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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 November 1, 1998May 2, 1999
- 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 1-8207
THE HOME DEPOT, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3261426
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2455 Paces Ferry Road N.W. Atlanta, Georgia 30339
(Address of principal executive offices) (Zip Code)
(770) 433-8211
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$.05 par value 1,563,115,707 shares,1,481,685,346 Shares, as of November 20, 1998May 28, 1999
THE HOME DEPOT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
November 1, 1998May 2, 1999
Page
Part I. Financial Information:
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS -
Three-Month and Nine-Month Periods Ended November 1, 1998May 2,1999 and November 2, 1997....................3May 3,1998..............3
CONSOLIDATED CONDENSED BALANCE SHEETS -
As of November 1, 1998May 2,1999 and February 1, 1998....................4January 31, 1999............................4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Nine-MonthThree-Month Periods Ended November 1, 1998May 2, 1999 and November 2, 1997....................5May 3,1998.............5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME -INCOME-
Three-Month and Nine-Month Periods Ended November 1, 1998May 2, 1999 and November 2, 1997....................6May 3,1998.............6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS...........................................7STATEMENTS.................7
Item 2. Management's Discussion and Analysis of ResultsResult
of Operations and Financial Condition ..................8Condition................. 8 - 13
Item 3. Quantitative and Qualitative Disclosures about Market
Risk..............................................13Risk.......................................................13
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders..................................................14Holders........13
Item 5. Other Information...........................................14Information..........................................13
Item 6. Exhibits and Reports on Form 8-K............................148-K...........................13
Signature Page.......................................................15Page......................................................14
Index to Exhibits....................................................16Exhibits...................................................15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In Millions, Except Per Share Data)
Three Months Ended
Nine Months Ended
November 1, NovemberMay 2, November 1, November 2,May 3,
1999 1998
1997 1998 1997
Net Sales $ 7,6998,952 $ 6,217 $ 22,961 $ 18,4257,123
Cost of Merchandise Sold 5,522 4,491 16,552 13,3466,386 5,155
Gross Profit 2,177 1,726 6,409 5,0792,566 1,968
Operating Expenses:
Selling and Store Operating 1,377 1,117 3,998 3,2361,584 1,268
Pre-Opening 24 16 61 4322 19
General and Administrative 131 106 375 305
Non-Recurring Charge --- 104 --- 104150 121
Total Operating Expenses 1,532 1,343 4,434 3,6881,756 1,408
Operating Income 645 383 1,975 1,391810 560
Interest Income (Expense):
Interest and Investment Income 9 13 24 373 7
Interest Expense (8) (10) (29) (32)(11)
Interest, Net 1 3 (5) 5(4)
Earnings Before Income Taxes 646 386 1,970 1,396805 556
Income Taxes 254 150 774 543316 219
Net Earnings $ 392489 $ 236 $ 1,196 $ 853337
Weighted Average Number of Common
Shares Outstanding 1,471 1,461 1,469 1,4571,478 1,466
Basic Earnings Per Share $ 0.270.33 $ 0.16 $ 0.81 $ 0.590.23
Weighted Average Number of Common
Shares Outstanding Assuming Dilution 1,547 1,529 1,544 1,5211,558 1,539
Diluted Earnings Per Share $ 0.260.32 $ 0.16 $ 0.79 $ 0.570.22
Dividends Per Share $ 0.030 $ 0.025 $ 0.085 $ 0.070
See accompanying notes to consolidated condensed financial statements.
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In Millions, Except Share Data)
November 1, February 1,
1998 1998May 2, January 31,
ASSETS 1999 1999
Current Assets:
Cash and Cash Equivalents $ 515604 $ 17262
Short-Term Investments 1 2--- ---
Receivables, Net 459 556502 469
Merchandise Inventories 4,157 3,6024,955 4,293
Other Current Assets 116 128150 109
Total Current Assets 5,248 4,4606,211 4,933
Property and Equipment, at cost 8,917 7,4879,937 9,422
Less: Accumulated Depreciation
and Amortization (1,213) (978)(1,342) (1,262)
Net Property and Equipment 7,704 6,5098,595 8,160
Long-Term Investments 15 15
Notes Receivable 28 2729 26
Cost in Excess of the Fair Value
of Net Assets Acquired 263 140274 268
Other 66 7875 63
$ 13,32415,199 $ 11,22913,465
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 2,1442,592 $ 1,3581,586
Accrued Salaries and Related Expenses 383 312465 395
Sales Taxes Payable 204 143263 176
Other Accrued Expenses 555 530599 586
Income Taxes Payable 90 105289 100
Current Installments of Long-Term Debt 10 8 14
Total Current Liabilities 3,386 2,4564,216 2,857
Long-Term Debt, excluding
current installments 1,319 1,3031,566
Other Long-Term Liabilities 219 178238 208
Deferred Income Taxes 79 7885 85
Minority Interest 5 11612 9
Stockholders' Equity:
Common Stock, par value $0.05.
Authorized: 2,500,000,000 shares;
issued and outstanding -
1,473,829,0001,479,491,000 shares at 11/1/985/2/99
and 1,464,216,0001,475,452,000 shares at 2/1/9831/99 74 7374
Paid-In Capital 2,820 2,6262,972 2,854
Retained Earnings 5,502 4,430
Cumulative Translation Adjustments (75) (28)
8,321 7,1016,321 5,876
Accumulated Other Comprehensive Income (33) (61)
9,334 8,743
Less Shares Purchased for
Compensation Plans 5 3(5) (3)
Total Stockholders' Equity 8,316 7,0989,329 8,740
$ 13,32415,199 $ 11,22913,465
See accompanying notes to consolidated condensed financial statements.
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
NineThree Months Ended
November 1, 1998 November 2, 1997
May 2,1999 May 3,1998
Cash Provided From Operations:
Net Earnings $ 1,196489 $ 853337
Reconciliation of Net Earnings to Net Cash
Provided by Operations:
Depreciation and Amortization 277 205
107 87
(Increase)Decrease (Increase) in Receivables, Net 95 (123)(31) 74
Increase in Merchandise Inventories (567) (756)(654) (404)
Increase in Accounts Payable
and Accrued Expenses 981 9531,198 818
Increase in Income Taxes Payable 29 ---241 171
Other 26 15(47) (23)
Net Cash Provided by Operations 2,037 1,1471,303 1,060
Cash Flows From Investing Activities:
Capital Expenditures (1,486) (985)(550) (424)
Proceeds from Sales of Property and Equipment 30 46
Payment for19 12
Purchase of Minority PartnershipRemaining Interest in
The Home Depot Canada --- (261) ---
Purchases of Investments (2) (194)--- (1)
Proceeds from Maturities of Investments 3 312--- 2
Repayments of Advances Secured
by Real Estate, Net (1) (1)(3) 3
Net Cash Used in Investing Activities (1,717) (822)(534) (669)
Cash Flows From Financing Activities:
Proceeds from Long-Term BorrowingsRepayments of Commercial Paper Obligations, Net (246) --- 15
Principal Repayments of Long-Term Debt (5) (37)(6) (4)
Proceeds from Sale of Common Stock, Net 150 10663 47
Cash Dividends Paid to Stockholders (125) (102)(44) (36)
Minority Interest Contributions to Partnership 7 5 8
Net Cash (Used in) Provided by
(Used in)
Financing Activities 27 (13)(228) 15
Effect of Exchange Rate Changes on Cash
Net (4)and Cash Equivalents 1 ---
Increase in Cash and Cash Equivalents 343 312542 406
Cash and Cash Equivalents
at Beginning of Period 62 172 146
Cash and Cash Equivalents at End of Period $ 515604 $ 458578
See accompanying notes to consolidated condensed financial statements.
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
Three Months Ended
Nine Months Ended
November 1, NovemberMay 2, November 1, November 2,May 3,
1999 1998
1997 1998 1997
Net Earnings $ 392489 $ 236 $ 1,196 $ 853337
Other Comprehensive Income, net of tax:Income:
Foreign Currency Translation Adjustments (9) (5) (28) (10)
Unrealized Loss on
Investments --- --- --- (1)
Other Comprehensive
Income (9) (5) (28) (11)28 5
Comprehensive Income $ 383517 $ 231 $ 1,168 $ 842342
THE HOME DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies:
Basis of Presentation - The accompanying consolidated condensed
financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information
and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended February 1, 1998,January 31, 1999, as
filed with the Securities and Exchange Commission (File No. 1-8207).
2. Stock Split
On May 27, 1998, the Board of Directors authorized a two-for-one stock
split, effected in the form of a stock dividend, which was distributed
on July 2, 1998 to stockholders of record on June 11, 1998. This
distribution resulted in a transfer on the Company's balance sheet of
$36,751,000 to common stock from paid-in capital. The accompanying
financial statements and Management's Discussion and Analysis of
Results of Operations and Financial Condition, including all share and
per share amounts, have been adjusted to reflect this transaction.
3. Purchase of Minority Interest in Canadian Partnership
During the first quarter of fiscal 1998, the Company purchased, for
$261 million, the remaining 25% partnership interest in The Home Depot
Canada partnership that was held by The Molson Companies. As a result
of this transaction, the Company and its subsidiaries now own all of
The Home Depot's Canadian operations. The Home Depot Canada
partnership was formed in February 1994 when the Company acquired 75%
of Aikenhead's Home Improvement Warehouse, which was then operating
seven home improvement stores in Canada. Since the original
acquisition and through the end of the third quarter of fiscal 1998,
The Home Depot Canada has opened 34 additional stores. The terms of
the original partnership agreement provided for a put/call option,
which would have resulted in the Company purchasing the remaining 25%
of The Home Depot Canada at any time after the sixth anniversary of
the original agreement. The companies reached a mutual agreement,
however, to complete the purchase transaction at an earlier date.
THE HOME DEPOT, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The data below reflectsreflect selected sales data, the percentage relationship
between sales and major categories in the Consolidated Statements of
Earnings and the percentage change in the dollar amounts of each of the
items.
Three Months Ended
Percentage
Increase
May 2, May 3, (Decrease)in
Three Months Nine Months1999 1998 Dollar Amounts
Ended Ended
Selected Consolidated
Statements of Earnings Nov. 1, Nov. 2, Nov. 1, Nov. 2, Three Nine
Data
1998 1997 1998 1997 Months Months
Net Sales 100.0% 100.0% 100.0% 100.0% 23.8% 24.6%25.7%
Gross Profit 28.3 27.8 27.928.7 27.6 26.1 26.230.4
Operating Expenses:
Selling and Store Operating 17.9 17.9 17.4 17.5 23.3 23.517.7 17.8 24.9
Pre-Opening 0.3 0.3 0.3 0.2 50.0 41.90.2 15.8
General and Administrative 1.7 1.7 1.6 1.7 23.6 23.0
Non-Recurring Charge --- 1.7 --- 0.6 N/A N/A24.0
Total Operating Expenses 19.9 21.6 19.3 20.0 14.1 20.2Ex 19.6 19.7 24.7
Operating Income 8.4 6.2 8.6 7.6 68.4 42.09.1 7.9 44.6
Interest Income (Expense):
Interest and Investment Income 0.0 0.1 0.2 0.1 0.2 (30.8) (35.1)(57.1)
Interest Expense (0.1) (0.2) (0.1) (0.2) (20.0) (9.4)(27.3)
Interest, Net --- --- --- --- (66.7) (200.0)(0.1) (0.1) 25.0
Earnings Before Income Taxes 8.4 6.2 8.6 7.6 67.4 41.19.0 7.8 44.8
Income Taxes 3.3 2.4 3.4 3.0 69.3 42.53.5 3.1 44.3
Net Earnings 5.1% 3.8% 5.2% 4.6% 66.1 40.25.5% 4.7% 45.1
Selected Consolidated Sales Data
Number of Transactions (in Millions) 167 139 503 418 20.1 20.3(000's) 185,200 156,209 18.6%
Average Amount of Sale Per Transaction $45.62 $44.50 $45.26 $43.89 2.5 3.1$ 47.97 $ 45.19 6.2
Weighted Average Weekly Sales
Per Operating Store (in Thousands) $ 847 $ 838(000's) $ 878 $ 865 1.1 1.5854 2.8
Weighted Average Sales
Per Square Foot $ 412425 $ 411 $ 427 $ 424 0.2 0.7417 1.9
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by the CompanyThe Home Depot, Inc. and
subsidiaries (the "Company") or with the approval of an authorized executive
officer of the Company may constitute "forward-
looking"forward-looking statements" as
defined under the Private Securities Litigation Reform Act of 1995. Words
or phrases such as "should result, are" "are expected to, we" "we anticipate, we" "we
estimate, we project"" "we project," or similar expressions are intended to identify
forward-looking statements. These statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
the Company's historical experience and its present expectations or
projections. These risks and uncertainties include, but are not limited to,
unanticipated weather conditions, stability of costs and availability of
sourcing channels, our ability to attract,train and retain highly qualified
associates, conditions affecting the availability, acquisition,development
and ownership of real estate, andyear 2000 problems, general economic
conditions, the impact of competition.competition and regulatory and litigation matters.
Caution should be taken not to place undue reliance on any such forward-
looking statements, since such statements speak only as of the date of the
making of such statements. Additional information concerning these risks and
uncertainties is contained in the Company's Annual Report on Form 10-K for
the year ended January 31, 1999, as filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Sales for the thirdfirst quarter of fiscal 19981999 increased 23.8%25.7% to $7.699$8.952 billion
from $6.217$7.123 billion for the thirdfirst quarter of fiscal 1997. For the first
nine months of fiscal 1998, sales increased 24.6% to $22.961 billion from
$18.425 billion for the comparable period in fiscal 1997.1998. The sales
increase for both periodsthe period was primarily attributable to 141 new stores (717(total
of 797 stores open at the end of the thirdfirst quarter of fiscal 19981999 compared with
583656 at the end of the thirdfirst quarter of fiscal 1997)1998) and a comparable store-for-
storestore-
for-store sales increase of 7%9% for both the thirdfirst quarter and first nine months of fiscal 1998.1999.
Gross profit as a percent of sales was 28.3%28.7% for the thirdfirst quarter of fiscal
1998 compared with 27.8% for the third quarter of fiscal 1997. For the first
nine months of fiscal 1998 gross profit as a percent of sales was 27.9%1999 compared with 27.6% for the comparable periodfirst quarter of fiscal 1997.1998. The gross
profit rate increase for both periodsthe period was primarily attributable to sales mix
changes and to lower costs of merchandise resulting from continued product
line reviews and other merchandising initiatives which have resulted in
lower costsincluding direct sourcing
of merchandise. In addition, sales mix changes and better
shrink results contributed to a higher margin rate.
Operatingimports.
Total operating expenses as a percent of sales decreased to 19.9%19.6% for the
thirdfirst quarter of fiscal 19981999 from 21.6%19.7% for the thirdfirst quarter of fiscal
1997
primarily due to a pre-tax non-recurring charge of $104 million in the third
quarter of fiscal 1997 related to the settlements of an employment-related
class action lawsuit and three other lawsuits. For the first nine months of
fiscal 1998, operating expenses decreased to 19.3% from 20.0% for the
comparable period in fiscal 1997, primarily due to the non-recurring charge
as described above.1998. Selling and store operating expenses as a percent of sales were 17.9%decreased
to 17.7% for the thirdfirst quarter of both fiscal 1998 and1999 from 17.8% for the first
quarter of fiscal 1997.1998. Net advertising expenses decreased as a percent of
sales due to increased national advertising, and cost leverage achieved from
opening new stores in existing markets. Duringmarkets, and higher vendor co-op advertising
support. Partially offsetting this decrease were higher credit card
discounts due to higher penetrations of credit sales and increases in non-
private label credit card discount rates. Pre-opening expenses as a percent
of sales were 0.2% for the first quarter of both fiscal 1999 and fiscal
1998. The Company opened 37 new stores and relocated 1 store during the
first quarter of fiscal 1998,1999 compared with 32 new stores opened during the
Company purchased the
remaining 25%first quarter of The Home Depot Canada Partnership from The Molson
Companies. As a result, minority interest expense, which includes the
Molson Companies' share of earnings in the partnership, was lowerfiscal 1998. General and administrative expenses as a
percent of sales inwere 1.7% for the thirdfirst quarter of both fiscal 1999 and
first nine months of fiscal 1998
compared with the third quarter and first nine months of fiscal 1997. In
addition, claims1998. Certain variable G&A expenses related to the company's self-funded insurance
programs were lower than last year as a
percent of sales, due to continued
focus on safety programswhich offset increased cost of staffing and claims management. Partially offsetting these
decreases were higher store selling payroll expensesinvestments
for various growth initiatives.
Net interest expense as a percent of sales was 0.1% for the thirdfirst quarter of
both fiscal 1999 and fiscal 1998. As a percent of sales, interest and
investment income for the first quarter of fiscal 1998 compared1999 decreased to the third quarter of fiscal
1997 primarily due to the continued focus on certain areas, including
flooring and other decor areas that require0.0%
from
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
RESULTS OF OPERATIONS - (Continued)
labor skills which tend to carry higher than average pay rates. Also,
credit card discounts were higher than last year due to a higher penetration
of credit card sales. Selling and store operating expenses as a percent of
sales decreased to 17.4%0.1% for the first nine months of fiscal 1998 from 17.5%
for the first nine months of fiscal 1997. This decrease was due primarily
to lower net advertising expenses and minority interest expense, partially
offset by higher store selling payroll expense, as described above.
Pre-opening expenses as a percent of sales were 0.3% for the third quarter
and first nine months of fiscal 1998 compared to 0.3% for the third quarter
and 0.2% for the first nine months of fiscal 1997. The Company opened 38
stores and relocated 3 stores during the third quarter of fiscal 1998,
compared with 24 new stores and 2 store relocations during the third quarter
of fiscal 1997. General and administrative expenses as a percent of sales
were 1.7% for the third quarter of both fiscal 1998 and fiscal 1997, and
1.6% for the first nine months of fiscal 1998 compared to 1.7% for fiscal
1997.
Net interest as a percent of sales was 0.0% for the third quarter and first
nine months of both fiscal 1998 and fiscal 1997. As a percent of sales,
interest and investment income for the third quarter and first nine months
of fiscal 1998 decreased to 0.1% from 0.2% for the third quarter and first
nine months of fiscal 1997, primarily due to lower investment
balances and
lower interest rates.balances. Interest expense as a
percent of sales decreased to 0.1% for the thirdfirst quarter and first nine months of fiscal 19981999 from
0.2% for the comparable periodsperiod of
fiscal 1997.1998. The decrease was primarily attributable to leverage achieved
from higher sales in fiscal 19981999 and to higher capitalized interest expense
during fiscal 1998.1999.
The Company's combined federal and state effective income tax rate increaseddecreased
to 39.2% for the first quarter of fiscal 1999 from 39.3% for the thirdcomparable
period of fiscal 1998. During the fourth quarter and first nine months of fiscal 1998, from
38.9% foran
adjustment was made to lower the comparable periods of fiscal 1997. The increase was dueannual effective tax rate to higher effective state tax rates and a reduction in tax-exempt interest
income.39.2%.
Net earnings as a percent of sales increased to 5.1% and 5.2%5.5% for the thirdfirst quarter and first nine months
of fiscal 1998, respectively,1999 from 3.8% and
4.6%4.7% for the thirdfirst quarter and first nine months of fiscal 1997 (4.8% and
5.0% for the third quarter and first nine months of fiscal 1997 excluding
the non-recurring charge.)1998. The increasesincrease
as a percent of sales for fiscal 1998, excluding the non-recurring charge last year, were1999 was primarily attributable to higher
gross margin rates and lower selling and store operating expenses partially offset by higher income tax rates, as
described above.
Diluted earnings per share was $0.26 and $0.79 for the third quarter and
first nine months of fiscal 1998, respectively, compared to $0.16 and $0.57
for the third quarter and first nine months of fiscal 1997, respectively.
Diluted earnings per share for 1997, excluding the non-recurring charge, was
$0.20 for the third quarter and $0.61$0.32 for the first nine months.
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)quarter of fiscal 1999
compared to $0.22 for the first quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from store operations provides the Company with a
significant source of liquidity. Additionally, a significant portion of the
Company's inventory is financed under vendor credit terms. During the first
nine monthsquarter of fiscal 1998,1999, the Company opened 9337 stores, relocated 1 store and
relocated 4
stores.temporarily closed 1 store, which will be reopened on the same site during
the third quarter of fiscal 1999. During the remainder of fiscal 1998,1999, the
Company plans to open approximately 44130 new stores and relocate 6 stores,
for a 22% unit growth rate.rate of approximately 22%. It is currently anticipated that
approximately 82%85% of these locations will be owned, and the remainder will
be leased.
The Company also plans to open approximately 170 stores,
including relocations, inDuring the last three fiscal 1999.
In June 1996,years, the Company entered into a $300 milliontwo operating
lease agreementagreements totaling $882 million for the purpose of financing
construction costs of certain new stores. The Company increased its available funding underUnder the operating lease
agreement to $600 million in May 1997 and to $882 million in October
1998. Under the agreement,agreements, the lessor purchases the properties, pays for the construction
costs and subsequently leases the facilities to the Company. The lease providesleases
provide for substantial residual value guarantees and includesinclude purchase
options at original cost on each property.
The Company financed a portion of new stores opened in fiscal 1997 and 1998
under the operating lease agreementagreements and anticipates utilizing this facilitythese
facilities to finance selected new stores in fiscal 19981999 and 1999,2000 and an
office building in fiscal 1999. In addition, some planned locations for fiscal 1998 and
fiscal 1999 will be leased individually, and it is expected that many
locations may be obtained through the acquisition of land parcels and
construction or purchase of buildings. While the cost of new stores to be
constructed and owned by the Company varies widely, principally due to land
costs, new store costs are currently estimated to average approximately
$13.1$13.0 million per location. The cost to remodel andand/or fixture stores
to be leased is expected to average approximately $2.5$3.6 million per store.
In addition, each new store will require approximately $3.0$3.1 million to
finance inventories, net of vendor financing.
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (Continued)
During fiscal 1996, the Company issued, through a public offering, $1.1
billion of 3.25% Convertible Subordinated Notes due October 1, 2001 ("3.25%(the
"3.25% Notes"). The 3.25% Notes were issued at par and are convertible into
shares of the Company's common stock at any time prior to maturity,
unless previously redeemed by the Company, at a conversion price of $23.0416$23.0417
per share, subject to adjustment under certain conditions. The 3.25% Notes
may be redeemed at the option ofby the Company, at any time on or after October 2, 1999, in
whole or in part, at a redemption price of 100.813% of the principal amount
and after October 1, 2000, at 100% of the principal amount. The Company
used the net proceeds from the offering to repay outstanding commercial
paper obligations, to finance a portion of the Company's capital
expenditure program, including store expansions and renovations, and
for general corporate purposes.
The Company has a commercial paper program that allows borrowings up to a
maximum of $800 million. AsDuring the first quarter of November 1, 1998,fiscal 1999 the
Company repaid $246 million outstanding under the commercial paper program
and as of May 2, 1999, there were no borrowings outstanding under the
program. In connection with the program, the Company has a back-up credit
facility with a consortium of banks for up to $800 million. The credit
facility, which expires in December 2000, contains various restrictive
covenants, none of which is expected to materially impact the Company's
liquidity or capital resources.
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (Continued)
As of November 1, 1998,May 2, 1999, the Company had $516$604 million in cash and cash
equivalents, and short-term investments, as well as $15 million in long-term investments. Management
believes that its current cash position, the proceeds from short-term and long-term
investments, internally generated funds, funds available from its $800
million commercial paper program, funds available from the $882 million operating lease
agreement, and/oragreements, and the ability to obtain alternate sources of financing should
enable the Company to complete its capital expenditure programs, including
store expansionsopenings and renovations, through the next several fiscal years.
YEAR 2000
The Company is currently addressing a universal situation commonly referred
to as the "Year 2000 Problem".Problem." The Year 2000 Problem relates to the
inability of certain computer software programs to properly recognize and
process date-sensitive information relative to the Yearyear 2000 and beyond.
During fiscal 1997, the Company developed a plan to devote the necessary
resources to identify and modify internal systems impacted by the Year 2000
Problem, or implement new systems to become Yearyear 2000 compliant in a timely
manner. This compliance plan consists of four major areas of focus:
systems, desktops, facilities and supplier management. The total cost of
executing this plan is estimated at $13,000,000$13 million, and as of November 1, 1998,May 2, 1999, the
Company had expended approximately $5,250,000$9.6 million to effect the plan.
The Company has substantially completed the intial phases of the systems portion of the
compliance plan. The intial phases include completingIn implementing the systems portion of the plan, the
Company completed an inventory of all software programs operating on Companyits
systems, identifying
Yearidentified year 2000 problems, and developing contingency plans. The next phase involves
creatingthen created an appropriate
testing environment and,environment. Additionally, as of November 1, 1998, this
phase was approximately 70% complete. SubsequentMay 2, 1999, the Company had
substantially completed the final phases of the systems portion of the compliance plan, which
involve execution of testing and the installation of
Yearinstalling year 2000 compliant software intoin the
production environment, which were,
respectively, approximately 30% and 25% complete as of the end of the third
quarter of fiscal 1998. The Company anticipates completing the systems
portion of its compliance plan by the end of the first quarter of fiscal 1999.
The Company has conducted an inventory of all desktop applications.environment.
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
YEAR 2000 - (Continued)
All desktop applications critical to the Company's overall business are beinghave
been inventoried and evaluated under the method described above. Asabove, and as of
November 1, 1998,January 31, 1999, this process was approximately 70% complete. The Company expects the execution of
this portion of thecompliance plan to befor
desktop infrastructure was also substantially complete byat the end of the fiscal
year 1998. Desktop infrastructure is also being tested. The Company expects
the testing of desktop infrastructure to be subsantially complete during the
first quarter of fiscal 1999.
Substantially all critical facilities systems, including, but not limited
to, security systems, energy management, material handling, copiers and
faxes, have been inventoried and are being tested. As of November 1, 1998,May 2, 1999, this
process was approximately 33%over 60% complete. The Company anticipates completing the
facilities systems portion of its compliance plan before the end of the
second quarter of fiscal 1999.
THE HOME DEPOT,INC.AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
YEAR 2000 - (Continued)
The Company is assessing the Yearyear 2000 compliance status of its suppliers,
many of which participate in electronic data interchange ("EDI") or similar
programs with the Company. The Company anticipates conductingwill conduct substantial testing with
EDI merchandise suppliers during 1999. In addition, the Company
plans to communicate with all itsand transportation carriers and to conduct
similar testing.carriers. With respect to
merchandise suppliers participating in EDI programs with the Company, the
Company anticipatesis conducting point-to-point testing of these EDI systems for Yearyear
2000 compliance.
The Company's risks involved with not solving the Year 2000 Problem include,
but are not limited to, the following: loss of local or regional
electricelectrical power, loss of telecommunication services, delays or
cancellations of shipping or transportation of merchandise shipments, manufacturing shut-downs,shutdowns, delays in
processing customer transactions, bank errors and computer errors by
suppliers. Because the Company's Yearyear 2000 compliance is dependent upon
certain third parties (including infrastructure providers) also being Yearyear
2000 compliant on a timely basis, there can be no assurance that the
Company's efforts will prevent a material adverse affectimpact on its results of
operations, financial condition or business.
The Company is developingmodifying its existing disaster recovery plans to include
year 2000 contingency plans for those areasplanning. Also, the Company is identifying critical
activities that would normally be conducted during the first two weeks of
its businessJanuary 2000, which may be affectedcompleted instead in December 1999. The Company
expects its year 2000 contingency planning to be substantially complete by
the Year 2000 Problem.end of the second quarter of fiscal 1999 and to test and modify
contingency plans throughout the remainder of 1999.
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe inflation has had a
material effect on sales or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risk associated with other financial instruments (suchinstruments(such as investments)
areand interest rate risk is not material.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security HoldersSUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
During the thirdfirst quarter of fiscal 1998,1999, no matters were submitted to a
vote of security holders.
Item 5. Other Information
NoneOTHER INFORMATION
On May 13, 1999, the Board of Directors appointed William S. Davila to serve
as a member of the Board. Mr. Davila's term will expire at the Annual
Meeting of Stockholders in 2001. Mr. Davila is the retired President and
Chief Operating Officer of The Vons Companies, Inc., and he serves on the
Boards of Directors of Wells Fargo Bank, Pacific Gas & Electric Corporation
and Hormel Foods Corporation.
Item 6. ExhibitsEXHIBITS
3.1 Restated Certificate of Incorporation of The Home Depot,Inc.,
as amended
11.1 Computation of Basic and Diluted Earnings Per Share
27. Financial Data Schedule (only submitted to SEC in
electronic format)
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.
THE HOME DEPOT, INC.
(Registrant)
By: /s/ Arthur M. Blank
Arthur M. Blank
President & CEO
/s/ Marshall L. Day
Marshall L. Day
Senior Vice President
Finance & Accounting
December 7, 1998June 2, 1999
(Date)
THE HOME DEPOT, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Description
3.1 Restated Certificate of Incorporation of The Home Depot, Inc.,
as amended
11.1 Computation of Basic and Diluted Earnings Per Share
27. Financial Data Schedule (only submitted to SEC in electronic
format)