-1- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended May 3, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-7898 LOWE'S COMPANIES, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-0578072 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1605 CURTIS BRIDGE ROAD, WILKESBORO, N.C. 28697 (Address of principal executive offices) (Zip Code) (336) 658-4000 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 31, 2002 Common Stock, $.50 par value 778,245,221 16 TOTAL PAGES -2- LOWE'S COMPANIES, INC. - INDEX - Page No. PART I - Financial Information: Consolidated Balance Sheets - May 3, 2002 (Unaudited), May 4, 2001 (Unaudited) and February 1, 2002 3 Consolidated Statements of Current and Retained Earnings (Unaudited) - three months ended May 3, 2002 and May 4, 2001 4 Consolidated Statements of Cash Flows (Unaudited) - three months ended May 3, 2002 and May 4, 2001 5 Notes to Unaudited Consolidated Financial Statements 6-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14 Independent Accountants' Report 15 PART II - Other Information 16 Item 6 (b) - Reports on Form 8-K -3- Lowe's Companies, Inc. Consolidated Balance Sheets In Thousands (Unaudited) (Unaudited) May 3, May 4, February 1, 2002 2001 2002 Assets Current assets: Cash and cash equivalents $1,475,579 $999,953 $798,839 Short-term investments 48,271 38,173 54,389 Accounts receivable - net 192,567 196,529 165,578 Merchandise inventory 4,360,056 3,917,667 3,610,776 Deferred income taxes 97,543 95,006 92,504 Other assets 267,078 197,532 198,306 Total current assets 6,441,094 5,444,860 4,920,392 Property, less accumulated depreciation 8,991,813 7,421,342 8,653,439 Long-term investments 19,170 32,141 21,660 Other assets 158,463 123,405 140,728 Total assets $15,610,540 $13,021,748 $13,736,219 Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings $100,000 $100,000 $100,000 Current maturities of long-term debt 59,790 37,635 59,259 Accounts payable 2,740,446 2,449,287 1,714,776 Employee retirement plans 136,171 88,920 126,339 Accrued salaries and wages 175,326 179,594 220,885 Other current liabilities 1,285,763 841,854 795,571 Total current liabilities 4,497,496 3,697,290 3,016,830 Long-term debt, excluding current maturities 3,735,651 3,291,823 3,734,011 Deferred income taxes 313,567 261,580 304,697 Other long-term liabilities 6,734 3,193 6,239 Total liabilities 8,553,448 7,253,886 7,061,777 Shareholders' equity Preferred stock - $5 par value, none issued - - - Common stock - $.50 par value; Issued and Outstanding May 3, 2002 777,301 May 4, 2001 769,744 February 1, 2002 775,714 388,650 384,872 387,857 Capital in excess of par 1,855,904 1,654,004 1,804,161 Retained earnings 4,812,001 3,730,174 4,481,734 Unearned compensation- restricted stock awards - (1,666) - Accumulated other comprehensive income (loss) 537 478 690 Total shareholders' equity 7,057,092 5,767,862 6,674,442 Total liabilities and shareholders' equity $15,610,540 $13,021,748 $13,736,219 See accompanying notes to unaudited consolidated financial statements. -4- Lowe's Companies, Inc. Consolidated Statements of Current and Retained Earnings (Unaudited) In Thousands, Except Per Share Data Three Months Ended May 3, 2002 May 4, 2001 Current Earnings Amount Percent Amount Percent Net sales $6,470,597 100.00 $5,276,365 100.00 Cost of sales 4,547,875 70.29 3,782,836 71.69 Gross margin 1,922,722 29.71 1,493,529 28.31 Expenses: Selling, general and administrative 1,141,096 17.64 939,745 17.81 Store opening costs 36,916 0.57 35,792 0.68 Depreciation 145,305 2.24 119,078 2.26 Interest 46,991 0.73 41,326 0.78 Total expenses 1,370,308 21.18 1,135,941 21.53 Pre-tax earnings 552,414 8.53 357,588 6.78 Income tax provision 206,603 3.19 132,308 2.51 Net earnings $345,811 5.34 $225,280 4.27 Shares outstanding - Basic 776,513 768,418 Basic earnings per share $0.45 $0.29 Shares outstanding - Diluted 798,092 787,510 Diluted earnings per share $0.44 $0.29 Retained Earnings Balance at beginning of period $4,481,734 $3,518,356 Net earnings 345,811 225,280 Cash dividends (15,544) (13,462) Balance at end of period $4,812,001 $3,730,174 See accompanying notes to unaudited consolidated financial statements. -5- Lowe's Companies, Inc. Consolidated Statements of Cash Flows (Unaudited) In Thousands For the Three Months Ended May 3, May 4, Periods Ended On 2002 2001 Cash Flows From Operating Activities: Net Earnings $345,811 $225,280 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Depreciation & Amortization 149,929 119,495 Deferred Income Taxes 3,920 (3,845) Loss on Disposition/Writedown of Fixed and Other Assets 9,000 13,614 Tax Effect of Stock Options Exercised 6,269 15,463 Changes in Operating Assets and Liabilities: Accounts Receivable - Net (26,989) (35,544) Merchandise Inventory (749,280) (632,297) Other Operating Assets (68,764) (36,034) Accounts Payable 1,025,760 734,917 Employee Retirement Plans 32,554 29,122 Other Operating Liabilities 445,128 193,065 Net Cash Provided by Operating Activities 1,173,248 623,236 Cash Flows from Investing Activities: Decrease (Increase) in Investment Assets: Short-Term Investments 10,441 (21,723) Purchases of Long-Term Investments (2,068) (990) Increase in Other Long-Term Assets (8,998) (6,686) Fixed Assets Acquired (501,193) (511,842) Proceeds from the Sale of Fixed and Other Long-Term Assets 4,024 7,140 Net Cash Used in Investing Activities (497,794) (534,101) Cash Flows from Financing Activities: Net (Decrease) in Short-Term Borrowings - (149,829) Long-Term Debt Borrowings - 601,066 Repayment of Long-Term Debt (6,707) (12,034) Proceeds from Stock Options Exercised 23,537 29,419 Cash Dividend Payments (15,544) (13,462) Net Cash Provided by Financing Activities 1,286 455,160 Net Increase in Cash and Cash Equivalents 676,740 544,295 Cash and Cash Equivalents, Beginning of Period 798,839 455,658 Cash and Cash Equivalents, End of Period $1,475,579 $999,953 See accompanying notes to unaudited consolidated financial statements. -6- Lowe's Companies, Inc. Notes to Consolidated Financial Statements (Unaudited) Note 1: The accompanying Consolidated Financial Statements (unaudited) have been reviewed by independent certified public accountants, and in the opinion of management, they contain all adjustments necessary to present fairly the financial position as of May 3, 2002, and the results of operations and the cash flows for the three months ended May 3, 2002 and May 4, 2001. These interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Lowe's Companies, Inc. (the Company) Annual Report on Form 10-K for the fiscal year ended February 1, 2002. The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year. Note 2: On May 25, 2001, the Company's Board of Directors approved a two-for- one split of the Company's common stock. As a result, shareholders received one additional share on June 29, 2001 for each share held as of the record date on June 8, 2001. The par value of the Company's common stock remained $0.50. All related financial information presented, including per share data, reflects the effects of the stock split. Note 3: 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, revenues 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, the results 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. Note 4: The Company recognizes revenues when sales transactions occur and customers take possession of the merchandise. A provision for anticipated merchandise returns is provided in the period that the related sales are recorded. Note 5: Basic earnings per share (EPS) excludes dilution and is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted earnings per share are calculated based on the weighted average shares of common stock as adjusted for the potential dilutive effect of stock options and convertible notes at the balance sheet date. The effect of the assumed conversion of the $580.7 million Senior Convertible Notes, issued in October 2001, has been excluded from diluted earnings per share for the three months ended May 3, 2002 because none of the conditions that would permit conversion had been satisfied during the period. The calculation does include the effect of the assumed conversion of the $1.005 billion convertible notes issued in February 2001. The table below illustrates the calculation of both basic and diluted EPS (in thousands, except per share data): -7- Three Months Ended May 3, May 4, 2002 2001 Basic Earnings per Share: Net Earnings $ 345,811 $ 225,280 Weighted Average Shares Outstanding 776,513 768,418 Basic earnings per share $ .45 $ .29 Diluted Earnings per Share: Net Earnings $ 345,811 $ 225,280 Net Earnings Adjustment for Interest on Convertible Debt Net of Tax 2,567 2,032 Net Earnings, as Adjusted $ 348,938 $ 227,312 Weighted Average Shares Outstanding 776,513 768,418 Dilutive Effect of Stock Options 5,049 4,923 Dilutive Effect of Convertible Debt 16,530 14,169 Weighted Average Shares, as Adjusted 798,092 787,510 Diluted Earnings per Share $ .44 $ .29 Note 6: Net interest expense is composed of the following (in thousands): Three Months Ended May 3, May 4, 2002 2001 Long-term debt $ 46,544 $ 45,070 Capitalized leases 10,248 10,335 Short-term debt 550 1,844 Amortization of Original Issue Discount and Loan Costs 818 668 Short-term interest income (4,226) (8,296) Interest capitalized on Construction in progress (6,943) (8,295) Net interest expense $ 46,991 $ 41,326 Note 7: Property is shown net of accumulated depreciation of $2.1 billion at May 3, 2002, $1.7 billion at May 4, 2001 and $2.0 billion at February 1, 2002. -8- Note 8: Supplemental disclosures of cash flow information (in thousands): Three Months Ended May 3, 2002 May 4, 2001 Cash paid for interest (net of capitalized) $ 56,202 $ 55,123 Cash paid for income taxes 6,370 7,030 Non-cash investing and financing activities: Common stock issued to ESOP 22,722 15,858 Fixed assets acquired under capital lease 4,254 - Note 9: In January 2002, the Board of Directors authorized the funding of the fiscal 2001 ESOP contribution primarily with the issuance of new shares of the Company's common stock. During the first quarter of fiscal 2002, the Company issued a total of 520,228 shares, with a market value of $22.7 million. Note 10: Total comprehensive income, comprised of net earnings and unrealized holding gains (losses) on available-for-sale securities was $345.7 and $225.3 million, compared to net earnings of $345.8 and $225.3 million for the three months ended May 3, 2002 and May 4, 2001, respectively. Note 11: In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed of," but retains many of its fundamental provisions. Additionally, this statement expands the scope of discontinued operations to include more disposal transactions. SFAS No. 144 was effective for the Company for the fiscal year beginning February 2, 2002. The adoption of this standard did not have a material impact on the Company's financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS No. 143 will require the accrual, at fair value, of the estimated retirement obligation for tangible long-lived assets if the company is legally obligated to perform retirement activities at the end of the related asset's life. SFAS No. 143 is effective for the Company for the fiscal year beginning February 1, 2003. Management does not believe that the initial adoption of this standard will have a material impact on the Company's financial statements. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion summarizes the significant factors affecting the Company's consolidated operating results, liquidity and capital resources during the quarter ended May 3, 2002. This discussion should be read in conjunction with the financial statements and financial statement footnotes that are included in the Company's fiscal 2001 Form 10-K. On May 25, 2001, the Company's Board of Directors approved a two-for- one split of the Company's common stock. As a result, shareholders received one additional share on June 29, 2001 for each share held as of the record date on June 8, 2001. The par value of the Company's common stock remained $0.50. All related financial information presented, including per share data, reflects the effects of the stock split. ACCOUNTING POLICIES AND ESTIMATES The following discussion and analysis of the results of operations and financial condition are based on the Company's financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets, liabilities, revenues 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, the results 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. The Company's significant accounting polices are described in Note 1 to the consolidated financial statements presented in the annual report to shareholders' filed as a part of the Company's fiscal 2001 Form 10-K. Management believes that the following accounting policies affect the more significant estimates used in preparing the consolidated financial statements. The Company records an inventory reserve for the loss associated with selling discontinued inventories at below cost. This reserve is based on management's current knowledge with respect to inventory levels, sales trends and historical experience relating to the liquidation of discontinued inventory. 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 actual shrink results from completed physical inventories could result in revisions to previously estimated shrink expense. Management believes it has sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves. -10- The Company is self-insured for certain losses relating to worker's compensation, automobile, general and product liability claims. Self- insurance claims filed and claims incurred but not reported are accrued based upon management's estimates of the aggregate liability for uninsured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Although management believes it has the ability to adequately record estimated losses related to claims, it is possible that actual results could significantly differ from recorded self-insurance liabilities. OPERATIONS For the first quarter of fiscal 2002, sales increased 22.6% to $6.5 billion, comparable store sales for the quarter increased 7.5%, and net earnings rose 53.5% to $345.8 million compared to last year's first quarter results. Diluted earnings per share were $.44 compared to $.29 for the comparable quarter of last year. The sales increase during the first quarter was primarily attributable to the addition of 14 million square feet of retail selling space relating to new and relocated stores since last year's first quarter and the increase in comparable store sales. The Company experienced wide-spread strength in sales across most product categories which contributed significantly to the comparable store sales increase during the quarter. Product categories showing the strongest performance included flooring, paint, fashion plumbing, outdoor power equipment, windows and walls and home organization. Gross margin was 29.71% of sales for the quarter ended May 3, 2002 compared to 28.31% for last year's comparable quarter. The increase in margin rate for the first quarter of 2002 is primarily due to higher margin rates, product mix shifts and improved shrinkage results. Selling, general and administrative expenses (SG&A) were 17.64% of sales versus 17.81% in last year's first quarter. SG&A increased by 21.4% compared to the 22.6% increase in sales for the quarter. The leverage in the current quarter was primarily the result of expense controls relating to store payroll and advertising costs, partially offset by higher incentive compensation driven by higher earnings. Store opening costs were $36.9 million for the quarter ended May 3, 2002 compared to $35.8 million last year. This represents costs associated with the opening of 46 stores during the current year's first quarter (42 new and 4 relocated) compared to 37 stores for the comparable period last year (32 new and 5 relocated). Charges in this quarter for future and prior openings were $5.4 million compared to $11.6 million in last year's first quarter. The Company's 2002 expansion plans are discussed under "Liquidity and Capital Resources" below. Depreciation was $145.3 million for the quarter ended May 3, 2002. This represents an increase of 22% over last year's first quarter. The increase is primarily due to the addition of buildings, fixtures, displays and computer equipment relating to the Company's ongoing expansion program and the increase in the percentage of owned locations since last year's first quarter. Interest expense increased from $41.3 million to $47.0 million for the quarter ended May 3, 2002. Interest has increased during the current year's first quarter primarily due to the issuance of $580.7 million aggregate principal amount of senior convertible notes in October 2001. A decrease in interest -11- income from investments due to declining interest rates and decreased interest capitalized also contributed to the increase in net interest expense. The Company's effective income tax rate was 37.4% for the quarter ended May 3, 2002 and 37.0% for last year's first quarter. The higher rate during 2002 is primarily related to expansion into states with higher income tax rates. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the Company's significant contractual obligations as of February 1, 2002, which was included in the annual report to shareholders filed as Exhibit 13 of the Company's fiscal 2001 Form 10-K. There have been no material changes in the Company's contractual obligations during the quarter ended May 3, 2002. Contractual Payments Due by Period Obligations Less than 1-3 4-5 After 5 (In Thousands) Total 1 year years years years Short-term Debt $ 100,000 $100,000 $ - $ - $ - Long-term Debt 3,826,290 40,321 64,494 616,674 3,104,801 Capital Lease Obligations 851,533 59,345 118,020 114,210 559,958 Operating Leases 2,991,367 187,705 379,349 358,586 2,065,727 Total Contractual Cash Obligations $7,769,190 $387,371 $561,863 $1,089,470 $5,730,486 The primary sources of liquidity are cash flows from operating activities, financing activities and various lines of credit currently available to the Company. Net cash provided by operating activities was $1.2 billion for the three months ended May 3, 2002 compared to $623.2 million for the first three months of fiscal 2001. The increase in cash provided by operating activities in the current year resulted primarily from an increase in net earnings, improved payables leverage and an increase in operating liabilities due to the timing of invoice payments. Working capital at May 3, 2002 was $1.9 billion compared to $1.7 billion at May 4, 2001 and $1.9 billion at February 1, 2002. The primary component of net cash used in investing activities continues to be new store facilities in connection with the Company's expansion plan. Cash acquisitions of fixed assets were $501.1 million and $511.8 million for the quarters ended May 3, 2002 and May 4, 2001, respectively. At May 3, 2002, the Company operated 785 stores in 42 states with 86.0 million square feet of retail selling space, a 19.7% increase over the selling space as of May 4, 2001. Cash flows provided by financing activities were $1.3 million for the quarter ended May 3, 2002. For the quarter ended May 4, 2001, cash flows provided by financing activities were $455.2 million. The cash provided by financing activities during the first quarter of 2002 primarily resulted from proceeds generated by stock option exercises. These proceeds were offset by long-term debt repayments and cash dividend payments. The major source of cash provided by financing activities during the first three months of 2001 resulted from the issuance of $1.005 billion aggregate principal of convertible notes at an issue price of $608.41 per note. These proceeds were partially offset by the -12- repayment of short-term borrowings relating to the Company's commercial paper program, normal long-term debt repayments and cash dividend payments. The ratio of long-term debt to equity plus long-term debt was 34.6% and 36.3% for the quarters ended May 3, 2002 and May 4, 2001, respectively. The Company has an $800 million senior credit facility. The facility is split into a $400 million five-year tranche, expiring in August 2006 and a $400 million 364-day tranche, expiring in August 2002, which is renewable annually. The Company intends to renew this facility in August 2002. The facility is used to support the Company's $800 million commercial paper program and for short-term borrowings. Any loans made are priced based upon market conditions at the time of funding in accordance with the terms of the senior credit facility. The senior credit facility contains certain restrictive covenants, which include maintenance of specific financial ratios, among others. The Company was in compliance with these covenants at May 3, 2002. Sixteen banking institutions are participating in the $800 million senior credit facility and, as of May 3, 2002, there were no outstanding loans under the facility. This facility replaced a $300 million revolving credit agreement. The Company has several lines of credit available which can provide additional liquidity. In December 2001, the Company completed a $100 million revolving credit and security agreement, expiring in December 2002, and renewable annually with a financial institution. The Company intends to renew this facility in December 2002. Interest rates under this agreement are determined at the time of borrowing based on market conditions in accordance with the terms of the agreement. The Company had $100 million outstanding at May 3, 2002 under this agreement, and $157.2 million in accounts receivable pledged as collateral. In addition, $25 million was available as of May 3, 2002, and $100 million was available as of May 4, 2001, on an unsecured basis, for the purpose of short-term borrowings on a bid basis from various banks. These lines are uncommitted and are reviewed periodically by both the banks and the Company. There were no borrowings outstanding under these lines of credit as of May 3, 2002 or May 4, 2001. The Company has three operating lease agreements whereby lessors have committed to purchase land, fund construction costs, and lease properties to the Company. The initial lease terms are five years with two five-year renewal options. One initial term expires in 2005 and the two remaining initial lease terms expire in 2006. The agreements contain guaranteed residual values up to a portion of the properties' original cost and purchase options at original cost for all properties under the agreements. The agreements contain certain restrictive covenants, which include maintenance of specific financial ratios, among others. The Company has financed four regional distribution centers, two of which are under construction, and fourteen retail stores through these lease agreements. Total commitments under these operating lease agreements as of May 3, 2002 and May 4, 2001, were $329.4 and $236.1 million, respectively. Outstanding advances under those commitments were $223.2 and $174.8 million as of May 3, 2002 and May 4, 2001. Future payments related to these lease agreements were included in the significant contractual obligations and commercial commitments table presented previously. The Company's 2002 capital budget is currently at $2.8 billion, inclusive of $307 million of operating or capital leases. Approximately 96% of this planned commitment is for store expansion and new distribution centers. Expansion plans for 2002 consist of 123 stores, including 9 relocations of older stores. This planned expansion is expected to increase sales floor square footage by -13- approximately 18%. Current plans indicate that around 4% of the 2002 projects will be leased and 96% will be owned. At May 3, 2002, the Company operated seven regional distribution centers. During 2001, the Company began construction on two additional regional distribution centers. The first is located in Cheyenne, Wyoming and is expected to be operational in the third quarter of 2002, and the second is located in Northampton, North Carolina, which expected to be operational in late 2002. The Company believes that funds from operations, funds from debt issuances, leases and existing short-term lines of credit will be adequate to finance the 2002 expansion plan and other operating requirements. However, general economic downturns, fluctuations in the prices of products, unanticipated impact arising from competition and adverse weather conditions could have an effect on funds generated from operations and our expansion plans. In addition, the availability of funds through the issuance of commercial paper and new debt could be adversely affected due to a debt rating downgrade or a deterioration of certain financial ratios. The $100 million revolving credit and security agreement requires a minimum investment grade rating in order to receive funding. There are no provisions in any agreements that would require early cash settlement of existing debt or leases as a result of a downgrade in the Company's debt rating or a decrease in the Company's stock price. Holders of the Company's $580.7 million Senior Convertible notes may convert their notes into the Company's common stock if the defined minimum investment grade rating is not maintained. MARKET RISK As discussed in the annual report to shareholders for the year ended February 1, 2002, the Company's major market risk exposure is the potential loss arising from changing interest rates and its impact on long-term debt. The Company's policy is to manage interest rate risks by maintaining a combination of fixed and variable rate financial instruments. The Company's market risk has not changed materially since February 1, 2002. Please see the tables titled "Long-term Debt Maturites by Fiscal Year" on page 24 of the annual report to shareholders' filed as Exhibit 13 of the Company's fiscal 2001 Form 10-K. RECENT ACCOUNTING PRONOUNCEMENTS In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed of," but retains many of its fundamental provisions. Additionally, this statement expands the scope of discontinued operations to include more disposal transactions. SFAS No. 144 was effective for the Company for the fiscal year beginning February 2, 2002. The adoption of this standard did not have a material impact on the Company's financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS No. 143 will require the accrual, at fair value, of the estimated retirement obligation for tangible long-lived assets if the company is legally obligated to perform retirement activities at the end of the related asset's life. SFAS No. 143 is effective for the Company for the fiscal year beginning February 1, 2003. Management does not believe that the initial adoption of this standard will have a material impact on the Company's financial statements. -14- FORWARD-LOOKING STATEMENTS Our quarterly report on Form 10-Q to be filed with the Securities and Exchange Commission talks about our future, particularly in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations." While we believe our expectations are reasonable, we can't guarantee them and you should consider this when thinking about statements we make that aren't historical facts. Some of the things that could cause our actual results to differ substantially from our expectations are: (1) Our sales are dependent upon the general economic health of the country, variations in the number of new housing starts and existing home sales, the level of repairs, remodeling and additions to existing homes, commercial building activity, and the availability and cost of financing. An economic downturn affecting consumer confidence in making housing and home improvement expenditures could affect sales because a portion of our inventory is purchased for discretionary projects, which can be delayed. (2) Our expansion strategy may be impacted by environmental regulations, local zoning issues and delays, availability and development of land, and more stringent land use regulations than we have traditionally experienced as well as the availability of sufficient labor to facilitate our growth. (3) Many of our products are commodities whose prices fluctuate erratically within an economic cycle, a condition especially true of lumber and plywood. (4) Our business is highly competitive, and as we expand to larger markets we may face new forms of competition, which do not exist in some of the markets we have traditionally served. (5) The ability to continue our everyday competitive pricing strategy and provide the products that customers want depends on our vendors providing a reliable supply of inventory at competitive prices. (6) On a short-term basis, weather may affect sales of product groups like nursery, lumber, and building materials. -15- INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors Lowe's Companies, Inc.: We have reviewed the accompanying consolidated balance sheets of Lowe's Companies, Inc. and subsidiaries (the "Company") as of May 3, 2002 and May 4, 2001, and the related consolidated statements of current and retained earnings, and of cash flows for the three-month periods ended May 3, 2002 and May 4, 2001. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Lowe's Companies, Inc. and subsidiaries as of February 1, 2002, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 19, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 1, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP Charlotte, North Carolina May 15, 2002 -16- Part II - OTHER INFORMATION Item 6 (b) - Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended May 3, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LOWE'S COMPANIES, INC. June 13, 2002 /s/ Kenneth W. Black, Jr. Date Kenneth W. Black, Jr. Senior Vice President and Chief Accounting Officer