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Item 7. Management’s Discussion and Analysis

2023-03-27 compared with 2022-03-21 · 126 added, 117 removed, 243 unchanged (50% of the section changed)

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

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

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

Unless otherwise noted, all references herein for the years 2022, 2021, and 2020 represent the fiscal years ended February 3, 2023, January 28, 2022, and January 29, 2021, respectively.

Fiscal year 2022 contains 53 weeks of operating results compared to fiscal years 2021 and 2020, which contain 52 weeks.

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

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EXECUTIVE OVERVIEW

Performance Overview

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

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

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

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

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

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

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

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

Net sales for fiscal 2022 increased 0.8% over fiscal 2021 to $97.1 billion.

The increase in total sales was primarily driven by the 53rd week, partially offset by a decrease in comparable sales.

The 53rd week contributed approximately 1.4% to the sales growth for 2022.

Comparable sales decreased 0.9% over fiscal 2021, driven by a 7.6% decrease in comparable customer transactions, partially offset by a 6.7% increase in comparable average ticket.

Net earnings for fiscal 2022 decreased 23.8% to $6.4 billion.

Diluted earnings per common share decreased 15.5% in fiscal 2022 to $10.17 from $12.04 in fiscal 2021.

Included in the fiscal 2022 results is $2.5 billion of pre-tax costs associated with the sale of the Canadian retail business consisting of long-lived asset impairment, loss on sale, and additional closing costs, which decreased diluted earnings per share by $3.64.

Adjusting for these items, adjusted diluted earnings per common share increased 14.7% to $13.81 in 2022 from diluted earnings per common share of $12.04 in 2021 (see the non-GAAP financial measures discussion).

For fiscal 2022, cash flows from operating activities were $8.6 billion, with $1.8 billion used for capital expenditures.

Continuing to deliver on our commitment to return excess cash to shareholders, the Company repurchased $14.1 billion of common stock and paid $2.4 billion in dividends during the year.

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

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

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

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

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

In addition, we have expanded our omnichannel fulfillment capabilities.

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

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

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

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

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

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

Looking Forward

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

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

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

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

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

The Total Home strategy remained our focus for the year, which reflects our commitment to provide a full complement of products and services for Pro and DIY consumers alike, enabling a Total Home solution for every project across the home.

During the year, our continued investment in the Pro customer helped generate broad-based demand with positive comparable sales in our core Pro categories.

In the first quarter, we launched our Pro loyalty program, MVPs Pro Rewards and Partnership Program TM , which is centered on creating a partnership with our Pro customers.

In addition, throughout the year, we improved Pro product and service offerings, and enhanced product assortments to meet Pro needs.

Demand with our DIY customer was strong in core, home-improvement categories throughout the year, while discretionary DIY category performance lagged due to a short spring season, cycling unprecedented demand over the past two years, and a reduction of holiday purchases.

Our Perpetual Productivity Improvement (PPI) initiatives continued to gain efficiencies through our enhanced labor management tools, store inventory management system, and improved pricing capabilities.

Also, to date, we have converted 11 geographic areas to our market-based delivery model for big and bulky product.

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

We expect these initiatives and our investments in the business to deliver operating margin productivity and drive meaningful long-term shareholder value going forward.

While improving our operating discipline, we have continued to invest in our front-line associates.

In addition to the discretionary and profit-sharing bonuses awarded throughout the year, we implemented $170 million in annual wage increases effective December 2022.

These compensation investments reflect our commitment to becoming the employer of choice in retail.

With the sale of our Canadian retail business on February 3, 2023, we are focused on the transformation of our U.S.

home improvement business to further enhance our operating margin, simplify our business model, and deliver sustainable value to our shareholders.

We believe the core demand drivers of our business are disposable personal income, home price appreciation, and the age of the housing stock.

The typical homeowner today has significant equity in his or her home, while the housing

stock continues to age.

These factors, along with strong millennial household formation, elderly preference to age in place, and widespread remote work, continue to support the home improvement market, and we believe we are well-positioned to gain market share through our Total Home strategy.

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

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Interest – net 1.16 0.92 24 26.8

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

Pre-tax earnings 9.31 11.64 (233) (19.4)

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Interest – net 0.92 0.95 (3) 4.4

Loss on extinguishment of debt 1.18 — 118 N/A

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

Pre-tax earnings 11.64 8.64 300 44.8

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

During fiscal 2022, the Company adjusted its comparable sales metric to exclude days affected by national outages with its third-party credit and debit processor.

Excluding these days, and the corresponding prior period days, increased comparable sales by approximately 5 basis points for fiscal 2022.

The comparable sales metric for fiscal 2021 and 2020 were not impacted or adjusted by similar outages.

Other Metrics 2022 1

Comparable sales increase 1

Comparable sales (decrease)/increase 2

(0.9) % 6.9 % 26.1 %

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30.4 % 35.3 % 27.7 %

1 The fiscal year ended February 3, 2023 had 53 weeks.

The fiscal years ended January 28, 2022 and January 29, 2021 had 52 weeks.

2 A comparable location is defined as a retail location that has been open longer than 13 months.

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

Operating locations which are sold are included in comparable sales until the date of sale.

Comparable sales include online sales, which positively impacted the comparable sales increase in fiscal 2022, fiscal 2021, and fiscal 2020 by approximately 45 basis points, 150 basis points, and 565 basis points, respectively.

The comparable sales calculation for 2022 included in the preceding table was calculated using sales for a comparable 53-week period.

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

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

As of February 3, 2023, ROIC was negatively impacted approximately 800 basis points as a result of the sale of the Canadian retail business.

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

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Adjusted Diluted Earnings Per Share

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

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

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

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

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

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

Adjusted diluted earnings per share excludes the impact of a discrete item, further described below, not contemplated in the Company’s business outlook for fiscal 2022.

There were no non-GAAP adjustments in fiscal 2021.

Fiscal 2022 Impacts

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

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

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

• In the third quarter of fiscal 2022, the Company recognized a pre-tax $2.1 billion long-lived asset impairment of the Canadian retail business.

In the fourth quarter of fiscal 2022, the Company recognized additional pre-tax costs totaling $441 million, consisting of the loss on the sale and other closing costs associated with the sale of the Canadian retail business (Canadian retail business transaction costs).

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

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

Pre-Tax Earnings Tax Net Earnings

Pre-Tax Earnings Tax 1

Diluted earnings per share, as reported $ 10.17

Non-GAAP adjustments – per share impacts

Loss on extinguishment of debt 1.41 (0.36) 1.05

Canada restructuring 0.06 — 0.06

Canadian retail business transaction costs 3.95 (0.31) 3.64

Adjusted diluted earnings per share $ 13.81

1 Represents the corresponding tax benefit or expense specifically related to the item excluded from adjusted diluted earnings per share.

Return on Invested Capital

Return on Invested Capital (ROIC) is calculated using a non-GAAP financial measure.

Management believes ROIC is a meaningful metric for analysts and investors as a measure of how effectively the Company is using capital to generate profits.

Management believes ROIC is a meaningful metric for analysts and investors as a measure of how effectively the Company is using capital to generate financial returns.

Although ROIC is a common financial metric, numerous methods exist for calculating ROIC.

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Return on invested capital 3

30.4 % 35.3 % 27.7 %

1 Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 28.8%, 24.7%, and 24.6% for 2022, 2021, and 2020, respectively.

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

3 As of February 3, 2023, ROIC was negatively impacted approximately 800 basis points as a result of the sale of the Canadian retail business.

Fiscal 2022 Compared to Fiscal 2021

For the purpose of the following discussion, comparable store sales, comparable average ticket, and comparable customer transactions are based upon comparable 53-week periods.

Net Sales – Net sales increased 0.8% to $97.1 billion in 2022.

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

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

Comparable sales change during each quarter of the

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

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

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

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

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

Geographically, all fifteen U.S.

regions and Canada experienced positive comparable sales.

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

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

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

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

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

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

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

stores in the prior year.

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

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

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

The increase in total sales was driven by the 53rd week, partially offset by a decrease in comparable sales.

The 53rd week contributed approximately 1.4% to the sales growth for 2022.

Comparable sales decreased 0.9% over the same period, driven by a 7.6% decline in comparable customer transactions, partially offset by a 6.7% increase in comparable average ticket.

Comparable sales change during each quarter of the fiscal year, as reported, were a decline of 4.0% in the first quarter, decline of 0.3% in the second quarter, increase of 2.2% in the third quarter, and decline of 1.5% in the fourth quarter.

During 2022, we experienced comparable sales increases in six of 14 product categories, led by Rough Plumbing, Building Materials, and Paint.

Strength in these categories reflects robust demand from Pro customers, as well as unit price increases

driven by inflation.

We experienced our lowest comparable sales in Seasonal & Outdoor Living, Tools, and Lawn & Garden.

Geographically, three of 15 U.S.

regions experienced positive comparable sales with strength primarily in the south, while our Canadian operations lagged the U.S.

Gross Margin – Gross margin as a percentage of sales for 2022 contracted 7 basis points compared to 2021.

Gross margin was negatively impacted by 30 basis points from higher transportation costs and expansion of our supply chain network and 20 basis points from inventory shrink.

These were partially offset by approximately 25 basis points of favorable product mix and 20 basis points of total rate improvement driven by continued improvement in managing product costs and disciplined pricing strategies.

SG&A – SG&A expense for 2022 deleveraged 193 basis points as a percentage of sales compared to 2021.

This was primarily driven by the long-lived asset impairment, loss on sale, and other closing costs associated with the sale of the Canadian retail business, partially offset by ongoing productivity initiatives.

Depreciation and Amortization – Depreciation and amortization expense deleveraged 9 basis points for 2022 as a percentage of sales compared to 2021, driven by ongoing capital investments in core business investments.

Property, less accumulated depreciation, decreased to $17.6 billion at February 3, 2023, compared to $19.1 billion at January 28, 2022, primarily due to the impairment of the Canadian retail business long-lived assets in the third quarter of 2022.

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

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Interest – net $ 1,123 $ 885

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

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

Net interest expense in 2022 deleveraged 24 basis points primarily as a result of interest expense related to the issuance of $5.0 billion unsecured notes in March 2022 and $4.8 billion unsecured notes in September 2022.

Income Tax Provision – Our effective income tax rate was 28.8% in 2022 compared to 24.7% in 2021.

The 2022 rate was unfavorably impacted by the partial deductibility of long-lived asset impairment and loss on sale associated with the Canadian retail business.

Fiscal 2021 Compared to Fiscal 2020

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Sources of Liquidity

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

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

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

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

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

Cash flows from operations, combined with our continued access to capital markets on both a short-term and long-term basis, as needed, remain adequate to fund our operations, make strategic investments to support long-term growth, and return excess cash to shareholders in the form of dividends and share repurchases.

We believe these sources of liquidity will continue to support our business for the next twelve months.

As of February 3, 2023, we held $1.3 billion of cash and cash equivalents, as well as $3.5 billion in undrawn capacity on our revolving credit facilities.

As of February 3, 2023, our material contractual obligations and commercial commitments consist of leases, long-term debt, purchase obligations, and letters of credit.

See Note 6 , Note 8 , and Note 15 of the Notes to the Consolidated Financial

Statements in Item 8 , “Financial Statements and Supplementary Data”, of this Annual Report for amounts outstanding related to leases, long-term debt, and commitments, respectively, as of February 3, 2023.

Cash Flows Provided by Operating Activities

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

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

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

The decrease in net cash provided by operating activities for the year ended February 3, 2023, compared to the year ended January 28, 2022, was due primarily to changes in working capital.

Inventory decreased operating cash flow for fiscal 2022 by approximately $2.6 billion compared to a decrease of $1.4 billion for fiscal 2021.

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

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

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

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

Accounts payable decreased operating cash flow for fiscal 2022 by $549 million compared to an increase of $466 million in fiscal 2021, driving a reduction of $1.0 billion in operating cash flows for fiscal 2022.

The increase in inventory is primarily due to product cost and freight inflation compared to the prior year, as well as lower inventory turns year-over-year.

The decrease in accounts payable is driven by timing of inventory purchases in the prior year.

Other operating liabilities increased operating cash flows $388 million for fiscal 2022 compared to a decrease of $570 million in fiscal 2021.

This increase is primarily driven by the deferral of payment of our third and fourth quarter estimated federal tax payments under the income tax relief announced by the Internal Revenue Service for business located in states impacted by Hurricane Ian.

Cash Flows Used in Investing Activities

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Net cash used in investing activities $ (1,309) $ (1,646)

Net cash used in investing activities primarily consists of transactions related to capital expenditures.

Net cash used in investing activities primarily consists of transactions related to capital expenditures, offset by proceeds from the sale of the Canadian retail business.

Capital expenditures

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

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

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

For 2023, our guidance for capital expenditures is up to $2.0 billion.

The following table provides the allocation of our fiscal 2023 capital expenditures guidance:

Existing store investments 70 %

Strategic initiatives 25 %

New stores, new corporate facilities and international 10 %

New stores and corporate facilities 5 %

Cash Flows Used in Financing Activities

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This is comprised of $5.0 billion of unsecured notes issued in March 2022 and $4.8 billion of unsecured notes issued in September 2022, the proceeds of which were designated for general corporate purposes.

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

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

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

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

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

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

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

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

In 2022, we paid approximately $765 million to retire scheduled debts at maturity.

We have 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, which has a maturity date of December 2026 and an aggregate availability of $2.0 billion.

We also have a $2.0 billion five-year unsecured revolving credit agreement dated March 23, 2020, and as amended, (the 2020 Credit Agreement) with a syndicate of banks, which has a maturity date of December 2026 and an aggregate availability of $2.0 billion.

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

The Credit Agreements support our commercial paper program.

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

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

Outstanding borrowings under the Company’s commercial paper program were $499 million, with a weighted average interest rate of 4.78% as of February 3, 2023.

There were no outstanding borrowings under the 2020 Credit Agreement or the Third Amended and Restated Credit Agreement as of February 3, 2023.

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

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

Total combined availability under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement as of February 3, 2023, was $3.5 billion.

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

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

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

We were in compliance with those covenants as of February 3, 2023.

The following table includes additional information related to our debt for 2022 and 2021:

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Net change in commercial paper $ 499 $ —

Maximum commercial paper outstanding at any month-end $ 400 $ 1,858

Maximum commercial paper outstanding at any period $ 2,470 $ 400

Short-term borrowings outstanding at year-end $ 499 $ —

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

Shares repurchased are returned to authorized and unissued status.

Shares repurchased are returned to

authorized and unissued status.

The following table provides, on a settlement date basis, the total number of shares repurchased, average price paid per share, and the total amount paid for share repurchases for 2022 and 2021:

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Average price paid per share $ 198.39 $ 207.32

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

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

As of February 3, 2023, we had $20.7 billion remaining under our share repurchase program with no expiration date.

In the third quarter of 2022, we increased our quarterly dividend payment by 31% to $1.05 per share.

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We expect to continue to have access to the capital markets on both short-term and long-term bases when needed for liquidity purposes by issuing commercial paper or new long-term debt.

The availability and the borrowing costs of these funds could be

adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios.

The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios.

The table below reflects our debt ratings by Standard & Poor’s (S&P) and Moody’s as of March 27, 2023, which is disclosed to provide an enhanced understanding of our sources of liquidity and the effect of our ratings on our cost of funds.

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There are no provisions in any agreements that would require early cash settlement of existing debt or leases as a result of a downgrade in our debt rating or a decrease in our stock price.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

During 2022, our reserve decreased approximately $29 million to $139 million as of February 3, 2023.

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

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

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

During 2022, the inventory shrink reserve increased approximately $14 million to $428 million as of February 3, 2023, in response to higher volumes and estimated shrinkage rates based on results from previous physical inventories.

In addition, we receive funds from vendors in the normal course of business, principally as a result of purchase volumes, sales, early payments or promotions of vendors’ products.

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

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

appropriately recorded.

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

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However, it is possible that actual results could differ from recorded reserves.

A 10% change in either the amount of products considered obsolete or the weighted average estimated loss rate used in the calculation of our obsolete inventory reserve would have affected net earnings by approximately $13 million for 2021.

A 10% change in either the amount of products considered obsolete or the weighted average estimated loss rate used in the calculation of our obsolete inventory reserve would each have affected net earnings by approximately $10 million for 2022.

A 10% change in the estimated shrinkage rate included in the calculation of our inventory shrink reserve would have affected net earnings by approximately $32 million for 2022.

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Long-Lived Asset Impairment

We review the carrying amounts of locations whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable.

When evaluating locations for impairment, our asset group is at an individual location level, as that is the lowest level for which cash flows are identifiable.

We review the carrying amounts of long-lived assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable.

When evaluating long-lived assets for impairment, our asset group is generally at an individual location level, as that is the lowest level for which cash flows are identifiable.

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

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

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

For operating locations, our primary indicator that assets may not be recoverable is

consistently negative cash flow for a twelve month period for those locations that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results.

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

We also consider there to be a triggering event when there is a current expectation that it is more likely than not that a given location will be closed or otherwise disposed of significantly before the end of its previously estimated useful life.

A potential impairment has occurred if projected future undiscounted cash flows expected to result from the use and eventual disposition of the location’s assets are less than the carrying amount 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.

During the third quarter of 2022, the Company determined it was more likely than not that the assets within the Canadian retail business would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives and were evaluated for recoverability.

Based on the proposed transaction, the Company reconsidered the appropriate asset grouping of long-lived assets attributable to the Company’s Canadian locations given the change in the Company’s expectations regarding use and disposition of its associated assets.

The Company determined the total Canada retail business (Canada asset group) to be the appropriate asset group for which Canadian business assets should be evaluated, as this represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

Changes in asset group determinations are accounted for on a prospective basis.

A potential impairment has occurred if the fair value of the asset group is less than the asset group’s carrying value.

The carrying value of an operating location’s asset group includes inventory, property, operating and finance lease right-of-use assets and operating liabilities including accounts payables, accrued compensation, and operating lease liabilities.

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

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An impairment loss is recognized when the carrying amount of the operating location is not recoverable and exceeds its fair value.

The carrying value of the Canada asset group included substantially all assets and liabilities of the Canadian retail business, including accounts receivable, inventory, property, operating and finance lease right-of-use assets, definite-lived intangible assets, operating liabilities including accounts payable and accrued compensation, and operating and finance lease liabilities.

The cumulative foreign currency translation adjustment balance was excluded from the carrying value of the Canada asset group in evaluating the recoverability of a held and used asset group.

We use an income approach to determine the fair value of our individual operating locations, which requires discounting projected future cash flows.

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The selected market participants represent a group of other retailers with a market footprint similar in size to ours.

We use a market approach to determine the fair value of our individual locations identified for closure.

We use a market approach to determine the fair value of our individual locations identified for sale or closure.

This involves making assumptions regarding the estimated selling prices or estimated lease rates by obtaining information from property brokers or appraisers in the specific markets being evaluated.

The information includes comparable sales of similar assets and assumptions about demand in the market for purchase or lease of these assets.

A market approach of an orderly transaction under current market conditions was used in determining the estimated fair value of the Canada asset group, which was based on the proposed transaction price, inclusive of performance-based contingent consideration.

Judgments and uncertainties involved in the estimate

Our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred, including the evaluation of whether it is more likely than not that a location will be closed significantly before the end of its previously estimated useful life.

Our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred, including the evaluation of whether it is more likely than not that a location will be closed or an asset will be otherwise disposed of significantly before the end of its previously estimated useful life.

Our impairment loss calculations require us to apply judgment in estimating expected future cash flows, including estimated sales, margin, and controllable expenses, assumptions about market performance for operating locations, and estimated selling prices or lease rates for locations identified for closure.

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Effect if actual results differ from assumptions

During fiscal years 2021 and 2020, long-lived asset impairment recorded within selling, general and administrative expenses in the consolidated statements of earnings was immaterial.

We have not made any material changes in the methodology used to estimate the future cash flows of operating locations or locations identified for closure during the past three fiscal years.

If the actual results are not consistent with the assumptions and judgments we have made in determining whether it is more likely than not that a location will be closed significantly before the end of its useful life or in estimating future cash flows and determining asset fair values, our actual impairment losses could vary from our estimated impairment losses.

During fiscal 2022, the Company recorded $2.1 billion of long-lived asset impairment within selling, general and administrative expenses (SG&A) in the consolidated statements of earnings, which reflects the full carrying value of the long-lived assets of the Canada asset group.

During fiscal 2021, long-lived asset impairment was immaterial.

If the actual results are not consistent

with the assumptions and judgments we have made in determining whether it is more likely than not that a location will be closed significantly before the end of its useful life or in estimating future cash flows and determining asset fair values, our actual impairment losses could vary from our estimated impairment losses.

In the event that our estimates vary from actual results, we may record additional impairment losses, which could be material to our results of operations.

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We have excess insurance coverage above certain retention amounts to limit exposure from single events and earnings volatility.

Our self-insured retention or deductible, as applicable, is limited to $2 million per occurrence involving workers’ compensation, $10 million per occurrence involving general or product liability, and $10 million per occurrence involving automobile.

Our self-insured retention or deductible, as applicable, is limited to $2 million per occurrence involving workers’ compensation, $10 million per occurrence involving general liability, product liability, and automobile liability.

We do not have any excess insurance coverage for self-insured extended protection plan or medical and dental claims.

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

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

During 2022, our self-insurance liabilities decreased approximately $45 million to $1.1 billion as of February 3, 2023.

Judgments and uncertainties involved in the estimate

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What changed 10-K

Item 7. Management’s Discussion and Analysis