Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data



Table of Contents
	Page No.
Management’s Report on Internal Control over Financial Reporting	37
Report of Independent Registered Public Accounting Firm	38
Consolidated Statements of Earnings	41
Consolidated Statements of Comprehensive Income	41
Consolidated Balance Sheets	42
Consolidated Statements of Shareholders’ Equity	43
Consolidated Statements of Cash Flows	44
Notes to Consolidated Financial Statements	45
Note 1: Summary of Significant Accounting Policies	45
Note 2: Revenue	51
Note 3: Acquisitions	53
Note 4: Investment in Australian Joint Venture	54
Note 5: Leases	54
Note 6: Fair Value Measurements	56
Note 7: Property and Accumulated Depreciation	59
Note 8: Exit Activities	60
Note 9: Short-Term Borrowings	62
Note 10: Long-Term Debt	63
Note 11: Shareholders’ Equity	64
Note 12: Accounting for Share-Based Payments	65
Note 13: Employee Retirement Plans	69
Note 14: Income Taxes	70
Note 15: Earnings Per Share	72
Note 16: Commitments and Contingencies	72
Note 17: Related Parties	73
Note 18: Other Information	73
Note 19: Subsequent Events	74

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our Internal Control as of January 31, 2020. In evaluating our Internal Control, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on our management’s assessment, we have concluded that, as of January 31, 2020, 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 40.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as of January 31, 2020 and February 1, 2019, the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows, for each of the three fiscal years in the period ended January 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2020 and February 1, 2019, and the results of its operations and its cash flows for each of the three fiscal years in the period ended January 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 23, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Accounting Pronouncement Recently Adopted

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in the fiscal year ended January 31, 2020 due to the adoption of Financial Accounting Standards Board Accounting Standards Update 2016-02, Leases (Topic 842).

Basis for Opinion

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

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

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Merchandise Inventory - Vendor Funds - Refer to Note 1 to the financial statements

Critical Audit Matter Description

The Company receives funds from its vendors in the normal course of business, principally as a result of purchase volumes, sales, early payments or promotions of vendors’ products. In the fiscal year ended January 31, 2020, the Company purchased inventory from a significant number of vendors. Many of the vendor funds associated with these purchases are earned under agreements that are negotiated on an annual basis or shorter. The funds are recorded as a reduction to the cost of inventory as they are earned. As the related inventory is sold, the amounts are recorded as a reduction to cost of sales.

We identified vendor funds as a critical audit matter because of the number, complexity, and diversity of the individual vendor agreements. This required an increased extent of effort when performing audit procedures to evaluate whether the vendor funds were recorded in accordance with the terms of the vendor agreements.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to whether the vendor funds were recorded in accordance with the terms of the vendor agreements included the following, among others:


•	We tested the effectiveness of controls over vendor funds, including management’s controls over the accrual and recording of vendor funds as a reduction to the cost of inventory or cost of sales in accordance with the terms of the vendor agreements.


•	We selected a sample of vendor funds and recalculated the amount earned using the terms of the vendor agreement, including the amount recorded as a reduction to the cost of inventory and/or the amount recorded as a reduction to cost of sales.


•	We selected a sample of vendor funds and confirmed the amount earned and terms of the agreement directly with the vendor.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina

March 23, 2020

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 January 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the fiscal year ended January 31, 2020 of the Company and our report dated March 23, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of Financial Accounting Standards Board Accounting Standards Update 2016-02, Leases (Topic 842).

Basis for Opinion

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

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

Definition and Limitations of Internal Control over Financial Reporting

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

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

/s/ Deloitte & Touche LLP

Charlotte, North Carolina

March 23, 2020

Lowe’s Companies, Inc.

Consolidated Statements of Earnings

(In millions, except per share and percentage data)



	Fiscal Years Ended
	January 31, 2020				February 1, 2019				February 2, 2018
Current Earnings	Amount		% Sales		Amount		% Sales		Amount		% Sales
Net sales	$	72,148	100.00	%	$	71,309	100.00	%	$	68,619	100.00	%
Cost of sales	49,205		68.20		48,401		67.88		46,185		67.31
Gross margin	22,943		31.80		22,908		32.12		22,434		32.69
Expenses:
Selling, general and administrative	15,367		21.30		17,413		24.41		14,444		21.04
Depreciation and amortization	1,262		1.75		1,477		2.07		1,404		2.05
Operating income	6,314		8.75		4,018		5.64		6,586		9.60
Interest - net	691		0.96		624		0.88		633		0.92
Loss on extinguishment of debt	—		—		—		—		464		0.68
Pre-tax earnings	5,623		7.79		3,394		4.76		5,489		8.00
Income tax provision	1,342		1.86		1,080		1.52		2,042		2.98
Net earnings	$	4,281	5.93	%	$	2,314	3.24	%	$	3,447	5.02	%

Basic earnings per common share	$	5.49			$	2.84			$	4.09
Diluted earnings per common share	$	5.49			$	2.84			$	4.09
Cash dividends per share	$	2.13			$	1.85			$	1.58

Lowe’s Companies, Inc.

Consolidated Statements of Comprehensive Income

(In millions, except percentage data)



	Fiscal Years Ended
	January 31, 2020					February 1, 2019					February 2, 2018
	Amount			% Sales		Amount			% Sales		Amount		% Sales
Net earnings	$	4,281		5.93	%	$	2,314		3.24	%	$	3,447	5.02	%
Foreign currency translation adjustments - net of tax	94			0.13		(221		)	(0.30	)	251		0.37
Other	(21		)	(0.03	)	1			—		—		—
Other comprehensive income/(loss)	73			0.10		(220		)	(0.30	)	251		0.37
Comprehensive income	$	4,354		6.03	%	$	2,094		2.94	%	$	3,698	5.39	%

See accompanying notes to consolidated financial statements.

Lowe’s Companies, Inc.

Consolidated Balance Sheets

(In millions, except par value)



		January 31, 2020			February 1, 2019

Assets
Current assets:
Cash and cash equivalents		$	716		$	511
Short-term investments		160			218
Merchandise inventory - net		13,179			12,561
Other current assets		1,263			938
Total current assets		15,318			14,228
Property, less accumulated depreciation		18,669			18,432
Operating lease right-of-use assets		3,891			—
Long-term investments		372			256
Deferred income taxes - net		216			294
Goodwill		303			303
Other assets		702			995
Total assets		$	39,471		$	34,508

Liabilities and shareholders’ equity
Current liabilities:
Short-term borrowings		$	1,941		$	722
Current maturities of long-term debt		597			1,110
Current operating lease liabilities		501			—
Accounts payable		7,659			8,279
Accrued compensation and employee benefits		684			662
Deferred revenue		1,219			1,299
Other current liabilities		2,581			2,425
Total current liabilities		15,182			14,497
Long-term debt, excluding current maturities		16,768			14,391
Noncurrent operating lease liabilities		3,943			—
Deferred revenue - extended protection plans		894			827
Other liabilities		712			1,149
Total liabilities		37,499			30,864

Commitments and contingencies

Shareholders’ equity:
Preferred stock - $5 par value, none issued		—			—
Common stock - $0.50 par value;
Shares issued and outstanding
January 31, 2020	763
February 1, 2019	801	381			401
Capital in excess of par value		—			—
Retained earnings		1,727			3,452
Accumulated other comprehensive loss		(136		)	(209		)
Total shareholders’ equity		1,972			3,644
Total liabilities and shareholders’ equity		$	39,471		$	34,508

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 Shareholders’ Equity
	Shares		Amount
Balance February 3, 2017	866		$	433		$	—		$	6,241		$	(240	)	$	6,434
Net earnings									3,447						3,447
Other comprehensive income												251			251
Cash dividends declared, $1.58 per share									(1,324		)				(1,324		)
Share-based payment expense						99									99
Repurchase of common stock	(40	)	(20		)	(215		)	(2,939		)				(3,174		)
Issuance of common stock under share-based payment plans	4		2			138									140
Balance February 2, 2018	830		$	415		$	22		$	5,425		$	11		$	5,873
Cumulative effect of accounting change									33						33
Net earnings									2,314						2,314
Other comprehensive loss												(220		)	(220		)
Cash dividends declared, $1.85 per share									(1,500		)				(1,500		)
Share-based payment expense						74									74
Repurchase of common stock	(32	)	(16		)	(209		)	(2,820		)				(3,045		)
Issuance of common stock under share-based payment plans	3		2			113									115
Balance February 1, 2019	801		$	401		$	—		$	3,452		$	(209	)	$	3,644
Cumulative effect of accounting change									(263		)				(263		)
Net earnings									4,281						4,281
Other comprehensive income												73			73
Cash dividends declared, $2.13 per share									(1,653		)				(1,653		)
Share-based payment expense						98									98
Repurchase of common stock	(41	)	(21		)	(214		)	(4,090		)				(4,325		)
Issuance of common stock under share-based payment plans	3		1			116									117
Balance January 31, 2020	763		$	381		$	—		$	1,727		$	(136	)	$	1,972

See accompanying notes to consolidated financial statements.

Lowe’s Companies, Inc.

Consolidated Statements of Cash Flows

(In millions)



	Fiscal Years Ended
	January 31, 2020			February 1, 2019			February 2, 2018
Cash flows from operating activities:
Net earnings	$	4,281		$	2,314		$	3,447
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	1,410			1,607			1,540
Noncash lease expense	468			—			—
Deferred income taxes	177			(151		)	53
Loss on property and other assets - net	117			630			40
Impairment of goodwill	—			952			—
Loss on extinguishment of debt	—			—			464
Loss/(gain) on cost method and equity method investments	12			9			(82		)
Share-based payment expense	98			74			99
Changes in operating assets and liabilities:
Merchandise inventory – net	(600		)	(1,289		)	(791		)
Other operating assets	(376		)	(110		)	250
Accounts payable	(637		)	1,720			(92		)
Other operating liabilities	(654		)	437			137
Net cash provided by operating activities	4,296			6,193			5,065

Cash flows from investing activities:
Purchases of investments	(743		)	(1,373		)	(981		)
Proceeds from sale/maturity of investments	695			1,393			1,114
Capital expenditures	(1,484		)	(1,174		)	(1,123		)
Proceeds from sale of property and other long-term assets	163			76			45
Acquisition of business - net	—			—			(509		)
Other – net	—			(2		)	13
Net cash used in investing activities	(1,369		)	(1,080		)	(1,441		)

Cash flows from financing activities:
Net change in commercial paper	220			(415		)	625
Net proceeds from issuance of debt	3,972			—			2,968
Repayment of long-term debt	(1,113		)	(326		)	(2,849		)
Proceeds from issuance of common stock under share-based payment plans	118			114			139
Cash dividend payments	(1,618		)	(1,455		)	(1,288		)
Repurchase of common stock	(4,313		)	(3,037		)	(3,192		)
Other – net	(1		)	(5		)	(10		)
Net cash used in financing activities	(2,735		)	(5,124		)	(3,607		)

Effect of exchange rate changes on cash	1			(12		)	13

Net increase/(decrease) in cash and cash equivalents, including cash classified within current assets held for sale	193			(23		)	30
Less: Net increase/(decrease) in cash classified within current assets held for sale	12			(54		)	—
Net increase/(decrease) in cash and cash equivalents	205			(77		)	30
Cash and cash equivalents, beginning of year	511			588			558
Cash and cash equivalents, end of year	$	716		$	511		$	588

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JANUARY 31, 2020**,** FEBRUARY 1, 2019 AND FEBRUARY 2, 2018

NOTE 1**: Summary of Significant Accounting Policies**

Lowe’s Companies, Inc. and subsidiaries (the Company) is the world’s second-largest home improvement retailer and operated 1,977 stores in the United States and Canada at January 31, 2020. Below are those accounting policies considered by the Company to be significant.

Fiscal Year - The Company’s fiscal year ends on the Friday nearest the end of January. Each of the fiscal years presented contained 52 weeks. All references herein for the years 2019, 2018, and 2017 represent the fiscal years ended January 31, 2020, February 1, 2019, and February 2, 2018, 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.

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

The proceeds from sales of available-for-sale debt securities were $121 million, $506 million, and $523 million for 2019, 2018, and 2017, respectively. Gross realized gains and losses on the sale of available-for-sale debt securities were not significant for any of the periods presented.

Investments with a stated maturity date of one year or less from the balance sheet date or that are expected to be used in current operations are classified as short-term investments. All other investments are classified as long-term. Investments classified as long-term at January 31, 2020, will mature in one to three years, based on stated maturity dates.

The Company classifies as investments restricted balances primarily pledged as collateral for the Company’s extended protection plan program. Restricted balances included in short-term investments were $160 million at January 31, 2020, and $218 million at February 1, 2019. Restricted balances included in long-term investments were $372 million at January 31, 2020, and $256 million at February 1, 2019.

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 6% and 7% of the consolidated inventory balances as of January 31, 2020 and February 1, 2019, respectively, are stated at lower of cost and net realizable value using the weighted average cost method. The cost of inventory includes certain costs associated with the preparation of inventory for resale, including distribution center costs, and is net of vendor funds.

The Company records an inventory reserve for the anticipated loss associated with selling inventories below cost. This reserve is based on management’s current knowledge with respect to inventory levels, sales trends, and historical experience. Management does not believe the Company’s merchandise inventories are subject to significant risk of obsolescence in the near term, and management has the ability to adjust purchasing 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 is exposed to the impact of changes in foreign currency exchange rates, benchmark interest rates, and the prices of commodities used in the normal course of business. The Company occasionally utilizes derivative financial instruments to manage certain business risks. However, the fair value of the Company’s derivative instruments and related activity were not material to the Company’s consolidated financial statements in any of the years presented.

Sale of Business Accounts Receivable and Credit Programs - The Company has branded and private label proprietary credit cards which generate sales that are not reflected in receivables. Under an agreement with Synchrony Bank (Synchrony), credit is extended directly to customers by Synchrony. All credit program-related services are performed and controlled directly by Synchrony. The Company has the option, but no obligation, to purchase the receivables at the end of the agreement.

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

Total commercial business accounts receivable sold to Synchrony were $3.2 billion in 2019, $3.1 billion in 2018, and $3.1 billion in 2017. The Company recognized losses of $41 million in 2019, $41 million in 2018, and $39 million in 2017 on these receivable sales, which primarily relates to the fair value of obligations related to servicing costs that are remitted to Synchrony monthly.

Property and Depreciation - Property is recorded at cost. Costs associated with major additions are capitalized and depreciated. Capital assets are expected to yield future benefits and have original useful lives which exceed one year. The total cost of a capital asset generally includes all applicable sales taxes, delivery costs, installation costs, and other appropriate costs incurred by the Company, including interest in the case of self-constructed assets. Upon disposal, the cost of properties and related accumulated depreciation is removed from the accounts, with gains and losses reflected in SG&A expense in the consolidated statements of earnings.

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

Depreciation is recognized over the estimated useful lives of the depreciable assets. Assets are depreciated using the straight-line method. Leasehold improvements and finance lease assets are depreciated and amortized, respectively, over the shorter of their estimated useful lives or the term of the related lease. The amortization of these assets is included in depreciation and amortization expense in the consolidated statements of earnings.

Long-Lived Asset Impairment - The carrying amounts of long-lived assets are reviewed whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. A potential impairment has occurred for long-lived assets held-for-use if projected future undiscounted cash flows expected to result from the use and eventual disposition of the assets are less than the carrying amounts of the assets. The carrying value of a location’s asset group includes inventory, property, operating and finance lease right-of-use assets, and operating liabilities, including inventory payables, salaries payable and operating lease liabilities. Financial and non-operating liabilities are excluded from the carrying value of the asset group. An impairment loss is recorded for long-lived assets held-for-use when the carrying amount of the asset is not recoverable and exceeds its fair value.

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.

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

The quantitative goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. Fair value represents the price a market participant would be willing to pay in a potential sale of the reporting unit and is based on a combination of an income approach, based on discounted future cash flows, and a market approach, based on market multiples applied to free cash flow. If the fair value exceeds carrying value, then no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Any impairment identified is included within SG&A expense in the consolidated statements of earnings. The income tax effect from any tax deductible goodwill on the carrying amount of the reporting unit, if applicable, is considered in determining the goodwill impairment loss.

A reporting unit is an operating segment or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. During fiscal 2019, goodwill was allocated to the U.S. Home Improvement reporting unit.

The changes in the carrying amount of goodwill for 2019, 2018, and 2017 were as follows:



(In millions)	2019		2018			2017
Goodwill, balance at beginning of year	$	303	$	1,307		$	1,082
Acquisitions 1	—		—			160
Impairment	—		(952		)	—
Other adjustments 2	—		(52		)	65
Goodwill, balance at end of year	$	303	$	303		$	1,307


1	Goodwill recorded for 2017 acquisitions relates to Maintenance Supply Headquarters. See Note 3 for additional information regarding this acquisition.


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.

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



	January 31, 2020					February 1, 2019
(In millions)	Gross Carrying Amount		Cumulative Impairment			Gross Carrying Amount		Cumulative Impairment
Goodwill	$	1,302	$	(999	)	$	1,302	$	(999	)

Leases - Effective February 2, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), which requires leases to be recognized on the balance sheet. Leases with an original term of 12 months or less are not recognized on the Company’s balance sheet, and the lease expense related to those short-term leases is recognized over the lease term. The Company does not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class.

The Company leases certain retail stores, warehouses, distribution centers, office space, land and equipment under finance and operating leases. Lease commencement occurs on the date the Company takes possession or control of the property or equipment. Original terms for facility-related leases are generally between five and twenty years. These leases generally contain provisions for four to six renewal options of five years each. Original terms for equipment-related leases, primarily material handling equipment and vehicles, are generally between one and seven years. Some of the Company’s leases also include rental escalation clauses and/or termination provisions. Renewal options and termination options are included in the determination of lease payments when management determines the options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital.

If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of the Company’s leases do not provide a readily determinable implicit rate. When the implicit rate is not determinable, the Company’s estimated incremental borrowing rate is utilized, determined on a collateralized basis, to discount lease payments based on information available at lease commencement.

The Company’s real estate leases typically require payment of common area maintenance and real estate taxes which represent the majority of variable lease costs. Certain lease agreements also provide for variable rental payments based on sales performance in excess of specified minimums, usage measures, or changes in the consumer price index. Variable rent payments based on future performance, usage, or changes in indices were not significant for any of the periods presented. Variable lease costs are excluded from the present value of lease obligations.

The Company’s lease agreements do not contain any material restrictions, covenants, or any material residual value guarantees. The Company subleases certain properties that are not used in its operations. Sublease income was not significant for any of the periods presented.

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

The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to finance amounts under these arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by these arrangements for those payment obligations that have been financed by suppliers. The Company’s outstanding payment obligations placed on the accounts payable tracking systems were $1.9 billion as of January 31, 2020 and $2.1 billion as of February 1, 2019, and are included in accounts payable on the consolidated balance sheets, and participating suppliers financed $1.3 billion and $1.5 billion, respectively, of those payment obligations to participating financial institutions. Total payment obligations that were placed and settled on the accounts payable tracking system were $8.7 billion and $8.4 billion for each of the years ended January 31, 2020 and February 1, 2019, respectively.

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



(In millions)	January 31, 2020		February 1, 2019
Self-insurance liabilities	$	501	$	378
Accrued dividends	420		385
Accrued interest	221		184
Sales return reserve	194		194
Sales tax liabilities	153		179
Accrued property taxes	104		108
Other	988		997
Total	$	2,581	$	2,425

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 $1.1 billion and $953 million at January 31, 2020, and February 1, 2019, 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 $262 million and $246 million at January 31, 2020, and February 1, 2019, 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.

Revenue Recognition - The Company recognizes revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. A description of the Company’s principle revenue generating activities is as follows:


•	Products - Revenue from products primarily relates to in-store and online merchandise purchases, which are recognized at the point in time when the customer obtains control of the merchandise. This occurs at the time of in-store purchase or delivery of the product to the customer. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded. The merchandise return reserve is presented on a gross basis, with a separate asset and liability included in the consolidated balance sheets.

•

Products - Revenue from products primarily relates to in-store and online merchandise purchases, which are recognized at the point in time when the customer obtains control of the merchandise. This occurs at the time of in-store purchase or delivery of the product to the customer. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded. The merchandise return reserve is presented on a gross basis, with a separate asset and liability included in the consolidated balance sheets.


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

•

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

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. In addition, the Company defers revenues from stored-value cards, which include gift cards and returned merchandise credits, and recognizes revenue into sales when the cards are redeemed.

The Company also defers revenues for its separately-priced 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.

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



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

Advertising - Costs associated with advertising are charged to expense as incurred. Advertising expenses were $871 million, $963 million, and $968 million in 2019, 2018, and 2017, 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 $115 million and $209 million at January 31, 2020 and February 1, 2019, 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 7.7% and 6.9%, respectively, at January 31, 2020. 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.

Accounting Pronouncements Recently Adopted - Effective February 2, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), and all related amendments, using the optional transition election to not restate comparative periods for the impact of adopting the standard and recognized the cumulative impact of adoption in the opening balance of retained earnings. Under ASU 2016-02, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The Company elected the package of transition expedients available for expired or existing contracts, which allowed the carry-forward of historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. Adoption of the standard resulted in the recording of additional net lease-related assets and lease-related liabilities of approximately $3.6 billion and $3.9 billion, respectively, as of February 2, 2019. The difference between the additional lease assets and lease liabilities, net of the $87 million deferred tax impact, was $263 million and was recorded as an adjustment to retained earnings. This adjustment to retained earnings primarily represents the write-off of right-of-use assets associated with closed locations, net of previously established store closing lease obligations as well as the derecognition of build-to-suit leases. The adoption of this standard by the Company did not have a material impact on its consolidated statements of earnings, comprehensive income or cash flows and had no impact on the Company’s debt covenant compliance under its current agreements. See Note 5 for additional details of the Company’s leases.

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. 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. 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 2 for additional details of the Company’s revenues.

Accounting Pronouncements Not Yet Adopted - Recent accounting pronouncements pending adoption not discussed in this Form 10-K are either not applicable to the Company or are not expected to have a material impact on the Company.

NOTE 2**: Revenue -** Net sales consists primarily of revenue, net of sales tax, associated with contracts with customers for the sale of goods and services in amounts that reflect consideration the Company is entitled to in exchange for those goods and services.

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



(In millions)		Years Ended
	January 31, 2020			February 1, 2019			February 2, 2018
Products		$	68,377		$	67,197		$	65,421
Services		2,112			2,539			2,469
Other		1,659			1,573			729
Net sales		$	72,148		$	71,309		$	68,619

Revenue from products primarily relates to in-store and online merchandise purchases, which are recognized at the point in time when the customer obtains control of the merchandise. This occurs at the time of in-store purchase or delivery of the product to the customer. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded. The merchandise return reserve is presented on a gross basis, with a separate asset and liability included in the consolidated balance sheets. Anticipated sales returns reflected in other current liabilities were $194 million at January 31, 2020 and $194 million at February 1, 2019. The associated right of return assets reflected in other current assets were $129 million at January 31, 2020 and $127 million at February 1, 2019.

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

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 $685 million at January 31, 2020 and $790 million at February 1, 2019. 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 $534 million and $509 million at January 31, 2020, and February 1, 2019, respectively, and these amounts are included in deferred revenue on the consolidated balance sheets. 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 January 31, 2020, February 1, 2019 and February 2, 2018.

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 $408 million for the fiscal year ended January 31, 2020, $390 million for the fiscal year ended February 1, 2019, and $368 million for the fiscal year ended February 2, 2018, 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 January 31, 2020, February 1, 2019 and February 2, 2018, 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 $184 million for the fiscal year ended January 31, 2020, $183 million for the fiscal year ended February 1, 2019, $161 million for the fiscal year ended February 2, 2018, respectively.

Disaggregation of Revenues

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



	Years Ended
	January 31, 2020			February 1, 2019			February 2, 2018
(In millions)	Total Sales		%	Total Sales		%	Total Sales		%
Home Décor ¹	$	25,867	36	$	25,261	35	$	24,521	36
Building Products ²	23,018		32	22,992		32	22,033		32
Hardlines ³	21,235		29	20,382		29	19,715		29
Other	2,028		3	2,674		4	2,350		3
Total	$	72,148	100	$	71,309	100	$	68,619	100

Note: Merchandise division net sales for prior periods have been reclassified to conform to the current year presentation.


1	Home Décor includes the following product categories: Appliances, Décor, Flooring, Kitchens & Bath, and Paint.


2	Building Products includes the following product categories: Lighting, Lumber & Building Materials, Millwork, and Rough Plumbing & Electrical.


3	Hardlines includes the following product categories: Hardware, Lawn & Garden, Seasonal & Outdoor Living, and Tools.

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



(In millions)		Years Ended
	January 31, 2020			February 1, 2019			February 2, 2018
United States		$	67,147		$	65,872		$	63,263
International		5,001			5,437			5,356
Net Sales		$	72,148		$	71,309		$	68,619

NOTE 3**: 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.

NOTE 4**: Investment in Australian Joint Venture**

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 gain is included in SG&A expense in the accompanying consolidated statements of earnings.

NOTE 5**: Leases**

Effective February 2, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), which requires leases to be recognized on the balance sheet. Leases with an original term of 12 months or less are not recognized on the Company’s balance sheet, and the lease expense related to those short-term leases is recognized over the lease term. The Company does not account for lease and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class.

The Company leases certain retail stores, warehouses, distribution centers, office space, land and equipment under finance and operating leases. Lease commencement occurs on the date the Company takes possession or control of the property or equipment. Original terms for our facility-related leases are generally between five and 20 years. These leases generally contain provisions for four to six renewal options of five years each. Original terms for equipment-related leases, primarily material handling equipment and vehicles, are generally between one and seven years. Some of the Company’s leases also include rental escalation clauses and/or termination provisions. Renewal options and termination options are included in the determination of lease payments when management determines the options are reasonably certain of exercise, considering financial performance, strategic importance and/or invested capital.

The table below presents the lease-related assets and liabilities recorded on the balance sheet.



Leases (In millions)	Classification	January 31, 2020
Assets
Operating lease assets	Operating lease right-of-use assets	$	3,891
Finance lease assets	Property, less accumulated depreciation 1	555
Total lease assets		4,446

Liabilities
Current
Operating	Current operating lease liabilities	501
Finance	Current maturities of long-term debt	72
Noncurrent
Operating	Noncurrent operating lease liabilities	3,943
Finance	Long-term debt, excluding current maturities	612
Total lease liabilities		$	5,128


1	Finance lease assets are recorded net of accumulated amortization of $42 million as of January 31, 2020.

The table below presents the lease costs for finance and operating leases for the fiscal year ended January 31, 2020:



Lease Cost (In millions)	Year Ended January 31, 2020
Finance lease cost
Amortization of leased assets	$	45
Interest on lease liabilities	30
Operating lease cost 1	674
Variable lease cost	224
Total lease cost	$	973


1	Includes short-term leases and sublease income, which are immaterial.

The future minimum rental payments required under operating and finance lease obligations as of January 31, 2020, having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:



Maturity of lease liabilities (In millions)	Operating Leases 1			Finance Leases 2			Total
2020	$	624		$	104		$	728
2021	662			104			766
2022	684			107			791
2023	588			102			690
2024	498			94			592
After 2024	2,606			352			2,958
Total lease payments	5,662			863			6,525
Less: interest 3	(1,218		)	(179		)	(1,397		)
Present value of lease liabilities 4	$	4,444		$	684		$	5,128


1	Operating lease payments include $279 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $265 million of minimum lease payments for leases signed but not yet commenced.


2	Finance lease payments include $11 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $45 million of minimum lease payments for leases signed but not yet commenced.


3	Calculated using the lease-specific incremental borrowing rate.


4	Includes the current portion of $501 million for operating leases and $72 million for finance leases.



Lease Term and Discount Rate	January 31, 2020
Weighted-average remaining lease term (years)
Operating leases	10.25
Finance leases	9.06
Weighted-average discount rate
Operating leases	4.10	%
Finance leases	5.64	%



Other Information (In millions)	Year Ended January 31, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	$	825
Operating cash flows used for finance leases	30
Financing cash flows used for finance leases	57
Leased assets obtained in exchange for new finance lease liabilities	329
Leased assets obtained in exchange for new operating lease liabilities	551

Prior Period Disclosures

As a result of the adoption of ASU 2016-02, Leases (Topic 842), on February 2, 2019, the Company is required to present future minimum lease payments for operating and finance lease obligations having initial or remaining non-cancellable lease terms in excess of one year. These future minimum lease payments were previously disclosed in our 2018 Annual Report on Form 10-K and accounted for under previous lease guidance. Commitments as of February 1, 2019 were as follows:



	February 1, 2019
Fiscal Year(In millions)	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 and $626 million in 2018 and 2017, 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 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 debt securities represented the only significant assets measured at fair value on a recurring basis for the fiscal years ended January 31, 2020 and February 1, 2019. The following table presents the Company’s financial assets measured at fair value on a recurring basis. The fair values of these instruments approximate amortized cost.



		Fair Value Measurements at
(In millions)	Measurement Level	January 31, 2020		February 1, 2019
Available-for-sale debt securities:
Money market funds	Level 1	$	105	$	207
Corporate debt securities	Level 2	23		1
Agency securities	Level 2	19		10
U.S. Treasury securities	Level 1	13		—
Total short-term investments		$	160	$	218
Available-for-sale debt securities:
U.S. Treasury securities	Level 1	$	280	$	—
Corporate debt securities	Level 2	62		191
Agency securities	Level 2	30		65
Total long-term investments		$	372	$	256

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

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

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

For the fiscal years ended January 31, 2020 and 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.

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.

During the three months ended November 1, 2019, the Company began a strategic review of its Canadian operations, and it was determined to be more likely than not the assets associated with certain Canadian stores 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. Based on this evaluation, certain long-lived assets were written down to their fair value of $40 million resulting in impairment charges of $53 million.

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, 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 and Mexico operations and certain U.S. and Canada locations during fiscal year 2018 as part of the Company’s strategic reassessment of the business, as well as the Company’s strategic review of its Canadian operations in fiscal year 2019.

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 January 31, 2020.

Fair Value Measurements - Nonrecurring Basis



	January 31, 2020					February 1, 2019
(In millions)	Fair Value Measurements		Impairment Losses			Fair Value Measurements		Impairment Losses
Assets-held-for-use:
Operating locations	$	46	$	(62	)	$	473	$	(331	)
Assets-held-for-sale:
Mexico operating locations	—		—			79		(222		)
Goodwill (Note 1)	—		—			2,851		(952		)
Total	$	46	$	(62	)	$	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, short-term borrowings, 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 finance and capitalized lease obligations, are as follows:



	January 31, 2020				February 1, 2019
(In millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Unsecured notes (Level 1)	$	16,648	$	18,808	$	14,721	$	14,473
Mortgage notes (Level 2)	5		6		6		6
Long-term debt (excluding finance and capitalized lease obligations)	$	16,653	$	18,814	$	14,727	$	14,479

NOTE 7**: Property and Accumulated Depreciation**

Property is summarized by major class in the following table:



(In millions)	Estimated Depreciable Lives, In Years	January 31, 2020			February 1, 2019
Cost:
Land	N/A	$	7,200		$	7,196
Buildings and building improvements	5-40	17,862			18,052
Equipment	2-15	10,377			10,090
Construction in progress	N/A	506			525
Total cost		35,945			35,863
Accumulated depreciation		(17,276		)	(17,431		)
Property, less accumulated depreciation		$	18,669		$	18,432

As of January 31, 2020, subsequent to the adoption of ASU 2016-02, Leases (Topic 842), included in net property are assets under finance lease of $597 million less accumulated depreciation of $42 million. As of February 1, 2019, included in net property are assets under capital lease of $665 million less accumulated depreciation of $244 million. The related amortization expense for assets under finance and capital leases are included in depreciation expense. The Company recognized depreciation expense, inclusive of amounts presented in cost of sales and depreciation and amortization, of $1.4 billion in 2019 and $1.6 billion in 2018 and $1.5 billion in 2017.

NOTE 8**: Exit Activities**

During fiscal years 2019 and 2018, the Company has incurred costs associated with an ongoing strategic reassessment of its business to drive an increased focus on its core home improvement operations and to improve overall operating performance and profitability. As a result of this reassessment, the Company decided to exit certain activities and close certain locations as further described below. Expenses associated with long-lived asset impairment, discontinued projects, severance, and lease obligations, are included in SG&A expense in the consolidated statements of earnings. Expenses associated with accelerated depreciation are included in depreciation and amortization expense in the consolidated statements of earnings. Inventory adjustments to net realizable value are included in cost of sales in the consolidated statements of earnings.

2019 Canada Restructuring

During the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations, and as a result, recognized pre-tax charges of $53 million associated with long-lived asset impairment. Subsequent to the end of the Company’s third quarter of fiscal 2019, a decision was made to close 34 under-performing stores in Canada and take additional restructuring actions to improve future sales and profitability of the Canadian operations. A summary of the significant charges associated with the 2019 strategic review of the Canadian operations, are as follows:



	Year Ended
(In millions)	January 31, 2020
Long-lived asset impairment	53
Accelerated depreciation and amortization	23
Severance costs	17
Other closing costs	15
Total	$	108

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. All facilities were closed by the end of fiscal year 2018. A summary of the significant charges associated with the exit of the Orchard operations is as follows:



	Year Ended
(In millions)	February 1, 2019
Lease obligation costs for closed locations	$	217
Long-lived asset impairment	206
Accelerated depreciation and amortization	103
Discontinued project write-offs	24
Severance costs	11
Total	$	561

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. A summary of the significant charges associated with the closure of these stores is as follows:



	Year Ended
(In millions)	February 1, 2019
Long-lived asset impairment	$	90
Lease obligation costs for closed locations	89
Accelerated depreciation and amortization	50
Severance costs	32
Discontinued project write-offs	10
Total	$	271

Mexico Operations

On November 9, 2018, management and the Board of Directors decided to pursue an exit of the Company’s Mexico operations. A summary of the significant charges incurred as a result of the exit of the Company’s Mexico operations is as follows:



	Year Ended
(In millions)	February 1, 2019
Long-lived asset impairment	$	244
Total	$	244

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. A summary of the significant charges incurred as a result of these decisions is as follows:



	Year Ended
(In millions)	February 1, 2019
Other closing costs	$	34
Severance costs	16
Long-lived asset impairment	9
Total	$	59

Prior to the adoption of ASU 2016-02, Leases (Topic 842), as of February 2, 2019, when locations under operating leases were closed, a liability was 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, were recognized in the period of change.

The following table summarizes store closing lease obligations activity during the twelve months ended January 31, 2020 and February 1, 2019:



(In millions)	Lease obligations
Accrual for exit activities, balance at February 2, 2018	$	60
Additions to the accrual - net	365
Cash payments	(86		)
Adjustments 1	22
Accrual for exit activities, balance at February 1, 2019	$	361
ASU 2016-02 adoption impact 2	(168		)
Cash payments	(43		)
Adjustments 1	(62		)
Accrual for exit activities, balance at January 31, 2020	$	88


1	Adjustments represents lease terminations and changes in estimates around sublease assumptions.


2	Upon adoption of ASU 2016-02, Leases (Topic 842), rent liabilities previously recognized in connection with leases were included in the determination of right-of-use assets at transition.

NOTE 9**: Short-Term Borrowings**

In January 2020, the Company entered into a $1.0 billion unsecured 364-day term loan facility (the Term Loan). The Company must repay the aggregate principal amount of loans outstanding under the Term Loan on the maturity date in effect at such time (currently December 31, 2020). Borrowings under the Term Loan will bear interest, at the Company’s option, calculated according to a base rate or a Eurocurrency rate, as the case may be, plus an applicable rate. The applicable rate on a base rate loan is 0.000%, and the applicable rate on a Eurocurrency rate loan is 0.625%. The Term Loan contains customary representations, warranties and covenants for a transaction of this type. The Company was in compliance with those covenants at January 31, 2020. Outstanding borrowings under the Term Loan were $1.0 billion, with a weighted average interest rate of 2.29%, as of January 31, 2020.

In September 2019, the Company entered into a $250 million unsecured 364-day credit agreement (the 2019 Credit Agreement) with a syndicate of banks. The Company may request borrowings under the 2019 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 2019 Credit Agreement on the termination date in effect at such time (currently September 7, 2020). The Company may elect to convert all of the loans outstanding under the 2019 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 2019 Credit Agreement will bear interest calculated according to a base rate or a Eurocurrency rate plus an applicable margin. The 2019 Credit Agreement contains customary representations, warranties and covenants for a transaction of this type. The Company was in compliance with those covenants at January 31, 2020.

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 January 31, 2020.

In addition, during September 2018, the Company entered into a $250 million unsecured 364-day credit agreement (the 2018 Credit Agreement) with a syndicate of banks. The Company may request borrowings under the 2018 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 2018 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 2018 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 2018 Credit Agreement will bear interest calculated according to a base rate or a Eurocurrency rate plus an applicable margin.

The Second Amended and Restated Credit Agreement and the 2019 and 2018 Credit Agreements (collectively, Credit Agreements) support the Company’s commercial paper program in their respective years. The amount available to be drawn under the Second Amended and Restated Credit Agreement and the Credit Agreements is reduced by the amount of borrowings under our commercial paper program. Outstanding borrowings under the Company’s commercial paper program were $941 million, with a weighted average interest rate of 2.10%, as of January 31, 2020, and $722 million, with a weighted average interest rate of 2.81%, as of February 1, 2019. There were no outstanding borrowings under the Second Amended and Restated Credit Agreement or the Credit Agreements as of January 31, 2020. There were no outstanding borrowings under the Amended and Restated Credit Agreement as of February 1, 2019. The weighted average interest rate of total short-term borrowings was 2.14% and 2.81% as of January 31, 2020 and February 1, 2019, respectively.

NOTE 10**: Long-Term Debt**



Debt Category (In millions)	Weighted-Average Interest Rate at January 31, 2020		January 31, 2020			February 1, 2019
Secured debt:
Mortgage notes due through fiscal 2027 1	5.23	%	$	5		$	6
Unsecured debt:
Notes due through fiscal 2024	3.70	%	3,232			4,278
Notes due fiscal 2025-2029	3.57	%	5,749			4,256
Notes due fiscal 2035-2039	5.96	%	897			897
Notes due fiscal 2040-2044	4.82	%	1,757			1,757
Notes due fiscal 2045-2049	3.89	%	5,013			3,533
Finance or capitalized lease obligations due through fiscal 2037			712			774
Total long-term debt			17,365			15,501
Less current maturities			(597		)	(1,110		)
Long-term debt, excluding current maturities			$	16,768		$	14,391


1	Real properties with an aggregate book value of $16 million were pledged as collateral at January 31, 2020, 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: 2020, $500 million; 2021, $1.0 billion; 2022, $765 million; 2023, $500 million; 2024, $450 million; thereafter, $13.6 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 January 31, 2020.

During 2019, the Company issued $3.0 billion of unsecured notes as follows:



Issue Date	Principal Amount (in millions)		Maturity Date	Fixed vs. Floating	Interest Rate	Discount (in millions)
April 2019	$	1,500	April 2029	Fixed	3.650%	$	9
April 2019	$	1,500	April 2049	Fixed	4.550%	$	19

Interest on the notes issued in 2019 is payable semiannually in arrears in April and October of each year until maturity.

The indentures governing the notes issued in 2019 and 2017 contain a provision that allows the Company to redeem these notes at any time, in whole or in part, at specified redemption prices, plus accrued interest, if any, up to the date of redemption. The indentures also contain a provision that allows the holders of the notes to require the Company to repurchase all or any part of their notes if a change of control triggering event occurs. If elected under the change of control provisions, the repurchase of the notes will occur at a purchase price of 101% of the principal amount, plus accrued interest, if any, on such notes up to the date of purchase. The indentures governing the notes do not limit the aggregate principal amount of debt securities that the Company may issue and do not require the Company to maintain specified financial ratios or levels of net worth or liquidity. However, the indentures include various restrictive covenants, none of which is expected to impact the Company’s liquidity or capital resources.

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.

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.

Occasionally, the Company will utilize derivative financial instruments to hedge its exposure to changes in benchmark interest rates. As of January 31, 2020, the Company held forward interest rate swaps with notional amounts totaling $770 million. The fair value of these instruments was not material as of January 31, 2020.

NOTE 11**: Shareholders’ Equity**

Authorized shares of preferred stock were 5.0 million ($5 par value) at January 31, 2020 and February 1, 2019, none of which have been issued. The Board of Directors may issue the preferred stock (without action by shareholders) in one or more series, having such voting rights, dividend and liquidation preferences, and such conversion and other rights as may be designated by the Board of Directors at the time of issuance.

Authorized shares of common stock were 5.6 billion ($0.50 par value) at January 31, 2020 and February 1, 2019.

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 December 12, 2018, the Company’s Board of Directors authorized a $10.0 billion share repurchase under the program with no expiration, which was announced the same day. As of January 31, 2020, the Company had $9.7 billion remaining under the program.

During the year ended January 31, 2020, the Company entered into Accelerated Share Repurchase (ASR) agreements with third-party financial institutions to repurchase a total of 17.2 million shares of the Company’s common stock for $1.7 billion. At inception, the Company paid the financial institutions using cash on hand and took initial delivery of shares. Under the terms of the ASR agreements, upon settlement, the Company would either receive additional shares from the financial institution or be required to deliver additional shares or cash to the financial institution. The Company controlled its election to either deliver additional shares or cash to the financial institution and was subject to provisions which limited the number of shares the Company would be required to deliver.

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

These ASR agreements were accounted for as treasury stock transactions and forward stock purchase contracts. The par value of the shares received was recorded as a reduction to common stock with the remainder recorded as a reduction to capital in excess of par value and 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		Minimum Notional Amount1		Maximum Notional Amount1		Cash Payment Received at Settlement1		Initial Shares Delivered	Additional Shares Delivered at Settlement	Total Shares Delivered
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
Q1 2019	Q1 2019	350		350		500		150		2.9	0.3	3.2
Q2 2019	Q2 2019	990		990		1,410		420		8.9	1.0	9.9
Q3 2019	Q3 2019	397		350		500		103		2.8	0.8	3.6

The Company entered into variable notional ASR agreements with third-party financial institutions to repurchase between a minimum notional amount and a maximum notional amount. At inception of each transaction, the Company paid the maximum notional amount and received shares. When the Company finalized each transaction, it received additional shares as well as a cash payment from the third-party financial institution equal to the difference between the prepayment amount (maximum notional amount) and the final notional amount.

During the year ended January 31, 2020, the Company also repurchased shares of its common stock through the open market totaling 23.8 million shares for a cost of $2.6 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 2019, 2018 and 2017 were as follows:



	2019			2018			2017
(In millions)	Shares	Cost 1		Shares	Cost 1		Shares	Cost 1
Share repurchase program	41.0	$	4,288	31.2	$	2,999	39.1	$	3,133
Shares withheld from employees	0.3	37		0.5	46		0.5	41
Total share repurchases	41.3	$	4,325	31.7	$	3,045	39.6	$	3,174


1	Reductions of $4.1 billion, $2.8 billion, and $2.9 billion were recorded to retained earnings, after capital in excess of par value was depleted, for 2019, 2018, and 2017, 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 January 31, 2020, there were 30.6 million shares remaining available for grants under the currently active Incentive Plans and 20.2 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 $98 million, $74 million, and $99 million in 2019, 2018, and 2017 respectively. The total associated income tax benefit recognized was $15 million, $15 million and $31 million in 2019, 2018 and 2017, respectively.

Total unrecognized share-based payment expense for all share-based payment plans was $169 million at January 31, 2020, of which $83 million will be recognized in 2020, $71 million in 2021 and $15 million thereafter. This results in these amounts being recognized over a weighted-average period of 2.7 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 2019, 2018, and 2017 are as follows:



	2019			2018			2017
Weighted-average assumptions used:
Expected volatility	23.0		%	23.3		%	23.6		%
Dividend yield	1.73		%	1.71		%	1.68		%
Risk-free interest rate	2.28		%	2.71		%	2.14		%
Expected term, in years	6.38			6.58			6.43

Weighted-average grant date fair value	$	23.66		$	21.12		$	18.30

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 $44 million, $36 million, and $77 million in 2019, 2018, and 2017, respectively.

Transactions related to stock options for the fiscal year ended January 31, 2020 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 1, 2019	2,691		$	70.87
Granted	683		108.95
Canceled, forfeited or expired	(189	)	95.79
Exercised	(842	)	54.04
Outstanding at January 31, 2020	2,343		$	86.01	7.42	$	70,977
Vested and expected to vest at January 31, 20201	2,263		$	85.29	7.36	$	70,136
Exercisable at January 31, 2020	1,287		$	72.86	6.28	$	55,834


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. Beginning in fiscal 2019, certain awards vest 50% at the end of a two-year period from the date of grant and 50% at the end of a three-year period from the date of grant. All awards are expensed on a straight-line basis over a three-year period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock awards granted was $109.04, $86.99, and $82.41 in 2019, 2018, and 2017, respectively. The total fair value of restricted stock awards vesting was approximately $64 million, $85 million, and $71 million in 2019, 2018, and 2017, respectively.

Transactions related to restricted stock awards for the fiscal year ended January 31, 2020 are summarized as follows:



	Shares (In thousands)		Weighted-Average Grant-Date Fair Value Per Share
Nonvested at February 1, 2019	1,790		$	81.16
Granted	1,136		109.04
Vested	(570	)	72.26
Canceled or forfeited	(359	)	90.86
Nonvested at January 31, 2020	1,997		$	97.81

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 2019, 2018, and 2017, 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 2019, 2018 and 2017. 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 2019, 22,500 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 $93.28, $95.83, and $80.22 in 2019, 2018, and 2017, respectively. The total fair value of deferred stock units vested was $2 million, $2 million, and $2 million in 2019, 2018, and 2017, respectively. At January 31, 2020, there were 0.1 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. For awards issued in fiscal 2019, the performance condition is primarily based on the achievement of the Company’s target return on invested capital (ROIC). For awards issued prior to fiscal 2019, 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 ROIC or 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 2019 and 2018 are as follows:



	2019		2018
Weighted-average assumptions used:
Expected volatility	24.1	%	22.8	%
Dividend yield	1.89	%	1.77	%
Risk-free interest rate	2.28	%	2.36	%
Expected term, in years	2.84		2.81

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 $115.93, $82.22, and $91.50 in 2019, 2018, and 2017, respectively. The total fair value of performance share units vesting was approximately $19 million, $13 million, and $31 million in 2019, 2018, and 2017, respectively.

Transactions related to performance share units classified as equity awards for the fiscal year ended January 31, 2020 are summarized as follows:



	Units (In thousands)1		Weighted-Average Grant-Date Fair Value Per Unit
Nonvested at February 1, 2019	613		$	83.83
Granted	249		115.93
Vested	(171	)	77.75
Canceled or forfeited	(122	)	92.50
Nonvested at January 31, 2020	569		$	97.86


¹	The number of units presented is based on achieving the targeted performance goals as defined in the performance share unit agreements. As of January 31, 2020, the maximum number of nonvested units that could vest under the provisions of the agreements was 0.7 million for the RONCAA awards and 0.4 million for the ROIC 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. Beginning in fiscal 2019, certain awards vest 50% at the end of a two-year period from the date of grant and 50% at the end of a three-year period from the date of grant. All awards are expensed on a straight-line basis over that period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock units granted was $103.40, $80.32, and $75.44 in 2019, 2018, and 2017, respectively. The total fair value of restricted stock units vesting was approximately $9 million, $7 million, and $6 million in 2019, 2018, and 2017, respectively.

Transactions related to restricted stock units for the fiscal year ended January 31, 2020 are summarized as follows:



	Shares (In thousands)		Weighted-Average Grant-Date Fair Value Per Share
Nonvested at February 1, 2019	329		$	74.95
Granted	452		103.40
Vested	(82	)	67.62
Canceled or forfeited	(193	)	88.57
Nonvested at January 31, 2020	506		$	96.39

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 0.8 million shares of common stock in 2019, 0.9 million shares of common stock in 2018, and 1.1 million shares of common stock in 2017 and recognized $13 million of share-based payment expense pursuant to the plan in 2019, 2018 and 2017.

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 thirty days 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 $175 million, $164 million, and $174 million in 2019, 2018, and 2017, respectively.

NOTE 14**: Income Taxes**

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



	2019		2018		2017
Statutory federal income tax rate 1	21.0	%	21.0	%	33.7	%
State income taxes, net of federal tax benefit	4.1		4.8		2.9
Valuation allowance	1.3		—		(0.6	)
Goodwill impairment	—		5.5		—
Mexico impairment	(1.4	)	1.5		—
Other, net	(1.1	)	(1.0	)	1.2
Effective tax rate	23.9	%	31.8	%	37.2	%


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)	2019		2018			2017
Current:
Federal	$	935	$	963		$	1,734
State	268		274			252
Total current 1	1,203		1,237			1,986
Deferred:
Federal	121		(102		)	60
State	18		(55		)	(4		)
Total deferred 1	139		(157		)	56
Total income tax provision	$	1,342	$	1,080		$	2,042


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

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



(In millions)	January 31, 2020			February 1, 2019
Deferred tax assets:
Self-insurance	$	260		$	252
Share-based payment expense	30			31
Deferred rent	—			58
Operating lease liabilities	1,377			—
Mexico impairment	—			74
Capital loss carryforwards	225			223
Net operating losses	273			239
Other, net	131			119
Total deferred tax assets	2,296			996
Valuation allowance	(561		)	(569		)
Net deferred tax assets	1,735			427

Deferred tax liabilities:
Operating lease assets	(1,198		)	—
Property	(293		)	(76		)
Other, net	(28		)	(57		)
Total deferred tax liabilities	(1,519		)	(133		)

Net deferred tax asset	$	216		$	294

As of January 31, 2020, the Company reported a deferred tax asset of $225 million, for the capital loss realized in 2017 for U.S. federal income tax purposes related to the exit from the Company’s joint venture investment in Australia. Since no present or future capital gains have been identified through which the asset can be realized, the Company has a full valuation allowance against the deferred tax asset. For U.S. federal tax purposes, this loss has a five-year carryforward period expiring at the end of fiscal 2022.

As of January 31, 2020, the Company established a valuation allowance for RONA’s Canadian net deferred tax assets of $72 million. This was a result of management’s assessment of the available positive and negative evidence to estimate the realization of this entity’s existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended January 31, 2020. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present or if estimates of future taxable income are increased.

The Company operates as a branch in various foreign jurisdictions and cumulatively has incurred net operating losses of $738 million and $800 million as of January 31, 2020, and February 1, 2019, respectively. These net operating losses are subject to expiration in 2026 through 2039. 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 $246 million and $331 million as of January 31, 2020, and February 1, 2019, respectively.

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



(In millions)	2019			2018		2017
Unrecognized tax benefits, beginning of year	$	10		$	—	$	6
Additions for tax positions of prior years	2			10		—
Reductions for tax positions of prior years	(3		)	—		(2		)
Settlements	(5		)	—		(1		)
Reductions due to a lapse in applicable statute of limitations	—			—		(3		)
Unrecognized tax benefits, end of year	$	4		$	10	$	—

The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $3 million as of January 31, 2020, and $8 million as of February 1, 2019.

The Company recognized an insignificant amount of interest expense in 2019, $3 million of interest expense in 2018, and $3 million of interest income in 2017 related to uncertain tax positions. The Company had $1 million and $3 million of accrued interest related to uncertain tax positions as of January 31, 2020 and February 1, 2019, respectively.

Penalties recognized related to uncertain tax positions were insignificant for 2019, 2018, and 2017. Accrued penalties were also insignificant as of January 31, 2020 and February 1, 2019.

The Company is subject to examination by various foreign and domestic taxing authorities. There are ongoing U.S. state audits covering tax years 2014 to 2018. An audit of the Company’s Canadian operations by the Canada Revenue Agency for fiscal years 2015 and 2016 is on-going. The Company remains subject to income tax examinations for international income taxes for fiscal years 2014 through 2018. 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 2019, 2018, and 2017:



(In millions, except per share data)	2019			2018			2017
Basic earnings per common share:
Net earnings attributable to Lowe's Companies, Inc.	$	4,281		$	2,314		$	3,447
Less: Net earnings allocable to participating securities	(13		)	(7		)	(11		)
Net earnings allocable to common shares, basic	$	4,268		$	2,307		$	3,436
Weighted-average common shares outstanding	777			811			839
Basic earnings per common share	$	5.49		$	2.84		$	4.09
Diluted earnings per common share:
Net earnings attributable to Lowe's Companies, Inc.	$	4,281		$	2,314		$	3,447
Less: Net earnings allocable to participating securities	(13		)	(7		)	(11		)
Net earnings allocable to common shares, diluted	$	4,268		$	2,307		$	3,436
Weighted-average common shares outstanding	777			811			839
Dilutive effect of non-participating share-based awards	1			1			1
Weighted-average common shares, as adjusted	778			812			840
Diluted earnings per common share	$	5.49		$	2.84		$	4.09

Stock options to purchase 0.9 million, 0.5 million, and 0.5 million shares of common stock for 2019, 2018, and 2017, respectively, were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive.

NOTE 16**: Commitments and Contingencies**

The Company is, from time to time, party to various legal proceedings considered to be in the normal course of business, none of which, individually or in the aggregate, are expected to be material to the Company’s financial statements. In evaluating

liabilities associated with its various legal proceedings, the Company has accrued for probable liabilities associated with these matters. The amounts accrued were not material to the Company’s consolidated financial statements in any of the years presented. Reasonably possible losses for any of the individual legal proceedings which have not been accrued were not material to the Company’s consolidated financial statements.

As of January 31, 2020, the Company had non-cancellable commitments of $1.2 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: 2020, $723 million; 2021, $367 million; 2022, $73 million; 2023, $11 million; thereafter, $0 million.

At January 31, 2020, the Company held standby and documentary letters of credit issued under banking arrangements which totaled $61 million. The majority of the Company’s letters of credit were issued for insurance and construction contracts.

NOTE 17**: 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 $165 million in 2019, $156 million in 2018, and $149 million in 2017. Amounts payable to this vendor were insignificant at January 31, 2020 and February 1, 2019.

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 $117 million in 2019 and $91 million in 2018. Amounts payable to this vendor were insignificant at January 31, 2020. This was not considered a related party relationship in 2017.

NOTE 18**: Other Information**

Net interest expense is comprised of the following:



(In millions)	2019			2018			2017
Long-term debt	$	668		$	582		$	582
Lease obligations	30			58			56
Interest income	(27		)	(28		)	(16		)
Interest capitalized	(1		)	(3		)	(5		)
Interest on tax uncertainties	—			3			(3		)
Other	21			12			19
Interest - net	$	691		$	624		$	633

Supplemental disclosures of cash flow information:



(In millions)	2019		2018		2017
Cash paid for interest, net of amount capitalized	$	671	$	635	$	654
Cash paid for income taxes, net	$	1,423	$	1,316	$	1,673
Non-cash investing and financing activities:
Non-cash property acquisitions1	$	441	$	44	$	97
Cash dividends declared but not paid	$	420	$	385	$	340

1 See Note 5 for supplemental cash flow disclosures related to finance and operating leases.

Sales by product category:



	2019				2018				2017
(Dollars in millions)	Total Sales		%		Total Sales		%		Total Sales		%
Appliances	$	9,989	14	%	$	9,485	13	%	$	8,687	13	%
Lumber & Building Materials	9,745		14		9,767		14		8,978		13
Seasonal & Outdoor Living	6,890		10		6,669		9		6,479		9
Lawn & Garden	6,459		9		6,133		9		5,905		9
Rough Plumbing & Electrical	6,224		9		6,164		9		5,937		9
Kitchens & Bath	5,433		7		5,582		8		5,576		8
Tools	4,420		6		4,218		6		4,033		6
Millwork	4,192		6		4,050		6		3,975		6
Paint	4,125		6		3,962		6		3,955		6
Flooring	3,877		5		3,898		5		3,964		6
Hardware	3,467		5		3,362		5		3,298		5
Lighting	2,857		4		3,011		4		3,143		5
Décor	2,443		3		2,333		3		2,339		3
Other	2,027		2		2,675		3		2,350		2
Net sales	$	72,148	100	%	$	71,309	100	%	$	68,619	100	%

Note: Product category sales for prior periods have been reclassified to conform to the current year presentation.

NOTE 19**: Subsequent Events**

COVID-19

On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. As of the date of this filing, our Lowe’s operated home improvement stores remain open in both the US and Canada, subject to regulated or reduced store hours. We cannot reasonably estimate the length or severity of this pandemic, or the extent to which the disruption may materially impact our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.

Credit Agreement

On March 23, 2020, the Company entered into an additional $1.020 billion five-year unsecured revolving credit agreement (the 2020 Credit Agreement) with a syndicate of banks. The Company must repay the aggregate principal amount of loans outstanding under the 2020 Credit Agreement on the termination date in effect at such time (currently March 23, 2025). The Company may request borrowings under the 2020 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 2020 Credit Agreement will bear interest calculated according to a base rate or a Eurocurrency rate, plus an applicable margin.

Subject to obtaining commitments from the lenders and satisfying other conditions specified in the 2020 Credit Agreement, the Company may increase the aggregate availability by an additional $250 million. The 2020 Credit Agreement contains customary representations, warranties, and covenants for a transaction of this type.

The 2020 Credit Agreement was used to refinance the 2019 Credit Agreement, as described in Note 9 above, and the Company terminated any commitments under the 2019 Credit Agreement as of March 23, 2020.

The 2020 Credit Agreement, in addition to the Second Amended and Restated Credit Agreement and the Credit Agreements, as defined in Note 9 above, support our commercial paper program in their respective years. The amount available to be drawn under the 2020 Credit Agreement, the Second Amended and Restated Credit Agreement and the Credit Agreements is reduced by the amount of borrowings under our commercial paper program. There were no outstanding borrowings under the 2020 Credit Agreement as of March 23, 2020.

SUPPLEMENTARY DATA

Selected Quarterly Data (UNAUDITED)

The following table summarizes the quarterly consolidated results of operations for 2019 and 2018:



	2019
(In millions, except per share data)	First 1		Second 2		Third 3		Fourth 4
Net sales	$	17,741	$	20,992	$	17,388	$	16,027
Gross margin	5,581		6,740		5,640		4,981
Net earnings	1,046		1,676		1,049		509
Basic earnings per common share	1.31		2.14		1.36		0.67
Diluted earnings per common share	$	1.31	$	2.14	$	1.36	$	0.66

	2018
(In millions, except per share data)	First		Second 5		Third 6		Fourth 7
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	)


1	The first quarter of fiscal 2019 includes pre-tax operating losses of $12 million associated with the exit and ongoing wind-down of the Mexico retail operations.


2	The second quarter of fiscal 2019 includes pre-tax operating losses of $14 million associated with the exit and ongoing wind-down of the Mexico retail operations.


3	The third quarter of fiscal 2019 includes pre-tax charges totaling $53 million related to long-lived asset impairments associated with the Company’s strategic review of its Canadian operations, as well as pre-tax operating losses of $9 million associated with the exit and ongoing wind-down of the Mexico retail operations.


4	The fourth quarter of fiscal 2019 includes pre-tax operating costs and charges totaling $176 million related to inventory liquidation, accelerated depreciation and amortization, severance, and other costs associated with the Company’s decision to close 34 under-performing stores and take additional actions to improve future performance and profitability of its Canadian operations.


5	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.

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.

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.

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