Item 8. Financial Statements and Supplementary Data

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Lowe’s Companies, Inc. and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting (Internal Control) as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our Internal Control was designed to provide reasonable assurance to our management and the Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness may vary over time.

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our Internal Control as of February 1, 2019. In evaluating our Internal Control, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on our management’s assessment, we have concluded that, as of February 1, 2019, our Internal Control is effective.

Deloitte & Touche LLP, the independent registered public accounting firm that audited the financial statements contained in this Annual Report, was engaged to audit our Internal Control. Their report appears on page 42.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Lowe’s Companies, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as of February 1, 2019 and February 2, 2018, the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended February 1, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 1, 2019 and February 2, 2018, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 1, 2019 in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 1, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 1, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company has elected to change its method of accounting to reclassify shipping and handling costs relating to the delivery of products to customers from selling, general and administrative and depreciation and amortization to cost of sales in the fiscal year ended February 1, 2019. This change in accounting principle has been retrospectively applied to the consolidated financial statements for the fiscal years ended February 2, 2018 and February 3, 2017.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

Charlotte, North Carolina

April 1, 2019

We have served as the Company's auditor since 1962.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Lowe’s Companies, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as of February 1, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 1, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the fiscal year ended February 1, 2019 of the Company and our report dated April 1, 2019, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the reclassification of shipping and handling costs relating to the delivery of products to customers from selling, general and administrative and depreciation and amortization to cost of sales.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP

Charlotte, North Carolina

April 1, 2019

Lowe’s Companies, Inc.

Consolidated Statements of Earnings

(In millions, except per share and percentage data)

	February 1, 2019				% Sales			February 2, 2018				% Sales			February 3, 2017				% Sales
Fiscal years ended on
Net sales	$	71,309			100.00	%		$	68,619			100.00	%		$	65,017			100.00	%
Cost of sales	48,401				67.88			46,185				67.31			43,343				66.66
Gross margin	22,908				32.12			22,434				32.69			21,674				33.34
Expenses:
Selling, general and administrative	17,413				24.41			14,444				21.04			14,375				22.12
Depreciation and amortization	1,477				2.07			1,404				2.05			1,453				2.23
Operating income	4,018				5.64			6,586				9.60			5,846				8.99
Interest - net	624				0.88			633				0.92			645				0.99
Loss on extinguishment of debt	—				—			464				0.68			—				—
Pre-tax earnings	3,394				4.76			5,489				8.00			5,201				8.00
Income tax provision	1,080				1.52			2,042				2.98			2,108				3.24
Net earnings	$	2,314			3.24	%		$	3,447			5.02	%		$	3,093			4.76	%
Basic earnings per common share	$	2.84						$	4.09						$	3.48
Diluted earnings per common share	$	2.84						$	4.09						$	3.47
Cash dividends per share	$	1.85						$	1.58						$	1.33

Lowe’s Companies, Inc.

Consolidated Statements of Comprehensive Income

(In millions, except percentage data)

	February 1, 2019				% Sales			February 2, 2018				% Sales			February 3, 2017				% Sales
Fiscal years ended on
Net earnings	$	2,314			3.24	%		$	3,447			5.02	%		$	3,093			4.76	%
Foreign currency translation adjustments - net of tax	(221		)		(0.30	)		251				0.37			154				0.23
Net unrealized investment gain - net of tax	1				—			—				—			—				—
Other comprehensive income/(loss)	(220		)		(0.30	)		251				0.37			154				0.23
Comprehensive income	$	2,094			2.94	%		$	3,698			5.39	%		$	3,247			4.99	%

See accompanying notes to consolidated financial statements.

Lowe’s Companies, Inc.

Consolidated Balance Sheets

(In millions, except par value)

			February 1, 2019				February 2, 2018
Assets
Current assets:
Cash and cash equivalents			$	511			$	588
Short-term investments			218				102
Merchandise inventory - net			12,561				11,393
Other current assets			938				689
Total current assets			14,228				12,772
Property, less accumulated depreciation			18,432				19,721
Long-term investments			256				408
Deferred income taxes - net			294				168
Goodwill			303				1,307
Other assets			995				915
Total assets			$	34,508			$	35,291
Liabilities and shareholders’ equity
Current liabilities:
Short-term borrowings			$	722			$	1,137
Current maturities of long-term debt			1,110				294
Accounts payable			8,279				6,590
Accrued compensation and employee benefits			662				747
Deferred revenue			1,299				1,378
Other current liabilities			2,425				1,950
Total current liabilities			14,497				12,096
Long-term debt, excluding current maturities			14,391				15,564
Deferred revenue - extended protection plans			827				803
Other liabilities			1,149				955
Total liabilities			30,864				29,418
Commitments and contingencies
Shareholders’ equity:
Preferred stock - $5 par value, none issued			—				—
Common stock - $.50 par value;
Shares issued and outstanding
February 1, 2019	801
February 2, 2018	830		401				415
Capital in excess of par value			—				22
Retained earnings			3,452				5,425
Accumulated other comprehensive income/(loss)			(209		)		11
Total shareholders’ equity			3,644				5,873
Total liabilities and shareholders’ equity			$	34,508			$	35,291

See accompanying notes to consolidated financial statements.

Lowe’s Companies, Inc.

Consolidated Statements of Shareholders’ Equity

(In millions, except per share data)

	Common Stock							Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income/(Loss)				Total Lowe’s Companies, Inc. Shareholders’ Equity				Noncontrolling Interest				Total Equity
	Shares			Amount
Balance January 29, 2016	910			$	455			$	—			$	7,593			$	(394	)		$	7,654			$	—			$	7,654
Net earnings												3,091								3,091				2				3,093
Other comprehensive income																154				154								154
Tax effect of non-qualified stock options exercised and restricted stock vested								57												57								57
Cash dividends declared, $1.33 per share												(1,169		)						(1,169		)						(1,169		)
Share-based payment expense								104												104								104
Repurchase of common stock	(48	)		(24		)		(279		)		(3,274		)						(3,577		)						(3,577		)
Issuance of common stock under share-based payment plans	4			2				136												138								138
Noncontrolling interest resulting from acquisition																				$	—			$	109			$	109
Dividends paid to noncontrolling interest holders																				$	—			$	(2	)		$	(2	)
Purchase of noncontrolling interest								$	(18	)										$	(18	)		$	(109	)		$	(127	)
Balance February 3, 2017	866			$	433			$	—			$	6,241			$	(240	)		$	6,434			$	—			$	6,434
Net earnings												3,447								3,447								3,447
Other comprehensive income																251				251								251
Cash dividends declared, $1.58 per share												(1,324		)						(1,324		)						(1,324		)
Share-based payment expense								99												99								99
Repurchase of common stock	(40	)		(20		)		(215		)		(2,939		)						(3,174		)						(3,174		)
Issuance of common stock under share-based payment plans	4			2				138												140								140
Balance February 2, 2018	830			$	415			$	22			$	5,425			$	11			$	5,873			$	—			$	5,873
Cumulative effect of accounting change												33								33								33
Net earnings												2,314								2,314								2,314
Other comprehensive loss																(220		)		(220		)						(220		)
Cash dividends declared, $1.85 per share												(1,500		)						(1,500		)						(1,500		)
Share-based payment expense								74												74								74
Repurchase of common stock	(32	)		(16		)		(209		)		(2,820		)						(3,045		)						(3,045		)
Issuance of common stock under share-based payment plans	3			2				113												115								115
Balance February 1, 2019	801			$	401			$	—			$	3,452			$	(209	)		$	3,644			$	—			$	3,644

See accompanying notes to consolidated financial statements.

Lowe’s Companies, Inc.

Consolidated Statements of Cash Flows

(In millions)

	February 1, 2019				February 2, 2018				February 3, 2017
Fiscal years ended on
Cash flows from operating activities:
Net earnings	$	2,314			$	3,447			$	3,093
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	1,607				1,540				1,590
Deferred income taxes	(151		)		53				28
Loss on property and other assets - net	630				40				143
Impairment of goodwill	952				—				—
Loss on extinguishment of debt	—				464				—
(Gain) loss on cost method and equity method investments	9				(82		)		302
Share-based payment expense	74				99				90
Changes in operating assets and liabilities:
Merchandise inventory – net	(1,289		)		(791		)		(178		)
Other operating assets	(110		)		250				(183		)
Accounts payable	1,720				(92		)		653
Other operating liabilities	437				137				79
Net cash provided by operating activities	6,193				5,065				5,617
Cash flows from investing activities:
Purchases of investments	(1,373		)		(981		)		(1,192		)
Proceeds from sale/maturity of investments	1,393				1,114				1,254
Capital expenditures	(1,174		)		(1,123		)		(1,167		)
Proceeds from sale of property and other long-term assets	76				45				37
Purchases of derivative instruments	—				—				(103		)
Proceeds from settlement of derivative instruments	—				—				179
Acquisition of business - net	—				(509		)		(2,356		)
Other – net	(2		)		13				(13		)
Net cash used in investing activities	(1,080		)		(1,441		)		(3,361		)
Cash flows from financing activities:
Net change in short-term borrowings	(415		)		625				466
Net proceeds from issuance of long-term debt	—				2,968				3,267
Repayment of long-term debt	(326		)		(2,849		)		(1,173		)
Proceeds from issuance of common stock under share-based payment plans	114				139				139
Cash dividend payments	(1,455		)		(1,288		)		(1,121		)
Repurchase of common stock	(3,037		)		(3,192		)		(3,595		)
Other – net	(5		)		(10		)		(75		)
Net cash used in financing activities	(5,124		)		(3,607		)		(2,092		)
Effect of exchange rate changes on cash	(12		)		13				(11		)
Net increase/(decrease) in cash and cash equivalents, including cash classified within current assets held for sale	(23		)		30				153
Less: Net increase in cash classified within current assets held for sale	(54		)		—				—
Net increase/(decrease) in cash and cash equivalents	(77		)		30				153
Cash and cash equivalents, beginning of year	588				558				405
Cash and cash equivalents, end of year	$	511			$	588			$	558

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED FEBRUARY 1, 2019, FEBRUARY 2, 2018 AND FEBRUARY 3, 2017

NOTE 1: Summary of Significant Accounting Policies

Lowe’s Companies, Inc. and subsidiaries (the Company) is the world’s second-largest home improvement retailer and operated 2,002 stores in the United States and Canada at February 1, 2019. In addition, as of February 1, 2019, Lowe’s operated 13 stores in Mexico; however, on November 20, 2018, the Company announced its plans to exit its retail operations in Mexico. Below are those accounting policies considered by the Company to be significant.

Fiscal Year - The Company’s fiscal year ends on the Friday nearest the end of January. Fiscal years 2018 and 2017 each contained 52 weeks and fiscal 2016 contained 53 weeks. All references herein for the years 2018, 2017, and 2016 represent the fiscal years ended February 1, 2019, February 2, 2018, and February 3, 2017, respectively.

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All intercompany accounts and transactions have been eliminated. During the first quarter of fiscal year 2018, the Company conformed the financial reporting calendar of a subsidiary, which did not have a significant effect on the consolidated financial statements.

Foreign Currency - The functional currencies of the Company’s international subsidiaries are generally the local currencies of the countries in which the subsidiaries are located. Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is included as a component of shareholders’ equity in accumulated other comprehensive income/loss. Gains and losses from foreign currency transactions are included in selling, general and administrative (SG&A) expense.

Use of Estimates - The preparation of the Company’s financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with original maturities of three months or less when purchased. Cash and cash equivalents are carried at amortized cost on the consolidated balance sheets. The majority of payments due from financial institutions for the settlement of credit card and debit card transactions process within two business days and are, therefore, classified as cash and cash equivalents.

Investments - Investments generally consist of money market funds, corporate debt securities, and agency securities, all of which are classified as available-for-sale. Available-for-sale securities are recorded at fair value, and unrealized gains and losses are recorded, net of tax, as a component of accumulated other comprehensive income/loss. Gross unrealized gains and losses were not significant for any of the periods presented.

The proceeds from sales of available-for-sale securities were $506 million, $523 million, and $505 million for 2018, 2017, and 2016, respectively. Gross realized gains and losses on the sale of available-for-sale securities were not significant for any of the periods presented.

Investments with a stated maturity date of one year or less from the balance sheet date or that are expected to be used in current operations are classified as short-term investments. All other investments are classified as long-term. Investments classified as long-term at February 1, 2019, will mature in one to 16 years, based on stated maturity dates.

The Company classifies as investments restricted balances primarily pledged as collateral for the Company’s extended protection plan program. Restricted balances included in short-term investments were $218 million at February 1, 2019, and $86 million at February 2, 2018. Restricted balances included in long-term investments were $256 million at February 1, 2019, and $381 million at February 2, 2018.

Merchandise Inventory - The majority of the Company’s inventory is stated at the lower of cost and net realizable value using the first-in, first-out method of inventory accounting. Inventory for certain subsidiaries representing approximately 7% and 10% of the consolidated inventory balances as of February 1, 2019 and February 2, 2018, respectively, are stated at lower of

cost and net realizable value using other inventory methods, including the weighted average cost method and the retail inventory method. The cost of inventory includes certain costs associated with the preparation of inventory for resale, including distribution center costs, and is net of vendor funds.

The Company records an inventory reserve for the anticipated loss associated with selling inventories below cost. This reserve is based on management’s current knowledge with respect to inventory levels, sales trends, and historical experience. Management does not believe the Company’s merchandise inventories are subject to significant risk of obsolescence in the near term, and management has the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in consumer purchasing patterns could result in the need for additional reserves. The Company also records an inventory reserve for the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrink results from previous physical inventories. Changes in the estimated shrink reserve are made based on the timing and results of physical inventories.

The Company receives funds from vendors in the normal course of business, principally as a result of purchase volumes, sales, early payments, or promotions of vendors’ products. Generally, these vendor funds do not represent the reimbursement of specific, incremental, and identifiable costs incurred by the Company to sell the vendor’s product. Therefore, the Company treats these funds as a reduction in the cost of inventory, and are recognized as a reduction of cost of sales when the inventory is sold. Funds that are determined to be reimbursements of specific, incremental, and identifiable costs incurred to sell vendors’ products are recorded as an offset to the related expense. The Company develops accrual rates for vendor funds based on the provisions of the agreements in place. Due to the complexity and diversity of the individual vendor agreements, the Company performs analyses and reviews historical trends throughout the year and confirms actual amounts with select vendors to ensure the amounts earned are appropriately recorded. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected annual purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met.

Derivative Financial Instruments - The Company occasionally utilizes derivative financial instruments to manage certain business risks. However, the amounts were not material to the Company’s consolidated financial statements in any of the years presented.

Sale of Business Accounts Receivable - The Company has an agreement with Synchrony Bank (Synchrony) under which Synchrony purchases at face value commercial business accounts receivable originated by the Company and services these accounts. The Company primarily accounts for these transfers as sales of the accounts receivable. When the Company transfers its commercial business accounts receivable, it retains certain interests in those receivables, including the funding of a loss reserve and its obligation related to Synchrony’s ongoing servicing of the receivables sold. Any gain or loss on the sale is determined based on the previous carrying amounts of the transferred assets allocated at fair value between the receivables sold and the interests retained. Fair value is based on the present value of expected future cash flows, taking into account the key assumptions of anticipated credit losses, payment rates, late fee rates, Synchrony’s servicing costs, and the discount rate commensurate with the uncertainty involved. Due to the short-term nature of the receivables sold, changes to the key assumptions would not materially impact the recorded gain or loss on the sales of receivables or the fair value of the retained interests in the receivables.

Total commercial business accounts receivable sold to Synchrony were $3.1 billion in 2018, $3.1 billion in 2017, and $2.8 billion in 2016. The Company recognized losses of $41 million in 2018, $39 million in 2017, and $32 million in 2016 on these receivable sales as SG&A expense, which primarily relates to the fair value of obligations related to servicing costs that are remitted to Synchrony monthly. At February 1, 2019 and February 2, 2018, the fair value of the retained interests was determined based on the present value of expected future cash flows and was insignificant.

Other Credit Programs - Sales generated through the Company’s proprietary credit cards are not reflected in receivables. Under an agreement with Synchrony, credit is extended directly to customers by Synchrony. All credit program-related services are performed and controlled directly by Synchrony. The Company has the option, but no obligation, to purchase the receivables at the end of the agreement. Portfolio income associated with the propriety credit program is included in sales in the consolidated statements of earnings as of the adoption of Accounting Standards Update 2014-09 (ASU 2014-09) in fiscal 2018. ASU 2014-09 was adopted using the modified retrospective approach; therefore, fiscal 2017 and fiscal 2016 present portfolio income associated with the proprietary credit program within SG&A expense.

Property and Depreciation - Property is recorded at cost. Costs associated with major additions are capitalized and depreciated. Capital assets are expected to yield future benefits and have original useful lives which exceed one year. The total cost of a capital asset generally includes all applicable sales taxes, delivery costs, installation costs, and other appropriate costs incurred by the Company, including interest in the case of self-constructed assets. Upon disposal, the cost of properties and

related accumulated depreciation is removed from the accounts, with gains and losses reflected in SG&A expense in the consolidated statements of earnings.

Property consists of land, buildings and building improvements, equipment, and construction in progress. Buildings and building improvements includes owned buildings, as well as buildings under capital lease and leasehold improvements. Equipment primarily includes store racking and displays, computer hardware and software, forklifts, vehicles, and other store equipment.

Depreciation is provided over the estimated useful lives of the depreciable assets. Assets are depreciated using the straight-line method. Leasehold improvements and assets under capital lease are depreciated over the shorter of their estimated useful lives or the term of the related lease, which may include one or more option renewal periods where failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to be reasonably assured. During the term of a lease, if leasehold improvements are placed in service significantly after the inception of the lease, the Company depreciates these leasehold improvements over the shorter of the useful life of the leasehold assets or a term that includes lease renewal periods deemed to be reasonably assured at the time the leasehold improvements are placed into service. The amortization of these assets is included in depreciation and amortization expense in the consolidated financial statements.

Long-Lived Asset Impairment/Exit Activities - The carrying amounts of long-lived assets are reviewed whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. A potential impairment has occurred for long-lived assets held-for-use if projected future undiscounted cash flows expected to result from the use and eventual disposition of the assets are less than the carrying amounts of the assets. An impairment loss is recorded for long-lived assets held-for-use when the carrying amount of the asset is not recoverable and exceeds its fair value.

Excess properties that are expected to be sold within the next 12 months and meet the other relevant held-for-sale criteria are classified as long-lived assets held-for-sale. Excess properties consist primarily of retail outparcels and property associated with relocated or closed locations. An impairment loss is recorded for long-lived assets held-for-sale when the carrying amount of the asset exceeds its fair value less cost to sell. A long-lived asset is not depreciated while it is classified as held-for-sale.

For long-lived assets to be abandoned, the Company considers the asset to be disposed of when it ceases to be used. Until it ceases to be used, the Company continues to classify the asset as held-for-use and tests for potential impairment accordingly. If the Company commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, its depreciable life is re-evaluated.

Impairment losses are included in SG&A expense in the consolidated statements of earnings. Fair value measurements associated with long-lived asset impairments are further described in Note 6 to the consolidated financial statements.

When locations under operating leases are closed, a liability is recognized for the fair value of future contractual obligations, including future minimum lease payments, property taxes, utilities, common area maintenance, and other ongoing expenses, net of estimated sublease income and other recoverable items. Subsequent changes to the liabilities, including a change resulting from a revision to either the timing or the amount of estimated cash flows, are recognized in the period of change. Expenses associated with exit activities are included in SG&A expense in the consolidated statement of earnings.

Goodwill - Goodwill is the excess of the purchase price over the fair value of identifiable assets acquired, less liabilities assumed, in a business combination. The Company reviews goodwill for impairment at the reporting unit level, which is one level below the operating segment level. Goodwill is not amortized but is evaluated for impairment at least annually on the first day of the fourth quarter or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable. The evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If, after assessing qualitative factors, we determine it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the quantitative goodwill impairment test is performed.

The quantitative goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. Fair value represents the price a market participant would be willing to pay in a potential sale of the reporting unit and is based on a combination of an income approach, based on discounted future cash flows, and a market approach, based on market multiples applied to free cash flow. If the fair value exceeds carrying value, then no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, in accordance with Accounting Standards Update 2017-04 which was early adopted by the Company in fiscal 2018, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Any impairment identified is included within SG&A expense in the consolidated statements of earnings. The income tax effect

from any tax deductible goodwill on the carrying amount of the reporting unit, if applicable, is considered in determining the goodwill impairment loss.

A reporting unit is an operating segment or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. During fiscal 2018, goodwill was allocated to the following reporting units: U.S. Home Improvement, Canada-Retail, and Canada-Distribution.

The changes in the carrying amount of goodwill for 2018, 2017, and 2016 were as follows:

(In millions)	2018				2017				2016
Goodwill, balance at beginning of year	$	1,307			$	1,082			$	154
Acquisitions 1	—				160				1,015
Impairment	(952		)		—				(46		)
Other adjustments 2	(52		)		65				(41		)
Goodwill, balance at end of year	$	303			$	1,307			$	1,082

1	Goodwill recorded for 2017 acquisitions relates to Maintenance Supply Headquarters. Goodwill recorded for 2016 acquisitions primarily relates to RONA. See Note 4 for additional information regarding these acquisitions.

2	Other adjustments primarily consist of changes in the goodwill balance as a result of foreign currency translation.

The Company’s annual goodwill impairment analysis performed during the fourth quarter of fiscal 2018 included a quantitative analysis of the Canada-Retail and Canada-Distribution reporting units. The Company classified these fair value measurements as Level 3. See Note 6 for additional information on the Company’s fair value measurements. The Company performed a discounted cash flow analysis and market multiple analysis for the Canada-Retail and Canada-Distribution reporting units. These discounted cash flow models included management assumptions for expected sales growth, margin expansion, operational leverage, capital expenditures, and overall operational forecasts. The market multiple analysis included historical and projected performance, market capitalization, volatility, and multiples for industry peers. These analyses led to the conclusion that the fair value of these reporting units was less than their carrying values by an amount that exceeded the carrying value of goodwill, primarily driven by a softening outlook for the Canadian housing market. Accordingly, the full carrying value of $952 million relating to the Canadian reporting units’ goodwill was impaired during the fourth quarter of 2018.

During the third quarter of fiscal 2016, the Company determined potential indicators of impairment within the Orchard reporting unit existed, and quantitatively evaluated the Orchard reporting unit for impairment. The Company classified this fair value measurement as Level 3. See Note 6 for additional information on the Company’s fair value measurements. The Company performed a discounted cash flow analysis for the Orchard reporting unit. The discounted cash flow model included management assumptions for expected sales growth, expansion plans, capital expenditures, and overall operational forecasts. The analysis led to the conclusion that the goodwill allocated to the Orchard reporting unit had no implied value. Accordingly, the full carrying value of $46 million relating to Orchard goodwill was impaired during the third quarter of 2016.

Gross carrying amounts and cumulative goodwill impairment losses are as follows:

	February 1, 2019								February 2, 2018
(In millions)	Gross Carrying Amount				Cumulative Impairment				Gross Carrying Amount				Cumulative Impairment
Goodwill	$	1,302			$	(999	)		$	1,354			$	(47	)

Equity Method Investments - The Company’s investments in certain unconsolidated entities are accounted for under the equity method. The balance of these investments is included in other assets (non-current) in the accompanying consolidated balance sheets. The balance is increased to reflect the Company’s capital contributions and equity in earnings of the investees. The balance is decreased for its equity in losses of the investees, for distributions received that are not in excess of the carrying amount of the investments, and for any other than temporary impairment losses recognized. Equity method investments were not significant as of February 1, 2019 and February 2, 2018. The Company’s equity in earnings and losses of the investees are included in SG&A expense, and were not significant for any of the periods presented.

Equity method investments are evaluated for impairment whenever events or changes in circumstances indicate that a decline in value has occurred that is other than temporary. Evidence considered in this evaluation includes, but would not necessarily

be limited to, the financial condition and near-term prospects of the investee, recent operating trends and forecasted performance of the investee, market conditions in the geographic area or industry in which the investee operates and the Company’s strategic plans for holding the investment in relation to the period of time expected for an anticipated recovery of its carrying value. Investments that are determined to have a decline in value deemed to be other than temporary are written down to estimated fair value. The Company’s other than temporary impairment losses are included in SG&A expense, and were not significant for 2018 and 2017. See Note 5 for additional information on the other than temporary impairment loss the Company recognized in 2016, related to its investment in the Australian joint venture.

Leases - For lease agreements that provide for escalating rent payments or free-rent occupancy periods, the Company recognizes rent expense on a straight-line basis over the non-cancellable lease term and option renewal periods where failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to be reasonably assured. The lease term commences on the date that the Company takes possession of or controls the physical use of the property. Deferred rent is included in other liabilities (non-current) on the consolidated balance sheets.

When the Company renegotiates and amends a lease to extend the non-cancellable lease term prior to the date at which it would have been required to exercise or decline a term extension option, the amendment is treated as a new lease. The new lease begins on the date the lease amendment is entered into and ends on the last date of the non-cancellable lease term, as adjusted to include any option renewal periods where failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception of the lease amendment, to be reasonably assured. The new lease is classified as operating or capital under the authoritative guidance through use of assumptions regarding residual value, economic life, incremental borrowing rate, and fair value of the leased asset(s) as of the date of the amendment.

Accounts Payable - The Company has an agreement with a third party to provide an accounts payable tracking system which facilitates participating suppliers’ ability to finance payment obligations from the Company with designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal in entering into this arrangement is to capture overall supply chain savings, in the form of pricing, payment terms, or vendor funding, created by facilitating suppliers’ ability to finance payment obligations at more favorable discount rates, while providing them with greater working capital flexibility.

The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to finance amounts under this arrangement. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by this arrangement for those payment obligations that have been financed by suppliers. The Company’s outstanding payment obligation placed on the accounts payable tracking system were $2.1 billion as of February 1, 2019 and $1.6 billion as of February 2, 2018, and participating suppliers had financed $1.5 billion and $1.1 billion, respectively, of those payment obligations to participating financial institutions.

Other Current Liabilities - Other current liabilities on the consolidated balance sheets consist of:

(In millions)	February 1, 2019				February 2, 2018
Accrued dividends	$	385			$	340
Self-insurance liabilities	378				347
Sales return reserve	194				71
Accrued interest	184				184
Sales tax liabilities	179				144
Accrued property taxes	108				109
Other	997				755
Total	$	2,425			$	1,950

Self-Insurance - The Company is self-insured for certain losses relating to workers’ compensation, automobile, property, and general and product liability claims. The Company has insurance coverage to limit the exposure arising from these claims. The Company is also self-insured for certain losses relating to extended protection plan and medical and dental claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management’s estimates of the discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Although management believes it has the ability to reasonably estimate losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities. The total self-insurance liability, including the current and non-current portions, was $953 million and $890 million at February 1, 2019, and February 2, 2018, respectively.

The Company provides surety bonds issued by insurance companies to secure payment of workers’ compensation liabilities as required in certain states where the Company is self-insured. Outstanding surety bonds relating to self-insurance were $246 million and $238 million at February 1, 2019, and February 2, 2018, respectively.

Income Taxes - The Company establishes deferred income tax assets and liabilities for temporary differences between the tax and financial accounting bases of assets and liabilities. The tax effects of such differences are reflected in the consolidated balance sheets at the enacted tax rates expected to be in effect when the differences reverse. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets if it is more likely than not that all or a portion of the asset will not be realized. The tax balances and income tax expense recognized by the Company are based on management’s interpretation of the tax statutes of multiple jurisdictions.

The Company establishes a liability for tax positions for which there is uncertainty as to whether or not the position will be ultimately sustained. The Company includes interest related to tax issues as part of net interest on the consolidated financial statements. The Company records any applicable penalties related to tax issues within the income tax provision.

Shareholders’ Equity - The Company has a share repurchase program that is executed through purchases made from time to time either in the open market or through private market transactions. Shares purchased under the repurchase program are retired and returned to authorized and unissued status. Any excess of cost over par value is charged to additional paid-in capital to the extent that a balance is present. Once additional paid-in capital is fully depleted, remaining excess of cost over par value is charged to retained earnings.

Cost of Sales and Selling, General and Administrative Expenses - The following lists the primary costs classified in each major expense category:

Cost of Sales		Selling, General and Administrative
n Total cost of products sold, including: - Purchase costs, net of vendor funds; - Freight expenses associated with moving merchandise inventories from vendors to selling locations; - Costs associated with operating the Company’s distribution network, including payroll and benefit costs and occupancy costs; n Costs of installation services provided; n Costs associated with shipping and handling to customers, as well as directly from vendors to customers by third parties; n Costs associated with inventory shrinkage and obsolescence; n Costs of services performed under the extended protection plan.		n Payroll and benefit costs for retail and corporate employees; n Occupancy costs of retail and corporate facilities; n Advertising; n Third-party, in-store service costs; n Tender costs, including bank charges, costs associated with credit card interchange fees and amounts associated with accepting the Company’s proprietary credit cards; n Costs associated with self-insured plans, and premium costs for stop-loss coverage and fully insured plans; n Long-lived asset impairment losses, gains/losses on disposal of assets, and exit costs; n Other administrative costs, such as supplies, and travel and entertainment.

Advertising - Costs associated with advertising are charged to expense as incurred. Advertising expenses were $963 million, $968 million, and $893 million in 2018, 2017, and 2016, respectively.

Store Opening Costs - Costs of opening new or relocated retail stores, which include payroll and supply costs incurred prior to store opening and grand opening advertising costs, are charged to expense as incurred.

Comprehensive Income - The Company reports comprehensive income in its consolidated statements of comprehensive income and consolidated statements of shareholders’ equity. Comprehensive income represents changes in shareholders’ equity from non-owner sources and is comprised of net earnings adjusted primarily for foreign currency translation adjustments. Net foreign currency translation losses, net of tax, classified in accumulated other comprehensive loss were $209 million and $240 million at February 1, 2019 and February 3, 2017, respectively. Net foreign currency translation gains, net of tax, classified in accumulated other comprehensive income were $11 million at February 2, 2018.

Segment Information - The Company’s home improvement retail operations represent a single reportable segment. Key operating decisions are made at the Company level in order to maintain a consistent retail store presentation. The Company’s

home improvement retail and hardware stores sell similar products and services, use similar processes to sell those products and services, and sell their products and services to similar classes of customers. In addition, the Company’s operations exhibit similar long-term economic characteristics. The amounts of long-lived assets and net sales outside of the U.S. were approximately 9.1% and 7.6%, respectively, at February 1, 2019. The amounts of long-lived assets and net sales outside of the U.S. were approximately 9.8% and 7.8%, respectively, at February 2, 2018. The amounts of long-lived assets and net sales outside of the U.S. were approximately 8.7% and 5.7%, respectively, at February 3, 2017.

Reclassifications - Certain prior period amounts have been reclassified to conform to current classifications.

Accounting Pronouncements Recently Adopted - Effective November 3, 2018, the Company early adopted Accounting Standards Update 2017-04 (ASU), Intangibles-Goodwill and Other (Topic 350). The ASU eliminates Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation to the identified assets and liabilities of the reporting unit to measure goodwill impairment. Under the amendments in this update, a goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance by the Company did not have a material impact on its consolidated financial statements.

Effective February 3, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and all the related amendments, using the modified retrospective method. ASU 2014-09 requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Upon adoption of ASU 2014-09, the Company recorded an immaterial adjustment to the opening balance of retained earnings as of February 3, 2018, with related adjustments to other current assets, deferred revenue, accounts payable, other current liabilities, and related tax effects. The adjustment to retained earnings primarily relates to the change in revenue recognition related to gift card breakage. The adoption of the guidance also required a change in the timing of when installation services are recognized, the presentation of sales return reserve on the consolidated balance sheet, and a change in the presentation of the Company’s profit sharing income from its proprietary credit program. We applied ASU 2014-09 only to contracts that were not completed prior to fiscal 2018. Results for reporting periods beginning after February 2, 2018 are presented under ASU 2014-09, while comparative prior period amounts have not been restated and continue to be presented under accounting standards in effect in those periods. See Note 3 for additional details of the Company’s revenues.

The impact of adopting the new revenue recognition guidance on our consolidated statement of earnings is as follows:

		Twelve Months Ended February 1, 2019
Consolidated Statement of Earnings (in millions)		As Reported				Under Historical Guidance				Impact of Adopting ASU 2014-09
Net Sales		$	71,309			$	70,586			$	723
Cost of sales		48,401				48,481				(80		)
Gross margin		22,908				22,105				803
Selling, general and administrative		17,413				16,610				803
Operating income		4,018				4,018				—
Pre-tax earnings		3,394				3,394				—
Net earnings		2,314				2,314				—

The impact of adopting the new revenue recognition guidance to assets and liabilities on our consolidated balance sheet are as follows:

		Balance at February 1, 2019
		As Reported				Under Historical Guidance				Impact of Adopting ASU 2014-09
Assets
Other current assets		$	938			$	811			$	127
Liabilities
Accounts payable		8,279				8,272				7
Deferred revenue		1,299				1,371				(72		)
Other current liabilities		2,425				2,281				144

Accounting Pronouncements Not Yet Adopted - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. In July 2018, the FASB issued ASU 2018-11, which allows a transition election to not restate comparative periods for the effects of applying the new standard. This transition election permits entities to change the date of initial application of the standard to the beginning of the year of adoption and to recognize the effects of applying Topic 842 as a cumulative-effect adjustment to the opening balance of retained earnings. Certain qualitative and quantitative disclosures are also required. The Company will adopt this ASU and related amendments on February 2, 2019. The Company will elect the optional transition approach and recognize the cumulative impact of adoption in the opening balance of retained earnings to beginning fiscal year 2019. The Company currently estimates the impact of adopting Topic 842 will result in an increase in lease-related assets of $3.2 billion to $3.6 billion and an increase in lease-related liabilities of $3.5 billion to $3.9 billion on its consolidated balance sheet, as a result of the requirement to recognize right-of-use assets and lease liabilities for operating leases. The Company does not expect a material impact to the Company’s consolidated statements of earnings, comprehensive income, shareholders’ equity, or cash flows.

NOTE 2: Change in Accounting Principle - During the fourth quarter of fiscal 2018, the Company changed its method of accounting for shipping and handling costs from the Company’s stores, distribution centers, and other locations to customers. Under the new accounting principle, shipping and handling costs related to the delivery of products from the Company to customers are included in costs of sales, whereas previously, they were included in SG&A expense as well as depreciation and amortization. In connection with the change in presentation, the Company also changed its definition of shipping and handling costs to include all direct and indirect costs associated with delivering product to a customer, including expenses associated with the central delivery terminals and depreciation and amortization of delivery assets. Under the previous definition of shipping and handling costs, the Company only included third-party delivery costs, salaries, and vehicle operations expenses relating to the delivery of product from stores and distribution centers to customers. The impact of this change in definition was not material.

The Company believes including these expenses in cost of sales is preferable, as it better aligns these costs with the related revenue in the gross profit calculation and is consistent with the practices of other retailers. This change in accounting principle has been applied retrospectively, and the consolidated statements of earnings reflect the effect of this accounting principle change in all years presented. This reclassification had no impact on operating income, net earnings or diluted earnings per share. The consolidated balance sheets, the consolidated statements of comprehensive income, consolidated statements of shareholders’ equity, and the consolidated statements of cash flows are not impacted by this accounting principle change.

The consolidated statements of earnings for fiscal 2018, 2017, and 2016 have been adjusted to reflect this change in accounting principle. The impact of the adjustment for fiscal 2018 was an increase of $1.2 billion to cost of sales and a corresponding decrease to SG&A expense of $1.1 billion and depreciation and amortization expense of $39 million. The impact of this adjustment for fiscal 2017 was an increase of $975 million to cost of sales and a corresponding decrease to SG&A expense of $932 million and depreciation and amortization expense of $43 million. The impact of the adjustment to fiscal 2016 was an increase of $790 million to cost of sales and a corresponding decrease to SG&A expense of $754 million and depreciation and amortization expense of $36 million.

NOTE 3: Revenue Recognition - Net sales consists primarily of revenue, net of sales tax, associated with contracts with customers for the sale of goods and services in amounts that reflect consideration the Company is entitled to in exchange for those goods and services.

The following table presents the Company’s sources of revenue:

(In millions)		Year Ended
	February 1, 2019				February 2, 2018				February 3, 2017
Products		$	67,197			$	65,421			$	62,053
Services		2,539				2,469				2,505
Other		1,573				729				459
Net sales		$	71,309			$	68,619			$	65,017

Revenue from products primarily relates to in-store and online merchandise purchases, which are recognized at the point in time when the customer obtains control of the merchandise, which is at the time of in-store purchase or delivery of the product to the customer. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded. Under ASU 2014-09, the merchandise return reserve is presented on a gross basis, with a separate asset and liability included in the consolidated balance sheets as of reporting periods after February 2, 2018. Reporting periods prior to the adoption of ASU 2014-09 reflect merchandise return reserves on a net basis. As of February 1, 2019, anticipated sales returns of $194 million are reflected in other current liabilities, and the associated right of return assets of $127 million are reflected in other current assets. As of February 2, 2018, the merchandise return reserve, net of the associated asset, was $71 million reflected in other current liabilities.

Revenues from services primarily relate to professional installation services the Company provides through subcontractors related to merchandise purchased by a customer. In certain instances, installation services include materials provided by the subcontractor, and both product and installation are included in service revenue. The Company recognizes revenue associated with services as they are rendered, and the majority of services are completed less than one week from initiation.

Deferred revenue is presented for merchandise that has not yet transferred control to the customer and for services that have not yet been provided, but for which tender has been accepted. Deferred revenue is recognized in sales either at a point in time when the customer obtains control of merchandise through pickup or delivery, or over time as services are provided to the customer. Deferred revenues associated with amounts received for which customers have not taken possession of the merchandise or for which installation has not yet been completed were $790 million at February 1, 2019 and $831 million at February 2, 2018. The majority of revenue for goods and services is recognized in the quarter following revenue deferral.

Stored-value cards

In addition, the Company defers revenues from stored-value cards, which include gift cards and returned merchandise credits, and recognizes revenue into sales when the cards are redeemed. The liability associated with outstanding stored-value cards was $509 million and $547 million at February 1, 2019, and February 2, 2018, respectively, and these amounts are included in deferred revenue on the consolidated balance sheets. Upon adoption of ASU 2014-09, the Company recognizes income from unredeemed stored-value cards in proportion to the pattern of rights exercised by the customer. Amounts recognized as breakage were insignificant for the years ended February 1, 2019, February 2, 2018 and February 3, 2017.

Extended protection plans

The Company also defers revenues for its separately-priced extended protection plan contracts, which is a Lowe’s-branded program for which the Company is ultimately self-insured. The Company recognizes revenue 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 five years from the date of purchase or the end of the manufacturer’s warranty, as applicable. Deferred revenue from extended protection plans recognized into sales were $390 million for the fiscal year ended February 1, 2019, $368 million for the fiscal year ended February 2, 2018, and $353 million for the fiscal year ended February 3, 2017, respectively. Incremental direct acquisition costs associated with the sale of extended protection plans are also deferred and recognized as expense on a straight-line basis over the respective contract term and were insignificant at February 1, 2019, February 2, 2018 and February 3, 2017, respectively. The Company’s extended protection plan deferred costs are included in other assets (noncurrent) on the consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising expenses are expensed as incurred.

The liability for extended protection plan claims incurred is included in other current liabilities on the consolidated balance sheets and was not material in any of the periods presented. Expenses for claims are recognized when incurred and totaled $183 million for the fiscal year ended February 1, 2019, $161 million for the fiscal year ended February 2, 2018, $141 million for the fiscal year ended February 3, 2017, respectively.

Disaggregation of Revenues

The following table presents the Company’s net sales disaggregated by merchandise division:

		Year Ended
		February 1, 2019						February 2, 2018						February 3, 2017
(In millions)		Total Sales				%		Total Sales				%		Total Sales				%
Building & Maintenance ¹		$	28,582			40		$	27,689			41		$	25,868			40
Home Décor ²		27,987				39		27,422				39		26,269				40
Seasonal ³		12,786				18		12,384				19		12,090				19
Other		1,955				3		1,124				1		790				1
Total		$	71,309			100		$	68,619			100		$	65,017			100

1	Building & Maintenance includes the following product categories: Lumber & Building Materials, Millwork, Rough Plumbing & Electrical, and Tools & Hardware.

2	Home Décor includes the following product categories: Appliances, Fashion Fixtures, Flooring, Kitchens, and Paint.

3	Seasonal includes the following product categories: Lawn & Garden and Seasonal & Outdoor Living.

The following table presents the Company’s net sales disaggregated by geographical area:

(In millions)		Year Ended
	February 1, 2019				February 2, 2018				February 3, 2017
United States		$	65,872			$	63,263			$	61,333
International		5,437				5,356				3,684
Net Sales		$	71,309			$	68,619			$	65,017

Practical Expedients

Sales commissions and other selling costs are considered immaterial and are expensed as incurred because the amortization period of the assets would be one year or less. These costs are reflected within SG&A expenses.

NOTE 4: Acquisitions

Maintenance Supply Headquarters

On June 23, 2017, the Company completed its acquisition of Maintenance Supply Headquarters, a leading distributor of maintenance, repair and operations (MRO) products serving the multifamily housing industry. The acquisition enables the

Company to deepen and broaden its relationship with Pro customers and better serve their needs. The aggregate cash purchase price of this acquisition was $513 million and is included in the investing section of the consolidated statements of cash flows, net of the cash acquired. Acquisition-related costs were expensed as incurred and were not significant.

The following table summarizes the aggregate purchase price allocation:

(In millions)	June 23, 2017
Allocation:
Cash acquired	$	4
Merchandise inventory	68
Other current assets	36
Property	12
Goodwill	160
Other assets	260
Accounts payable	(18		)
Other current liabilities	(9		)
Net assets acquired	$	513

Intangible assets acquired totaled $259 million, and include a trademark of $34 million with a useful life of 15 years and a customer list of $225 million with a useful life of 20 years, each of which are included in other assets in the accompanying consolidated balance sheets. The goodwill of $160 million is primarily attributable to the synergies associated with the acquisition and is deductible for tax purposes.

Pro forma and historical financial information has not been provided as the acquisition was not material to the consolidated financial statements.

RONA

On May 20, 2016, the Company acquired all of the issued and outstanding common shares of RONA for C$24 per share in cash. In addition, as part of the transaction, borrowings under RONA’s revolving credit facility were settled in full at the closing of the acquisition, and the facility was eliminated. Total cash consideration to acquire the equity and settle the debt was C$3.1 billion ($2.4 billion) and is included in the investing section of the consolidated statements of cash flows. RONA is one of Canada’s largest retailers and distributors of hardware, building materials, home renovation, and gardening products. The acquisition enables the Company to accelerate its growth strategy by significantly expanding its presence in the Canadian home improvement market. Acquisition-related costs were expensed as incurred and were not significant.

The following represents the aggregate purchase price allocation which includes purchase accounting adjustments made during the measurement period:

(In millions)	May 20, 2016
Purchase price:
Cash paid to common shareholders	$	1,999
Cash paid to debt holders	368
Total cash paid	$	2,367
Allocation:
Cash acquired	$	83
Accounts receivable	260
Merchandise inventory	814
Property	897
Goodwill	971
Other assets	437
Other current liabilities	(619		)
Long-term liabilities	(367		)
Noncontrolling interest	(109		)
Net assets acquired	$	2,367

The intangible assets acquired totaled $310 million, and include trademarks of $204 million with a weighted average useful life of 15 years and dealer relationships of $106 million with a weighted average useful life of 20 years, which are included in other assets in the accompanying consolidated balance sheets. The goodwill of $971 million is primarily attributable to the synergies associated with the acquisition. Goodwill of approximately $107 million is expected to be deductible for tax purposes.

The transaction included the assumption by Lowe’s of unsecured debentures held by RONA of approximately C$118 million ($91 million) as of the acquisition date. The debentures matured and were settled in October 2016.

As of the acquisition date, 6.9 million preferred shares of RONA remained outstanding. The total fair value of the shares and Lowe’s corresponding noncontrolling interest was $109 million, which was determined based on the closing market price of RONA’s preferred shares on the acquisition date. During the fourth fiscal quarter of 2016, the Company acquired all of the remaining noncontrolling interest in RONA by paying RONA’s preferred shareholders approximately $127 million, which represented an $18 million premium in excess of the carrying amount of the noncontrolling interest. See Note 15 to the consolidated financial statements for information regarding the impact of this transaction to the Company’s earnings per share calculation.

Pro forma and historical financial information has not been provided as the acquisition was not material to the consolidated financial statements. In addition, net earnings attributable to the noncontrolling interest was not significant for any of the reporting periods presented.

NOTE 5: Investment in Australian Joint Venture

In the fourth quarter of fiscal year 2015, the Company announced its decision to exit the Australian joint venture investment with Woolworths Limited (Woolworths) and recorded a $530 million impairment of its equity method investment due to a determination that there was a decrease in value that was other than temporary. The Company owned a one-third share in the joint venture, Hydrox Holdings Pty Ltd. (Hydrox), which operated Masters Home Improvement stores and Home Timber and Hardware Group’s retail stores and wholesale distribution in Australia. As a result of this decision to exit, Woolworths was required to purchase the Company’s one-third share at its fair value as of January 18, 2016. The process for the two parties agreeing on fair value is prescribed in the Joint Venture Agreement. The $530 million non-cash impairment charge recorded in fiscal 2015 was based on the Company’s estimate of the value of its portion of the overall joint venture fair value as of January 18, 2016.

During the third quarter of fiscal year 2016, Woolworths claimed a unilateral termination of the joint venture agreement, and executed other agreements to initiate the wind down of Hydrox without the Company’s approval as required under the joint

venture agreement. Due to this, Lowe’s concluded that under applicable accounting standards, the investment should be accounted for as a cost method investment going forward. As a result of this determination, accumulated foreign currency translation adjustments of $208 million were reclassified from accumulated other comprehensive loss into the carrying value of the cost method investment. In addition, the unilateral actions of Woolworths to begin the liquidation of Hydrox, represented a triggering event requiring the Company to evaluate the cost method investment for impairment. Management determined that the requirements for determining impairment were met, and leveraged wind down cash flow projections in determining the estimated fair value of the entity as of October 28, 2016. The value was determined using an income approach based upon the expected future cash flows generated from the settlement of assets and liabilities inclusive of inventory, property, payables, lease liabilities and employee entitlements. As a result, the Company recorded a $290 million non-cash impairment charge during the third quarter of fiscal 2016 to reflect its estimated portion of the overall joint venture fair value in wind down. The Company classified this fair value measurement as Level 3. See Note 6 for additional information on the Company’s fair value measurements.

Following the impairment recorded in the third quarter of fiscal 2016, the Company considered the amount due under the joint venture agreement, which was based on the fair value as of January 18, 2016 on a going concern basis, to exceed the recorded amount of the investment, which was based on an estimated current fair value in wind down. This claim for additional value under the joint venture agreement above and beyond any amounts expected to be received through the wind down process, represented a contingent asset whereby the Company would recognize any amounts as they were realized.

During the second quarter of fiscal 2017, the Company completed the sale of our interest in the Australian joint venture with Woolworths and received proceeds of $199 million, which is included in cash flows from investing activities in the accompanying consolidated statements of cash flows. The proceeds from the sale exceeded the carrying value of the investment and resulted in a gain of $96 million. The carrying value prior to the sale reflected the non-cash impairment charges taken in fiscal years 2015 and 2016. The gain is included in SG&A expense in the accompanying consolidated statements of earnings.

NOTE 6: Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows:

•	Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities

•	Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly

•	Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The Company’s available-for-sale securities represented the only significant assets measured at fair value on a recurring basis for the fiscal years ended February 1, 2019 and February 2, 2018. The following table presents the Company’s financial assets measured at fair value on a recurring basis. The fair values of these instruments approximated amortized costs.

			Fair Value Measurements at
(In millions)	Measurement Level		February 1, 2019				February 2, 2018
Available-for-sale securities:
Money market funds	Level 1		$	207			$	86
Agency securities	Level 2		10				—
Corporate debt securities	Level 2		1				—
Certificates of deposit	Level 1		—				16
Total short-term investments			$	218			$	102
Available-for-sale securities:
Corporate debt securities	Level 2		$	191			$	—
Agency securities	Level 2		$	65			$	—
Municipal floating rate obligations	Level 2		$	—			$	407
Certificates of deposit	Level 1		—				1
Total long-term investments			$	256			$	408

There were no transfers between Levels 1, 2 or 3 during any of the periods presented.

When available, quoted prices were used to determine fair value. When quoted prices in active markets were available, investments were classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable market inputs. The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

For the fiscal year ended February 1, 2019, the Company’s only significant measurements of assets and liabilities at fair value on a nonrecurring basis subsequent to their initial recognition were goodwill (see Note 1 to the consolidated financial statements for additional information regarding this fair value measurement) and certain long-lived assets. For the fiscal year ended February 2, 2018, the Company had no significant measurements of assets and liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

Long-lived assets

The Company reviews the carrying amount of a long-lived asset (group) whenever certain events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets are grouped for review at the lowest level of identifiable cash flows. With input from executive management and retail store operations, the Company’s accounting and finance personnel that organizationally report to the chief financial officer assess the performance of retail stores and other long-lived assets (groups) quarterly against historical patterns, projections of future profitability and whether it is more likely than not the assets (groups) will be disposed of significantly prior to the end of their estimated useful life for evidence of possible impairment. An impairment loss is recognized when the carrying amount of the asset or group is not recoverable and exceeds its fair value. The Company estimated the fair values of assets subject to long-lived asset impairment based on the Company’s own judgments about the assumptions that market participants would use in pricing the assets and on observable market data, when available. The Company classified these fair value measurements as Level 3.

In the determination of impairment for operating locations, the Company determined the fair values of individual operating locations using an income approach, which required discounting projected future cash flows. When determining the stream of projected future cash flows associated with an individual operating location, management made assumptions, including highest and best use, incorporating local market conditions and inputs from retail store operations where necessary, and about key variables including the following unobservable inputs: sales growth rates, gross margin, controllable and uncontrollable expenses, and asset residual values. In order to calculate the present value of those future cash flows, the Company discounted cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows. In general, the selected market participants represented a group of other retailers with a location footprint similar in size to the Company’s. Any impairment identified is included in SG&A expense in the accompanying consolidated statements of earnings.

As part of a strategic reassessment of Orchard Supply Hardware (Orchard), during the three months ended August 3, 2018, it was determined to be more likely than not the assets of Orchard would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives, and therefore, these assets experienced a triggering event and were evaluated for recoverability. Operating locations evaluated for recoverability included all Orchard stores, as well as a distribution facility that services the Orchard stores and a corporate facility. Based on this evaluation of Orchard, certain long-lived assets, including tangible and intangible assets, were written down to their fair value of $284 million resulting in impairment charges of $206 million.

During the three months ended November 2, 2018, the company committed to closing 20 U.S. home improvement stores and 31 locations in Canada, including 27 stores, as well as exiting certain non-core activities within its U.S. home improvement business. As a result of these decisions, the related assets experienced a triggering event and were evaluated for recoverability. Based on this evaluation, certain long-lived assets were written down to their fair value of $81 million resulting in impairment charges of $99 million.

In addition, during the three months ended November 2, 2018, it was determined to be more likely than not that the assets of the Mexico operations would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives, and therefore, these assets experienced a triggering event and were evaluated for recoverability. Locations evaluated for recoverability included all 13 stores in Mexico, as well as a corporate facility. Based on this evaluation of the Mexico operations, certain long-lived assets were written down to their fair value of $107 million resulting in impairment charges of $22 million.

Assets held for sale

During the three months ended February 1, 2019, the Company committed to a plan to exit its Mexico operations and began marketing the operations to potential acquirers. In addition, the Company determined that the asset group is ready for immediate sale, completion of sale is probable within the next year, and no significant changes to the plan to sale are expected. Accordingly, as of February 1, 2019, the Company determined that the held-for sale criteria were met and measured the assets, including currency translation adjustments, of the Mexico operations at fair value less costs to sell of $79 million, resulting in an additional impairment charge of $222 million. The fair value of the Mexico operations was determined using a probability weighted approach of discounted cash flow and market multiple analyses and included management assumptions regarding expected sales growth, margin expansion, operational leverage, capital expenditures, and overall operational forecasts. The Company classified this fair value measurement as Level 3. These non-cash impairment charges are included in SG&A expense in the accompanying consolidated statements of earnings.

See Note 8 for additional information regarding the Company’s decisions to exit its Orchard operations and certain U.S. and Canada locations during the third quarter and its decision to exit Mexico operations in the fourth quarter, as part of the Company’s ongoing strategic reassessment of the business.

The following table presents the Company’s assets measured at estimated fair value on a nonrecurring basis and the resulting impairment losses included in earnings, excluding costs to sell for excess properties held-for-sale. Because these assets subject to impairment were not measured at fair value on a recurring basis, certain fair value measurements presented in the table may reflect values at earlier measurement dates and may no longer represent the fair values at February 1, 2019.

Fair Value Measurements - Nonrecurring Basis

	February 1, 2019
(In millions)	Fair Value Measurements				Impairment Losses
Assets-held-for-use:
Operating locations	$	473			$	(331	)
Assets-held-for-sale:
Mexico operating locations	$	79			$	(222	)
Goodwill (Note 1)	$	2,851			$	(952	)
Total	$	3,403			$	(1,505	)

Fair Value of Financial Instruments

The Company’s financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and long-term debt and are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature. The fair values of the Company’s unsecured notes were estimated using quoted market prices. The fair values of the Company’s mortgage notes were estimated using discounted cash flow analyses, based on the future cash outflows associated with these arrangements and discounted using the applicable incremental borrowing rate.

Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding capitalized lease obligations, are as follows:

	February 1, 2019								February 2, 2018
(In millions)	Carrying Amount				Fair Value				Carrying Amount				Fair Value
Unsecured notes (Level 1)	$	14,721			$	14,473			$	14,961			$	15,608
Mortgage notes (Level 2)	6				6				6				7
Long-term debt (excluding capitalized lease obligations)	$	14,727			$	14,479			$	14,967			$	15,615

NOTE 7: Property and Accumulated Depreciation

Property is summarized by major class in the following table:

(In millions)	Estimated Depreciable Lives, In Years		February 1, 2019				February 2, 2018
Cost:
Land	N/A		$	7,196			$	7,414
Buildings and building improvements	5-40		18,052				18,521
Equipment	2-15		10,090				10,475
Construction in progress	N/A		525				530
Total cost			35,863				36,940
Accumulated depreciation			(17,431		)		(17,219		)
Property, less accumulated depreciation			$	18,432			$	19,721

Included in net property are assets under capital lease of $665 million, less accumulated depreciation of $244 million, at February 1, 2019, and $724 million less accumulated depreciation of $273 million, at February 2, 2018. The related amortization expense for assets under capital lease is included in depreciation expense. The Company recognized depreciation expense of $1.4 billion in 2018 and 2017, and $1.5 billion in 2016.

NOTE 8: Exit Activities

During the second quarter of fiscal year 2018, the Company initiated a strategic reassessment of its business to drive increased focus on its core home improvement operations. As a result of this reassessment, the Company decided to exit certain activities and close certain locations as further described below.

Orchard Supply Hardware (Orchard)

On August 17, 2018, the Company approved plans to exit its Orchard operations by closing all 99 Orchard stores, which are located in California, Oregon and Florida, as well as the distribution facility that services the Orchard stores, and the Orchard corporate office. To facilitate an orderly wind-down, the Company partnered with Hilco Merchant Services to help manage the store closing sales process and provide a seamless experience for customers. All facilities were closed by the end of fiscal year 2018.

During the second quarter ended August 3, 2018, the Company recorded $230 million of pre-tax charges associated with its Orchard operations. This included $206 million of impairment of certain long-lived assets, including tangible and intangible assets, due to the determination it was more likely than not the assets of Orchard would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives (see Note 6 to the consolidated financial statements) and $24 million related primarily to three store projects that were discontinued during the quarter. During the third quarter ended November 2, 2018, the Company recorded $123 million of pre-tax charges related to the exit of its Orchard operations, including accelerated depreciation and amortization of $103 million, severance costs of $11 million, and costs associated with lease obligations of $9 million During the fourth quarter ended February 1, 2019, the Company recorded $208 million of additional pre-tax charges related to lease obligation costs at the cease use date of the individual facilities.

U.S. and Canada Location Closings

On October 31, 2018, the Company committed to closing 20 U.S. home improvement stores and 31 locations in Canada, including 27 stores. The store closings were completed in the fourth quarter of fiscal 2018. In addition, the Company concurrently decided to no longer pursue a new store project that was in process. As a result of these decisions, during the third quarter ended November 2, 2018, the Company recorded $121 million of pre-tax charges, including $90 million of impairment of certain long-lived assets (see Note 6 to the consolidated financial statements), severance costs of $21 million, and discontinued project costs of $10 million. The Company recorded $150 million of additional pre-tax charges during the fourth quarter ended February 1, 2019, including lease obligation costs of $89 million, accelerated depreciation of $50 million, and severance costs of $11 million.

Mexico Operations

On November 9, 2018, subsequent to the end of the Company’s third quarter of fiscal 2018, management and the Board of Directors decided to pursue an exit of the Company’s Mexico operations. During the third quarter ended November 2, 2018, the Company recorded $22 million of pre-tax charges associated with long-lived asset impairment due to the determination it was more likely than not the assets of the Mexico operations would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives.

During the fourth quarter ended February 1, 2019, the Company committed to a plan to exit its Mexico operations and classified these assets as held for sale. As a result, impairment charges of $222 million were recorded during the quarter to measure the Mexico operations at fair value less costs to sell. (See Note 6 for additional information regarding these fair value measurements).

Other Non-Core Activities

During the third quarter ended November 2, 2018, the Company decided to pursue an exit of certain non-core activities within its U.S. home improvement business. As a result of these decisions, during the third quarter ended November 2, 2018, the Company recorded $14 million of pre-tax charges, including long-lived asset impairments of $9 million (see Note 6 to the consolidated financial statements), and the write-down of inventory to net realizable value of $5 million. During the fourth quarter ended February 1, 2019, the Company recorded additional pre-tax charges of $32 million, including closing costs of $27 million, severance costs of $3 million, and write-down of inventory to net realizable value of $2 million.

In addition, during the fourth quarter ended February 1, 2019, the Company decided to eliminate the Projects Specialists Interiors positions from its U.S. home improvement stores. As a result of the elimination of this position, the Company recorded $13 million of pre-tax charges related to severance costs.

A summary of the significant components of charges associated with the exit activities discussed above, are as follows:

	Costs Incurred
	Three Months Ended				Three Months Ended				Three Months Ended				Year Ended
(In millions)	August 3, 2018				November 2, 2018				February 1, 2019				February 1, 2019
Long-lived asset impairments	$	206			$	121			$	222			$	549
Lease obligation costs for closed locations	—				9				298				307
Accelerated depreciation and amortization	—				103				50				153
Severance costs	—				32				26				58
Discontinued project write-offs	24				10				—				34
Inventory adjustments to net realizable value	—				5				2				7
Other closing costs	—				—				27				27
Total	$	230			$	280			$	625			$	1,135

All estimated amounts are subject to change until finalized. Expenses associated with long-lived asset impairment, discontinued projects, severance, and lease obligations, are included in SG&A expense in the consolidated statement of earnings. Inventory adjustments to net realizable value are included in cost of sales in the consolidated statement of earnings. Severance costs of $33 million remain accrued as of February 1, 2019 related to the Company’s strategic reassessment of the business.

The following table summarizes store closing lease obligations activity during the twelve months ended February 1, 2019:

		2018
(In millions)		Lease obligations
Accrual for exit activities, balance at the beginning of period		$	60
Additions to the accrual - net		365
Cash payments		(86		)
Adjustments 1		22
Accrual for exit activities, balance at the end of period		$	361

1 Adjustments represents changes in estimates around sublease assumptions.

NOTE 9: Short-Term Borrowings

In September 2018, the Company entered into a $1.75 billion five year unsecured revolving second amended and restated credit agreement (the Second Amended and Restated Credit Agreement) with a syndicate of banks. The Second Amended and Restated Credit Agreement amends and restates the Company’s amended and restated credit agreement, dated November 23, 2016 (the Amended and Restated Credit Agreement), to among other things (i) extend the maturity date of the revolving credit facility to September 2023 and (ii) modify the revolving commitments of the existing lenders. The Company may request borrowings under the Second Amended and Restated Credit Agreement that are denominated in U.S. Dollar, Euro, Sterling, Canadian Dollar and other currencies approved by the administrative agent and the lenders. Borrowings under the Second Amended and Restated Credit Agreement will bear interest calculated according to a Base Rate or a Eurocurrency Rate, plus an applicable margin.

In January 2019, the Company increased the aggregate availability under the Second Amended and Restated Credit Agreement by $230 million for a total of $1.98 billion available. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the Second Amended and Restated Credit Agreement, the Company may increase the aggregate availability by an additional $270 million. The Second Amended and Restated Credit Agreement contains customary representations, warranties, and covenants for a transaction of this type. The Company was in compliance with those covenants at February 1, 2019.

In September 2018, the Company entered into a $250 million unsecured 364-day credit agreement (the 364-Day Credit Agreement) with a syndicate of banks. The Company may request borrowings under the 364-Day Credit Agreement that are denominated in U.S. Dollar, Euro, Sterling, Canadian Dollar and other currencies approved by the administrative agent and the

lenders. The Company must repay the aggregate principal amount of loans outstanding under the 364-Day Credit Agreement on the termination date in effect at such time (currently September 9, 2019). The Company may elect to convert all of the loans outstanding under the 364-Day Credit Agreement on the termination date into a term loan which the Company shall repay in full on the first anniversary date of the termination date. Borrowings under the 364-Day Credit Agreement will bear interest calculated according to a Base Rate or a Eurocurrency Rate plus an applicable margin. The 364-Day Credit Agreement contains customary representations, warranties and covenants for a transaction of this type. The Company was in compliance with those covenants at February 1, 2019.

The Second Amended and Restated Credit Agreement and the 364-Day Credit Agreement both support our commercial paper program. The amount available to be drawn under the Second Amended and Restated Credit Agreement and the 364-Day Credit Agreement is reduced by the amount of borrowings under our commercial paper program. Outstanding borrowings under the Company’s commercial paper program were $722 million, with a weighted average interest rate of 2.81%, as of February 1, 2019, and $1.1 billion, with a weighted average interest rate of 1.85%, as of February 2, 2018. There were no outstanding borrowings under the Second Amended and Restated Credit Agreement or the 364-Day Credit Agreement as of February 1, 2019. There were no outstanding borrowings under the Amended and Restated Credit Agreement as of February 2, 2018.

NOTE 10: Long-Term Debt

Debt Category (In millions)	Weighted-Average Interest Rate at February 1, 2019			February 1, 2019				February 2, 2018
Secured debt:
Mortgage notes due through fiscal 2027 1	5.26	%		$	6			$	6
Unsecured debt:
Notes due through fiscal 2023	3.43	%		3,832				4,079
Notes due fiscal 2024-2028	3.30	%		4,393				4,389
Notes due fiscal 2029-2033	6.50	%		309				309
Notes due fiscal 2034-2038	5.96	%		897				897
Notes due fiscal 2039-2043	4.96	%		1,411				1,410
Notes due fiscal 2044-2048	4.01	%		3,879				3,877
Capitalized lease obligations due through fiscal 2038				774				891
Total long-term debt				15,501				15,858
Less current maturities				(1,110		)		(294		)
Long-term debt, excluding current maturities				$	14,391			$	15,564

1	Real properties with an aggregate book value of $16 million were pledged as collateral at February 1, 2019, for secured debt.

Debt maturities, exclusive of unamortized original issue discounts, unamortized debt issuance costs, and capitalized lease obligations, for the next five years and thereafter are as follows: 2019, $1.1 billion; 2020, $500 million; 2021, $1.0 billion; 2022, $766 million; 2023, $500 million; thereafter, $11.0 billion.

The Company’s unsecured notes are issued under indentures that generally have similar terms and, therefore, have been grouped by maturity date for presentation purposes in the table above. The notes contain certain restrictive covenants, none of which are expected to impact the Company’s capital resources or liquidity. The Company was in compliance with all covenants of these agreements at February 1, 2019.

Unsecured notes issued during 2016 were as follows:

Issue Date		Principal Amount (in millions)				Maturity Date		Fixed vs. Floating		Interest Rate		Discount (in millions)
April 2016		$	250			April 2019		Floating		Floating		$	1
April 2016		$	350			April 2019		Fixed		1.150%		$	1
April 2016		$	1,350			April 2026		Fixed		2.500%		$	12
April 2016		$	1,350			April 2046		Fixed		3.700%		$	19

The floating rate notes issued in 2016 will bear interest at a floating rate, reset quarterly, equal to the three-month LIBOR-plus 0.240% (3.027% as of February 1, 2019). Interest on these floating rate notes is payable quarterly in arrears in April, July, October, and January of each year until maturity. Interest on the fixed rate notes issued in 2016 is payable semiannually in arrears in April and October of each year until maturity.

Unsecured notes issued during 2017 were as follows:

Issue Date		Principal Amount (in millions)				Maturity Date		Fixed vs. Floating		Interest Rate		Discount (in millions)
May 2017		$	1,500			May 2027		Fixed		3.100%		$	9
May 2017		$	1,500			May 2047		Fixed		4.050%		$	23

Interest on the notes issued in 2017 is payable semiannually in arrears in May and November of each year until maturity.

The discounts associated with these issuances, which include the underwriting and issuance discounts, are recorded in long-term debt and are being amortized over the respective terms of the notes using the effective interest method.

The indentures governing the fixed rate notes issued in 2017 and 2016 contain a provision that allows the Company to redeem the notes at any time, in whole or in part, at specified redemption prices plus accrued interest to the date of redemption. We do not have the right to redeem the floating rate notes issued in 2016 prior to maturity. The indentures also contain a provision that allows the holders of the notes to require the Company to repurchase all or any part of their notes if a change of control triggering event (as defined in the indentures) occurs. If elected under the change of control provisions, the repurchase of the notes will occur at a purchase price of 101% of the principal amount, plus accrued and unpaid interest on such notes to the date of purchase, if any. The indentures governing the notes do not limit the aggregate principal amount of debt securities that the Company may issue and do not require the Company to maintain specified financial ratios or levels of net worth or liquidity. However, the indenture includes various restrictive covenants, none of which is expected to impact the Company’s liquidity or capital resources.

During 2017, the Company completed a cash tender offer to purchase and retire $1.6 billion combined aggregate principal amount of its outstanding notes and recognized a loss on extinguishment of debt of $464 million.

NOTE 11: Shareholders’ Equity

Authorized shares of preferred stock were 5.0 million ($5 par value) at February 1, 2019, and February 2, 2018, none of which have been issued. The Board of Directors may issue the preferred stock (without action by shareholders) in one or more series, having such voting rights, dividend and liquidation preferences, and such conversion and other rights as may be designated by the Board of Directors at the time of issuance.

Authorized shares of common stock were 5.6 billion ($.50 par value) at February 1, 2019, and February 2, 2018.

The Company has a share repurchase program that is executed through purchases made from time to time either in the open market or through private off-market transactions. Shares purchased under the repurchase program are retired and returned to authorized and unissued status. On January 26, 2018, the Company’s Board of Directors authorized a $5.0 billion share repurchase under the program with no expiration, which was announced on the same day. On December 12, 2018, the Company’s Board of Directors authorized an additional $10.0 billion share repurchase under the program with no expiration, which was announced the same day. As of February 1, 2019, the Company had $13.9 billion remaining under the program.

During the year ended February 1, 2019, the Company entered into Accelerated Share Repurchase (ASR) agreements with third-party financial institutions to repurchase a total of 11.0 million shares of the Company’s common stock for $1.1 billion. At inception, the Company paid the financial institutions using cash on hand and took initial delivery of shares. Under the terms of the ASR agreements, upon settlement, the Company would either receive additional shares from the financial institution or be required to deliver additional shares or cash to the financial institution. The Company controlled its election to either deliver additional shares or cash to the financial institution and was subject to provisions which limited the number of shares the Company would be required to deliver.

The final number of shares received upon settlement of each ASR agreement was determined with reference to the volume-weighted average price of the Company’s common stock over the term of the ASR agreement. The initial repurchase of shares under these agreements resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share.

These ASR agreements were accounted for as treasury stock transactions and forward stock purchase contracts. The par value of the shares received was recorded as a reduction to common stock with the remainder recorded as a reduction to capital in excess of par value and retained earnings. The forward stock purchase contracts were considered indexed to the Company’s own stock and were classified as equity instruments.

The terms of each ASR agreement entered into during the last three fiscal years, structured as outlined above, follow (in millions):

Agreement Execution Date	ASR Settlement Date	ASR Agreement Amount			Initial Shares Delivered		Additional Shares Delivered at Settlement		Total Shares Delivered
Q1 2016	Q2 2016	$	500		6.2		0.6		6.8
Q2 2016	Q3 2016	500			5.3		1.0		6.3
Q3 2016	Q3 2016	250			2.8		0.6		3.4
Q4 2016	Q4 2016	190			2.4		0.2		2.6
Q1 2017	Q1 2017	500			5.3		0.8		6.1
Q2 2017	Q2 2017	500			5.2		1.2		6.4
Q3 2017	Q3 2017	250			2.9		0.3		3.2
Q2 2018	Q2 2018	550			4.8		0.8		5.6
Q3 2018	Q3 2018	310			2.5		0.3		2.8
Q4 2018	Q1 2019	270			2.6		0.3		2.9

During the year ended February 1, 2019, the Company also repurchased shares of its common stock through the open market totaling 20.2 million shares for a cost of $1.9 billion.

The Company also withholds shares from employees to satisfy either the exercise price of stock options exercised or the statutory withholding tax liability resulting from the vesting of restricted stock awards and performance share units.

Shares repurchased for 2018, 2017 and 2016 were as follows:

	2018							2017							2016
(In millions)	Shares			Cost 1				Shares			Cost 1				Shares			Cost 1
Share repurchase program	31.2			$	2,999			39.1			$	3,133			46.7			$	3,500
Shares withheld from employees	0.5			46				0.5			41				1.0			77
Total share repurchases	31.7			$	3,045			39.6			$	3,174			47.7			$	3,577

1	Reductions of $2.8 billion, $2.9 billion, and $3.3 billion were recorded to retained earnings, after capital in excess of par value was depleted, for 2018, 2017, and 2016, respectively.

NOTE 12: Accounting for Share-Based Payments

Overview of Share-Based Payment Plans

The Company has a number of active and inactive equity incentive plans (the Incentive Plans) under which the Company has been authorized to grant share-based awards to key employees and non-employee directors. The Company also has an employee stock purchase plan (the ESPP) that allows employees to purchase Company shares at a discount through payroll deductions. All of these plans contain a non-discretionary anti-dilution provision that is designed to equalize the value of an award as a result of any stock dividend, stock split, recapitalization, or any other similar equity restructuring.

A total of 199.0 million shares have been previously authorized for grant to key employees and non-employee directors under all of the Company’s Incentive Plans, but only 80.0 million of those shares were authorized for grants of share-based awards under the Company’s currently active Incentive Plans. In addition, a total of 70.0 million shares have been previously authorized for purchases by employees participating in the ESPP.

At February 1, 2019, there were 32.3 million shares remaining available for grants under the currently active Incentive Plans and 21.0 million shares remaining available for purchases under the ESPP.

The Company recognized share-based payment expense within SG&A expense in the consolidated statements of earnings of $74 million, $99 million, and $90 million in 2018, 2017 and 2016 respectively. The total associated income tax benefit recognized was $15 million, $31 million and $29 million in 2018, 2017 and 2016, respectively.

Total unrecognized share-based payment expense for all share-based payment plans was $113 million at February 1, 2019, of which $59 million will be recognized in 2019, $42 million in 2020 and $12 million thereafter. This results in these amounts being recognized over a weighted-average period of 1.9 years.

For all share-based payment awards, the expense recognized has been adjusted for estimated forfeitures where the requisite service is not expected to be provided. Estimated forfeiture rates are developed based on the Company’s analysis of historical forfeiture data for homogeneous employee groups.

General terms and methods of valuation for the Company’s share-based awards are as follows:

Stock Options

Stock options have terms of seven or 10 years, with one-third of each grant vesting each year for three years, and are assigned an exercise price equal to the closing market price of a share of the Company’s common stock on the date of grant. Options are expensed on a straight-line basis over the grant vesting period, which is considered to be the requisite service period.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. When determining expected volatility, the Company considers the historical volatility of the Company’s stock price, as well as implied volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, based on the options’ expected term. The expected term of the options is based on the Company’s evaluation of option holders’ exercise patterns and represents the period of time that options are expected to remain unexercised. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted average assumptions used in the Black-Scholes option-pricing model and weighted-average grant date fair value for options granted in 2018, 2017, and 2016 are as follows:

	2018				2017				2016
Weighted-average assumptions used:
Expected volatility	23.3		%		23.6		%		24.0		%
Dividend yield	1.71		%		1.68		%		1.66		%
Risk-free interest rate	2.71		%		2.14		%		1.42		%
Expected term, in years	6.58				6.43				6.44
Weighted-average grant date fair value	$	21.12			$	18.30			$	15.00

The total intrinsic value of options exercised, representing the difference between the exercise price and the market price on the date of exercise, was approximately $36 million, $77 million and $73 million in 2018, 2017 and 2016, respectively.

Transactions related to stock options for the fiscal year ended February 1, 2019 are summarized as follows:

	Shares (In thousands)			Weighted-Average Exercise Price Per Share				Weighted-Average Remaining Term (In years)		Aggregate Intrinsic Value (In thousands)
Outstanding at February 2, 2018	2,815			$	60.84
Granted	1,021			90.75
Canceled, forfeited or expired	(385	)		79.63
Exercised	(760	)		55.95
Outstanding at February 1, 2019	2,691			$	70.87			7.10		$	72,613
Vested and expected to vest at February 1, 2019 1	2,610			$	70.18			7.04		$	72,067
Exercisable at February 1, 2019	1,719			$	60.49			6.03		$	62,943

1	Includes outstanding vested options as well as outstanding nonvested options after a forfeiture rate is applied.

Restricted Stock Awards

Restricted stock awards are valued at the market price of a share of the Company’s common stock on the date of grant. In general, these awards vest at the end of a three-year period from the date of grant and are expensed on a straight-line basis over that period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock awards granted was $86.99, $82.41 and $71.35 in 2018, 2017, and 2016, respectively. The total fair value of restricted stock awards vesting was approximately $85 million, $71 million and $151 million in 2018, 2017 and 2016, respectively.

Transactions related to restricted stock awards for the fiscal year ended February 1, 2019 are summarized as follows:

	Shares (In thousands)			Weighted-Average Grant-Date Fair Value Per Share
Nonvested at February 2, 2018	1,896			$	73.21
Granted	1,021			86.99
Vested	(772	)		70.93
Canceled or forfeited	(355	)		77.73
Nonvested at February 1, 2019	1,790			$	81.16

Deferred Stock Units

Deferred stock units are valued at the market price of a share of the Company’s common stock on the date of grant. For non-employee Directors, these awards vest immediately and are expensed on the grant date. During 2018, 2017 and 2016, each non-employee Director was awarded a number of deferred stock units determined by dividing the annual award amount by the fair market value of a share of the Company’s common stock on the award date and rounding up to the next 100 units. The annual award amount used to determine the number of deferred stock units granted to each Director was $175,000 for 2018 and 2017, and $150,000 for 2016. During 2018, the Company appointed a new Chairman of the Board who received an additional grant of deferred stock units. The award amount used to determine the additional units granted was $140,000. During 2018, 24,300 deferred stock units were granted and immediately vested for non-employee Directors. The weighted-average grant-date fair value per share of deferred stock units granted was $95.83, $80.22 and $80.35 in 2018, 2017 and 2016, respectively. The total fair value of deferred stock units vested was $2.3 million in 2018, $1.8 million in 2017, and $1.5 million in 2016. At February 1, 2019, there were 0.2 million deferred stock units outstanding, all of which were vested.

Performance Share Units

The Company issues performance share units classified as equity awards. Expense is recognized on a straight-line basis over the requisite service period, based on the probability of achieving the performance condition, with changes in expectations

recognized as an adjustment to earnings in the period of the change. Compensation cost is not recognized for performance share units that do not vest because service or performance conditions are not satisfied and any previously recognized compensation cost is reversed. Performance share units do not have dividend rights. The Company uses historical data to estimate the timing and amount of forfeitures.

The Company’s performance share units are classified as equity and contain performance and service conditions that must be satisfied for an employee to earn the right to benefit from the award. The performance condition is primarily based on the achievement of the Company’s target return on non-cash average assets (RONCAA). These awards are valued at the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period.

In fiscal 2016, the Company began issuing performance share units that contain a market condition modifier, in addition to having a performance and service condition. The performance condition for these awards continues to be based primarily on the achievement of the Company’s RONCAA targets. The market condition is based on the Company’s total shareholder return (TSR) compared to the median TSR of companies listed in the S&P 500 Index over a three year performance period. The Company used a Monte-Carlo simulation to determine the grant date fair value for these awards, which takes into consideration the possible outcomes pertaining to the TSR market condition. The weighted-average assumptions used in the Monte Carlo simulations for these awards granted in 2018 and 2017 are as follows:

	2018			2017
Weighted-average assumptions used:
Expected volatility	22.8	%		20.8	%
Dividend yield	1.77	%		1.62	%
Risk-free interest rate	2.36	%		1.46	%
Expected term, in years	2.81			2.83

In general, 0% to 200% of the Company’s performance share units vest at the end of a three year service period from the date of grant based upon achievement of the performance condition, or a combination of the performance and market conditions, specified in the performance share unit agreement.

The weighted-average grant-date fair value per unit of performance share units classified as equity awards granted was $82.22, $91.50 and $77.58 in 2018, 2017 and 2016, respectively. The total fair value of performance share units vesting was approximately $13 million, $31 million, and $24 million in 2018, 2017, and 2016, respectively.

Transactions related to performance share units classified as equity awards for the fiscal year ended February 1, 2019 are summarized as follows:

	Units (In thousands)1			Weighted-Average Grant-Date Fair Value Per Unit
Nonvested at February 2, 2018	698			$	81.31
Granted	320			82.22
Vested	(144	)		71.22
Canceled or forfeited	(261	)		82.09
Nonvested at February 1, 2019	613			$	83.83

¹	The number of units presented is based on achieving the targeted performance goals as defined in the performance share unit agreements. As of February 1, 2019, the maximum number of nonvested units that could vest under the provisions of the agreements was 1.2 million for the RONCAA awards.

Restricted Stock Units

Restricted stock units do not have dividend rights and are valued at the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period. In general, these awards vest at the end of a three-year period from the date of grant and are expensed on a straight-line basis over that period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of

forfeitures. The weighted-average grant-date fair value per share of restricted stock units granted was $80.32, $75.44 and $67.26 in 2018, 2017 and 2016, respectively. The total fair value of restricted stock units vesting was approximately $7.1 million, $5.6 million, and $7.7 million in 2018, 2017 and 2016, respectively.

Transactions related to restricted stock units for the fiscal year ended February 1, 2019 are summarized as follows:

	Shares (In thousands)			Weighted-Average Grant-Date Fair Value Per Share
Nonvested at February 2, 2018	277			$	69.21
Granted	182			80.32
Vested	(63	)		66.62
Canceled or forfeited	(67	)		73.65
Nonvested at February 1, 2019	329			$	74.95

ESPP

The purchase price of the shares under the ESPP equals 85% of the closing price on the date of purchase. The Company’s share-based payment expense per share is equal to 15% of the closing price on the date of purchase. The ESPP is considered a liability award and is measured at fair value at each reporting date, and the share-based payment expense is recognized over the six-month offering period. The Company issued 0.9 million shares of common stock in 2018, 1.1 million shares of common stock in 2017, and 1.3 million shares of common stock in 2016 and recognized $13 million of share based payment expense pursuant to the plan in 2018 and 2017, and $15 million of share-based payment expense pursuant to the plan in 2016.

NOTE 13: Employee Retirement Plans

The Company maintains a defined contribution retirement plan for eligible employees (the 401(k) Plan). Eligible employees may participate in the 401(k) Plan six months after their original date of service. Eligible employees hired or rehired prior to November 1, 2012, were automatically enrolled in the 401(k) Plan at a contribution rate of 1% of their pre-tax annual compensation unless they elected otherwise. Eligible employees hired or rehired November 1, 2012, or later must make an active election to participate in the 401(k) Plan. The Company makes contributions to the 401(k) Plan each payroll period, based upon a matching formula applied to employee deferrals (the Company Match). Participants are eligible to receive the Company Match pursuant to the terms of the 401(k) Plan. The Company Match varies based on how much the employee elects to defer up to a maximum of 4.25% of eligible compensation. The Company Match is invested identically to employee contributions and is immediately vested.

The Company maintains a Benefit Restoration Plan to supplement benefits provided under the 401(k) Plan to participants whose benefits are restricted as a result of certain provisions of the Internal Revenue Code of 1986. This plan provides for employee salary deferrals and employer contributions in the form of a Company Match.

The Company maintains a non-qualified deferred compensation program called the Lowe’s Cash Deferral Plan. This plan is designed to permit certain employees to defer receipt of portions of their compensation, thereby delaying taxation on the deferral amount and on subsequent earnings until the balance is distributed. This plan does not provide for Company contributions.

The Company recognized expense associated with these employee retirement plans of $164 million, $174 million and $180 million in 2018, 2017 and 2016, respectively.

NOTE 14: Income Taxes

The following is a reconciliation of the federal statutory tax rate to the effective tax rate:

	2018			2017			2016
Statutory federal income tax rate 1	21.0	%		33.7	%		35.0	%
State income taxes, net of federal tax benefit	4.8			2.9			3.6
Valuation allowance - Australian joint venture	—			(0.6	)		2.0
Goodwill impairment	5.5			—			—
Mexico impairment	1.5			—			—
Other, net	(1.0	)		1.2			(0.1	)
Effective tax rate	31.8	%		37.2	%		40.5	%

1	The Company utilized a blended rate in 2017 due to the Tax Cuts and Job Act enacted on December 22, 2017.

The components of the income tax provision are as follows:

(In millions)	2018				2017				2016
Current:
Federal	$	963			$	1,734			$	1,824
State	274				252				275
Total current 1	1,237				1,986				2,099
Deferred:
Federal	(102		)		60				6
State	(55		)		(4		)		3
Total deferred 1	(157		)		56				9
Total income tax provision	$	1,080			$	2,042			$	2,108

1	Amounts applicable to foreign income taxes were insignificant for all periods presented.

The tax effects of cumulative temporary differences that gave rise to the deferred tax assets and liabilities were as follows:

(In millions)	February 1, 2019				February 2, 2018
Deferred tax assets:
Self-insurance	$	252			$	238
Share-based payment expense	31				36
Deferred rent	58				66
Mexico impairment	74				—
Capital loss carryforwards	223				225
Net operating losses	239				213
Other, net	119				124
Total deferred tax assets	996				902
Valuation allowance	(569		)		(475		)
Net deferred tax assets	427				427
Deferred tax liabilities:
Property	(76		)		(264		)
Other, net	(57		)		(23		)
Total deferred tax liabilities	(133		)		(287		)
Net deferred tax asset	$	294			$	140

The Tax Cuts and Job Act (Tax Act) was enacted on December 22, 2017. Among numerous changes to existing laws, the Tax Act lowered the corporate federal income tax rate from 35% to 21%, as well as established a one-time deemed repatriation tax, effective on January 1, 2018. In accordance with ASC 740, the effects of changes in tax rates on deferred tax balances are required to be taken into consideration in the period in which the changes are enacted versus when they are effective. During the fourth quarter of 2017, the Company recorded $56 million of provisional tax expense for the revaluation of its U.S. net deferred tax assets and a $22 million provisional tax expense for the one-time transition tax. A blended statutory tax rate of 33.7% was utilized for 2017 in accordance with Section 15 of the Internal Revenue Code. This blended rate resulted in a tax benefit of $58 million for the year. For 2018, the Company’s effective tax rate differs from the 21% statutory rate primarily due to a goodwill impairment charge related to the Company’s operations in Canada, the majority of which is non-deductible for tax purposes. In addition, the rate was impacted by the decision to exit Mexico retail operations, which resulted in the anticipated recapture of previously deducted losses, as well as other current charges associated with impairments that are expected to be non-deductible for tax purposes. The Company completed its assessment of the Tax Act’s impact in January 2018, and in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin (SAB 118). The Company recorded an additional adjustment of $2 million in tax related to the one-time deemed repatriation transition tax.

As of February 1, 2019, the Company reported a deferred tax asset of $223 million, for the capital loss realized in 2017 for U.S. federal income tax purposes related to the exit from the Company’s joint venture investment in Australia. Since no present or future capital gains have been identified through which the asset can be realized, the Company has a full valuation allowance against the deferred tax asset. For U.S. federal tax purposes, this loss has a five-year carryforward period expiring at the end of fiscal 2022.

In December 2016, the U.S. Treasury Department and the U.S. Internal Revenue Service issued final and temporary regulations under Internal Revenue Code Section 987 (the Regulations). The Regulations provide guidance on the taxation of foreign currency gains and losses arising from qualified business units that operate in a currency other than the currency of their owner. As a result of the enacted guidance, net deferred tax assets were increased by $26 million in 2018 and decreased by $11 million and $33 million in 2017 and 2016, respectively. The Company’s plan to exit Mexico prior to the effective date of the Regulations resulted in $18 million of the deferred tax increase in 2018.

The Company operates as a branch in various foreign jurisdictions and cumulatively has incurred net operating losses of $800 million and $720 million as of February 1, 2019, and February 2, 2018, respectively. These net operating losses are subject to expiration in 2019 through 2038. Deferred tax assets have been established for these foreign net operating losses in the accompanying consolidated balance sheets. Given the uncertainty regarding the realization of the foreign net deferred tax assets, the Company recorded cumulative valuation allowances of $331 million and $234 million as of February 1, 2019, and February 2, 2018, respectively.

A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:

(In millions)	2018				2017				2016
Unrecognized tax benefits, beginning of year	$	—			$	6			$	3
Additions for tax positions of prior years	10				—				3
Reductions for tax positions of prior years	—				(2		)		—
Settlements	—				(1		)		—
Reductions due to a lapse in applicable statute of limitations	—				(3		)		—
Unrecognized tax benefits, end of year	$	10			$	—			$	6

The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $8 million as of February 1, 2019, and $5 million as of February 3, 2017.

The Company recognized $3 million of interest expense, $3 million of interest income, and $2 million of interest expense related to uncertain tax positions during 2018, 2017, and 2016, respectively. The Company had $3 million of accrued interest related to uncertain tax positions as of February 1, 2019. The Company had no accrued interest related to uncertain tax positions as of February 2, 2018.

Penalties recognized related to uncertain tax positions were insignificant for 2018, 2017, and 2016. Accrued penalties were also insignificant as of February 1, 2019 and February 2, 2018.

The Company is subject to examination by various foreign and domestic taxing authorities. There are ongoing U.S. state audits covering tax years 2013 to 2017. An audit of the Company’s Canadian operations by the Canada Revenue Agency for fiscal years 2014 and 2015 is on-going. The Company remains subject to income tax examinations for international income taxes for fiscal years 2012 through 2017. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and open years.

Note 15: Earnings Per Share

The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of share-based payment awards that contain a nonforfeitable right to receive dividends and, therefore, are considered to participate in undistributed earnings with common shareholders.

Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares as of the balance sheet date, as adjusted for the potential dilutive effect of non-participating share-based awards. The following table reconciles earnings per common share for 2018, 2017 and 2016:

(In millions, except per share data)	2018				2017				2016
Basic earnings per common share:
Net earnings attributable to Lowe's Companies, Inc.	$	2,314			$	3,447			$	3,091
Less: Net earnings allocable to participating securities	(7		)		(11		)		(11		)
Less: Premium paid to acquire noncontrolling interest	—				—				(18		)
Net earnings allocable to common shares, basic	$	2,307			$	3,436			$	3,062
Weighted-average common shares outstanding	811				839				880
Basic earnings per common share	$	2.84			$	4.09			$	3.48
Diluted earnings per common share:
Net earnings attributable to Lowe's Companies, Inc.	$	2,314			$	3,447			$	3,091
Less: Net earnings allocable to participating securities	(7		)		(11		)		(11		)
Less: Premium paid to acquire noncontrolling interest	—				—				(18		)
Net earnings allocable to common shares, diluted	$	2,307			$	3,436			$	3,062
Weighted-average common shares outstanding	811				839				880
Dilutive effect of non-participating share-based awards	1				1				1
Weighted-average common shares, as adjusted	812				840				881
Diluted earnings per common share	$	2.84			$	4.09			$	3.47

As discussed in Note 4 to the consolidated financial statements, the Company paid RONA’s preferred shareholders a premium to acquire the remaining noncontrolling interest in RONA during the fourth quarter of fiscal 2016. The premium paid was accounted for as a capital transaction and as such, no loss was recognized in the Company’s consolidated financial statements. However, the premium paid represents a return on investment to RONA’s preferred shareholders and is not available to common shareholders. Therefore, the premium paid to acquire the remaining noncontrolling interest is reflected in the table above as a deduction from net earnings to compute net earnings allocable to common shares.

Stock options to purchase 0.5 million, 0.5 million and 1.0 million shares of common stock for 2018, 2017 and 2016, respectively, were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive.

NOTE 16: Leases

The Company leases facilities and land for certain facilities under agreements with original terms generally of 20 years. The leases generally contain provisions for four to six renewal options of five years each. Some lease agreements also provide for contingent rentals based on sales performance in excess of specified minimums or on changes in the consumer price

index. Contingent rentals were not significant for any of the periods presented. The Company subleases certain properties that are not used in its operations. Sublease income was not significant for any of the periods presented.

The future minimum rental payments required under operating leases and capitalized lease obligations having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:

(In millions) Fiscal Year	Operating Leases				Capitalized Lease Obligations				Total
2019	$	595			$	133			$	728
2020	605				87				692
2021	564				90				654
2022	519				87				606
2023	473				86				559
Later years	2,609				783				3,392
Total minimum lease payments	$	5,365			$	1,266			$	6,631
Less amount representing interest					(492		)
Present value of minimum lease payments					774
Less current maturities					(65		)
Present value of minimum lease payments, less current maturities					$	709

Rental expenses under operating leases were $616 million, $626 million and $549 million in 2018, 2017 and 2016, respectively, and were recognized within SG&A expense. Excluded from these amounts are rental expenses associated with closed locations which were recognized as exit costs in the period of closure.

NOTE 17: Commitments and Contingencies

The Company is, from time to time, party to various legal proceedings considered to be in the normal course of business, none of which, individually or in the aggregate, are expected to be material to the Company’s financial statements. In evaluating liabilities associated with its various legal proceedings, the Company has accrued for probable liabilities associated with these matters. The amounts accrued were not material to the Company’s consolidated financial statements in any of the years presented. Reasonably possible losses for any of the individual legal proceedings which have not been accrued were not material to the Company’s consolidated financial statements.

As of February 1, 2019, the Company had non-cancellable commitments of $1.0 billion related to certain marketing and information technology programs, and purchases of merchandise inventory. Payments under these commitments are scheduled to be made as follows: 2019, $564 million; 2020, $352 million; 2021, $86 million; 2022, $20 million; thereafter, $0 million.

At February 1, 2019, the Company held standby and documentary letters of credit issued under banking arrangements which totaled $59 million. The majority of the Company’s letters of credit were issued for insurance and construction contracts.

NOTE 18: Related Parties

A member of the Company’s Board of Directors also serves on the Board of Directors of a vendor that provides branded consumer packaged goods to the Company. The Company purchased products from this vendor in the amount of $156 million in 2018, $149 million in 2017, and $124 million in 2016. Amounts payable to this vendor were insignificant at February 1, 2019 and February 2, 2018.

A member of the Company’s Board of Directors also serves on the Board of Directors of a vendor that provides certain services to the Company related to health and welfare benefit plans. The Company made payments to this vendor in the amount of $2 million in 2018, $14 million in 2017, and $59 million in 2016. Amounts payable to this vendor were insignificant at February 1, 2019 and February 2, 2018.

The Company’s President and Chief Executive Officer also serves on the Board of Directors of a vendor that provides transportation and business services to the Company. The Company purchased services from this vendor in the amount of $91

million in 2018. Amounts payable to this vendor were insignificant at February 1, 2019. This was not considered a related party relationship in 2017 or 2016.

NOTE 19: Other Information

Net interest expense is comprised of the following:

(In millions)	2018				2017				2016
Long-term debt	$	582			$	582			$	583
Capitalized lease obligations	58				56				53
Interest income	(28		)		(16		)		(12		)
Interest capitalized	(3		)		(5		)		(4		)
Interest on tax uncertainties	3				(3		)		2
Other	12				19				23
Interest - net	$	624			$	633			$	645

Supplemental disclosures of cash flow information:

(In millions)	2018				2017				2016
Cash paid for interest, net of amount capitalized	$	635			$	654			$	619
Cash paid for income taxes, net	$	1,316			$	1,673			$	2,217
Non-cash investing and financing activities:
Non-cash property acquisitions, including assets acquired under capital lease	$	44			$	97			$	86
Cash dividends declared but not paid	$	385			$	340			$	304

Sales by product category:

	2018							2017							2016
(Dollars in millions)	Total Sales				%			Total Sales				%			Total Sales				%
Lumber & Building Materials	$	9,968			14	%		$	9,517			14	%		$	8,513			13	%
Appliances	8,391				12			7,696				11			7,037				11
Seasonal & Outdoor Living	7,352				10			7,162				10			6,998				11
Tools & Hardware	6,906				10			6,723				10			6,376				10
Fashion Fixtures	6,351				9			6,424				9			6,303				10
Rough Plumbing & Electrical	6,327				9			6,142				9			5,741				9
Lawn & Garden	5,433				8			5,222				8			5,091				8
Millwork	5,381				8			5,308				8			5,238				8
Paint	5,263				7			5,297				8			5,171				8
Flooring	4,282				6			4,363				6			4,227				6
Kitchens	3,700				5			3,642				5			3,532				5
Other	1,955				2			1,123				2			790				1
Totals	$	71,309			100	%		$	68,619			100	%		$	65,017			100	%

NOTE 20: Derivative Instruments

In February 2016, the Company entered into an option to purchase 3.2 billion Canadian dollars in order to manage the foreign currency exchange rate risk on the consideration to be paid for the RONA acquisition. This option contract was not accounted for as a hedging instrument, and gains and losses resulting from changes in fair value and settlement were included in SG&A expense in the accompanying consolidated statements of earnings. The cash flows related to this option were included within investing activities in the accompanying consolidated statements of cash flows.

The premium paid for the foreign currency exchange option contract was $103 million. The option contract was settled during the second quarter of fiscal year 2016 for $179 million, resulting in a total realized gain of $76 million for the fiscal year ended February 3, 2017.

The Company’s other derivative instruments, and related activity, were not material in any of the periods presented.

SUPPLEMENTARY DATA

Selected Quarterly Data (UNAUDITED)

The following table summarizes the quarterly consolidated results of operations for 2018 and 2017:

	20181
(In millions, except per share data)	First				Second 2				Third 3				Fourth 4
Net sales	$	17,360			$	20,888			$	17,415			$	15,647
Gross margin	5,748				6,885				5,377				4,898
Net earnings/(loss)	988				1,520				629				(824		)
Basic earnings/(loss) per common share	1.19				1.86				0.78				(1.03		)
Diluted earnings/(loss) per common share	$	1.19			$	1.86			$	0.78			$	(1.03	)
	20171
(In millions, except per share data)	First 5				Second 6				Third				Fourth 7
Net sales	$	16,860			$	19,495			$	16,770			$	15,494
Gross margin	5,595				6,420				5,454				4,964
Net earnings	602				1,419				872				554
Basic earnings per common share	0.70				1.68				1.05				0.67
Diluted earnings per common share	$	0.70			$	1.68			$	1.05			$	0.67

1

In the fourth quarter of fiscal 2018, the Company changed its method of accounting for shipping and handling costs from the Company’s stores, distribution centers, and other locations to customers. Under the new accounting principle, shipping and handling costs related to the delivery of products from the Company to customers are included in cost of sales, whereas they were previously presented in selling, general, and administrative expense, and depreciation and amortization. Amounts presented for fiscal years 2018 and 2017 reflect adjusted amounts in accordance with this accounting principle change. See Note 2 to the consolidated financial statements for additional information on the accounting principle change.

2	The second quarter of fiscal 2018 includes pre-tax charges totaling $230 million related to long lived asset impairments and discontinued projects associated with the Company’s decision to close all Orchard Supply Hardware locations.

3

The third quarter of fiscal 2018 includes the following pre-tax charges: $123 million related to accelerated depreciation and amortization, severance and lease obligation costs associated with the Company’s decision to close all Orchard Supply Hardware locations; $121 million related to long-lived asset impairment and severance costs associated with the Company’s decision to close 20 U.S. stores and 31 stores and other locations in Canada; $22 million related to long-lived asset impairments associated with the Company’s decision to exit its Mexico retail operations; and $14 million associated with long-lived asset impairments and inventory write-down related to the Company’s decision to exit certain non-core activities within its U.S. Home Improvement business.

4

The fourth quarter of fiscal 2018 includes the following pre-tax charges: $952 million of goodwill impairment associated with the Company’s Canadian operations; $222 million related to impairments associated with the Company’s decision to exit its Mexico retail operations; $208 million related primarily to lease obligation costs associated with the Company’s decision to close all Orchard Supply Hardware locations; $150 million related to accelerated depreciation, severance and lease obligation costs associated with the Company’s decision to close 20 U.S. stores and 31 stores and other locations in Canada; $32 million related to the Company’s decision to exit certain non-core activities within its U.S. home improvement business; and $13 million related of severance costs associated with the elimination of the Project Specialists Interiors position.

5	The first quarter of fiscal 2017 includes a $464 million pre-tax loss on extinguishment of debt in connection with a $1.6 billion cash tender offer.

6	The second quarter of fiscal 2017 includes a $96 million gain from the sale of the Company’s interest in its Australian joint venture with Woolworths.

7	The fourth quarter of fiscal 2017 includes the $20 million net impact associated with the Tax Cuts and Jobs Act of 2017 and $66 million from a one-time cash bonus to eligible hourly employees attributable to the passage of the Tax Cuts and Jobs Act of 2017.