of properties and related accumulated depreciation is removed from the accounts, with gains and losses reflected in SG&A expense in the consolidated statements of earnings. Property consists of land, buildings and building improvements, equipment, finance lease assets, and construction in progress. Buildings and building improvements includes owned buildings, as well as buildings under finance lease and leasehold improvements. Equipment primarily includes store racking and displays, computer hardware and software, forklifts, vehicles, finance lease equipment, and other store equipment . In addition, excess properties held for use are included within land and buildings. Depreciation is recognized over the estimated useful lives of the depreciable assets. Assets are depreciated using the straight-line method. Leasehold improvements and finance lease assets are depreciated and amortized, respectively, over the shorter of their estimated useful lives or the term of the related lease. The amortization of these assets is included in depreciation and amortization expense in the consolidated statements of earnings. Long-Lived Asset Impairment - The carrying amounts of long-lived assets are reviewed whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. A potential impairment has occurred for long-lived assets held-for-use if projected future undiscounted cash flows expected to result from the use and eventual disposition of the assets are less than the carrying amounts of the assets. 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 non-operating liabilities are excluded from the carrying value of the asset group. An impairment loss is recorded for long-lived assets held-for-use when the carrying amount of the asset is not recoverable and exceeds its fair value. Impairment losses are included in SG&A expense in the consolidated statements of earnings. Excess properties that are expected to be sold within the next twelve months and meet the other relevant held-for-sale criteria are classified as long-lived assets held-for-sale. Excess properties consist primarily of retail outparcels and property associated with relocated or closed locations. An impairment loss is recorded for long-lived assets held-for-sale when the carrying amount of the asset exceeds its fair value less cost to sell. A long-lived asset is not depreciated while it is classified as held-for-sale. 44 Table of Contents For long-lived assets to be abandoned, the Company considers the asset to be disposed of when it ceases to be used. Until it ceases to be used, the Company continues to classify the asset as held-for-use and tests for potential impairment accordingly. If the Company commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, its depreciable life is evaluated. Goodwill - Goodwill is the excess of the purchase price over the fair value of identifiable assets acquired, less liabilities assumed, in a business combination. The Company reviews goodwill for impairment at the reporting unit level, which is the operating segment level or one level below the operating segment level. Goodwill is not amortized but is evaluated for impairment at least annually on the first day of the fourth quarter or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable. The evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If, after assessing qualitative factors, we determine it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the quantitative goodwill impairment test is performed. The quantitative goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. Fair value represents the price a market participant would be willing to pay in a potential sale of the reporting unit and is based on a combination of an income approach, based on discounted future cash flows, and a market approach, based on market multiples applied to free cash flow. If the fair value exceeds carrying value, then no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Any impairment identified is included within SG&A expense in the consolidated statements of earnings. The income tax effect from any tax deductible goodwill on the carrying amount of the reporting unit, if applicable, is considered in determining the goodwill impairment loss. A reporting unit is an operating segment or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. During fiscal 2021, goodwill was allocated to the U.S. Home Improvement reporting unit. In fiscal 2021, we completed our annual qualitative assessment of the recoverability of goodwill for the U.S. Home Improvement reporting unit and concluded that the fair value of the reporting unit significantly exceeded its carrying value. The changes in the carrying amount of goodwill for 2021, 2020, and 2019 were as follows: Years Ended (In millions) January 28, 2022 January 29, 2021 January 31, 2020 Goodwill, balance at beginning of year $ 311 $ 303 $ 303 Acquisitions — 8 — Goodwill, balance at end of year $ 311 $ 311 $ 303 Gross carrying amounts and cumulative goodwill impairment losses are as follows: January 28, 2022 January 29, 2021 (In millions) Gross Carrying Amount Cumulative Impairment Gross Carrying Amount Cumulative Impairment Goodwill $ 1,310 $ ( 999 ) $ 1,310 $ ( 999 ) Other Intangible Assets - Intangible assets with indefinite lives are evaluated for impairment on the first day of the fourth quarter or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable. The cost of definite-lived intangible assets is amortized over their estimated useful lives, which range up to 20 years. Intangible assets are recorded within other assets on the consolidated balance sheets. Leases - The Company leases certain retail stores, warehouses, distribution centers, office space, land and equipment under finance and operating leases. Lease commencement occurs on the date the Company takes possession or control of the property or equipment. Original terms for facility-related leases are generally between five and 20 years. These leases generally contain provisions for four to six renewal options of five years each. Original terms for equipment-related leases, primarily material handling equipment and vehicles, are generally between one and seven years . Some of the Company’s leases also include rental escalation clauses and/or termination provisions. Renewal options and termination options are included in the determination of lease payments when management determines the options are reasonably certain of exercise, considering 45 Table of Contents financial performance, strategic importance and/or invested capital. Leases with an original term of twelve months or less are not recognized on the Company’s balance sheet, and the lease expense related to those short-term leases is recognized over the lease term. The Company does not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class. If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of the Company’s leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable, the Company’s estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on information available at lease commencement. The Company’s real estate leases typically require payment of common area maintenance and real estate taxes which represent the majority of variable lease costs. Certain lease agreements also provide for variable rental payments based on sales performance in excess of specified minimums, usage measures, or changes in the consumer price index. Variable rent payments based on future performance, usage, or changes in indices were not significant for any of the periods presented. Variable lease costs are excluded from the present value of lease obligations. The Company’s lease agreements do not contain any material restrictions, covenants, or any material residual value guarantees. The Company subleases certain properties that are not used in its operations. Sublease income was not significant for any of the periods presented. Accounts Payable - The Company has agreements with third parties to provide accounts payable tracking systems which facilitate participating suppliers’ ability to finance payment obligations from the Company with designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal in entering into these arrangements is to capture overall supply chain savings in the form of pricing, payment terms, or vendor funding, created by facilitating suppliers’ ability to finance payment obligations at more favorable discount rates, while providing them with greater working capital flexibility. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to finance amounts under these arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by these arrangements for those payment obligations that have been financed by suppliers. The Company’s outstanding payment obligations with participating suppliers were $ 3.0 billion as of January 28, 2022, and $ 2.5 billion as of January 29, 2021, and are included in accounts payable on the consolidated balance sheets, and participating suppliers financed $ 2.3 billion and $ 1.7 billion, respectively, of those payment obligations to participating financial institutions. Total payment obligations that were placed and settled on the accounts payable tracking systems were $ 11.0 billion and $ 9.7 billion for each of the years ended January 28, 2022 and January 29, 2021, respectively. Other Current Liabilities - Other current liabilities on the consolidated balance sheets consist of: (In millions) January 28, 2022 January 29, 2021 Accrued dividends $ 537 $ 440 Self-insurance liabilities 440 435 Accrued interest 275 250 Sales return reserve 245 252 Sales tax liabilities 228 256 Income taxes payable 128 168 Accrued property taxes 124 120 Other 1,358 1,314 Total $ 3,335 $ 3,235 Self-Insurance - The Company is self-insured for certain losses relating to workers’ compensation, automobile, property, and general and product liability claims. The Company has excess insurance coverage above certain retention amounts to limit exposure from these claims. The Company is also self-insured for certain losses relating to extended protection plans, as well as medical and dental claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management’s estimates of the discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Although management believes it has the ability to reasonably estimate losses 46 Table of Contents related to claims, it is possible that actual results could differ from recorded self-insurance liabilities. Total self-insurance liabilities, including the current and non-current portions, were $ 1.1 billion at January 28, 2022 and January 29, 2021. The Company provides surety bonds issued by insurance companies to secure payment of workers’ compensation liabilities as required in certain states where the Company is self-insured. Outstanding surety bonds relating to self-insurance were $ 270 million at January 28, 2022 and January 29, 2021. Income Taxes - The Company establishes deferred income tax assets and liabilities for temporary differences between the tax and financial accounting bases of assets and liabilities. The tax effects of such differences are reflected in the consolidated balance sheets at the enacted tax rates expected to be in effect when the differences reverse. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets if it is more likely than not that all or a portion of the asset will not be realized. The tax balances and income tax expense recognized by the Company are based on management’s interpretation of the tax statutes of multiple jurisdictions. The Company establishes a liability for tax positions for which there is uncertainty as to whether or not the position will be ultimately sustained. The Company includes interest related to tax issues as part of net interest on the consolidated statements of earnings. The Company records any applicable penalties related to tax issues within the income tax provision. Shareholders’ (Deficit)/Equity - The Company has a share repurchase program that is executed through purchases made from time to time either in the open market or through private market transactions. Shares purchased under the repurchase program are returned to authorized and unissued status. Any excess of cost over par value is charged to additional paid-in capital to the extent that a balance is present. Once additional paid-in capital is fully depleted, remaining excess of cost over par value is charged to (accumulated deficit)/retained earnings. Revenue Recognition - The Company recognizes revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. A description of the Company’s principle revenue generating activities is as follows: • Products - Revenue from products primarily relates to in-store and online merchandise purchases, which are recognized at the point in time when the customer obtains control of the merchandise. This occurs at the time of in-store purchase or delivery of the product to the customer. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded. The merchandise return reserve is presented on a gross basis, with a separate asset and liability included in the consolidated balance sheets. • Services - Revenues from services primarily relate to professional installation services the Company provides through subcontractors related to merchandise purchased by a customer. In certain instances, installation services include materials provided by the subcontractor, and both product and installation are included in service revenue. The Company recognizes revenue associated with services as they are rendered, and the majority of services are completed within one week from initiation. Retail deferred revenue consists of amounts received for which customers have not yet taken possession of the merchandise or for which installation has not yet been completed. Deferred revenue is recognized in sales either at a point in time when the customer obtains control of merchandise through pickup or delivery, or over time as services are provided to the customer. The majority of revenue for goods and services is recognized in the quarter following revenue deferral. In addition, the Company defers revenues from stored-value cards, which include gift cards and returned merchandise credits, and recognizes revenue into sales when the cards are redeemed. The Company also defers revenues for its separately-priced long-term protection plan contracts (Lowe’s protection plans), which is a Lowe’s-branded program for which the Company is ultimately self-insured. The Company recognizes revenue from Lowe’s protection plan sales on a straight-line basis over the respective contract term. Expenses for claims are recognized in cost of sales when incurred. Incremental direct acquisition costs associated with the sale of Lowe’s protection plans for contracts greater than one year are also deferred and recognized as expense on a straight-line basis over the respective contract term. Lowe’s protection plan contract terms primarily range from one to five years from the date of purchase or the end of the manufacturer’s warranty, as applicable. 47 Table of Contents Cost of Sales and Selling, General and Administrative Expenses - The following lists the primary costs classified in each major expense category: Cost of Sales Selling, General and Administrative n Total cost of products sold, including: - Purchase costs, net of vendor funds; - Freight expenses associated with moving merchandise inventories from vendors to selling locations; - Costs associated with operating the Company’s distribution network, including payroll and benefit costs and occupancy costs; - Depreciation of assets associated with the Company’s distribution network; n Costs of installation services provided; n Costs associated with shipping and handling to customers, as well as directly from vendors to customers by third parties; n Depreciation of assets used in delivering product to customers; n Costs associated with inventory shrinkage and obsolescence; n Costs of services performed under the extended protection plan. n Payroll and benefit costs for retail and corporate employees; n Occupancy costs of retail and corporate facilities; n Advertising; n Store environment costs; n Tender costs, including bank charges, costs associated with credit card interchange fees; n Costs associated with self-insured plans, and premium costs for stop-loss coverage and fully insured plans; n Long-lived asset impairment losses, gains/losses on disposal of assets, and exit costs; n Other administrative costs, such as supplies, and travel and entertainment. Advertising - Costs associated with advertising are charged to expense as incurred. Advertising expenses were $ 877 million, $ 798 million, and $ 871 million in 2021, 2020, and 2019, respectively. Comprehensive Income - The Company reports comprehensive income in its consolidated statements of comprehensive income and consolidated statements of shareholders’ (deficit)/equity. Comprehensive income represents changes in shareholders’ (deficit)/equity from non-owner sources and is comprised of net earnings adjusted primarily for foreign currency translation adjustments and cash flow hedge derivative contracts. Net foreign currency translation losses, net of tax, classified in accumulated other comprehensive loss were $ 41 million, $ 37 million, and $ 115 million at January 28, 2022, January 29, 2021, and January 31, 2020, respectively. Net cash flow hedge (gains)/losses, net of tax, classified in accumulated other comprehensive loss were ($ 6 ) million, $ 103 million, and $ 24 million at January 28, 2022, January 29, 2021, and January 31, 2020, respectively. Segment Information - The Company’s home improvement retail operations represent a single reportable segment. Key operating decisions are made at the Company level in order to maintain a consistent retail customer experience. The Company’s home improvement retail and hardware stores, in addition to online selling channels, sell similar products and services, use similar processes to sell those products and services, and sell their products and services to similar classes of customers. In addition, the Company’s operations exhibit similar long-term economic characteristics. The amounts of long-lived assets and net sales outside of the U.S. were approximately 7.2 % and 6.1 %, respectively, at January 28, 2022. The amounts of long-lived assets and net sales outside of the U.S. were approximately 7.5 % and 5.9 %, respectively, at January 29, 2021. The amounts of long-lived assets and net sales outside of the U.S. were approximately 7.7 % and 6.9 %, respectively, at January 31, 2020. Accounting Pronouncements Not Yet Adopted - Recent accounting pronouncements pending adoption not discussed in this Form 10-K are either not applicable to the Company or are not expected to have a material impact on the Company. NOTE 2: Revenue Net sales consists primarily of revenue, net of sales tax, associated with contracts with customers for the sale of goods and services in amounts that reflect consideration the Company is entitled to in exchange for those goods and services. 48 Table of Contents The following table presents the Company’s sources of revenue: (In millions) Years Ended January 28, 2022 January 29, 2021 January 31, 2020 Products $ 92,415 $ 86,046 $ 68,377 Services 2,304 1,949 2,112 Other 1,531 1,602 1,659 Net sales $ 96,250 $ 89,597 $ 72,148 The balances and classification within the consolidated balance sheets for anticipated sales returns and the associated right of return assets are as follows: (In millions) Classification January 28, 2022 January 29, 2021 Anticipated sales returns Other current liabilities $ 245 $ 252 Right of return assets Other current assets 151 164 Deferred revenue - retail and stored-value cards Deferred revenue for retail and stored-value cards are as follows: (In millions) January 28, 2022 January 29, 2021 Retail deferred revenue $ 1,285 $ 1,046 Stored-value cards deferred revenue 629 562 Deferred revenue $ 1,914 $ 1,608 Deferred revenue - Lowe’s protection plans Deferred revenue associated with Lowe’s protection plans is as follows: (In millions) January 28, 2022 January 29, 2021 Deferred revenue - Lowe’s protection plans $ 1,127 $ 1,019 Lowe’s protection plan sales previously recorded as deferred revenue and claim expenses incurred are as follows: (In millions) Years Ended January 28, 2022 January 29, 2021 January 31, 2020 Lowe’s protection plan deferred revenue recognized into sales $ 488 $ 430 $ 408 Lowe’s protection plan claim expenses 178 158 184 49 Table of Contents Disaggregation of Revenues The following table presents the Company’s net sales disaggregated by merchandise division: Years Ended January 28, 2022 January 29, 2021 January 31, 2020 (In millions) Total Sales % Total Sales % Total Sales % Home Décor ¹ $ 34,025 35.3 % $ 31,536 35.2 % $ 26,198 36.3 % Building Products ² 31,151 32.4 28,218 31.5 22,524 31.2 Hardlines ³ 28,571 29.7 27,877 31.1 21,438 29.7 Other 2,503 2.6 1,966 2.2 1,988 2.8 Total $ 96,250 100.0 % $ 89,597 100.0 % $ 72,148 100.0 % Note: Merchandise division net sales for prior periods have been reclassified to conform to the current year presentation. 1 Home Décor includes the following product categories: Appliances, Décor, Flooring, Kitchens & Bath, and Paint 2 Building Products includes the following product categories: Building Materials, Electrical, Lighting, Lumber, Millwork, and Rough Plumbing 3 Hardlines includes the following product categories: Hardware, Lawn & Garden, Seasonal & Outdoor Living, and Tools The following table presents the Company’s net sales disaggregated by geographical area: (In millions) Years Ended January 28, 2022 January 29, 2021 January 31, 2020 United States $ 90,348 $ 84,303 $ 67,147 International 5,902 5,294 5,001 Net Sales $ 96,250 $ 89,597 $ 72,148 NOTE 3: Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows: • Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities • Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly • Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities Assets and Liabilities that are Measured at Fair Value on a Recurring Basis The following table presents the Company’s financial assets and financial liabilities measured at fair value on a recurring basis. Fair Value Measurements at (In millions) Classification Measurement Level January 28, 2022 January 29, 2021 Available-for-sale debt securities: Money market funds Short-term investments Level 1 $ 120 $ 109 U.S. Treasury securities Short-term investments Level 1 75 223 Commercial Paper Short-term investments Level 2 30 97 Certificates of deposit Short-term investments Level 1 14 — Foreign government debt securities Short-term investments Level 2 14 — 50 Table of Contents Fair Value Measurements at (In millions) Classification Measurement Level January 28, 2022 January 29, 2021 Municipal obligations Short-term investments Level 2 10 — Corporate debt securities Short-term investments Level 2 8 47 Agency securities Short-term investments Level 2 — 30 U.S. Treasury securities Long-term investments Level 1 132 129 Corporate debt securities Long-term investments Level 2 50 58 Foreign government debt securities Long-term investments Level 2 14 — Municipal obligations Long-term investments Level 2 3 13 Derivative instruments: Forward interest rate swaps Other current assets Level 2 $ 66 $ — Forward interest rate swaps Other assets Level 2 48 4 Forward interest rate swaps Other current liabilities Level 2 — 8 Fixed-to-floating interest rate swaps Other liabilities Level 2 21 — There were no transfers between Levels 1, 2, or 3 during any of the periods presented. When available, quoted prices were used to determine fair value. When quoted prices in active markets were available, investments were classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable market inputs. The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others. Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis For the fiscal years ended January 28, 2022 and January 29, 2021, the Company had no material measurements of assets and liabilities at fair value on a nonrecurring basis subsequent to their initial recognition. Other Fair Value Disclosures The Company’s financial assets and liabilities not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, and long-term debt and are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature. As further described in Note 9 , certain long-term debt is associated with a fair value hedge, and the changes in fair value of the hedged debt is included in the carrying value of long-term debt on the consolidated balance sheets. The fair values of the Company’s unsecured notes were estimated using quoted market prices. The fair values of the Company’s mortgage notes were estimated using discounted cash flow analyses, based on the future cash outflows associated with these arrangements and discounted using the applicable incremental borrowing rate. Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding finance lease obligations, are as follows: January 28, 2022 January 29, 2021 (In millions) Carrying Amount Fair Value Carrying Amount Fair Value Unsecured notes (Level 1) $ 24,056 $ 25,425 $ 21,121 $ 24,349 Mortgage notes (Level 2) 5 5 5 5 Long-term debt (excluding finance lease obligations) $ 24,061 $ 25,430 $ 21,126 $ 24,354 51 Table of Contents NOTE 4: Property and Accumulated Depreciation Property is summarized by major class in the following table: (In millions) Estimated Depreciable Lives, In Years January 28, 2022 January 29, 2021 Cost: Land N/A $ 7,278 $ 7,315 Buildings and building improvements 5 - 40 18,433 18,090 Equipment 2 - 15 10,533 10,466 Construction in progress N/A 715 831 Total cost 36,959 36,702 Accumulated depreciation ( 17,888 ) ( 17,547 ) Property, less accumulated depreciation $ 19,071 $ 19,155 Included in property, less accumulated depreciation are right-of-use assets under finance leases. The related amortization expense for right-of-use assets under finance leases is included in depreciation and amortization expense. The Company recognized depreciation and amortization expense, inclusive of amounts presented in cost of sales, of $ 1.8 billion in 2021, $ 1.5 billion in 2020, and $ 1.4 billion in 2019. NOTE 5: Goodwill and Intangible Assets The carrying amount of goodwill as well as the gross carrying amount and accumulated amortization of intangible assets consist of the following: January 28, 2022 January 29, 2021 (In millions) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Goodwill $ 311 $ — $ 311 $ — Definite-lived intangible assets: Customer-related 1 $ 344 $ ( 88 ) $ 372 $ ( 99 ) Trademarks and trade names 1 263 ( 131 ) 264 ( 119 ) Other 1 ( 1 ) 12 ( 11 ) Total definite-lived intangible assets $ 608 $ ( 220 ) $ 648 $ ( 229 ) Indefinite-lived intangible assets: Trademark 2 $ 134 $ — $ — $ — Total intangible assets $ 742 $ ( 220 ) $ 648 $ ( 229 ) 1 Certain definite-lived intangible assets are denominated in a foreign currency and subject to translation. 2 In April 2021, the Company acquired the STAINMASTER ® brand for total consideration of $ 134 million, which was determined to have an indefinite life. Amortization expense for intangible assets is as follows: Years Ended (In millions) January 28, 2022 January 29, 2021 January 31, 2020 Amortization expense $ 32 $ 59 $ 39 52 Table of Contents Amortization expense expected to be recognized in future periods for intangible assets is as follows: (In millions) Amortization Expense Fiscal 2022 $ 35 Fiscal 2023 32 Fiscal 2024 32 Fiscal 2025 32 Fiscal 2026 31 Thereafter 226 Total $ 388 NOTE 6: Leases The lease-related assets and liabilities recorded on the balance sheet are summarized in the following table: Leases (In millions) Classification January 28, 2022 January 29, 2021 Assets Operating lease assets Operating lease right-of-use assets $ 4,108 $ 3,832 Finance lease assets Property, less accumulated depreciation 1 548 539 Total lease assets 4,656 4,371 Liabilities Current Operating Current operating lease liabilities 636 541 Finance Current maturities of long-term debt 103 86 Noncurrent Operating Noncurrent operating lease liabilities 4,021 3,890 Finance Long-term debt, excluding current maturities 563 564 Total lease liabilities $ 5,323 $ 5,081 1 Finance lease assets are recorded net of accumulated amortization of $ 206 million as of January 28, 2022, and $ 122 million as of January 29, 2021. The table below presents the lease costs for finance and operating leases: Lease Cost (In millions) Years Ended January 28, 2022 January 29, 2021 January 31, 2020 Finance lease cost Amortization of leased assets $ 89 $ 82 $ 45 Interest on lease liabilities 30 32 30 Operating lease cost 1 699 659 674 Variable lease cost 268 244 224 Total lease cost $ 1,086 $ 1,017 $ 973 1 Includes short-term leases and sublease income, which are immaterial. The future minimum rental payments required under operating and finance lease obligations as of January 28, 2022, having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows: 53 Table of Contents Maturity of lease liabilities (In millions) Operating Leases 1 Finance Leases 2 Total 2022 $ 767 $ 126 $ 893 2023 735 121 856 2024 647 108 755 2025 649 100 749 2026 560 83 643 After 2026 2,332 267 2,599 Total lease payments 5,690 805 6,495 Less: Interest 3 ( 1,033 ) ( 139 ) ( 1,172 ) Present value of lease liabilities 4 $ 4,657 $ 666 $ 5,323 1 Operating lease payments include $ 268 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $ 638 million of minimum lease payments for leases signed but not yet commenced. 2 Finance lease payments exclude $ 6 million of minimum lease payments for leases signed but not yet commenced. 3 Calculated using the lease-specific incremental borrowing rate. 4 Includes the current portion of $ 636 million for operating leases and $ 103 million for finance leases. Lease Term and Discount Rate January 28, 2022 January 29, 2021 Weighted-average remaining lease term (years) Operating leases 9.53 9.61 Finance leases 8.49 7.88 Weighted-average discount rate Operating leases 3.59 % 3.88 % Finance leases 4.91 % 5.34 % Other Information Years Ended (In millions) January 28, 2022 January 29, 2021 January 31, 2020 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows used for operating leases $ 708 $ 643 $ 825 Operating cash flows used for finance leases 30 32 30 Financing cash flows used for finance leases 92 104 57 Leased assets obtained in exchange for new finance lease liabilities 110 69 329 Leased assets obtained in exchange for new operating lease liabilities 1 815 465 551 1 Excludes $ 638 million of leases signed but not yet commenced as of January 28, 2022. NOTE 7: Exit Activities During fiscal years 2020 and 2019, the Company incurred costs associated with an ongoing strategic reassessment of its business to drive an increased focus on its core home improvement operations and to improve overall operating performance and profitability. As a result of this reassessment, the Company decided to exit certain activities and close certain locations as further described below. Expenses associated with long-lived asset impairment, severance, and other closing costs are included in SG&A expense in the consolidated statements of earnings. Expenses associated with accelerated depreciation are included in depreciation and amortization expense in the consolidated statements of earnings. Canada Restructuring During the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations, and as a result, recognized pre-tax charges of $ 53 million associated with long-lived asset impairment. Subsequent to the end of the Company’s third quarter of fiscal 2019, a decision was made to close 34 under-performing stores in Canada and take additional 54 Table of Contents restructuring actions to improve future sales and profitability of the Canadian operations. As a result of these actions, during fiscal 2020, the Company recognized pre-tax charges of $ 35 million. A summary of the significant charges associated with the restructuring of the Canadian operations are as follows: Years Ended Cumulative (In millions) January 29, 2021 January 31, 2020 Amount Long-lived asset impairment $ — $ 53 $ 53 Severance costs 15 17 32 Accelerated depreciation and amortization 1 23 24 Other closing costs 19 15 34 Total $ 35 $ 108 $ 143 The following table summarizes store closing lease obligations activity during the twelve months ended January 28, 2022 and January 29, 2021: Years Ended (In millions) January 28, 2022 January 29, 2021 Accrual for exit activities, balance at beginning of year $ 69 $ 88 Cash payments ( 14 ) ( 18 ) Adjustments 1 ( 1 ) ( 1 ) Accrual for exit activities, balance at end of year $ 54 $ 69 1 Adjustments represent lease terminations and changes in estimates around sublease assumptions. NOTE 8: Debt Commercial Paper Program In December 2021, the Company 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. Borrowings under the Third Amended and Restated Credit Agreement will bear interest calculated according to a Base Rate or a Eurocurrency Rate, plus an applicable margin. Also in December 2021, the Company 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. Borrowings under the 2020 Credit Agreement will bear interest calculated according to a Base Rate or a Eurocurrency Rate, plus an applicable margin. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the Third Amended and Restated Credit Agreement and the 2020 Credit Agreement (collectively, the Credit Agreements), the Company may increase the combined aggregate availability of both agreements by an additional $ 1.0 billion. The Credit Agreements contain customary representations, warranties, and covenants for transactions of these type. The Company was in compliance with those financial covenants at January 28, 2022. The Credit Agreements support the Company’s commercial paper program. The amounts available to be drawn under the Credit Agreements are reduced by the amount of borrowings under the commercial paper program. There were no outstanding borrowings under the Company’s commercial paper program, the Third Amended and Restated Credit Agreement, or the 2020 Credit Agreement as of January 28, 2022. There were no outstanding borrowings under the Company’s commercial paper program, the Second Amended and Restated Credit Agreement or the 2020 Credit Agreement as of January 29, 2021. Total combined availability under the Credit Agreements was $ 4.0 billion as of January 28, 2022. Other Short-Term Borrowings In April 2021, the Company entered into a $ 1.0 billion unsecured 364-day term loan facility (the 2021 Term Loan), which was scheduled to mature in April 2022, but was repaid early in January 2022. 55 Table of Contents Long-Term Debt Debt Category (In millions) Weighted-Average Interest Rate at January 28, 2022 January 28, 2022 January 29, 2021 Secured debt: Mortgage notes due through fiscal 2027 1 4.98 % $ 5 $ 5 Unsecured debt: Notes due through fiscal 2026 3.22 % 4,540 5,568 Notes due fiscal 2027-2031 3.04 % 9,611 7,135 Notes due fiscal 2032-2036 5.64 % 622 621 Notes due fiscal 2037-2041 4.13 % 1,862 873 Notes due fiscal 2042-2046 4.14 % 2,692 2,690 Notes due fiscal 2047-2051 3.77 % 4,729 4,234 Finance lease obligations due through fiscal 2042 666 654 Total long-term debt 24,727 21,780 Less current maturities ( 868 ) ( 1,112 ) Long-term debt, excluding current maturities $ 23,859 $ 20,668 1 Real properties with an aggregate book value of $ 16 million as of January 28, 2022, were pledged as collateral for secured debt. Debt maturities, exclusive of unamortized original issue discounts, unamortized debt issuance costs, fair-value hedge adjustments, and finance lease obligations, for the next five fiscal years and thereafter are as follows: (In millions) Principal Fiscal 2022 $ 765 Fiscal 2023 503 Fiscal 2024 450 Fiscal 2025 1,500 Fiscal 2026 1,350 Thereafter 19,717 Total $ 24,285 The Company’s unsecured notes are issued under indentures that generally have similar terms and, therefore, have been grouped by maturity date for presentation purposes in the table above. The notes contain certain restrictive covenants, none of which are expected to impact the Company’s capital resources or liquidity. The Company was in compliance with all financial covenants of these agreements at January 28, 2022. During 2021, the Company issued $ 4.0 billion of unsecured fixed rate notes (collectively, the 2021 Notes) as follows: Issue Date Principal Amount (in millions) Maturity Date Interest Rate Discount (in millions) March 2021 $ 1,500 April 2031 2.625 % $ 7 March 2021 $ 500 April 2051 3.500 % $ 5 September 2021 $ 1,000 September 2028 1.700 % $ 6 September 2021 $ 1,000 September 2041 2.800 % $ 10 Interest on the September 2021 Notes is payable semiannually in arrears in March and September of each year until maturity. Interest on the March 2021 Notes is payable semiannually in arrears in April and October of each year until maturity. 56 Table of Contents During 2020, the Company issued $ 8.0 billion of unsecured fixed rate notes (collectively, the 2020 Notes) as follows: Issue Date Principal Amount (in millions) Maturity Date Interest Rate Discount (in millions) March 2020 $ 750 April 2025 4.000 % $ 4 March 2020 $ 1,250 April 2030 4.500 % $ 12 March 2020 $ 750 April 2040 5.000 % $ 10 March 2020 $ 1,250 April 2050 5.125 % $ 13 October 2020 $ 1,000 April 2028 1.300 % $ 5 October 2020 $ 1,250 October 2030 1.700 % $ 10 October 2020 $ 1,750 October 2050 3.000 % $ 17 Interest on the 2020 Notes is payable semiannually in arrears in April and October of each year until maturity. The indentures governing the 2021 and 2020 Notes contain a provision that allows the Company to redeem these notes at any time, in whole or in part, at specified redemption prices, plus accrued interest, if any, up to the date of redemption. The indentures also contain a provision that allows the holders of the notes to require the Company to repurchase all or any part of their notes if a change of control triggering event occurs. If elected under the change of control provisions, the repurchase of the notes will occur at a purchase price of 101 % of the principal amount, plus accrued interest, if any, on such notes up to the date of purchase. The indentures governing the notes do not limit the aggregate principal amount of debt securities that the Company may issue and do not require the Company to maintain specified financial ratios or levels of net worth or liquidity. However, the indentures include various restrictive covenants, none of which is expected to impact the Company’s liquidity or capital resources. The discounts associated with these issuances, which include the underwriting and issuance discounts, are recorded in long-term debt and are being amortized over the respective terms of the notes using the effective interest method. During 2020, the Company completed cash tender offers to purchase and retire $ 3.0 billion combined aggregate principal amount of its outstanding notes with a weighted average interest rate of 4.80 %. As a result of the 2020 cash tender offers, the Company recognized a loss on extinguishment of debt of $ 1.1 billion which includes premium paid to holders of the debt, unamortized deferred financing fees and original issue discounts, and loss on reverse treasury lock derivative contracts. See Note 9 for additional information regarding the reverse treasury lock derivative contracts. NOTE 9: Derivative Instruments Derivatives Designated as Hedging Instruments The notional amounts of the Company’s material derivative instruments are as follows: (In millions) January 28, 2022 January 29, 2021 Cash flow hedges: Forward interest rate swap agreement notional amounts $ 2,560 $ 638 Fair value hedges: Fixed-to-floating interest rate swap agreement notional amounts $ 850 $ — See Note 3 for the gross fair values of the Company’s outstanding derivative financial instruments and corresponding fair value classifications. The impact of forward interest rate swap derivatives, both matured and outstanding, designated as cash flow hedges recorded in other comprehensive income and earnings for 2021, 2020, and 2019, including its line item in the financial statements, is as follows: 57 Table of Contents Years Ended (In millions) January 28, 2022 January 29, 2021 January 31, 2020 Other comprehensive income: Cash flow hedges – net of tax (expense)/benefit of ($ 35 ) million, $ 21 million, and $ 8 million, respectively $ 103 $ ( 76 ) $ ( 23 ) Net earnings: Interest – net $ 11 $ 10 $ 2 Other Derivatives Not Designated as Hedging Instruments To hedge the economic risk of changes in value of the 2020 cash tender offers prior to the pricing date, the Company entered into reverse treasury lock derivative contracts with a combined notional amount of $ 2.0 billion. Upon the pricing of the 2020 cash tender offers, the Company settled the reverse treasury lock derivative contracts and made a payment to its counterparty for $ 26 million, which is included in loss on extinguishment of debt in the consolidated statements of earnings for the year ended January 29, 2021. The cash flows related to these contracts are included within financing activities in the accompanying consolidated statements of cash flows. NOTE 10: Shareholders’ (Deficit)/Equity Authorized shares of preferred stock were 5.0 million ($ 5 par value) at January 28, 2022 and January 29, 2021, 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. Authorized shares of common stock were 5.6 billion ($ 0.50 par value) at January 28, 2022 and January 29, 2021. The Company has a share repurchase program that is executed through purchases made from time to time either in the open market or through private off-market transactions. Shares purchased under the repurchase program are returned to authorized and unissued status. On December 15, 2021, the Company announced that its Board of Directors authorized a $ 13.0 billion share repurchase under the program, in addition to the $ 15.0 billion of share repurchases authorized by the Board of Directors in December 2020, with no expiration. As of January 28, 2022, the Company had $ 19.7 billion remaining under the program. During the year ended January 28, 2022, the Company entered into Accelerated Share Repurchase (ASR) agreements with third-party financial institutions to repurchase a total of 41.6 million shares of the Company’s common stock for $ 8.7 billion. At inception, the Company paid the financial institutions using cash on hand and took initial delivery of shares. Under the terms of the ASR agreements, upon settlement, the Company would either receive additional shares from the financial institution or be required to deliver additional shares or cash to the financial institution. The Company controlled its election to either deliver additional shares or cash to the financial institution and was subject to provisions which limited the number of shares the Company would be required to deliver. The final number of shares received upon settlement of each ASR agreement was determined with reference to the volume-weighted average price of the Company’s common stock over the term of the ASR agreement. The initial repurchase of shares under these agreements resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. These ASR agreements were accounted for as treasury stock transactions and forward stock purchase contracts. The par value of the shares received was recorded as a reduction to common stock with the remainder recorded as a reduction to capital in excess of par value and (accumulated deficit)/retained earnings. The forward stock purchase contracts were considered indexed to the Company’s own stock and were classified as equity instruments. 58 Table of Contents The terms of each ASR agreement entered into during the last three fiscal years, structured as outlined above, are as follows (in millions): Agreement Execution Date ASR Settlement Date ASR Agreement Amount Minimum Notional Amount 1 Maximum Notional Amount 1 Cash Payment Received at Settlement 1 Initial Shares Delivered Additional Shares Delivered at Settlement Total Shares Delivered Q1 2019 Q1 2019 $ 350 $ 350 $ 500 $ 150 2.9 0.3 3.2 Q2 2019 Q2 2019 990 990 1,410 420 8.9 1.0 9.9 Q3 2019 Q3 2019 397 350 500 103 2.8 0.8 3.6 Q1 2020 Q1 2020 500 — — — 3.9 1.6 5.5 Q4 2020 Q4 2020 3,000 — — — 17.1 1.6 18.7 Q1 2021 Q1 2021 2,000 — — — 10.7 0.2 10.9 Q2 2021 Q2 2021 2,132 1,750 2,500 368 7.2 4.0 11.2 Q3 2021 Q3 2021 1,592 1,500 2,000 408 5.9 1.7 7.6 Q4 2021 Q4 2021 3,000 — — — 10.3 1.6 11.9 1 The Company entered into variable notional ASR agreements with third-party financial institutions to repurchase between a minimum notional amount and a maximum notional amount. At inception of each transaction, the Company paid the maximum notional amount and received shares. When the Company finalized each transaction, it received additional shares as well as a cash payment from the third-party financial institution equal to the difference between the prepayment amount (maximum notional amount) and the final notional amount. During the year ended January 28, 2022, the Company also repurchased shares of its common stock through the open market totaling 21.0 million shares for a cost of $ 4.3 billion. The Company also withholds shares from employees to satisfy either the exercise price of stock options exercised or the statutory withholding tax liability resulting from the vesting of restricted stock awards and performance share units. Total shares repurchased for 2021, 2020, and 2019 were as follows: Years Ended January 28, 2022 January 29, 2021 January 31, 2020 (In millions) Shares Cost 1 Shares Cost 1 Shares Cost 1 Share repurchase program 62.6 $ 12,990 34.2 $ 4,940 41.0 $ 4,288 Shares withheld from employees 0.4 84 0.1 11 0.3 37 Total share repurchases 63.0 $ 13,074 34.3 $ 4,951 41.3 $ 4,325 1 Reductions of $ 12.6 billion, $ 4.7 billion, and $ 4.1 billion were recorded to (accumulated deficit)/retained earnings, after capital in excess of par value was depleted, for 2021, 2020, and 2019, respectively. NOTE 11: Share-Based Payments Overview of Share-Based Payment Plans The Company has a number of active equity incentive plans (the Incentive Plans) under which the Company has been authorized to grant share-based awards to key employees and non-employee directors. The Company also has an employee stock purchase plan (the ESPP) that allows employees to purchase Company shares at a discount through payroll deductions. All of these plans contain a non-discretionary anti-dilution provision that is designed to equalize the value of an award as a result of any stock dividend, stock split, recapitalization, or any other similar equity restructuring. A total of 80.0 million shares were authorized for grants of share-based awards to key employees and non-employee directors under the Company’s currently active Incentive Plans, of which there were 27.0 million shares remaining available for grants as of January 28, 2022. On May 29, 2020, shareholders approved the Lowe’s Companies, Inc. 2020 Employee Stock Purchase Plan (the 2020 ESPP), which permits a maximum number of shares offered under the new plan of 20.0 million shares. The first offering date under 59 Table of Contents the 2020 ESPP began December 1, 2020, following the expiration of the Lowe’s Companies Employee Stock Purchase Plan – Stock Options for Everyone (the Former ESPP). From its adoption to expiration on November 30, 2020, there were 50.5 million of the 70.0 million authorized shares issued under the Former ESPP. The first offering period under the 2020 ESPP ended May 31, 2021, with the automatic exercise of options occurring the same day. As of January 28, 2022, there were 19.4 million s hares remaining available for purchases. The Company recognized share-based payment expense within SG&A expense in the consolidated statements of earnings of $ 230 million, $ 155 million, and $ 98 million in 2021, 2020, and 2019, respectively. The total associated income tax benefit recognized, exclusive of excess tax benefits, was $ 40 million, $ 29 million, and $ 15 million in 2021, 2020, and 2019, respectively. Total unrecognized share-based payment expense for all share-based payment plans was $ 299 million at January 28, 2022, of which $ 186 million will be recognized in 2022, $ 97 million in 2023, and $ 16 million thereafter. This results in these amounts being recognized over a weighted-average period of 1.5 years. For all share-based payment awards, the expense recognized has been adjusted for estimated forfeitures where the requisite service is not expected to be met. Estimated forfeiture rates are developed based on the Company’s analysis of historical forfeiture data for homogeneous employee groups. General terms and methods of valuation for the Company’s share-based awards are as follows: Stock Options Stock options have terms of 10 years, with one-third of each grant vesting each year for three years , subsequent to the date of the grant, and are assigned an exercise price equal to the closing market price of a share of the Company’s common stock on the date of grant. Options are expensed on a straight-line basis over the grant vesting period, which is considered to be the requisite service period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. When determining expected volatility, the Company considers the historical volatility of the Company’s stock price, as well as implied volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, based on the options’ expected term. The expected term of the options is based on the Company’s evaluation of option holders’ exercise patterns and represents the period of time that options are expected to remain unexercised. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted average assumptions used in the Black-Scholes option-pricing model and weighted-average grant date fair value for options granted in 2021, 2020, and 2019 are as follows: Years Ended January 28, 2022 January 29, 2021 January 31, 2020 Weighted-average assumptions used: Expected volatility 30.2 % 28.8 % 23.0 % Dividend yield 1.73 % 1.78 % 1.73 % Risk-free interest rate 1.25 % 0.47 % 2.28 % Expected term, in years 6.49 6.50 6.38 Weighted-average grant date fair value $ 49.47 $ 18.82 $ 23.66 The total intrinsic value of options exercised, representing the difference between the exercise price and the market price on the date of exercise, was approximately $ 46 million, $ 60 million, and $ 44 million in 2021, 2020, and 2019, respectively. 60 Table of Contents Transactions related to stock options for the fiscal year ended January 28, 2022 are summarized as follows: Shares (In thousands) Weighted-Average Exercise Price Per Share Weighted-Average Remaining Term (In years) Aggregate Intrinsic Value (In thousands) Outstanding at January 29, 2021 2,135 $ 89.51 Granted 318 191.31 Canceled, forfeited or expired ( 81 ) 112.50 Exercised ( 361 ) 79.72 Outstanding at January 28, 2022 2,011 $ 106.43 7.44 $ 258,513 Vested and expected to vest at January 28, 2022 1 1,963 $ 105.39 7.41 $ 254,439 Exercisable at January 28, 2022 1,072 $ 93.24 6.66 $ 151,988 1 Includes outstanding vested options as well as outstanding nonvested options after a forfeiture rate is applied. Restricted Stock Awards Restricted stock awards are valued at the market price of a share of the Company’s common stock on the date of grant. In general, these awards vest 50 % at the end of a two-year period from the date of grant and 50 % at the end of a three-year period from the date of grant. Certain awards vest 100 % at the end of a three-year period from the date of grant. All awards are expensed on a straight-line basis over a three-year period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock awards granted was $ 192.26 , $ 83.83 , and $ 109.04 in 2021, 2020, and 2019, respectively. The total fair value of restricted stock awards vesting each year was approximately $ 200 million, $ 31 million, and $ 64 million in 2021, 2020, and 2019, respectively. Transactions related to restricted stock awards for the fiscal year ended January 28, 2022 are summarized as follows: Shares (In thousands) Weighted-Average Grant-Date Fair Value Per Share Nonvested at January 29, 2021 2,972 $ 92.30 Granted 672 192.26 Vested ( 1,026 ) 96.02 Canceled or forfeited ( 311 ) 113.04 Nonvested at January 28, 2022 2,307 $ 117.04 Deferred Stock Units Deferred stock units are valued at the market price of a share of the Company’s common stock on the date of grant. For non-employee Directors, these awards vest immediately and are expensed on the grant date. During 2021, 2020, and 2019, each non-employee Director was awarded a number of deferred stock units determined by dividing the annual award amount by the fair market value of a share of the Company’s common stock on the award date and rounding up to the next 100 units. The annual award amount used to determine the number of deferred stock units granted to each Director was $ 175,000 for 2021, 2020, and 2019. During 2021, 9,800 deferred stock units were granted and immediately vested for non-employee Directors. The weighted-average grant-date fair value per share of deferred stock units granted was $ 194.83 , $ 130.35 , and $ 93.28 in 2021, 2020, and 2019, respectively. The total fair value of deferred stock units vested was $ 2 million, $ 2 million, and $ 2 million in 2021, 2020, and 2019, respectively. At January 28, 2022, there were 107,000 deferred stock units outstanding, all of which are vested. Performance Share Units The Company issues performance share units classified as equity awards. Expense is recognized on a straight-line basis over the requisite service period, based on the probability of achieving the performance condition, with changes in expectations 61 Table of Contents recognized as an adjustment to earnings in the period of the change. Compensation cost is not recognized for performance share units that do not vest because service or performance conditions are not satisfied, and any previously recognized compensation cost is reversed. Performance share units do not have dividend rights. The Company uses historical data to estimate the timing and amount of forfeitures. The Company’s performance share units are classified as equity and contain performance and service conditions that must be satisfied for an employee to earn the right to benefit from the award. The performance share units contain a market condition modifier, in addition to having a performance and service condition. The performance condition for these awards continues to be based primarily on the achievement of the Company’s return on invested capital (ROIC) targets. The market condition is based on the Company’s total shareholder return (TSR) compared to the median TSR of companies listed in the S&P 500 Index over a three-year performance period. The Company uses a Monte-Carlo simulation to determine the grant date fair value for these awards, which takes into consideration the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period, as well as the possible outcomes pertaining to the TSR market condition. The weighted-average assumptions used in the Monte Carlo simulations for these awards granted in 2021, 2020, and 2019 are as follows: Years Ended January 28, 2022 January 29, 2021 January 31, 2020 Weighted-average assumptions used: Expected volatility 37.5 % 38.5 % 24.1 % Dividend yield 1.77 % 1.89 % 1.89 % Risk-free interest rate 0.35 % 0.13 % 2.28 % Expected term, in years 2.84 2.42 2.84 In general, 0 % to 200 % of the Company’s performance share units vest at the end of a three-year service period from the date of grant based upon achievement of the performance condition, or a combination of the performance and market conditions, specified in the performance share unit agreement. The weighted-average grant-date fair value per unit of performance share units classified as equity awards granted was $ 208.74 , $ 203.85 , and $ 115.93 in 2021, 2020, and 2019, respectively. There were no performance share units vesting in 2021 or 2020. The total fair value of performance share units vesting was approximately $ 19 million in 2019. Transactions related to performance share units classified as equity awards for the fiscal year ended January 28, 2022 are summarized as follows: Units (In thousands) 1 Weighted-Average Grant-Date Fair Value Per Unit Nonvested at January 29, 2021 703 $ 149.61 Granted 165 208.74 Canceled or forfeited ( 222 ) 104.68 Nonvested at January 28, 2022 646 $ 180.13 ¹ The number of units presented is based on achieving the targeted performance goals as defined in the performance share unit agreements. As of January 28, 2022, the maximum number of nonvested units that could vest under the provisions of the agreements was 1.3 million. Restricted Stock Units Restricted stock units do not have dividend rights and are valued at the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period. In general, these awards vest 50 % at the end of a two-year period from the date of grant and 50 % at the end of a three-year period from the date of grant. Certain awards vest 100 % at the end of a three-year period from the date of grant. All awards are expensed on a straight-line basis over that period, which is considered to be the requisite service period. The Company uses historical data to estimate the 62 Table of Contents timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock units granted was $ 184.40 , $ 75.59 , and $ 103.40 in 2021, 2020, and 2019, respectively. The total fair value of restricted stock units vesting was approximately $ 47 million, $ 5 million, and $ 9 million in 2021, 2020, and 2019, respectively. Transactions related to restricted stock units for the fiscal year ended January 28, 2022 are summarized as follows: Shares (In thousands) Weighted-Average Grant-Date Fair Value Per Share Nonvested at January 29, 2021 992 $ 84.84 Granted 329 184.40 Vested ( 240 ) 94.71 Canceled or forfeited ( 187 ) 110.10 Nonvested at January 28, 2022 894 $ 113.51 ESPP The purchase price of the shares under both the 2020 ESPP and the Former ESPP equals 85 % of the closing price on the date of purchase. The Company’s share-based payment expense per share 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. Under the 2020 ESPP, the Company issued 0.6 million shares of common stock in 2021 and recognized $ 20 million of share-based payment expense. Under the Former ESPP, the Company issued 0.7 million and 0.8 million shares of common stock in 2020 and 2019, respectively, and recognized $ 16 million and $ 13 million of share-based payment expense pursuant to the Former ESPP in 2020 and 2019, respectively. NOTE 12: Employee Retirement Plans The Company maintains a defined contribution retirement plan for eligible employees (the 401(k) Plan). Eligible employees may participate in the 401(k) Plan the first of the month after thirty days of employment. The Company makes contributions to the 401(k) Plan each payroll period, based upon a matching formula applied to employee deferrals (the Company Match). Participants are eligible to receive the Company Match pursuant to the terms of the 401(k) Plan. The Company Match varies based on how much the employee elects to defer up to a maximum of 4.25 % of eligible compensation. The Company Match is invested identically to employee contributions and is immediately vested. The Company maintains a Benefit Restoration Plan to supplement benefits provided under the 401(k) Plan to participants whose benefits are restricted as a result of certain provisions of the Internal Revenue Code of 1986. This plan provides for employee salary deferrals and employer contributions in the form of a Company 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 Company contributions. The Company recognized expense associated with these employee retirement plans of $ 177 million, $ 175 million, and $ 175 million in 2021, 2020, and 2019, respectively. 63 Table of Contents NOTE 13: Income Taxes The following is a reconciliation of the federal statutory tax rate to the effective tax rate: Years Ended January 28, 2022 January 29, 2021 January 31, 2020 Statutory federal income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax benefit 4.0 4.0 4.1 Valuation allowance — — 1.3 Mexico impairment — — ( 1.4 ) Other, net ( 0.3 ) ( 0.4 ) ( 1.1 ) Effective tax rate 24.7 % 24.6 % 23.9 % The components of the income tax provision are as follows: Years Ended (In millions) January 28, 2022 January 29, 2021 January 31, 2020 Current: Federal $ 2,069 $ 1,578 $ 935 State 557 425 268 Total current 1 2,626 2,003 1,203 Deferred: Federal 129 ( 73 ) 121 State 11 ( 26 ) 18 Total deferred 1 140 ( 99 ) 139 Total income tax provision $ 2,766 $ 1,904 $ 1,342 1 Amounts applicable to foreign income taxes were insignificant for all periods presented. The tax effects of cumulative temporary differences that gave rise to the deferred tax assets and liabilities were as follows: (In millions) January 28, 2022 January 29, 2021 Deferred tax assets: Self-insurance $ 287 $ 284 Share-based payment expense 53 48 Operating lease liabilities 1,386 1,328 Capital loss carryforwards 225 225 Net operating losses 251 274 Other, net 242 337 Total deferred tax assets 2,444 2,496 Valuation allowance ( 590 ) ( 601 ) Net deferred tax assets 1,854 1,895 Deferred tax liabilities: Operating lease assets ( 1,378 ) ( 1,146 ) Property ( 267 ) ( 382 ) Other, net ( 45 ) ( 27 ) Total deferred tax liabilities ( 1,690 ) ( 1,555 ) Net deferred tax assets $ 164 $ 340 64 Table of Contents As of January 28, 2022, the Company reported a deferred tax asset of $ 225 million, for the capital loss realized in 2017 for U.S. federal income tax purposes related to the exit from the Company’s joint venture investment in Australia. Since no present or future capital gains have been identified through which the asset can be realized, the Company has a full valuation allowance against the deferred tax asset. For U.S. federal tax purposes, this loss has a five-year carryforward period expiring at the end of fiscal 2022. The Company operates Lowe’s Companies Canada, ULC as a branch and has cumulatively incurred Canadian net operating losses of $ 750 million and $ 769 million as of January 28, 2022 and January 29, 2021, respectively. The Company operates RONA inc. as a foreign corporation and has cumulatively incurred Canadian net operating losses of $ 189 million and $ 261 million as of January 28, 2022 and January 29, 2021, respectively. These net operating losses are subject to expiration in 2024 through 2041. Deferred tax assets have been established for these foreign 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 cumulative valuation allowances of $ 346 million and $ 357 million as of January 28, 2022 and January 29, 2021, respectively. These valuation allowances are based on management’s assessment of the available positive and negative evidence to estimate the realization of this entity’s existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year periods ended January 28, 2022 and January 29, 2021, respectively. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and if estimates of future taxable income are increased. A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows: Years Ended (In millions) January 28, 2022 January 29, 2021 January 31, 2020 Unrecognized tax benefits, beginning of year $ 2 $ 4 $ 10 Additions for tax positions of prior years 38 — 2 Reductions for tax positions of prior years — — ( 3 ) Settlements ( 2 ) ( 2 ) ( 5 ) Unrecognized tax benefits, end of year $ 38 $ 2 $ 4 The unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $ 38 million as of January 28, 2022 and $ 2 million as of January 29, 2021. The net interest expense recognized by the Company related to uncertain tax positions was $ 12 million for 2021, and insignificant for 2020 and 2019. The Company had $ 11 million and $ 1 million of accrued interest related to uncertain tax positions as of January 28, 2022 and January 29, 2021. Penalties recognized related to uncertain tax positions were $ 4 million for 2021 and insignificant for tax years 2020 and 2019. The Company had $ 4 million of accrued penalties related to uncertain tax positions as of January 28, 2022, and no accrued penalties as of January 29, 2021. The Company is subject to examination by various foreign and domestic taxing authorities. There are ongoing U.S. state audits covering tax years 2015 to 2020. An audit of the Company’s Canadian operations by the Canada Revenue Agency for fiscal years 2015 and 2016 is on-going. The Company remains subject to income tax examinations for fiscal years 2015 through 2020. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years. Note 14: Earnings Per Share The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of share-based payment awards that contain a nonforfeitable right to receive dividends and, therefore, are considered to participate in undistributed earnings with common shareholders. Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares as of the balance sheet 65 Table of Contents date, as adjusted for the potential dilutive effect of non-participating share-based awards. The following table reconciles earnings per common share for 2021, 2020, and 2019: Years Ended (In millions, except per share data) January 28, 2022 January 29, 2021 January 31, 2020 Basic earnings per common share: Net earnings attributable to Lowe's Companies, Inc. $ 8,442 $ 5,835 $ 4,281 Less: Net earnings allocable to participating securities ( 33 ) ( 24 ) ( 13 ) Net earnings allocable to common shares, basic $ 8,409 $ 5,811 $ 4,268 Weighted-average common shares outstanding 696 748 777 Basic earnings per common share $ 12.07 $ 7.77 $ 5.49 Diluted earnings per common share: Net earnings attributable to Lowe's Companies, Inc. $ 8,442 $ 5,835 $ 4,281 Less: Net earnings allocable to participating securities ( 33 ) ( 24 ) ( 13 ) Net earnings allocable to common shares, diluted $ 8,409 $ 5,811 $ 4,268 Weighted-average common shares outstanding 696 748 777 Dilutive effect of non-participating share-based awards 3 2 1 Weighted-average common shares, as adjusted 699 750 778 Diluted earnings per common share $ 12.04 $ 7.75 $ 5.49 Anti-dilutive securities excluded from diluted weighted-average common shares 0.3 0.3 0.9 NOTE 15: Commitments and Contingencies The Company is, from time to time, party to various legal proceedings considered to be in the normal course of business, none of which, individually or in the aggregate, are expected to be material to 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. Reasonably possible losses for any of the individual legal proceedings which have not been accrued were not material to the Company’s consolidated financial statements. As of January 28, 2022, the Company had non-cancellable commitments of $ 1.6 billion related to certain marketing and information technology programs, and purchases of merchandise inventory. These commitments 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. Payments under these commitments are scheduled to be made as follows: 2022, $ 1.1 billion; 2023, $ 402 million; 2024, $ 78 million; 2025, $ 68 million; 2026, $ 9 million. At January 28, 2022, the Company held standby and documentary letters of credit issued under banking arrangements which totaled $ 462 million. The majority of the Company’s letters of credit were issued to support the Company’s warranty program. NOTE 16: Related Parties A former member of the Company’s Board of Directors also serves on the Board of Directors of a vendor that provides branded consumer packaged goods to the Company. The Company purchased products from this vendor in the amount of $ 203 million in 2021, $ 214 million in 2020, and $ 165 million in 2019. Amounts payable to this vendor were insignificant to the Company at January 28, 2022 and January 29, 2021. This was no longer considered a related party relationship as of January 28, 2022. The Company’s President and Chief Executive Officer also serves on the Board of Directors of a vendor that provides transportation and business services to the Company. The Company purchased services from this vendor in the amount of $ 269 million in 2021, $ 138 million in 2020, and $ 117 million in 2019. Amounts payable to this vendor were insignificant to the Company at January 28, 2022 and January 29, 2021. 66 Table of Contents NOTE 17: Other Information Net interest expense is comprised of the following: Years Ended (In millions) January 28, 2022 January 29, 2021 January 31, 2020 Long-term debt $ 827 $ 807 $ 668 Lease obligations 30 32 30 Short-term borrowings 5 13 — Interest income ( 12 ) ( 24 ) ( 27 ) Interest capitalized ( 3 ) — ( 1 ) Interest on tax uncertainties 12 — — Other 26 20 21 Interest – net $ 885 $ 848 $ 691 Supplemental disclosures of cash flow information: Years Ended (In millions) January 28, 2022 January 29, 2021 January 31, 2020 Cash paid for interest, net of amount capitalized $ 837 $ 824 $ 671 Cash paid for income taxes, net $ 2,735 $ 1,588 $ 1,423 Non-cash investing and financing activities: 1 Cash dividends declared but not paid $ 537 $ 440 $ 420 1 See Note 6 for supplemental cash flow disclosures related to finance and operating leases. Sales by product category: Years Ended January 28, 2022 January 29, 2021 January 31, 2020 (Dollars in millions) Total Sales % Total Sales % Total Sales % Appliances $ 13,427 14.0 % $ 12,096 13.5 % $ 9,972 13.8 % Lumber 9,722 10.1 8,344 9.3 5,710 7.9 Seasonal & Outdoor Living 9,555 9.9 8,854 9.9 6,813 9.4 Lawn & Garden 9,043 9.4 8,864 9.9 6,487 9.0 Kitchens & Bath 6,781 7.0 6,154 6.9 5,430 7.5 Tools 5,392 5.6 5,461 6.1 4,295 6.0 Millwork 5,331 5.5 4,971 5.5 4,202 5.8 Paint 5,132 5.3 5,372 6.0 4,073 5.6 Flooring 4,952 5.1 4,445 5.0 3,885 5.4 Rough Plumbing 4,762 4.9 4,334 4.8 3,831 5.3 Hardware 4,581 4.8 4,697 5.2 3,842 5.3 Building Materials 4,370 4.5 4,115 4.6 3,446 4.8 Décor 3,732 3.9 3,469 3.9 2,838 3.9 Electrical 3,536 3.7 2,973 3.3 2,447 3.4 Lighting 3,429 3.6 3,481 3.9 2,887 4.0 Other 2,505 2.7 1,967 2.2 1,990 2.9 Net sales $ 96,250 100.0 % $ 89,597 100.0 % $ 72,148 100.0 % Note: Product category sales for prior periods have been reclassified to conform to the current year presentation. 67 Table of Contents SUPPLEMENTARY DATA Selected Quarterly Data (UNAUDITED) The following table summarizes the quarterly consolidated results of operations for 2021 and 2020: Year Ended January 28, 2022 (In millions, except per share data) First Second Third Fourth Net sales $ 24,422 $ 27,570 $ 22,918 $ 21,339 Gross margin 8,130 9,312 7,587 7,027 Net earnings 2,321 3,018 1,896 1,206 Basic earnings per common share 3.22 4.27 2.74 1.79 Diluted earnings per common share $ 3.21 $ 4.25 $ 2.73 $ 1.78 Year Ended January 29, 2021 (In millions, except per share data) First Second Third Fourth Net sales $ 19,675 $ 27,302 $ 22,309 $ 20,311 Gross margin 6,513 9,304 7,300 6,456 Net earnings 1,337 2,828 692 978 Basic earnings per common share 1.76 3.74 0.92 1.33 Diluted earnings per common share $ 1.76 $ 3.74 $ 0.91 $ 1.32 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.