CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Year Ended
-------------------------------------------------------
amounts in millions,except per share data FEBRUARY 3, 2002 January 28, 2001 January 30, 2000
- ---------------------------------------------------------------------------------------------------------------------------------
NET SALES $ 53,553 $ 45,738 $ 38,434
Cost of Merchandise Sold 37,406 32,057 27,023
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Profit 16,147 13,681 11,411
Operating Expenses:
Selling and Store Operating 10,163 8,513 6,819
Pre-Opening 117 142 113
General and Administrative 935 835 671
- ---------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 11,215 9,490 7,603
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 4,932 4,191 3,808
Interest Income (Expense):
Interest and Investment Income 53 47 37
Interest Expense (28) (21) (41)
- ---------------------------------------------------------------------------------------------------------------------------------
Interest,net 25 26 (4)
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 4,957 4,217 3,804
Income Taxes 1,913 1,636 1,484
- ---------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 3,044 $ 2,581 $ 2,320
===================================================
BASIC EARNINGS PER SHARE $ 1.30 $ 1.11 $ 1.03
Weighted Average Number of Common Shares Outstanding 2,335 2,315 2,244
===================================================
DILUTED EARNINGS PER SHARE $ 1.29 $ 1.10 $ 1.00
Weighted Average Number of Common Shares Outstanding Assuming Dilution 2,353 2,352 2,342
===================================================
See accompanying notes to consolidated financial statements.
24 The Home Depot,Inc.and Subsidiaries
CONSOLIDATED BALANCE SHEETS
amounts in millions, except share data FEBRUARY 3, 2002 January 28,2001
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 2,477 $ 167
Short-Term Investments,including current maturities of long-term investments 69 10
Receivables, net 920 835
Merchandise Inventories 6,725 6,556
Other Current Assets 170 209
- ----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 10,361 7,777
- ----------------------------------------------------------------------------------------------------------------------------------
Property and Equipment, at cost:
Land 4,972 4,230
Buildings 7,698 6,167
Furniture, Fixtures and Equipment 3,403 2,877
Leasehold Improvements 750 665
Construction in Progress 1,049 1,032
Capital Leases 257 261
- ----------------------------------------------------------------------------------------------------------------------------------
18,129 15,232
Less Accumulated Depreciation and Amortization 2,754 2,164
- ----------------------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 15,375 13,068
- ----------------------------------------------------------------------------------------------------------------------------------
Notes Receivable 83 77
Cost in Excess of the Fair Value of Net Assets Acquired,net of accumulated
amortization of $49 at February 3, 2002 and $41 at January 28, 2001 419 314
Other 156 149
- ----------------------------------------------------------------------------------------------------------------------------------
$ 26,394 $ 21,385
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 3,436 $ 1,976
Accrued Salaries and Related Expenses 717 627
Sales Taxes Payable 348 298
Other Accrued Expenses 933 752
Deferred Revenue 851 650
Income Taxes Payable 211 78
Current Installments of Long-Term Debt 5 4
- ----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 6,501 4,385
- ----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt, excluding current installments 1,250 1,545
Other Long-Term Liabilities 372 249
Deferred Income Taxes 189 195
Minority Interest -- 7
STOCKHOLDERS' EQUITY
Common Stock, par value $0.05. Authorized:10,000,000,000 shares; issued and outstanding -
2,345,888,000 shares at February 3, 2002 and 2,323,747,000 shares at January 28, 2001 117 116
Paid-In Capital 5,412 4,810
Retained Earnings 12,799 10,151
Accumulated Other Comprehensive Loss (220) (67)
- ----------------------------------------------------------------------------------------------------------------------------------
18,108 15,010
Less Unearned Compensation 26 6
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 18,082 15,004
- ----------------------------------------------------------------------------------------------------------------------------------
$ 26,394 $ 21,385
============================
See accompanying notes to consolidated financial statements.
The Home Depot,Inc. and Subsidiaries 25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accu-
mulated
Other
Compre- Total
Common Stock hensive Stock- Compre-
amounts in millions, ---------------- Paid-In Retained Income holders' hensive
except per share data Shares Amount Capital Earnings (Loss) Other Equity Income(1)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1999 2,213 $111 $2,817 $ 5,876 $ (61) $ (3) $ 8,740
===============================================================================
Shares Issued Under
Employee Stock Purchase
and Option Plans 19 1 273 -- -- -- 274
Tax Effect of Sale of
Option Shares by Employees -- -- 132 -- -- -- 132
Conversion of 3 1/4%
Convertible Subordinated
Notes, net 72 3 1,097 -- -- -- 1,100
Net Earnings -- -- -- 2,320 -- -- 2,320 $ 2,320
Translation Adjustments -- -- -- -- 34 -- 34 34
Unearned Compensation -- -- -- -- -- (4) (4)
Cash Dividends
($0.11 per share) -- -- -- (255) -- -- (255)
-------
Comprehensive Income for
Fiscal 1999 $ 2,354
- ------------------------------------------------------------------------------------------------------------------ =======
BALANCE, JANUARY 30, 2000 2,304 $115 $4,319 $ 7,941 $ (27) $ (7) $ 12,341
===============================================================================
Shares Issued Under
Employee Stock Purchase
and Option Plans 20 1 348 -- -- -- 349
Tax Effect of Sale of
Option Shares by Employees -- -- 137 -- -- -- 137
Net Earnings -- -- -- 2,581 -- -- 2,581 $ 2,581
Translation Adjustments -- -- -- -- (40) -- (40) (40)
Stock Compensation Expense -- -- 6 -- -- -- 6
Unearned Compensation -- -- -- -- -- 1 1
Cash Dividends
($0.16 per share) -- -- -- (371) -- -- (371)
-------
Comprehensive Income
for Fiscal 2000 $ 2,541
- ------------------------------------------------------------------------------------------------------------------ =======
BALANCE, JANUARY 28, 2001 2,324 $116 $4,810 $ 10,151 $ (67) $ (6) $ 15,004
===============================================================================
Shares Issued Under
Employee Stock Purchase
and Option Plans 22 1 448 -- -- -- 449
Tax Effect of Sale of
Option Shares by Employees -- -- 138 -- -- -- 138
Net Earnings -- -- -- 3,044 -- -- 3,044 $ 3,044
Translation Adjustments -- -- -- -- (124) -- (124) (124)
Unrealized Loss on
Derivatives -- -- -- -- (29) -- (29) (18)
Stock Compensation Expense -- -- 16 -- -- -- 16
Unearned Compensation -- -- -- -- -- (20) (20)
Cash Dividends
($0.17 per share) -- -- -- (396) -- -- (396)
-------
Comprehensive Income
for Fiscal 2001 $ 2,902
- ------------------------------------------------------------------------------------------------------------------ =======
BALANCE, FEBRUARY 3, 2002 2,346 $117 $5,412 $ 12,799 $(220) $(26) $ 18,082
===============================================================================
(1) Components of comprehensive income are reported net of related taxes.
See accompanying notes to consolidated financial statements.
26 The Home Depot,Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
----------------------------------------------------
amounts in millions FEBRUARY 3, 2002 January 28,2001 January 30,2000
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS:
Net Earnings $ 3,044 $ 2,581 $ 2,320
Reconciliation of Net Earnings to Net Cash Provided by Operations:
Depreciation and Amortization 764 601 463
Increase in Receivables, net (119) (246) (85)
Increase in Merchandise Inventories (166) (1,075) (1,142)
Increase in Accounts Payable and Accrued Liabilities 2,078 754 820
Increase in Income Taxes Payable 272 151 93
Other 90 30 (23)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations 5,963 2,796 2,446
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, net of $5, $16 and $37 of non-cash capital
expenditures in fiscal 2001, 2000 and 1999, respectively (3,393) (3,558) (2,581)
Payments for Businesses Acquired, net (190) (26) (101)
Proceeds from Sale of Business, net 64 -- --
Proceeds from Sales of Property and Equipment 126 95 87
Purchases of Investments (85) (39) (32)
Proceeds from Maturities of Investments 25 30 30
Other (13) (32) (25)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (3,466) (3,530) (2,622)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) Issuance of Commercial Paper Obligations, net (754) 754 (246)
Proceeds from Long-Term Debt 532 32 522
Repayments of Long-Term Debt -- (29) (14)
Proceeds from Sale of Common Stock, net 445 351 267
Cash Dividends Paid to Stockholders (396) (371) (255)
Minority Interest Contributions to Partnership -- -- 7
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided by Financing Activities (173) 737 281
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (14) (4) 1
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 2,310 (1) 106
Cash and Cash Equivalents at Beginning of Year 167 168 62
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,477 $ 167 $ 168
=============================================
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS MADE FOR:
Interest, net of interest capitalized $ 18 $ 16 $ 26
Income Taxes $ 1,685 $ 1,386 $ 1,396
=============================================
See accompanying notes to consolidated financial statements.
The Home Depot, Inc. and Subsidiaries 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Home Depot, Inc. and subsidiaries (the "Company") operates Home Depot
stores, which are full-service, warehouse-style stores averaging approximately
109,000 square feet in size. The stores stock approximately 40,000 to 50,000
different kinds of building materials, home improvement supplies and lawn and
garden products that are sold primarily to do-it-yourselfers, but also to home
improvement contractors, tradespeople, and building maintenance professionals.
In addition, the Company operates EXPO Design Center stores, which offer
products and services primarily related to design and renovation projects, and
Villager's Hardware stores, which offer products and services for home
enhancement and smaller project needs in a convenience hardware store format.
Additionally, the Company operates one Home Depot Floor Store, a test store that
offers only flooring products and installation services. At the end of fiscal
2001, the Company was operating 1,333 stores, including 1,201 Home Depot stores,
41 EXPO Design Center stores, 4 Villager's Hardware stores and 1 Home Depot
Floor Store in the United States; 78 Home Depot stores in Canada; 4 Home Depot
stores in Argentina, which were sold on February 18, 2002; and 4 Home Depot
stores in Mexico. Included in the Company's Consolidated Balance Sheet at
February 3, 2002, were $946 million of net assets of the Canada, Argentina and
Mexico operations. Also included in consolidated results are several wholly-
owned subsidiaries. The Company offers facilities maintenance and repair
products, as well as wallpaper and custom window treatments via direct shipment
through subsidiaries Maintenance Warehouse and National Blinds and Wallpaper,
Inc. Georgia Lighting is a specialty lighting designer, distributor and retailer
to both commercial and retail customers. The Company offers plumbing, HVAC and
other professional plumbing products through wholesale plumbing distributors
Apex Supply Company and Your "other" Warehouse.
FISCAL YEAR The Company's fiscal year is a 52- or 53-week period ending on the
Sunday nearest to January 31. Fiscal year 2001, which ended February 3, 2002,
consisted of 53 weeks. Fiscal years 2000 and 1999, which ended January 28, 2001
and January 30, 2000, respectively, consisted of 52 weeks.
BASIS OF PRESENTATION The consolidated financial statements include the accounts
of the Company, its wholly-owned subsidiaries, and its majority-owned
partnership, The Home Depot Chile S.A. In October 2001, the Company sold its
interest in The Home Depot Chile S.A. All significant intercompany transactions
have been eliminated in consolidation.
Stockholders' equity, share and per share amounts for all periods
presented have been adjusted for a three-for-two stock split effected in the
form of a stock dividend on December 30, 1999.
CASH EQUIVALENTS The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents. The Company's
cash and cash equivalents are carried at fair market value and consist primarily
of commercial paper, money market funds, U.S. government agency securities and
tax-exempt notes and bonds.
MERCHANDISE INVENTORIES The majority of the Company's inventory is stated at the
lower of cost (first-in, first-out) or market, as determined by the retail
inventory method.
Certain subsidiaries and distribution centers value inventories at the
lower of cost (first-in, first-out) or market, as determined by the cost method.
These inventories represent approximately 6% of total inventory.
INVESTMENTS The Company's investments, consisting primarily of high-grade debt
securities, are recorded at fair value and are classified as available-for-sale.
INCOME TAXES The Company provides for federal, state and foreign income taxes
currently payable, as well as for those deferred because of timing differences
between reporting income and expenses for financial statement purposes versus
tax purposes. Federal, state and foreign incentive tax credits are recorded as a
reduction of income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of a change in tax rates is recognized as income or expense in the period
that includes the enactment date.
The Company and its eligible subsidiaries file a consolidated U.S.
federal income tax return. Non-U.S. subsidiaries, which are consolidated for
financial reporting, are not eligible to be included in consolidated U.S.
federal income tax returns. Separate provisions for income taxes have been
determined for these entities. The Company intends to reinvest the unremitted
earnings of its non-U.S. subsidiaries and postpone their remittance
indefinitely. Accordingly, no provision for U.S. income taxes for non-U.S.
subsidiaries was required for any year presented.
28 The Home Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEPRECIATION AND AMORTIZATION The Company's buildings, furniture, fixtures and
equipment are depreciated using the straight-line method over the estimated
useful lives of the assets. Improvements to leased premises are amortized using
the straight-line method over the life of the lease or the useful life of the
improvement, whichever is shorter. The Company's property and equipment is
depreciated using the following estimated useful lives:
Life
- ------------------------------------------------------
Buildings 10-45 years
Furniture, fixtures and equipment 5-20 years
Leasehold improvements 5-30 years
Computer software 3-5 years
- ------------------------------------------------------
REVENUES The Company recognizes revenue, net of estimated returns, at the time
the customer takes possession of merchandise or receives services. When the
Company collects payment from customers before ownership of the merchandise has
passed or the service has been performed, the amount received is recorded as a
deferred revenue liability.
SELF INSURANCE The Company is self-insured for certain losses related to general
liability, product liability and workers' compensation. The Company has stop
loss coverage to limit the exposure arising from these claims. The expected
ultimate cost for claims incurred as of the balance sheet date is not discounted
and is recognized as a liability. The expected ultimate cost of claims is
estimated based upon analysis of historical data and actuarial estimates.
ADVERTISING Television and radio advertising production costs along with media
placement costs are expensed when the advertisement appears. Included in current
assets are $15 million and $20 million at the end of fiscal years 2001 and 2000,
respectively, relating to prepayments of production costs for print and
broadcast advertising.
SHIPPING AND HANDLING COSTS The Company accounts for certain shipping and
handling costs related to the shipment of product to customers from vendors as
cost of goods sold. However, costs of shipments to customers by the Company are
classified as selling and store operating expenses. The costs of shipments
included in selling and store operating expenses amounted to $122 million, $73
million and $40 million in fiscal years 2001, 2000 and 1999, respectively.
COST IN EXCESS OF THE FAIR VALUE OF NET ASSETS ACQUIRED Goodwill, which
represents the excess of purchase price over fair value of net assets acquired,
is amortized on a straight-line basis over 40 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining useful life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted cash
flows using a discount rate reflecting the Company's average cost of funds.
IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets for
impairment when circumstances indicate the carrying amount of an asset may not
be recoverable. Impairment is recognized to the extent the sum of undiscounted
estimated future cash flows expected to result from the use of the asset is less
than the carrying value. Accordingly, when the Company commits to relocate or
close a store, the estimated unrecoverable costs are charged to selling and
store operating expense. Such costs include the estimated loss on the sale of
land and buildings, the book value of abandoned fixtures, equipment and
leasehold improvements, and a provision for the present value of future lease
obligations, less estimated sublease income.
STOCK COMPENSATION Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation" encourages the use of a
fair-value-based method of accounting. As allowed by SFAS 123, the Company has
elected to account for its stock-based compensation plans under the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Under APB
25, compensation expense is recorded on the date of grant if the current market
price of the underlying stock exceeds the exercise price. The Company complies
with the disclosure requirements of SFAS 123.
DERIVATIVES On January 29, 2001, the Company adopted Statement of Financial
Accounting Standards Nos. 133, 137, and 138 (collectively "SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires an entity to measure derivatives at fair value and recognize these
assets or liabilities on the balance sheet. Recognition of changes in the fair
value of a derivative in the income statement or other accumulated comprehensive
income (loss) depends on the intended use of the derivative and its designation.
The Company designates its derivatives based upon criteria established by SFAS
133. The Company's objective for holding derivative instruments is to decrease
the volatility of earnings and cash flow associated with fluctuations in
interest rates and foreign currencies.
The Home Depot, Inc. and Subsidiaries 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME Comprehensive income includes net earnings adjusted for
certain revenues, expenses, gains and losses that are excluded from net earnings
under generally accepted accounting principles. Examples include foreign
currency translation adjustments and unrealized gains and losses on certain
hedge transactions.
FOREIGN CURRENCY TRANSLATION The assets and liabilities denominated in a foreign
currency are translated into U.S. dollars at the current rate of exchange on the
last day of the reporting period, revenues and expenses are translated at the
average monthly exchange rates, and equity transactions are translated using the
actual rate on the day of the transaction.
USE OF ESTIMATES Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the disclosure
of contingent assets and liabilities, and reported amounts of revenues and
expenses in preparing these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
RECLASSIFICATIONS Certain amounts in prior fiscal years have been reclassified
to conform with the presentation adopted in the current fiscal year.
NOTE 2. LONG-TERM DEBT
The Company's long-term debt at the end of fiscal 2001 and fiscal 2000 consisted
of the following (amounts in millions):
FEBRUARY 3, 2002 January 28,2001
- ----------------------------------------------------------------------------------
Commercial Paper; weighted
average interest rate of 6.1%
at January 28, 2001 $ -- $ 754
6 1/2% Senior Notes; due September
15, 2004; interest payable semi-annually
on March 15 and September 15 500 500
5 3/8% Senior Notes; due April 1, 2006;
interest payable semi-annually on
April 1 and October 1 500 --
Capital Lease Obligations; payable
in varying installments through
January 31, 2027 232 230
Other 23 65
- ----------------------------------------------------------------------------------
Total long-term debt 1,255 1,549
Less current installments 5 4
- ----------------------------------------------------------------------------------
Long-term debt,excluding
current installments $1,250 $1,545
===========================
The Company has a commercial paper program with maximum available borrowings up
to $1 billion. 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 September 2004, contains various restrictive covenants, none of
which are expected to materially impact the Company's liquidity or capital
resources. Commercial paper borrowings of $754 million outstanding at January
28, 2001, were classified as noncurrent pursuant to the Company's intent and
ability to finance this obligation on a long-term basis.
The Company issued $500 million of 5 3/8% Senior Notes in fiscal 2001
and $500 million of 6 1/2% Senior Notes in fiscal 1999, collectively referred to
as "Senior Notes." The Senior Notes may be redeemed by the Company at any time,
in whole or in part, at a redemption price plus accrued interest up to the
redemption date. The redemption price is equal to the greater of (1) 100% of the
principal amount of the Senior Notes to be redeemed or (2) the sum of the
present values of the remaining scheduled payments of principal and interest to
maturity. The Senior Notes are not subject to sinking fund requirements.
Interest expense in the accompanying Consolidated Statements of
Earnings is net of interest capitalized of $84 million, $73 million and $45
million in fiscal 2001, 2000 and 1999, respectively.
Maturities of long-term debt are $5 million for fiscal 2002, $6 million
for fiscal 2003, $507 million for fiscal 2004, $8 million for fiscal 2005 and
$509 million for fiscal 2006.
As of February 3, 2002, the market values of the publicly traded 5 3/8%
and 6 1/2% Senior Notes were approximately $511 million and $531 million,
respectively. The estimated fair value of all other long-term borrowings,
excluding capital lease obligations, approximated the carrying value of $23
million. These fair values were estimated using a discounted cash flow analysis
based on the Company's incremental borrowing rate for similar liabilities.
NOTE 3. INCOME TAXES
The provision for income taxes consisted of the following
(in millions):
Fiscal Year Ended
---------------------------------------------------------------------
FEBRUARY 3, 2002 January 28, 2001 January 30, 2000
- --------------------------------------------------------------------------------------------------
Current:
U.S. $ 1,594 $ 1,267 $ 1,209
State 265 216 228
Foreign 60 45 45
- --------------------------------------------------------------------------------------------------
1,919 1,528 1,482
- --------------------------------------------------------------------------------------------------
Deferred:
U.S. (12) 98 9
State (1) 9 (4)
Foreign 7 1 (3)
- --------------------------------------------------------------------------------------------------
(6) 108 2
- --------------------------------------------------------------------------------------------------
Total $ 1,913 $ 1,636 $ 1,484
=============================================================
30 The Home Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's combined federal, state and foreign effective tax rates for fiscal
years 2001, 2000 and 1999, net of offsets generated by federal, state and
foreign tax incentive credits, were approximately 38.6%, 38.8%, and 39.0%,
respectively. A reconciliation of income tax expense at the federal statutory
rate of 35% to actual tax expense for the applicable fiscal years is as follows
(in millions):
Fiscal Year Ended
---------------------------------------------------------------------
FEBRUARY 3, 2002 January 28, 2001 January 30, 2000
- --------------------------------------------------------------------------------------------------
Income taxes at U.S.
statutory rate $ 1,735 $ 1,476 $ 1,331
State income taxes, net
of federal income
tax benefit 172 146 145
Foreign rate differences 4 5 2
Other, net 2 9 6
- --------------------------------------------------------------------------------------------------
Total $ 1,913 $ 1,636 $ 1,484
=============================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of February 3, 2002
and January 28, 2001 were as follows (in millions):
FEBRUARY 3, 2002 January 28,2001
- -----------------------------------------------------------------------------------
Deferred Tax Assets:
Accrued self-insurance liabilities $ 220 $ 151
Other accrued liabilities 138 118
Net loss on disposition 31 --
- -----------------------------------------------------------------------------------
Total gross deferred tax assets 389 269
Valuation allowance (31) --
- -----------------------------------------------------------------------------------
Deferred tax assets,
net of valuation allowance 358 269
- -----------------------------------------------------------------------------------
Deferred Tax Liabilities:
Accelerated depreciation (492) (389)
Other (55) (75)
- -----------------------------------------------------------------------------------
Total gross deferred tax liabilities (547) (464)
- -----------------------------------------------------------------------------------
Net deferred tax liability $ (189) $ (195)
===========================
A valuation allowance was established in fiscal 2001 for a deferred tax asset
generated from the net loss on disposition of a business. Company management
believes the existing net deductible temporary differences comprising the
deferred tax assets, net of the valuation allowance, will reverse during periods
in which the Company generates net taxable income.
NOTE 4. EMPLOYEE STOCK PLANS
The 1997 Omnibus Stock Incentive Plan ("1997 Plan") provides that incentive
stock options, non-qualified stock options, stock appreciation rights,
restricted stock and deferred shares may be issued to selected associates,
officers and directors of the Company. The maximum number of shares of the
Company's common stock available for issuance under the 1997 Plan is the lesser
of 225 million shares or the number of shares carried over from prior plans plus
one-half percent of the total number of outstanding shares as of the first day
of each fiscal year. In addition, restricted shares issued under the 1997 Plan
may not exceed 22.5 million shares. As of February 3, 2002, there were 121
million shares available for future grants under the 1997 Plan.
Under the 1997 Plan, the Company has granted incentive and
non-qualified options for 143 million shares, net of cancellations (of which 76
million had been exercised). Incentive stock options typically vest at the rate
of 25% per year commencing on the first anniversary date of the grant and expire
on the tenth anniversary date of the grant. The non-qualified options have
similar terms but typically commence vesting on the second anniversary of the
date of grant.
Under the 1997 Plan, 712,000 shares of restricted stock have been
issued, net of cancellations (the restrictions on 4,600 shares have lapsed).
Generally, the restrictions on 25% of the restricted shares lapse upon the third
and sixth year anniversaries of the date of issuance with the restrictions on
the remaining 50% of the restricted shares lapsing upon attainment of age 62.
The fair value of the restricted shares is expensed over the period during which
the restrictions lapse. The Company recorded compensation expense related to
restricted stock in the amount of $3 million and $455,000 in fiscal 2001 and
2000, respectively.
Under the Non-Qualified Stock Option and Deferred Stock Unit Plans and
Agreements, the Company issued 2.5 million non-qualified stock options with an
exercise price of $40.75 per share in fiscal 2000. In addition, the Company
granted 629,000 deferred stock units and 750,000 deferred stock units in fiscal
years 2001 and 2000, respectively, to several key officers vesting at various
dates. Each deferred stock unit entitles the officer to one share of common
stock to be received up to five years after the vesting date of the deferred
stock unit, subject to certain deferral rights of the officer. The fair value of
the deferred stock units on the grant dates was $27 million and $31 million for
deferred units granted in fiscal 2001 and 2000, respectively. These amounts are
being amortized based upon the vesting dates. The Company recorded stock
compensation expense related to deferred stock units in the amount of $16
million and $6 million in fiscal 2001 and 2000, respectively.
The per share weighted average fair value of stock options granted
during fiscal years 2001, 2000 and 1999 was $20.51,
The Home Depot, Inc. and Subsidiaries 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$31.96 and $18.86, respectively. The fair value of these options was determined
at the date of grant using the Black-Scholes option-pricing model with the
following assumptions:
Fiscal Year Ended
--------------------------------------------------------
FEBRUARY 3, 2002 January 28,2001 January 30,2000
- -----------------------------------------------------------------------------------
Risk-free interest rate 5.1% 6.4% 5.1%
Expected volatility of
common stock 48.1% 54.6% 51.6%
Dividend yield 0.4% 0.3% 0.3%
Expected option term 6 years 7 years 5 years
===============================================
The Company applies APB 25 in accounting for its stock plans and, accordingly,
no compensation costs have been recognized in the Company's financial statements
for incentive or non-qualified stock options granted. If, under SFAS 123, the
Company determined compensation costs based on the fair value at the grant date
for its stock options, net earnings and earnings per share would have been
reduced to the pro forma amounts below (in millions, except per share data):
Fiscal Year Ended
--------------------------------------------------------------
FEBRUARY 3, 2002 January 28,2001 January 30,2000
- -----------------------------------------------------------------------------------------
Net Earnings
As reported $3,044 $2,581 $2,320
Pro forma $2,800 $2,364 $2,186
Basic Earnings per Share
As reported $ 1.30 $ 1.11 $ 1.03
Pro forma $ 1.20 $ 1.02 $ 0.97
Diluted Earnings per Share
As reported $ 1.29 $ 1.10 $ 1.00
Pro forma $ 1.19 $ 1.01 $ 0.94
====================================================
The following table summarizes options outstanding at February 3, 2002, January
28, 2001 and January 30, 2000 and changes during the fiscal years ended on these
dates (shares in thousands):
Weighted
Number Average
of Shares Option Price
- ----------------------------------------------------------------------
Outstanding at January 31,1999 71,592 $13.45
Granted 14,006 37.81
Exercised (13,884) 10.88
Cancelled (3,295) 18.88
- ----------------------------------------------------------------------
Outstanding at January 30,2000 68,419 $18.79
Granted 14,869 49.78
Exercised (14,689) 13.15
Cancelled (2,798) 30.51
- ----------------------------------------------------------------------
Outstanding at January 28,2001 65,801 $26.46
Granted 25,330 40.33
Exercised (16,614) 15.03
Cancelled (5,069) 39.20
- ----------------------------------------------------------------------
Outstanding at February 3,2002 69,448 $33.33
=========================
Exercisable 26,777 $22.68
=========================
The following table summarizes information regarding stock options outstanding
as of February 3, 2002 (shares in thousands):
Weighted Weighted Weighted
Average Average Average
Range of Options Remaining Outstanding Options Exercisable
Exercise Prices Outstanding Life (Yrs) Option Price Exercisable Option Price
- -----------------------------------------------------------------------------------------------
$ 6.00 to 12.00 11,999 4.1 $10.10 11,631 $10.00
12.00 to 20.00 1,732 5.6 17.10 1,560 17.30
20.00 to 30.00 9,714 6.1 21.80 5,456 21.70
30.00 to 42.00 34,271 8.8 39.30 6,037 38.90
42.00 to 54.00 11,732 8.3 51.70 2,093 52.80
- -----------------------------------------------------------------------------------------------
69,448 7.0 $33.33 26,777 $22.68
=======================================================================
In addition, the Company had 48 million shares available for future grants under
the Employee Stock Purchase Plan ("ESPP") at February 3, 2002. The ESPP enables
the Company to grant substantially all full-time associates options to purchase
up to 152 million shares of common stock, of which 104 million shares have been
exercised from inception of the plan, at a price equal to the lower of 85% of
the stock's fair market value on the first day or the last day of the purchase
period.
During fiscal 2001, 5.5 million shares were purchased under the ESPP at
an average price of $35.87 per share. At February 3, 2002, there were 2.8
million options outstanding, net of cancellations, at an average price of $37.26
per share.
NOTE 5. LEASES
The Company leases certain retail locations, office space, warehouse and
distribution space, equipment and vehicles. While the majority of the leases are
operating leases, certain retail locations are leased under capital leases. As
leases expire, it can be expected that in the normal course of business, leases
will be renewed or replaced.
The Company has two off-balance sheet lease agreements totaling $882
million comprised of an initial lease agreement of $600 million and a subsequent
agreement of $282 million. Off-balance sheet leases include leases created under
structured financing arrangements. These lease agreements totaling $882 million
involve a special purpose entity which meets the criteria established by
generally accepted accounting principles and is not owned by or affiliated with
the Company, its management or officers. The Company financed a portion of its
new stores opened in fiscal 1997 through 2001, as well as a distribution center
and office buildings, under these lease agreements. Under both agreements, the
lessor purchases the properties, pays for the construction costs and
subsequently leases the facilities to the Company. The lease term for the $600
million agreement expires in 2004 and includes four 2-year renewal options. The
lease term for the $282 million agreement expires in 2008 with no renewal
options. Both lease agreements provide for substantial residual value guarantees
and include purchase options at original cost on each property.
32 The Home Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also leases an import distribution facility, including its
related equipment, under an off-balance sheet lease arrangement totaling $85
million. The lease for the import distribution facility expires in 2005 and has
four 5-year renewal options. The lease agreement provides for substantial
residual value guarantees and includes purchase options at the higher of the
cost or fair market value of the assets.
The maximum amount of the residual value guarantees relative to the
assets under the off-balance sheet lease agreements described above is projected
to be $799 million. As the leased assets are placed into service, the Company
estimates its liability under the residual value guarantees and records
additional rent expense on a straight-line basis over the remaining lease terms.
Total rent expense, net of minor sublease income, for the fiscal years
ended February 3, 2002, January 28, 2001 and January 30, 2000, was $522 million,
$479 million and $389 million, respectively. Real estate taxes, insurance,
maintenance and operating expenses applicable to the leased property are
obligations of the Company under the lease agreements. Certain store leases
provide for contingent rent payments based on percentages of sales in excess of
specified minimums. Contingent rent expense for the fiscal years ended February
3, 2002, January 28, 2001, and January 30, 2000 was approximately $10 million,
$9 million and $11 million, respectively.
The approximate future minimum lease payments under capital and
operating leases, including off-balance sheet leases, at February 3, 2002 were
as follows (in millions):
Capital Operating
Fiscal Year Leases Leases
- ----------------------------------------------------------------------
2002 $ 41 $ 517
2003 42 495
2004 43 447
2005 44 415
2006 44 394
Thereafter 577 5,139
- ----------------------------------------------------------------------
791 $7,407
======
Less imputed interest 559
- -------------------------------------------------------
Net present value of capital lease obligations 232
Less current installments 4
- -------------------------------------------------------
Long-term capital lease obligations,
excluding current installments $228
====
Short-term and long-term obligations for capital leases are included in the
Company's Consolidated Balance Sheets in Current Installments of Long-Term Debt
and Long-Term Debt, respectively. The assets under capital leases recorded in
Net Property and Equipment, net of amortization, totaled $199 million and $213
million at February 3, 2002 and January 28, 2001, respectively.
NOTE 6. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution plan ("401(k)") that covers
substantially all associates meeting certain service requirements. The Company
makes weekly matching cash contributions to purchase shares of the Company's
common stock, up to specified percentages of associates' contributions as
approved by the Board of Directors.
The Company also maintains a 401(k) Restoration Plan to provide certain
associates deferred compensation that they would have received under the 401(k)
matching contribution if not for the maximum compensation limits under the
Internal Revenue Code. The Company funds the 401(k) Restoration Plan through
contributions made to a "rabbi trust," which are then used to purchase shares of
the Company's common stock in the open market. Compensation expense related to
this plan for fiscal years 2001, 2000 and 1999 was not material.
During February 1999, the Company made its final contribution to the
Employee Stock Ownership Plan and Trust ("ESOP"), which was originally
established during fiscal 1988.
The Company's combined contributions to the 401(k) and ESOP were
$97 million, $84 million and $57 million for fiscal years 2001, 2000 and 1999,
respectively. At February 3, 2002, the 401(k) and the ESOP held a total of 33
million shares of the Company's common stock in trust for plan participants.
NOTE 7. BASIC AND DILUTED EARNINGS PER SHARE
The calculations of basic and diluted earnings per share for fiscal years 2001,
2000 and 1999 were as follows (amounts in millions, except per share data):
Fiscal Year Ended
------------------------------------------------------------------
FEBRUARY 3, 2002 January 28, 2001 January 30, 2000
- -----------------------------------------------------------------------------------------------------------------------------
Calculation of Basic
Earnings Per Share:
Net earnings $ 3,044 $ 2,581 $ 2,320
Weighted average number of
common shares outstanding 2,335 2,315 2,244
- -----------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 1.30 $ 1.11 $ 1.03
- -----------------------------------------------------------------------------------------------------------------------------
Calculation of Diluted
Earnings Per Share:
Net earnings $ 3,044 $ 2,581 $ 2,320
Tax-effected interest expense
attributable to 3 1/4% Notes -- -- 17
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings assuming dilution $ 3,044 $ 2,581 $ 2,337
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 2,335 2,315 2,244
Effect of potentially dilutive securities:
3 1/4% Notes -- -- 51
Employee Stock Plans 18 37 47
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding
assuming dilution 2,353 2,352 2,342
- -----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 1.29 $ 1.10 $ 1.00
=========================================================
The Home Depot, Inc. and Subsidiaries 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employee stock plans represent shares granted under the Company's employee stock
purchase plan and stock option plans, as well as shares issued for deferred
compensation stock plans. For fiscal year 1999, shares issuable upon conversion
of the Company's 3 1/4% Notes, issued in October 1996 and converted in 1999,
were included in weighted average shares outstanding assuming dilution for
purposes of calculating diluted earnings per share. To calculate diluted
earnings per share, net earnings are adjusted for tax-effected net interest and
issue costs on the 3 1/4% Notes (prior to conversion to equity in October 1999)
and divided by weighted average shares outstanding assuming dilution.
NOTE 8. COMMITMENTS AND CONTINGENCIES
At February 3, 2002, the Company was contingently liable for approximately $557
million under outstanding letters of credit issued for certain business
transactions, including insurance programs, import inventory purchases and
construction contracts.
In addition, the Company has certain off-balance sheet leases that
include residual value guarantees contingent on the value of underlying assets
at the end of the lease term. The estimated maximum amount of the residual value
guarantees at the end of the lease terms is $799 million. These leases expire at
various terms from 2004 through 2008 with some containing renewal options
through 2025.
The Company is involved in litigation arising from the normal course of
business. In management's opinion, this litigation is not expected to materially
impact the Company's consolidated results of operations or financial condition.
NOTE 9. ACQUISITIONS AND DISPOSITIONS
In 2001, the Company acquired Your "other" Warehouse and TotalHOME de Mexico,
S.A. de C.V. These acquisitions were accounted for under the purchase method of
accounting.
In October 2001, the Company sold all of the assets of The Home Depot
Chile S.A., resulting in a gain of $31 million included in selling and store
operating expenses.
On February 18, 2002, the Company sold all of the assets of The Home
Depot Argentina S.R.L. In connection with the sale, the Company received
proceeds comprised of cash and secured notes. An impairment charge of $45
million was recorded in selling and store operating expenses in fiscal 2001 to
write down the net assets of The Home Depot Argentina S.R.L. to fair value.
During fiscal 2000, Maintenance Warehouse, a wholly-owned subsidiary of
the Company, acquired N-E Thing Supply Company, Inc. The Company acquired Apex
Supply Company, Inc. and Georgia Lighting, Inc. in fiscal 1999. These
acquisitions were recorded under the purchase method of accounting.
Pro forma results of operations for fiscal years 2001, 2000 and 1999
would not be materially different as a result of the acquisitions discussed
above and therefore are not presented.
NOTE 10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the fiscal
years ended February 3, 2002 and January 28, 2001 (dollars in millions, except
per share data):
Increase
(Decrease) Basic Diluted
In Comparable Gross Net Earnings Earnings
Net Sales Store Sales Profit Earnings Per Share Per Share
- -----------------------------------------------------------------------------------------------------------------------------
Fiscal year ended February 3, 2002:
First quarter $12,200 (3)% $ 3,655 $ 632 $0.27 $0.27
Second quarter 14,576 1% 4,326 924 0.40 0.39
Third quarter 13,289 0% 4,010 778 0.33 0.33
Fourth quarter 13,488 5% 4,156 710 0.30 0.30
- -----------------------------------------------------------------------------------------------------------------------------
Fiscal year $53,553 0% $16,147 $3,044 $1.30 $1.29
=================================================================================
Fiscal year ended January 28, 2001:
First quarter $11,112 7% $ 3,274 $ 629 $0.27 $0.27
Second quarter 12,618 6% 3,739 838 0.36 0.36
Third quarter 11,545 4% 3,450 650 0.28 0.28
Fourth quarter 10,463 0% 3,217 465 0.20 0.20
- -----------------------------------------------------------------------------------------------------------------------------
Fiscal year $45,738 4% $13,681 $2,581 $1.11 $1.10
=================================================================================
Note: The quarterly data may not sum to fiscal year totals due to rounding.
34 The Home Depot, Inc. and Subsidiaries
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements presented in this Annual Report have been prepared with
integrity and objectivity and are the responsibility of the management of The
Home Depot, Inc. These financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and properly reflect certain estimates and judgments based upon the best
available information.
The Company maintains a system of internal accounting controls, which
is supported by an internal audit program and is designed to provide reasonable
assurance, at an appropriate cost, that the Company's assets are safeguarded and
transactions are properly recorded. This system is continually reviewed and
modified in response to changing business conditions and operations and as a
result of recommendations by the external and internal auditors. In addition,
the Company has distributed to associates its policies for conducting business
affairs in a lawful and ethical manner.
The financial statements of the Company have been audited by KPMG LLP,
independent auditors. Their accompanying report is based upon an audit conducted
in accordance with auditing standards generally accepted in the United States of
America, including the related review of internal accounting controls and
financial reporting matters.
The Audit Committee of the Board of Directors, consisting solely of
outside directors, meets five times a year with the independent auditors, the
internal auditors and representatives of management to discuss auditing and
financial reporting matters. The Audit Committee, acting on behalf of the
stockholders, maintains an ongoing appraisal of the internal accounting
controls, the activities of the outside auditors and internal auditors and the
financial condition of the Company. Both the Company's independent auditors and
the internal auditors have free access to the Audit Committee.
/s/ Carol B. Tome
Carol B. Tome
Executive Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Home Depot, Inc.:
We have audited the accompanying consolidated balance sheets of The Home Depot,
Inc. and subsidiaries as of February 3, 2002 and January 28, 2001 and the
related consolidated statements of earnings, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended February 3, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Home
Depot, Inc. and subsidiaries as of February 3, 2002 and January 28, 2001, and
the results of their operations and their cash flows for each of the years in
the three-year period ended February 3, 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Atlanta, Georgia
February 26, 2002
The Home Depot, Inc. and Subsidiaries 35