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

The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period ended February 2, 2018 (our fiscal years 2017, 2016 and 2015). Fiscal year 2016 contains 53 weeks of operating results compared to fiscal years 2017 and 2015 which contain 52 weeks. Unless otherwise noted, all references herein for the years 2017, 2016 and 2015 represent the fiscal years ended February 2, 2018, February 3, 2017 and January 29, 2016, respectively. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report that have been prepared in accordance with accounting principles generally accepted in the United States of America. This discussion and analysis is presented in six sections:

•	Executive Overview

•	Operations

•	Financial Condition, Liquidity and Capital Resources

•	Off-Balance Sheet Arrangements

•	Contractual Obligations and Commercial Commitments

•	Critical Accounting Policies and Estimates

EXECUTIVE OVERVIEW

Net sales for 2017 were $68.6 billion, a 5.5% increase over fiscal year 2016. The increase in total sales was driven primarily by an increase in comparable sales, the addition of RONA in May of 2016, new stores, and the acquisition of Maintenance Supply Headquarters in June 2017, partially offset by the 53rd week impacts in the prior year. Comparable sales increased 4.0%, driven by a comparable average ticket increase of 4.1% and a comparable transaction decrease of 0.1%. RONA, new stores, and Maintenance Supply Headquarters contributed 2.2%, 0.7% and 0.3%, respectively, to the sales growth for 2017. The 53rd week in 2016 and resulting week shift negatively impacted 2017 sales growth by 1.3%. Net earnings increased 11.5% to $3.4 billion. Diluted earnings per common share increased 17.9% in fiscal year 2017 to $4.09 from $3.47 in 2016. Adjusting 2017 and 2016 amounts for certain significant discrete items not originally contemplated in the business outlooks for those respective years, adjusted diluted earnings per common share increased 10.0% in fiscal year 2017 to $4.39 from $3.99 in 2016 (see discussion on non-GAAP financial measures beginning on page 22).

For 2017, cash flows from operating activities were approximately $5.1 billion, with $1.1 billion used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, the Company repurchased 39.1 million shares of stock through the share repurchase program for $3.1 billion and paid $1.3 billion in dividends during the year.

During the year, we focused on investing in capabilities to support the DIY, DIFM, and Pro customers’ needs and expanding our home improvement reach. We made further progress on advancing our customer service capabilities through our omni-channel assets, empowering customers across the most relevant moments of their project journey. We leveraged our investments in Lowes.com to provide an upgraded online shopping experience and advanced our online platform by making it easier for customers to engage with our in-home Project Specialists and request services online. Our Project Specialists represent a critical element of our omni-channel offering and a differentiated capability in capturing project demand for the DIFM customer. In addition, we continued to build upon our strong foundation with the Pro customer by focusing on our breadth and depth of inventory, portfolio of brands, and enhancing digital focus on LowesForPros.com. The acquisition of Maintenance Supply Headquarters during 2017, in addition to the Central Wholesalers, Inc. acquisition in the prior year, will provide an opportunity to improve and expand our ability to serve the multi-family housing industry. We also continued to make progress on the integration of RONA, including the roll-out of Appliances to approximately 100 locations as well as further optimizing our shared supplier relationships and procurement efforts. During 2017, we converted five RONA stores to a Lowe’s-branded store as part of our initiative to convert certain larger format locations, where we are combining the best elements of Lowe’s store experience, merchandising, and brands with RONA’s strong Pro offerings.

While we are pleased with the strategic milestones we achieved this year, we are actively working to improve conversion, gross margin, and inventory management to ensure greater success in the future. We will be taking the necessary actions to transform our supply chain, better empower our associates through training programs and the re-engineering of key processes such as Pick Up In Store and centralized project quoting, and continue to deliver compelling product experiences.

In 2018, we look to capitalize on a strong macroeconomic environment and see an opportunity to invest incremental cash flow from corporate tax reform to accelerate our strategic priorities. We will be focusing our investments on the following six strategic areas to build upon our strong foundation which will be instrumental to further strengthening our competitiveness and enhancing our position as the omni-channel project authority:

•	We are focusing on leveraging analytics to know the customer and their homes better, understanding their plans and designing better solutions to help them navigate their project journey.

•	We are improving how we engage, connecting with customers and associates through relevant tools and personalized messages through our enhanced marketing management platform. We will better empower our associates by deploying more user-friendly interfaces allowing our associates to better serve customers.

•

We are expanding our fulfillment options to better serve customers’ needs and expectations including investing in a new direct fulfillment center which will allow for the expansion of our online product offering and faster parcel shipping, investing in delivery capacity to meet increased demand, and advancing our Pick Up In Store experience to allow customers and our installation service providers to pick up products quickly.

•	We are continuing to deliver compelling product experiences to provide inspiration and personalized choices through a combination of strategic brands and differentiated store experiences.

•	We are investing to improve the Pro experience in order to grow our Pro sales and expand our market share including building on our strength with the maintenance, repair & operations customer and increasing relevance with specialty trades and repair/re-modelers.

•	We are providing a differentiated service offering for the DIFM customer, delivering complete home improvement project solutions through our in-home sales platform.

Through these six strategic areas, we are focusing our resources on what is most relevant to the customer, building the capabilities required to deliver simple and seamless omni-channel experiences for DIY, DIFM, and Pro customers and engaging them in the moments that matter most.

OPERATIONS

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. 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.

					Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year1			Percentage Increase / (Decrease) in Dollar Amounts from Prior Year1
	2017		2016		2017 vs. 2016			2017 vs. 2016
Net sales	100.00%		100.00%		N/A			5.5	%
Gross margin	34.11		34.55		(44	)		4.2
Expenses:
Selling, general and administrative	22.40		23.27		(87	)		1.6
Depreciation and amortization	2.11		2.29		(18	)		(2.8	)
Operating income	9.60		8.99		61			12.6
Interest - net	0.92		0.99		(7	)		(2.0	)
Loss on extinguishment of debt	0.68		—		68			N/A
Pre-tax earnings	8.00		8.00		—			5.5
Income tax provision	2.98		3.24		(26	)		(3.2	)
Net earnings	5.02%		4.76%		26			11.5	%
					Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year1			Percentage Increase / (Decrease) in Dollar Amounts from Prior Year1
	2016		2015		2016 vs. 2015			2016 vs. 2015
Net sales	100.00%		100.00%		N/A			10.1	%
Gross margin	34.55		34.82		(27	)		9.2
Expenses:
Selling, general and administrative	23.27		23.88		(61	)		7.2
Depreciation and amortization	2.29		2.53		(24	)		(0.3	)
Operating income	8.99		8.41		58			17.6
Interest - net	0.99		0.93		6			16.9
Pre-tax earnings	8.00		7.48		52			17.7
Income tax provision	3.24		3.17		7			12.6
Net earnings	4.76%		4.31%		45			21.5	%

1	The fiscal year ended February 3, 2017 had 53 weeks. The fiscal years ended February 2, 2018 and January 29, 2016 had 52 weeks.

Other Metrics	2017				2016				2015
Comparable sales increase 2	4.0		%		4.2		%		4.8		%
Total customer transactions (in millions) 1	953				945				878
Average ticket 3	$	72.00			$	68.83			$	67.26
At end of year:
Number of stores 4	2,152				2,129				1,857
Sales floor square feet (in millions)	215				213				202
Average store size selling square feet (in thousands) 5	100				100				109
Return on average assets 6	9.5		%		8.9		%		7.8		%
Return on average shareholders’ equity 7	59.2		%		44.4		%		28.8		%
Return on invested capital 8	18.8		%		15.8		%		14.1		%

1	The fiscal year ended February 3, 2017 had 53 weeks. The fiscal years ended February 2, 2018 and January 29, 2016 had 52 weeks.

2

A comparable location is defined as a location that has been open longer than 13 months. A location that is identified for relocation is no longer considered comparable in the month of its relocation. The relocated location must then remain open longer than 13 months to be considered comparable. 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. Acquired locations are included in the comparable sales calculation beginning in the first full month following the first anniversary of the date of the acquisition. Comparable sales include online sales, which positively impacted fiscal 2017 by approximately 120 basis points. The comparable store sales calculation for fiscal 2016 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.

4	The number of stores as of February 3, 2017 includes 245 stores acquired in the acquisition of RONA.

5	Average store size selling square feet is defined as sales floor square feet divided by the number of stores open at the end of the period. The average Lowe’s-branded home improvement store has approximately 112,000 square feet of retail selling space.

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

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

8	Return on invested capital is a non-GAAP financial measure. See below for additional information and a reconciliation to the most comparable GAAP measure.

Non-GAAP Financial Measures

Return on Invested Capital

Return on Invested Capital (ROIC) is calculated using a non-GAAP financial measure. We believe ROIC is a meaningful metric for investors because it represents management’s measure of how effectively the Company is using capital to generate profits. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method used by our management to calculate ROIC may differ from the methods other companies use to calculate their ROIC. We encourage you to understand the methods used by another company to calculate its ROIC before comparing its ROIC to ours.

We define ROIC as trailing four quarters’ net operating profit after tax (NOPAT) divided by the average of ending debt and equity for the last five quarters. NOPAT is a non-GAAP financial measure, and net earnings is considered to be the most comparable GAAP financial measure to NOPAT. The calculation of ROIC, together with a reconciliation of NOPAT to net earnings, the most comparable GAAP financial measure, is as follows:

(In millions, except percentage data)	2017				2016				2015
Calculation of Return on Invested Capital
Numerator
Net earnings	$	3,447			$	3,093			$	2,546
Plus:
Interest expense - net	633				645				552
Loss on extinguishment of debt	464				—				—
Provision for income taxes	2,042				2,108				1,873
Net operating profit	6,586				5,846				4,971
Less:
Income tax adjustment 1	2,450				2,370				2,058
Net operating profit after tax	$	4,136			$	3,476			$	2,913
Denominator
Average debt and equity 2	$	21,999			$	21,958			$	20,693
Return on invested capital	18.8		%		15.8		%		14.1		%

1	Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 37.2%, 40.5%, and 42.4% for 2017, 2016, and 2015, respectively.

2	Average debt and equity is defined as average debt, including current maturities and short-term borrowings, plus total equity for the last five quarters.

Adjusted Diluted Earnings Per Share

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 financial performance. Adjusted diluted earnings per share excludes the impact of certain discrete items not contemplated in the Company’s business outlooks for 2017, 2016, and 2015. Unless otherwise noted, the income tax effect of these adjustments is calculated using the marginal rates for the respective periods.

Adjusted diluted earnings per share 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 for this or similar non-GAAP financial measures. Accordingly, these non-GAAP measures may not be comparable to the measures used by other companies.

	2017										2016										2015
	Pre-Tax Earnings			Tax			Net Earnings				Pre-Tax Earnings			Tax			Net Earnings				Pre-Tax Earnings			Tax			Net Earnings
Diluted earnings per share, as reported							$	4.09									$	3.47									$	2.73
Non-GAAP Adjustments - per share impacts
Impact of tax reform 1	—			0.02			0.02				—			—			—				—			—			—
One-time cash bonus attributable to tax reform 2	0.08			(0.03	)		0.05				—			—			—				—			—			—
Gain on sale of interest in Australian joint venture 3	(0.11	)		—			(0.11		)		—			—			—				—			—			—
Loss on extinguishment of debt 4	0.55			(0.21	)		0.34				—			—			—				—			—			—
Severance-related costs 5	—			—			—				0.09			(0.03	)		0.06				—			—			—
IRC Section 987 charge 6	—			—			—				—			0.04			0.04				—			—			—
Premium paid to acquire noncontrolling interest 7	—			—			—				—			—			0.02				—			—			—
Net gain on foreign currency hedge 8	—			—			—				(0.09	)		0.04			(0.05		)		—			—			—
Australian joint venture impairment 9	—			—			—				0.33			—			0.33				0.56			—			0.56
Project write-offs 10	—			—			—				0.11			(0.04	)		0.07				—			—			—
Orchard Supply Hardware goodwill and long-lived asset impairment 11	—			—			—				0.08			(0.03	)		0.05				—			—			—
Adjusted diluted earnings per share							$	4.39									$	3.99									$	3.29

1	Represents the net impact related to the passage of the Tax Cuts and Jobs Act of 2017.

2	Represents the one-time cash bonus for eligible hourly employees attributable to the passage of the Tax Cuts and Jobs Act of 2017.

3	Represents the gain from the sale of the Company’s interest in its Australian joint venture with Woolworths. This gain had no impact on the Company’s income tax provision due to the reduction of a previously established deferred tax valuation allowance.

4	Represents the loss on extinguishment of debt in connection with a $1.6 billion cash tender offer.

5	Represents the costs associated with the Company’s organizational changes in the stores, distribution centers, and corporate offices.

6	Represents tax charge primarily related to the issuance of Internal Revenue Code Section 987 final and temporary regulations in 2016.

7	Represents the premium paid to RONA’s preferred shareholders. Under the two-class method, the premium paid was deducted from net earnings to compute net earnings allocable to common shareholders.

8	Represents the net settlement of a foreign currency hedge entered into in advance of the Company’s acquisition of RONA during 2016.

9	Represents impairment charges related to the Company’s Australian joint venture with Woolworths. The charge had no impact on the Company’s income tax provision due to the establishment of a full deferred tax valuation allowance.

10	Represents charges recognized in 2016 for projects canceled as a part of the Company’s ongoing review of strategic initiatives.

11	Represents impairment charges associated with the Company’s Orchard Supply Hardware operations as part of a strategic reassessment of this business during 2016.

Fiscal 2017 Compared to Fiscal 2016

For the purpose of the following discussion, comparable store sales, comparable store average ticket and comparable store customer transactions are based upon comparable 52-week periods.

Net Sales – Net sales increased 5.5% to $68.6 billion in 2017. The increase in total sales was driven by 4.0% comparable sales growth, the addition of RONA during the second quarter of 2016 (2.2%), new stores (0.7%), and the acquisition of Maintenance Supply Headquarters (0.3%), partially offset by the impact of the 53rd week in 2016 and resulting week shift in 2017 (1.3%). RONA retail sales are included in comparable sales beginning in Q2 2017. The comparable sales increase of 4.0% in 2017 was driven primarily by a 4.1% increase in comparable average ticket offset by a 0.1% decrease in comparable customer transactions. Comparable sales during each quarter of the fiscal year, as reported, were 1.9% in the first quarter, 4.5% in the second quarter, 5.7% in the third quarter, and 4.1% in the fourth quarter.

All of our product categories experienced comparable sales increases for the year. During 2017, we experienced comparable sales increases above the company average in Appliances, Lumber & Building Materials, Rough Plumbing & Electrical, and Tools & Hardware. Strong brand and service advantages in Appliances, as well as our continued investment in customer experience both in-store and online, drove strong comparable sales during the year. Lumber & Building Materials benefited from an increased demand for hurricane-related products, an increase in Pro demand, and inflation. We also achieved strong comparable sales in Rough Plumbing & Electrical and Tools & Hardware driven by continued improvements in brand relevance and demand from the Pro customer. Geographically, all of our 14 U.S. regions experienced positive comparable store sales.

During the fourth quarter of 2017, we experienced comparable sales increases in nine of 11 product categories, as well as flat comparable sales in Lawn & Garden and Fashion Fixtures. Comparable sales increases were above the company average in Appliances, Lumber & Building Materials, Rough Plumbing & Electrical, and Tools & Hardware. Strong brand and service advantages in Appliances, as well as our continued investment in customer experience both in-store and online, drove double digit comparable sales during the quarter. We achieved strong comparable sales in Lumber & Building materials driven by continued recovery efforts from Hurricane Irma and Harvey, inflation, and strong demand from the Pro customer. Our holiday performance combined with our strategy to serve demand for critical items customers needed during colder temperatures and winter storms drove performance in Rough Plumbing & Electrical and Tools & Hardware. Geographically, 13 of 14 U.S. regions experienced increases in comparable sales.

Gross Margin – Gross margin of 34.11% for 2017 represented a 44 basis point decrease from 2016. Gross margin was negatively impacted approximately 25 basis points due to competitive actions, approximately 10 basis points due to mix of products sold, and approximately 10 basis points due to damaged, clearance and non-productive inventory.

During the fourth quarter of 2017, gross margin of 33.73% decreased 68 basis points as a percentage of sales. Gross margin was negatively impacted approximately 45 basis points due to rate pressures associated with damaged, clearance and non-productive inventory, as well as competitive actions, and inflation in lumber. In addition, gross margin was negatively impacted by approximately 10 basis points due to mix of products sold and approximately 10 basis points due to higher shrink rates.

SG&A – SG&A expense for 2017 leveraged 87 basis points as a percentage of sales compared to 2016. This was primarily driven by 59 basis points of leverage attributable to the prior year non-cash impairment charge related to the investment in the Australian joint venture and the current year sale of our interest in the Australian joint venture, 27 basis points of leverage in operating salaries, 15 basis points of leverage primarily due to the prior year write-off of canceled technology-enabled projects, and 12 basis points of leverage associated with goodwill and long-lived asset impairments related to Orchard operations in the prior year. These were partially offset by 13 basis points of deleverage in outside delivery due to shifting a portion of our deliveries to third party providers in order to meet increased demand in Appliances, 12 basis points of deleverage due to the prior year settlement of the foreign currency option contract entered into in advance of the RONA acquisition, and 10 basis points of deleverage in risk insurance.

For the fourth quarter of 2017, SG&A expense deleveraged 29 basis points as a percentage of sales compared to the fourth quarter of 2016. This was primarily driven by 42 basis points of deleverage due to the one-time Tax Reform bonus, 21 basis points of deleverage in outside delivery due to a shift in our delivery strategy, and 14 basis points of deleverage in advertising as a result of our efforts to amplify consumer messaging. These were partially offset by 53 basis points of leverage associated with severance and related costs in the prior year for organizational changes in the stores, distribution centers, and corporate offices, 32 basis points in incentive compensation due to lower attainment levels compared to the prior year, and 21 basis points of leverage in employee insurance costs. Certain other costs also deleveraged as a result of the week shift related to the 53rd week in the prior fiscal year.

Depreciation and Amortization – Depreciation and amortization expense leveraged 18 basis points for 2017 compared to 2016 primarily due to the increase in sales and assets becoming fully depreciated partially offset by the incremental expense due to the acquisition of Maintenance Supply Headquarters. Property, less accumulated depreciation, decreased to $19.7 billion at February 2, 2018, compared to $19.9 billion at February 3, 2017. As of February 2, 2018 and February 3, 2017, we owned 79% of our stores, which included stores on leased land.

Depreciation and amortization expense for the fourth quarter of 2017 was flat compared to the prior year.

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

(In millions)	2017				2016
Interest expense, net of amount capitalized	$	638			$	647
Amortization of original issue discount and loan costs	11				10
Interest income	(16		)		(12		)
Interest - net	$	633			$	645

Net interest expense decreased in 2017 primarily as a result of the cash tender offer to purchase and retire $1.6 billion aggregate principal amount of our outstanding notes, the payoff of scheduled debts at maturity, and the favorable settlement of accrued interest related to uncertain tax issues. These were partially offset by the issuance of unsecured notes in April 2016 and May 2017, respectively.

Loss on Extinguishment of Debt - During the first quarter of 2017, we repurchased and retired $1.6 billion aggregate principal amount of our outstanding debt resulting in a loss on extinguishment of debt of $464 million.

Income Tax Provision - Our effective income tax rate was 37.2% in 2017 compared to 40.5% in 2016. During 2017, the Company was impacted by the passage of the Tax Cuts and Job Act (the Tax Act), which provided a reduction in the statutory Federal rate from 35% to 21%. The effective date of January 1, 2018, resulted in the usage of a blended rate for the year of 33.7% for the Company. The new rate of 21% was applied against the Company’s deferred balances resulting in a decrease of its overall deferred tax assets. The rate was also impacted by the one-time repatriation tax enacted under Internal Revenue Code Section 965. In 2016, final and temporary regulations were issued under Internal Revenue Code Section 987, which negatively impacted the Company’s income tax rate due to the adjustment of deferred tax assets associated with cumulative currency translation adjustments related to certain of the Company’s international operations. In addition, the Company recorded a deferred tax asset related to the investment in the Australian joint venture with Woolworths associated with the non-cash impairment charges that occurred during both 2016 and 2015. The deferred tax asset associated with these losses was offset with the establishment of a full valuation allowance due to the fact the benefit of these losses can only be realized to the extent the Company has available capital gains for offset, and no present or future capital gains have been identified through which this deferred tax asset can be realized.

Our effective income tax rates were 41.3% and 40.3% for the three months ended February 2, 2018, and February 3, 2017, respectively. The increase in the effective income tax rate is primarily due to the enactment of the Tax Act effective January 1, 2018. The federal rate was lowered from 35% to 21% as part of the Tax Act, which resulted in a tax benefit of $58 million for the year. The Company remeasured its deferred tax assets and liabilities using the new federal rate, which led to a one-time tax expense of approximately $56 million to reduce the Company’s overall federal deferred tax asset. In addition, the Company recorded a $22 million provisional tax expense for the one-time transition tax on unrepatriated earnings of foreign subsidiaries.

Fiscal 2016 Compared to Fiscal 2015

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

Net Sales – Net sales increased 10.1% to $65.0 billion in 2016. The increase in total sales was driven by an increase in comparable sales, the addition of RONA, the 53rd week, and new stores. The addition of RONA and the 53rd week contributed 3.8% and 1.6%, respectively, to the sales growth for 2016. The comparable sales increase of 4.2% in 2016 was driven by a 2.5% increase in comparable average ticket and a 1.6% increase in comparable customer transactions. Comparable sales during each quarter of the fiscal year, as reported, were 7.3% in the first quarter, 2.0% in the second quarter, 2.7% in the third quarter, and 5.1% in the fourth quarter.

All of our product categories experienced comparable sales increases for the year. During 2016, we experienced comparable sales increases above the company average in Lumber & Building Materials, Appliances, Tools & Hardware, and Lawn & Garden. Performance in Lumber & Building Materials and Tools & Hardware was driven by strong demand from the Pro customer. Tools & Hardware also benefited from customers’ positive response to our continued enhancements in product assortment and brand relevance. Strong brand and service advantages in Appliances, as well as our continued investment in customer experience both in-store and online, drove solid comparable sales during the year. An extended outdoor selling season as a result of favorable weather conditions, positively impacted sales within Lawn & Garden. Geographically, all of our 14 U.S. regions experienced increases in comparable store sales, with the strongest results in the South and Northwest.

During the fourth quarter of 2016, we experienced comparable sales increases in all of our product categories, with comparable sales increases above the company average in Appliances, Kitchens, Lawn & Garden, Lumber & Building Materials, and Rough Plumbing & Electrical. Strong brand and service advantages in Appliances as well as our successful Holiday events drove solid comparable sales during the quarter. Performance in Kitchens was driven by our strategy to focus on the entire Kitchen project, investment in project specialists, and targeted promotions. We experienced strength in several outdoor project categories, including Lawn & Garden, Lumber & Building Materials, and Rough Plumbing & Electrical. Warmer weather, particularly in the South and West, drove strong demand for outdoor projects in Lawn & Garden. Lumber & Building Materials benefited from continued recovery efforts from Hurricane Matthew and Louisiana flooding, as well as strong performance with the Pro customer.

Gross Margin – Gross margin of 34.55% for 2016 represented a 27 basis point decrease from 2015. The change was primarily driven by 23 basis points decrease due to purchase price adjustments to RONA’s opening inventory balance, and 11 basis points decrease due to targeted promotional activity, partially offset by 9 basis points increase due to cost reductions associated with Value Improvement efforts.

During the fourth quarter of 2016, gross margin of 34.41% decreased 25 basis points as a percentage of sales. Gross margin was negatively impacted 25 basis points by the RONA business, primarily driven by purchase price adjustments to their opening inventory balance and mix of business.

SG&A – SG&A expense for 2016 leveraged 61 basis points as a percentage of sales compared to 2015. This was primarily driven by 45 basis points of net leverage associated with impairment charges recorded during 2016 versus 2015 relating to our Australian joint venture with Woolworths. We experienced 15 basis points of leverage associated with incentive compensation, 14 basis points in employee insurance costs, and 12 basis points related to the settlement of the foreign currency option contract entered into in anticipation of the RONA acquisition. This was partially offset by 15 basis points of deleverage associated with the write-off of cancelled technology-enabled projects as part of an ongoing review of our strategic initiatives and 12 basis points associated with severance and related costs for organizational changes in the stores, distribution centers, and corporate offices.

During the fourth quarter of 2016, SG&A expense leveraged 445 basis points as a percentage of sales due primarily to 403 basis points of leverage associated with a non-cash impairment charge resulting from our decision to exit our Australian joint venture recorded in the fourth quarter of the prior year. We experienced 59 basis points of leverage in benefits primarily related to incentive compensation due to lower attainment levels compared to the same quarter of the prior year. These were partially offset by 53 basis points of deleverage associated with separation events for organizational changes in the stores, distribution centers, and corporate offices. Store environment, operating salaries, and certain other costs also leveraged as a result of sales growth.

Depreciation and Amortization – Depreciation and amortization expense leveraged 24 basis points for 2016 compared to 2015 primarily due to the increase in sales from the 53rd week, partially offset by incremental expense due to the acquisition of RONA. Property, less accumulated depreciation, increased to $19.9 billion at February 3, 2017, compared to $19.6 billion at January 29, 2016. As of February 3, 2017, and January 29, 2016, we owned 79% and 86% of our stores, respectively, which included stores on leased land.

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

(In millions)	2016				2015
Interest expense, net of amount capitalized	$	647			$	548
Amortization of original issue discount and loan costs	10				8
Interest income	(12		)		(4		)
Interest - net	$	645			$	552

Net interest expense increased due primarily to an increase in total debt compared to the prior year.

Income Tax Provision - Our effective income tax rate was 40.5% in 2016 compared to 42.4% in 2015. During 2016, the Company was impacted by the issuance of the U.S. Internal Revenue Service Internal Revenue Code Section 987, which negatively impacted the income tax rate due to the adjustment of deferred tax assets associated with cumulative currency translation adjustments related to certain of the Company’s international operations. In addition, the Company recorded a deferred tax asset related to the investment in the Australian joint venture with Woolworths associated with the non-cash impairment charges that occurred during both 2016 and 2015. The deferred tax asset associated with these losses was offset

with the establishment of a full valuation allowance due to the fact the benefit of these losses can only be realized to the extent the Company has available capital gains for offset, and no present or future capital gains have been identified through which this deferred tax asset can be realized.

Our effective income tax rates were 40.3% and 96.1% for the three months ended February 3, 2017 and January 29, 2016, respectively, due to the same factors that impacted the income tax provision in the year.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

Cash flows from operations, supplemented with our short-term and long-term borrowings, have been sufficient to fund our operations while allowing us to make strategic investments that will grow our business, and to return excess cash to shareholders in the form of dividends and share repurchases. We believe that our sources of liquidity will continue to be adequate to fund our operations and investments to grow our business, pay dividends, and fund our share repurchases over the next 12 months.

Cash Flows Provided by Operating Activities

(In millions)	2017				2016				2015
Net cash provided by operating activities	$	5,065			$	5,617			$	4,784

Cash flows from operating activities continued to provide the primary source of our liquidity. The decrease in net cash provided by operating activities for 2017, when compared to 2016, was driven primarily by changes in working capital and was partially offset by an increase in net earnings, adjusted for non-cash expenses.

The increase in net cash provided by operating activities for 2016, when compared to 2015, was driven primarily by an increase in net earnings, adjusted for non-cash expenses, and improved working capital management.

We are forecasting cash flows from operations of approximately $6.5 billion for 2018, which includes $750 million of expected incremental cash flow benefit related to the enactment of the Tax Cuts and Jobs Act of 2017.

Cash Flows Used in Investing Activities

(In millions)	2017				2016				2015
Net cash used in investing activities	$	(1,441	)		$	(3,361	)		$	(1,343	)

Net cash used in investing activities primarily consist of transactions related to capital expenditures and business acquisitions.

Capital expenditures

Our capital expenditures generally consist of investments in our existing stores, expansion plans, corporate programs, and our existing distribution network. Capital expenditures were $1.1 billion in 2017, and $1.2 billion in 2016 and 2015. The following table provides the allocation of capital expenditures for 2017, 2016, and 2015:

	2017			2016			2015
Existing stores	40	%		35	%		45	%
Total expansion	35	%		40	%		30	%
Corporate programs	20	%		20	%		20	%
Existing distribution network	5	%		5	%		5	%

Our 2018 capital expenditures forecast is approximately $1.7 billion. The increase in our forecast, relative to historical capital expenditures, is primarily attributable to incremental cash flow benefit related to the enactment of the Tax Cuts and Jobs Act of 2017. The following table provides the allocation of our fiscal 2018 capital expenditures forecast:

		2018
Strategic initiatives, including information technology and supply chain		45	%
Existing store investments, including store equipment, technology enhancements, and remerchandising		40	%
New stores		15	%

Business Acquisitions

We continue to seek compelling strategic investment opportunities to further expand our home improvement reach. In 2017, we paid $509 million, net of cash received, to acquire Maintenance Supply Headquarters, which is expected to enable us to deepen and broaden our relationship with the Pro customer and better serve their needs. In 2016, we used $2.3 billion, net of cash received, to acquire RONA, which enabled us to accelerate our growth strategy in the Canadian home improvement market. See Note 2 to the consolidated financial statements included herein for additional information regarding our business acquisitions.

Cash Flows Used in Financing Activities

(In millions)	2017				2016				2015
Net cash used in financing activities	$	(3,607	)		$	(2,092	)		$	(3,493	)

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

Short-term Borrowing Facilities

We have an unsecured revolving credit agreement with a syndicate of banks (the 2016 Credit Facility) which provides for borrowings up to $1.75 billion and supports our commercial paper program. The amount available to be drawn under the 2016 Credit Facility is reduced by the amount of borrowings under our commercial paper program. All of our short-term borrowings in 2017, 2016, and 2015 were under the commercial paper program. Our commercial paper program, along with cash flows generated from operations, is typically utilized during our fourth fiscal quarter to build inventory in anticipation of the spring selling season. The following table includes additional information related to our short-term borrowings for 2017, 2016, and 2015:

(In millions, except for interest rate data)	2017				2016				2015
Amount outstanding at year-end	$	1,137			$	510			$	43
Maximum amount outstanding at any month-end	$	1,137			$	658			$	91
Weighted-average interest rate of short-term borrowings outstanding	1.85		%		1.01		%		0.60		%

The 2016 Credit Facility expires in November 2021 and contains customary representations, warranties, and covenants. We were in compliance with those covenants at February 2, 2018. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the 2016 Credit Facility, the Company may increase the aggregate availability by an additional $500 million. See Note 6 to the consolidated financial statements included herein for additional information regarding our short-term borrowings.

Long-term Debt

The following table includes additional information related to the Company’s long-term debt for 2017, 2016, and 2015:

(In millions)	2017				2016				2015
Net proceeds from issuance of long-term debt	$	2,968			$	3,267			$	1,718
Repayment of long-term debt	$	(2,849	)		$	(1,173	)		$	(552	)

In 2017, we paid approximately $2.0 billion to purchase $1.6 billion of our higher coupon notes prior to maturity in connection with a cash tender offer. We issued $3.0 billion of unsecured notes to fund the tender offer, finance current year maturities, and for other general corporate purposes, which included share repurchases, capital expenditures, strategic investments, and working capital needs.

In 2016, we issued $3.3 billion of unsecured notes to fund the acquisition of RONA, finance current year maturities, and for other general corporate purposes, which included share repurchases, capital expenditures, strategic investments, and working capital needs.

In 2015, we issued $1.75 billion of unsecured notes to finance current year maturities, and for other general corporate purposes, which included share repurchases, capital expenditures, strategic investments, and working capital needs.

Our ratio of debt to capital (equity plus debt) was 74.3% and 70.9% as of February 2, 2018, and February 3, 2017, respectively.

See Note 7 to the consolidated financial statements included herein for additional information related to our long-term debt.

Share Repurchases

We have an ongoing share repurchase program, authorized by the Company’s Board of Directors, that is executed through purchases made from time to time either in the open market or through private off-market transactions. We also withhold shares from employees to satisfy tax withholding liabilities. Shares repurchased are retired and returned to authorized and unissued status. 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 2017, 2016, and 2015:

(In millions, except per share data)	2017				2016				2015
Total amount paid for share repurchases	$	3,192			$	3,595			$	3,925
Total number of shares repurchased	39.9				48.0				55.1
Average price paid per share	$	80.01			$	74.89			$	71.21

As of February 2, 2018, we had $6.9 billion remaining under our share repurchase program with no expiration date. We expect to repurchase shares totaling $2.5 billion in 2018. See Note 8 to the consolidated financial statements included herein for additional information regarding share repurchases.

Dividends

In 2017, we increased our quarterly dividend payment 17% to $0.41 per share. Our dividend payment dates are established such that dividends are paid in the quarter immediately following the quarter in which they are declared. The following table provides additional information related to our dividend payments for 2017, 2016, and 2015:

(In millions, except per share data and percentage data)	2017				2016				2015
Total cash dividend payments	$	1,288			$	1,121			$	957
Dividends paid per share	$	1.52			$	1.26			$	1.02
Dividend payout ratio	37		%		36		%		38		%

Capital Resources

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 table below reflects our debt ratings by Standard & Poor’s (S&P) and Moody’s as of April 2, 2018, which we are disclosing to enhance understanding of our sources of liquidity and the effect of our ratings on our cost of funds. Our debt ratings have enabled, and should continue to enable, us to refinance our debt as it becomes due at favorable rates in capital markets. Although we currently do not expect a downgrade in our debt ratings, our commercial paper and senior debt ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.

Debt Ratings	S&P		Moody’s
Commercial Paper	A-2		P-2
Senior Debt	A-		A3
Outlook	Stable		Stable

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.

OFF-BALANCE SHEET ARRANGEMENTS

Other than in connection with executing operating leases, we do not have any off-balance sheet financing that has, or is reasonably likely to have, a current or future material effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table summarizes our significant contractual obligations at February 2, 2018:

	Payments Due by Period
Contractual Obligations (in millions)	Total				Less Than 1 Year				1-3 Years				4-5 Years				After 5 Years
Long-term debt (principal amounts, excluding discount and debt issuance costs)	$	15,114			$	251			$	1,551			$	1,790			$	11,522
Long-term debt (interest payments)	9,283				577				1,109				1,005				6,592
Capitalized lease obligations 1, 2	1,491				108				254				178				951
Operating leases 1	5,837				666				1,199				1,002				2,970
Purchase obligations 3	1,069				537				478				54				—
Total contractual obligations	$	32,794			$	2,139			$	4,591			$	4,029			$	22,035
	Amount of Commitment Expiration by Period
Commercial Commitments (in millions)	Total				Less Than 1 Year				1-3 Years				4-5 Years				After 5 Years
Letters of Credit 4	$	63			$	63			$	—			$	—			$	—

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

2	Amounts include imputed interest and residual values.

3

Purchase obligations include agreements to purchase goods or services that are enforceable, are legally binding, and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase obligations include firm commitments related to certain marketing and information technology programs, as well as purchases of merchandise inventory.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the consolidated financial statements and notes to consolidated financial statements presented in this Annual Report requires us to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. We base 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.

Our significant accounting policies are described in Note 1 to the consolidated financial statements. We believe that the following accounting policies affect the most significant estimates and management judgments used in preparing the consolidated financial statements.

Merchandise Inventory

Description

We record an obsolete inventory reserve for the anticipated loss associated with selling inventories below cost. This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience. During 2017, our reserve increased approximately $18 million to $77 million as of February 2, 2018.

We also record an inventory reserve for the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrinkage results from previous physical inventories. During 2017, the inventory shrinkage reserve increased approximately $23 million to $212 million as of February 2, 2018.

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. Generally, these vendor funds do not represent the reimbursement of specific, incremental and identifiable costs that we incurred to sell the vendor’s product. Therefore, we treat these funds as a reduction in the cost of inventory as the amounts are accrued, and recognize these funds 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.

Judgments and uncertainties involved in the estimate

We do not believe that our merchandise inventories are subject to significant risk of obsolescence in the near term, and we have the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in consumer purchasing patterns or a deterioration in product quality could result in the need for additional reserves. Likewise, changes in the estimated shrink reserve may be necessary, based on the timing and results of physical inventories. We also apply judgment in the determination of levels of obsolete inventory and assumptions about net realizable value.

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

Effect if actual results differ from assumptions

We have not made any material changes in the methodology used to establish our inventory valuation or the related reserves for obsolete inventory or inventory shrinkage during the past three fiscal years. We believe that we have sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves. 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 $4 million for 2017. A 10% change in the estimated shrinkage rate included in the calculation of our inventory shrinkage reserve would have affected net earnings by approximately $13 million for 2017.

We have not made any material changes in the methodology used to recognize vendor funds during the past three fiscal years. If actual results are not consistent with the assumptions and estimates used, we could be exposed to additional adjustments that could positively or negatively impact gross margin and inventory. However, substantially all receivables associated with these activities do not require subjective long-term estimates because they are collected within the following fiscal year. Adjustments to gross margin and inventory in the following fiscal year have historically not been material.

Long-Lived Asset Impairment

Description

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

We evaluate locations for triggering events relating to long-lived asset impairment on a quarterly basis to determine when a location’s asset carrying values may not be recoverable. For operating locations, our primary indicator that asset carrying values may not be recoverable is consistently negative cash flow for a 12-month period for those locations that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results. 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 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. When determining the stream of projected future cash flows associated with an individual operating location, management makes assumptions, incorporating local market conditions, about key store variables including sales growth rates, gross margin and controllable expenses, such as store payroll and occupancy expense, as well as asset residual values or lease rates. An impairment loss is recognized when the carrying amount of the operating location is not recoverable and exceeds its fair value.

We use an income approach to determine the fair value of our individual operating locations, which requires discounting projected future cash flows. This involves making assumptions regarding both a location’s future cash flows, as described above, and an appropriate discount rate to determine the present value of those future cash flows. We discount our cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows. The selected market participants represent a group of other retailers with a market footprint similar in size to ours.

Judgments and uncertainties involved in the estimate

Our impairment evaluations for long-lived assets 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 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. We also apply judgment in estimating asset fair values, including the selection of an appropriate discount rate for fair values determined using an income approach.

Effect if actual results differ from assumptions

A 10% reduction in projected sales used to estimate future cash flows for operating locations that experienced a triggering event would not have had a significant impact to impairment losses recognized during 2017.

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 positively or negatively from our estimated impairment losses.

Goodwill

Description

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. We test for goodwill impairment at the reporting unit level, which is one level below the operating segment level. 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 two-step goodwill impairment test is necessary.

The first step of the 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 discounted future cash flows. 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, a second step is required to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.

Judgments and uncertainties involved in the estimate

The determination of the fair value of the reporting units requires us to make significant estimates and assumptions, including store growth rates, existing store sales growth rates, forecasting expenses and selecting appropriate discount rates.

Effect if actual results differ from assumptions

The carrying value of goodwill as of February 2, 2018, was $1.3 billion. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.

Self-Insurance

Description

We are self-insured for certain losses relating to workers’ compensation, automobile, general and product liability, extended protection plan, and certain medical and dental claims. Our self-insured retention or deductible, as applicable, is limited to $2 million per occurrence involving workers’ compensation, $5 million per occurrence involving general or product liability, and $10 million per occurrence involving automobile. We do not have any 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 2017, our self-insurance liability increased approximately $59 million to $890 million as of February 2, 2018.

Judgments and uncertainties involved in the estimate

These estimates are subject to changes in the regulatory environment, utilized discount rate, projected exposures including payroll, sales and vehicle units, as well as the frequency, lag and severity of claims.

Effect if actual results differ from assumptions

We have not made any material changes in the methodology used to establish our self-insurance liability during the past three fiscal years. Although we believe that we have the ability to reasonably estimate losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities. A 10% change in our self-insurance liability would have affected net earnings by approximately $56 million for 2017. A 100 basis point change in our discount rate would have affected net earnings by approximately $19 million for 2017.

Revenue Recognition

Description

See Note 1 to the consolidated financial statements for a discussion of our revenue recognition policies. The following accounting estimates relating to revenue recognition require management to make assumptions and apply judgment regarding the effects of future events that cannot be determined with certainty.

We sell separately-priced extended protection plan contracts under a Lowe’s-branded program for which the Company is ultimately self-insured. The Company recognizes revenues from extended protection plan sales on a straight-line basis over the respective contract term. Extended protection plan contract terms primarily range from one to four years from the date of purchase or the end of the manufacturer’s warranty, as applicable. The Company consistently groups and evaluates extended protection plan contracts based on the characteristics of the underlying products and the coverage provided in order to monitor for expected losses. A loss on the overall contract would be recognized if the expected costs of performing services under the contracts exceeded the amount of unamortized acquisition costs and related deferred revenue associated with the contracts.

Deferred revenues associated with the extended protection plan contracts increased $40 million to $803 million as of February 2, 2018.

We defer revenue and cost of sales associated with settled transactions for which customers have not yet taken possession of merchandise or for which installation has not yet been completed. Revenue is deferred based on the actual amounts received. We use historical gross margin rates to estimate the adjustment to cost of sales for these transactions. During 2017, deferred revenues associated with these transactions increased $76 million to $831 million as of February 2, 2018.

Judgments and uncertainties involved in the estimate

For extended protection plans, there is judgment inherent in our evaluation of expected losses as a result of our methodology for grouping and evaluating extended protection plan contracts and from the actuarial determination of the estimated cost of the contracts. There is also judgment inherent in our determination of the recognition pattern of costs of performing services under these contracts.

For the deferral of revenue and cost of sales associated with transactions for which customers have not yet taken possession of merchandise or for which installation has not yet been completed, there is judgment inherent in our estimates of gross margin rates.

Effect if actual results differ from assumptions

We have not made any material changes in the methodology used to recognize revenue on our extended protection plan contracts during the past three fiscal years. We currently do not anticipate incurring any overall contract losses on our extended protection plan contracts. Although we believe that we have the ability to adequately monitor and estimate expected losses under the extended protection plan contracts, it is possible that actual results could differ from our estimates. In addition, if future evidence indicates that the costs of performing services under these contracts are incurred on other than a straight-line basis, the timing of revenue recognition under these contracts could change. A 10% change in the amount of revenue recognized in 2017 under these contracts would have affected net earnings by approximately $23 million.

We have not made any material changes in the methodology used to reverse net sales and cost of sales related to amounts received for which customers have not yet taken possession of merchandise or for which installation has not yet been completed. We believe we have sufficient current and historical knowledge to record reasonable estimates related to the impact to cost of sales for these transactions. However, if actual results are not consistent with our estimates or assumptions, we may incur additional income or expense. A 10% change in the estimate of the gross margin rates applied to these transactions would have affected net earnings by approximately $12 million in 2017.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

We speak throughout this Annual Report in forward-looking statements about our future, but particularly in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The words “believe,” “expect,” “will,” “should,” “suggest,” and other similar expressions are intended to identify those forward-looking statements. While we believe our expectations are reasonable, they are not guarantees of future performance. Our actual results could differ materially from our expectations.

For a detailed description of the risks and uncertainties that we are exposed to, you should read Item 1A, “Risk Factors” included elsewhere in this Annual Report. All forward-looking statements speak only as of the date of this Annual Report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section and in Item 1A, “Risk Factors” included elsewhere in this Annual Report. We do not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this Annual Report.