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2002 FINANCIAL REVIEW
[HOME DEPOT LOGO]
Management's Discussion and Analysis
of Results of Operations and Financial Condition 22
Consolidated Statements of Earnings 28
Consolidated Balance Sheets 29
Consolidated Statements of Stockholders' Equity
and Comprehensive Income 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial Statements 32
Management's Responsibility for Financial Statements 41
Independent Auditors' Report 41
10-Year Summary of Financial and Operating Results 42
Corporate and Stockholder Information 44
Board of Directors and Executive Officers 45
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE HOME DEPOT, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED STATEMENTS OF EARNINGS DATA
The data below reflect 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.
Percentage
Increase
Fiscal (Decrease) In
Year(1) Dollar Amounts
- --------------------------------------------------------------------------------------------------------------------------
2002 2001
2002 2001 2000 vs. 2001 vs. 2000
- --------------------------------------------------------------------------------------------------------------------------
NET SALES 100.0% 100.0% 100.0% 8.8% 17.1%
GROSS PROFIT 31.1 30.2 29.9 12.1 18.0
Operating Expenses:
Selling and Store Operating 19.2 19.0 18.6 10.0 19.4
Pre-Opening 0.2 0.2 0.3 (17.9) (17.6)
General and Administrative 1.7 1.7 1.8 7.2 12.0
- --------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 21.1 20.9 20.7 9.5 18.2
- --------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 10.0 9.3 9.2 18.2 17.7
Interest Income (Expense):
Interest and Investment Income 0.1 0.1 0.1 49.1 12.8
Interest Expense (0.0) (0.1) (0.1) 32.1 33.3
- --------------------------------------------------------------------------------------------------------------------------
Interest, net 0.1 -- -- 68.0 (3.8)
- --------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE PROVISION FOR
INCOME TAXES 10.1 9.3 9.2 18.5 17.5
Provision for Income Taxes 3.8 3.6 3.6 15.4 16.9
- --------------------------------------------------------------------------------------------------------------------------
NET EARNINGS 6.3% 5.7% 5.6% 20.4% 17.9%
- --------------------------------------------------------------------------------------------------------------------------
SELECTED SALES DATA(2)
Number of Transactions (000s) 1,160,994 1,090,975 936,519 6.4% 16.5%
Average Sale per Transaction $ 49.43 $ 48.64 $ 48.65 1.6 --
Weighted Average Weekly Sales per
Operating Store $ 772,000 $ 812,000 $864,000 (4.9) (6.0)
Weighted Average Sales per Square Foot(3) $ 370.21 $ 387.93 $ 414.68 (4.6) (6.5)
- --------------------------------------------------------------------------------------------------------------------------
(1) Fiscal years 2002, 2001 and 2000 refer to the fiscal years ended
February 2, 2003, February 3, 2002 and January 28, 2001, respectively.
Fiscal years 2002 and 2000 include 52 weeks, while fiscal year 2001
includes 53 weeks.
(2) Includes all retail locations in excess of 50,000 square feet and,
therefore, excludes Apex Supply Company, Georgia Lighting, Maintenance
Warehouse, Your "other" Warehouse, Designplace Direct (formerly
National Blinds and Wallpaper) and HD Builder Solutions Group
locations.
(3) Adjusted to reflect the first 52 weeks of the 53-week fiscal year in
2001.
FORWARD-LOOKING STATEMENTS
Certain statements made herein regarding implementation of store initiatives,
store openings, capital expenditures and the effect of adopting certain
accounting standards constitute "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. These statements are subject
to various risks and uncertainties that could cause actual results to differ
materially from our historical experience and our present expectations. These
risks and uncertainties include, but are not limited to, fluctuations in and the
overall condition of the U.S. economy, stability of costs and availability of
sourcing channels, conditions affecting new store development, our ability to
implement new technologies and processes, our ability to attract, train and
retain highly-qualified associates, unanticipated weather conditions,
the impact of competition and the effects of regulatory and litigation matters.
You should not place undue reliance on such forward-looking statements as such
statements speak only as of the date on which they are made. Additional
information concerning these and other risks and uncertainties is contained in
our periodic filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced our performance
during the past three fiscal years, the following discussion should be read in
conjunction with the consolidated financial statements and the notes to
consolidated financial statements presented in this annual report.
22 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
FISCAL YEAR ENDED FEBRUARY 2, 2003 ("FISCAL 2002") COMPARED TO FISCAL YEAR ENDED
FEBRUARY 3, 2002 ("FISCAL 2001")
Fiscal 2002 included 52 weeks as compared to 53 weeks in fiscal 2001. Net sales
for fiscal 2002 increased 8.8% to $58.2 billion from $53.6 billion in fiscal
2001. This increase was attributable to the 203 new stores opened during fiscal
2002 and full year sales from the 204 new stores opened during fiscal 2001. The
increase was partially offset by the net sales attributable to the additional
week in fiscal 2001 of $880 million.
Comparable store-for-store sales were flat in fiscal 2002, reflecting a
number of internal and external factors. In the spring and early summer, we
experienced some inventory out-of-stock positions as we transitioned through our
new in-store Service Performance Improvement ("SPI") initiative, in which our
stores handle and receive inventory at night. In addition, comparable
store-for-store sales were negatively impacted by the level of merchandise
resets implemented throughout the year, which disrupted in-store service and had
a negative impact on our customers' experience in our stores. Kitchen and bath,
plumbing and paint categories experienced strong comparable store-for-store
sales growth for the year, which offset price deflation and the resulting
comparable store-for-store sales decline in commodity categories such as lumber.
In order to meet our customer service objectives, we strategically open
stores near market areas served by existing strong performing stores
("cannibalize") to enhance service levels, gain incremental sales and increase
market penetration. As of the end of fiscal 2002, certain new stores
cannibalized 21% of our existing stores and we estimate that store
cannibalization reduced total comparable store-for-store sales by approximately
4%, or about the same percentage as in the prior year. As we heavily
cannibalized our most productive divisions, the weighted average weekly sales
per store decreased during fiscal 2002 to $772,000 from $812,000 in the prior
year. Additionally, we believe that our sales performance has been, and could
continue to be, negatively impacted by the level of competition that we
encounter in various markets. However, due to the highly-fragmented U.S. home
improvement industry, in which we estimate our market share is approximately
10%, measuring the impact on our sales by our competitors is extremely
difficult.
During fiscal 2002, we continued the implementation or expansion of a
number of in-store initiatives. We believe these initiatives will increase
customer loyalty and operating efficiencies as they are fully implemented in the
stores. The professional business customer ("Pro") initiative adds programs to
our stores to enhance service levels to the Pro customer base. As of the end of
fiscal 2002, the Pro initiative was in 1,135 stores or 74% of total stores,
compared to 535 stores or 40% of total stores as of the end of fiscal 2001. This
initiative is still in its early stages as approximately half of our stores
implemented the Pro initiative in fiscal 2002. We expect to add the Pro
initiative to an additional 204 stores by the end of fiscal 2003. As the Pro
initiative matures within the stores in which it has been implemented, we expect
to generate improvements in operating performance.
We continued to implement the Appliance initiative which was started in
the third quarter of fiscal 2001. The Appliance initiative offers customers an
assortment of in-stock name brand appliances, including General Electric(R) and
Maytag(R), and offers the ability to special order over 2,300 additional related
products through computer kiosks located in the stores. In the stores which have
implemented the Appliance initiative, we have enhanced the offering of
appliances through 1,500 to 2,000 square feet of dedicated appliance selling
space. Comparable store-for-store sales in the appliance category increased by
approximately 23% in fiscal 2002. The Appliance initiative was in 743 or 48% of
our stores as of the end of fiscal 2002, compared to 73 or 5% of our stores as
of the end of fiscal 2001. We expect to add the Appliance initiative to an
additional 671 stores by the end of fiscal 2003.
We also continued to implement our Designplace initiative. This
initiative offers an enhanced shopping experience to our design and decor
customers by providing personalized service from specially-trained associates
and an enhanced merchandise selection in an attractive setting. Although the
Designplace initiative is in its early stages, stores generally show a positive
sales trend after implementation. The Designplace initiative was in 873 or 57%
of our stores as of the end of fiscal 2002, compared to 205 or 15% of our stores
as of the end of fiscal 2001. We expect to add the Designplace initiative to an
additional 556 stores by the end of fiscal 2003.
In addition, we continued to drive our services programs, which focus
primarily on providing products and services to our do-it-for-me customers.
These programs are offered through Home Depot and EXPO Design Center stores. We
also arrange for the provision of flooring installation services to homebuilders
through HD Builder Solutions Group, Inc. Net service revenues for fiscal 2002
increased 25% to $2.0 billion from $1.6 billion for fiscal 2001.
Gross profit as a percent of sales was 31.1% for fiscal 2002 compared
to 30.2% for fiscal 2001. The rate increase was attributable to a reduction in
the cost of merchandise sold which resulted from centralized purchasing, as we
continued rationalizing vendor and sku assortments. Enhanced inventory control,
resulting in lower shrink levels, and an increase in direct import penetration
to 8% in fiscal 2002 from 6% in fiscal 2001 also positively impacted the gross
profit rate.
Operating expenses as a percent of sales were 21.1% for fiscal 2002
compared to 20.9% for fiscal 2001. Included in operating expenses are selling
and store operating expenses which, as a percent of sales, increased to 19.2% in
fiscal 2002 from 19.0% in fiscal 2001. The increase in selling and store
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 23
operating expenses was primarily attributable to higher costs associated with
merchandise resets and store renovations as we invested in new signage, fixtures
and general maintenance of our stores, a continued investment in store
leadership positions in our stores and rising workers' compensation expense due
in part to medical cost inflation. These increases were partially offset by a
decrease in store payroll expense which resulted from improvement in labor
productivity and effective wage rate management.
Pre-opening expenses as a percent of sales were 0.2% for both fiscal
2002 and fiscal 2001. We opened 203 new stores in fiscal 2002 as compared to 204
new stores in fiscal 2001.
General and administrative expenses as a percent of sales were 1.7% for
both fiscal 2002 and fiscal 2001.
Interest and investment income as a percent of sales was 0.1% for both
fiscal 2002 and 2001. Interest expense as a percent of sales was 0.0% for fiscal
2002 and 0.1% for fiscal 2001.
Our combined federal and state effective income tax rate decreased to
37.6% for fiscal 2002 from 38.6% for fiscal 2001. The decrease in fiscal 2002
was attributable to higher tax credits and a lower effective state income tax
rate compared to fiscal 2001.
FISCAL 2001 COMPARED TO FISCAL YEAR ENDED JANUARY 28, 2001 ("FISCAL 2000")
Fiscal 2001 included 53 weeks as compared to 52 weeks in fiscal 2000. Net sales
for fiscal 2001 increased 17.1% to $53.6 billion from $45.7 billion in fiscal
2000. This increase was attributable to, among other things, the 204 new stores
opened during fiscal 2001 and full year sales from the 204 new stores opened
during fiscal 2000. Approximately $880 million of the increase in sales was
attributable to the additional week in fiscal 2001. Comparable store-for-store
sales were flat in fiscal 2001 due to the weak economic environment resulting
from certain factors including, but not limited to, low consumer confidence and
high unemployment.
Gross profit as a percent of sales was 30.2% for fiscal 2001 compared
to 29.9% for fiscal 2000. The rate increase was primarily attributable to a
lower cost of merchandise resulting from product line reviews, purchasing
synergies created by our newly centralized merchandising structure and an
increase in the number of tool rental centers from 342 at the end of fiscal 2000
to 466 at the end of fiscal 2001.
Operating expenses as a percent of sales were 20.9% for fiscal 2001
compared to 20.7% for fiscal 2000. Included in operating expenses are selling
and store operating expenses which, as a percent of sales, increased to 19.0% in
fiscal 2001 from 18.6% in fiscal 2000. The increase was primarily attributable
to growth in store occupancy costs resulting from higher depreciation and
property taxes due to our investment in new stores, combined with increased
energy costs. Also, credit card transaction fees were higher than the prior year
due to increased penetration of total credit sales. These increases were
partially offset by a decrease in store payroll expense due to an improvement in
labor productivity which resulted from initiatives inside the store and new
systems enhancements.
Store initiatives included our SPI initiative which was introduced to
every Home Depot store in fiscal 2001. Under SPI our stores receive and handle
inventory at night, allowing our associates to spend more time with customers
during peak selling hours. In addition, our Pro program was in 535 of our Home
Depot stores at the end of fiscal 2001, providing dedicated store resources to
serve the specific needs of professional customers.
Pre-opening expenses as a percent of sales were 0.2% for fiscal 2001
and 0.3% for fiscal 2000. We opened 204 new stores in both fiscal 2001 and 2000.
The decrease was primarily due to shorter pre-opening periods as we
re-engineered our store opening process.
General and administrative expenses as a percent of sales were 1.7% for
fiscal 2001 compared to 1.8% for fiscal 2000. This decrease was primarily due to
cost savings associated with the reorganization of certain components of our
organizational structure, such as the centralization of our merchandising
organization and our focus on expense control in areas such as travel.
Interest and investment income as a percent of sales was 0.1% for both
fiscal 2001 and 2000. Interest expense as a percent of sales was 0.1% for both
fiscal 2001 and 2000.
Our combined federal and state effective income tax rate decreased to
38.6% for fiscal 2001 from 38.8% for fiscal 2000. The decrease in fiscal 2001
was attributable to higher tax credits and a lower effective state income tax
rate compared to fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations provides us with a significant source of
liquidity. For fiscal 2002, cash provided by operations decreased to $4.8
billion from $6.0 billion in fiscal 2001. The decrease was primarily due to a
7.9% increase in average inventory per store resulting from our focus on
improving our in-stock position in fiscal 2002.
During fiscal 2002, we experienced a significant growth in days payable
outstanding to 42 days at the end of fiscal 2002 from 34 days at the end of
fiscal 2001. The growth in days payable is the result of our efforts to move our
payment terms to industry averages. We have realized the majority of the benefit
from our renegotiated payment terms.
24 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
Cash used in investing activities decreased to $2.9 billion in fiscal
2002 from $3.5 billion in fiscal 2001. Capital expenditures decreased to $2.7
billion in fiscal 2002 from $3.4 billion in fiscal 2001. This decrease was due
primarily to a shift in the timing of spending for future store openings. We
opened 203 new stores in fiscal 2002 compared to 204 new stores in fiscal 2001.
We own 195 and 188 of the stores opened in fiscal 2002 and fiscal 2001,
respectively, and lease the remainder.
We plan to open 206 stores in fiscal 2003, including 6 Home Depot
Landscape Supply stores, and expect total capital expenditures to be
approximately $4.0 billion, which includes a higher level of investment in store
remodeling, technology and other initiatives as compared to fiscal 2002.
Cash used in financing activities in fiscal 2002 was $2.2 billion
compared with $173 million in fiscal 2001. This change is primarily due to the
repurchase of approximately 68.6 million shares of our common stock for $2
billion, pursuant to the Share Repurchase Program approved by our Board of
Directors in July 2002.
We have a commercial paper program that allows borrowings for up to a
maximum of $1 billion. As of February 2, 2003, there were no borrowings
outstanding under the program. In connection with the program, we have 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 impact our liquidity or capital
resources.
We use capital and operating leases, as well as three off-balance sheet
leases created under structured financing arrangements, to finance about 22% of
our real estate. The net present value of capital lease obligations is reflected
in our Consolidated Balance Sheets in Long-Term Debt. The three off-balance
sheet leases were created to purchase land and fund the construction of certain
stores, office buildings and distribution centers. Two of these lease agreements
involve a special purpose entity ("SPE") which meets the criteria for
non-consolidation established by generally accepted accounting principles and is
not owned by or affiliated with our Company, management or officers. Operating
and off-balance sheet leases are not reflected in our Consolidated Balance
Sheets in accordance with generally accepted accounting principles.
As of the end of fiscal 2002, our long-term debt-to-equity ratio was
6.7%. If the estimated net present value of future payments under the operating
and off-balance sheet leases were capitalized, our long-term debt-to-equity
ratio would increase to 28.5%.
The following table summarizes our significant contractual obligations
and commercial commitments as of February 2, 2003 (amounts in millions):
Payments Due By Fiscal Year
-----------------------------------------------------------------
Contractual Obligations(1) Total 2003 2004-2005 2006-2007 Thereafter
------ ---- --------- --------- ----------
Long-Term Debt $1,051 $ 2 $502 $502 $ 45
Capital Lease Obligations 834 44 89 93 608
Operating Leases 7,308 541 988 864 4,915
Amount of Commitment Expiration Per Fiscal Year
-----------------------------------------------------------------
Commercial Commitments(2) Total 2003 2004-2005 2006-2007 Thereafter
------ ---- --------- --------- ----------
Letters of Credit $ 930 $921 $ 9 $ -- $ --
Guarantees 799 -- 72 504 223
(1) Contractual obligations include long-term debt comprised primarily of
$1 billion of Senior Notes further discussed in "Quantitative and
Qualitative Disclosures about Market Risk" and future minimum lease
payments under capital and operating leases, which include off-balance
sheet leases, used in the normal course of business.
(2) Commercial commitments include letters of credit for certain business
transactions and guarantees provided under the off-balance sheet
leases. We issue letters of credit for insurance programs, import
purchases and construction contracts. Under the three off-balance sheet
leases for certain stores, office buildings and distribution centers,
we have provided residual value guarantees. The estimated maximum
amount of the residual value guarantees at the end of the leases is
$799 million. The leases expire at various dates during fiscal 2005
through 2008 with two of the leases having an option to renew through
2025. Events or circumstances that would require us to perform under
the guarantees include 1) our default on the leases with the assets
being sold for less than the initial book value, or 2) we decide not to
purchase the assets at the end of the leases and the sale of the assets
results in proceeds less than the initial book value of the assets. Our
guarantees are limited to 82% of the initial book value of the assets.
The expiration dates of the residual value guarantees as disclosed in
the table above are based on the expiration of the leases; however, the
expiration dates will change if the leases are renewed.
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 25
As of February 2, 2003, we had approximately $2.3 billion in cash and
short-term investments. We believe that our current cash position, cash flow
generated from operations, funds available from the $1 billion commercial paper
program and the ability to obtain alternate sources of financing should be
sufficient to enable us to complete our capital expenditure programs through the
next several fiscal years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk results primarily from fluctuations in interest
rates. Although we have international operating entities, our exposure to
foreign currency rate fluctuations is not significant to our financial condition
and results of operations. Our objective for holding derivative instruments is
primarily to decrease the volatility of earnings and cash flow associated with
fluctuations in interest rates.
We have financial instruments that are sensitive to changes in interest
rates. These instruments include primarily fixed rate debt. As of February 2,
2003, we had $500 million of 5 3/8% Senior Notes and $500 million of 6 1/2%
Senior Notes outstanding. The market values of the publicly traded 5 3/8% and 6
1/2% Senior Notes as of February 2, 2003, were approximately $538 million and
$537 million, respectively. We have an interest rate swap agreement, with the
notional amount of $300 million, that swaps fixed rate interest on $300 million
of our $500 million 5 3/8% Senior Notes for a variable interest rate equal to
LIBOR plus 30 basis points and expires on April 1, 2006.
IMPACT OF INFLATION AND CHANGING PRICES
Although we cannot accurately determine the precise effect of inflation on
operations, we do not believe inflation has had a material effect on sales or
results of operations.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 1 to our consolidated
financial statements. The following discussion addresses our most critical
accounting policies, which are those that are both important to the portrayal of
our financial condition and results of operations and that require significant
judgment or use of complex estimates.
REVENUE RECOGNITION
We recognize revenue, net of estimated returns, at the time the
customer takes possession of the merchandise or receives services. We
estimate the liability for sales returns based on our historical return
levels. The methodology used is consistent with other retailers. We
believe that our estimate for sales returns is an accurate reflection
of future returns. When we receive payment from customers before the
customer has taken possession of the merchandise or the service has
been performed, the amount received is recorded in Deferred Revenue in
the accompanying Consolidated Balance Sheets.
INVENTORY
Our inventory is stated at the lower of cost (first-in, first-out) or
market, with approximately 93% valued under the retail method and the
remainder under the cost method. Retailers with many different types of
merchandise at low unit cost with a large number of transactions
frequently use the retail method. Under the retail method, inventory is
stated at cost which is determined by applying a cost-to-retail ratio
to the ending retail value of inventory. As our inventory retail value
is adjusted regularly to reflect market conditions, our inventory
methodology approximates the lower of cost or market. Accordingly,
there were no significant valuation reserves related to our inventory
as of February 2, 2003 and February, 2002. In addition, we reduce our
ending inventory value for estimated losses related to shrink. This
estimate is determined based upon analysis of historical shrink losses
and recent shrink trends.
SELF INSURANCE
We are self-insured for certain losses related to general liability,
product liability, workers' compensation and medical claims. Our
liability represents an estimate of the ultimate cost of claims
incurred as of the balance sheet date. The estimated liability is not
discounted and is established based upon analysis of historical data
and actuarial estimates, and is reviewed by management and third party
actuaries on a quarterly basis to ensure that the liability is
appropriate. While we believe these estimates are reasonable based on
the information currently available, if actual trends, including the
severity or frequency of claims, medical cost inflation, or
fluctuations in premiums, differ from our estimates, our results of
operations could be impacted.
CHANGE IN ACCOUNTING FOR STOCK-BASED COMPENSATION
During fiscal 2002 and all fiscal years prior, we elected to account for our
stock-based compensation plans under Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees," which requires the
recording of compensation expense for some, but not all, stock-based
compensation, rather than the alternative accounting permitted by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," was issued, which provides three
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based compensation in accordance with SFAS No.
123.
26 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
Effective February 3, 2003, we adopted the fair value method of recording
compensation expense related to all stock options granted after February 2,
2003, in accordance with SFAS Nos. 123 and 148. Accordingly, the fair value of
stock options as determined on the date of grant using the Black-Scholes
option-pricing model will be expensed over the vesting period of the related
stock options. The estimated negative impact on diluted earnings per share is
approximately $.02 for fiscal 2003. The actual impact may differ from this
estimate as the estimate is based upon a number of factors including, but not
limited to, the number of stock options granted and the fair value of the stock
options on the date of grant.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities."
Interpretation No. 46 requires consolidation of a variable interest entity if a
company's variable interest absorbs a majority of the entity's losses or
receives a majority of the entity's expected residual returns, or both. We do
not have a variable interest in the SPE created as part of our off-balance sheet
structured financing arrangements and, therefore, we are not required to
consolidate the SPE. We do not expect Interpretation No. 46 to have any impact
on our consolidated financial statements.
In January 2003, the Emerging Issues Task Force issued EITF 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor," which states that cash consideration received from a
vendor is presumed to be a reduction of the prices of the vendor's products or
services and should, therefore, be characterized as a reduction of Cost of
Merchandise Sold when recognized in our Consolidated Statements of Earnings.
That presumption is overcome when the consideration is either a reimbursement of
specific, incremental, identifiable costs incurred to sell the vendor's
products, or a payment for assets or services delivered to the vendor. EITF
02-16 is effective for arrangements entered into after December 31, 2002. We are
currently assessing the impact of the adoption of EITF 02-16 and do not expect
the adoption to materially impact net earnings in fiscal 2003. We do, however,
expect that certain payments received from our vendors that are currently
reflected as a reduction in advertising expense, which is classified as Selling
and Store Operating Expense, will be reclassified as a reduction of Cost of
Merchandise Sold.
In December 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which provides for additional disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations and requires, under certain circumstances, a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. We have adopted the
disclosure requirements for the fiscal year ended February 2, 2003. We do not
expect the recognition and measurement provisions of Interpretation No. 45 for
guarantees issued or modified after December 31, 2002, to have a material impact
on our consolidated financial statements.
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 27
CONSOLIDATED STATEMENTS OF EARNINGS
THE HOME DEPOT, INC. AND SUBSIDIARIES
Fiscal Year Ended(1)
-------------------------------------------------
February 2, February 3, January 28,
amounts in millions, except per share data 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
NET SALES $ 58,247 $ 53,553 $ 45,738
Cost of Merchandise Sold 40,139 37,406 32,057
- ----------------------------------------------------------------------------------------------------
GROSS PROFIT 18,108 16,147 13,681
Operating Expenses:
Selling and Store Operating 11,180 10,163 8,513
Pre-Opening 96 117 142
General and Administrative 1,002 935 835
- ----------------------------------------------------------------------------------------------------
Total Operating Expenses 12,278 11,215 9,490
- ----------------------------------------------------------------------------------------------------
OPERATING INCOME 5,830 4,932 4,191
Interest Income (Expense):
Interest and Investment Income 79 53 47
Interest Expense (37) (28) (21)
- ----------------------------------------------------------------------------------------------------
Interest, net 42 25 26
- ----------------------------------------------------------------------------------------------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 5,872 4,957 4,217
Provision for Income Taxes 2,208 1,913 1,636
- ----------------------------------------------------------------------------------------------------
NET EARNINGS $ 3,664 $ 3,044 $ 2,581
- ----------------------------------------------------------------------------------------------------
Weighted Average Common Shares 2,336 2,335 2,315
BASIC EARNINGS PER SHARE $ 1.57 $ 1.30 $ 1.11
- ----------------------------------------------------------------------------------------------------
Diluted Weighted Average Common Shares 2,344 2,353 2,352
DILUTED EARNINGS PER SHARE $ 1.56 $ 1.29 $ 1.10
- ----------------------------------------------------------------------------------------------------
(1) Fiscal years ended February 2, 2003 and January 28, 2001 include 52
weeks. Fiscal year ended February 3, 2002 includes 53 weeks.
See accompanying notes to consolidated financial statements.
28 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
THE HOME DEPOT, INC. AND SUBSIDIARIES
February 2, February 3,
amounts in millions, except per share data 2003 2002
- ------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 2,188 $ 2,477
Short-Term Investments, including current maturities
of long-term investments 65 69
Receivables, net 1,072 920
Merchandise Inventories 8,338 6,725
Other Current Assets 254 170
- ------------------------------------------------------------------------------------------------
Total Current Assets 11,917 10,361
- ------------------------------------------------------------------------------------------------
Property and Equipment, at cost:
Land 5,560 4,972
Buildings 9,197 7,698
Furniture, Fixtures and Equipment 4,074 3,403
Leasehold Improvements 872 750
Construction in Progress 724 1,049
Capital Leases 306 257
- ------------------------------------------------------------------------------------------------
20,733 18,129
Less Accumulated Depreciation and Amortization 3,565 2,754
- ------------------------------------------------------------------------------------------------
Net Property and Equipment 17,168 15,375
- ------------------------------------------------------------------------------------------------
Notes Receivable 107 83
Cost in Excess of the Fair Value of Net Assets Acquired,
net of accumulated amortization of $50 at
February 2, 2003 and $49 at February 3, 2002 575 419
Other Assets 244 156
- ------------------------------------------------------------------------------------------------
$ 30,011 $ 26,394
- ------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 4,560 $ 3,436
Accrued Salaries and Related Expenses 809 717
Sales Taxes Payable 307 348
Deferred Revenue 998 851
Income Taxes Payable 227 211
Other Accrued Expenses 1,134 938
- ------------------------------------------------------------------------------------------------
Total Current Liabilities 8,035 6,501
- ------------------------------------------------------------------------------------------------
Long-Term Debt, excluding current installments 1,321 1,250
Other Long-Term Liabilities 491 372
Deferred Income Taxes 362 189
STOCKHOLDERS' EQUITY
Common Stock, par value $0.05; authorized: 10,000 shares,
issued and outstanding 2,362 shares at February 2, 2003
and 2,346 shares at February 3, 2002 118 117
Paid-in Capital 5,858 5,412
Retained Earnings 15,971 12,799
Accumulated Other Comprehensive Loss (82) (220)
Unearned Compensation (63) (26)
Treasury Stock, at cost, 69 shares at February 2, 2003 (2,000) --
- ------------------------------------------------------------------------------------------------
Total Stockholders' Equity 19,802 18,082
- ------------------------------------------------------------------------------------------------
$ 30,011 $ 26,394
- ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
THE HOME DEPOT, INC. AND SUBSIDIARIES
Accumulated
Other
Common Stock Paid-In Retained Comprehensive
amounts in millions, except per share data Shares Amount Capital Earnings Income (Loss)
- ------------------------------------------ ------ ------ ------- -------- -------------
BALANCE, JANUARY 30, 2000 2,304 $115 $4,319 $ 7,941 $ (27)
===== ===== ====== ======== =====
Net Earnings -- -- -- 2,581 --
Shares Issued Under Employee
Stock Purchase and Option Plans 20 1 348 -- --
Tax Effect of Sale of Option Shares
by Employees -- -- 137 -- --
Translation Adjustments -- -- -- -- (40)
Stock Compensation Expense -- -- 6 -- --
Cash Dividends ($0.16 per share) -- -- -- (371) --
Comprehensive Income
----- ----- ------ -------- -----
BALANCE, JANUARY 28, 2001 2,324 $116 $4,810 $ 10,151 $ (67)
===== ===== ====== ======== =====
Net Earnings -- -- -- 3,044 --
Shares Issued Under Employee
Stock Purchase and Option Plans 22 1 448 -- --
Tax Effect of Sale of Option Shares
by Employees -- -- 138 -- --
Translation Adjustments -- -- -- -- (124)
Unrealized Loss on Derivative -- -- -- -- (29)
Stock Compensation Expense -- -- 16 -- --
Cash Dividends ($0.17 per share) -- -- -- (396) --
Comprehensive Income
----- ----- ------ -------- -----
BALANCE, FEBRUARY 3, 2002 2,346 $117 $5,412 $ 12,799 $(220)
===== ===== ====== ======== =====
Net Earnings -- -- -- 3,664 --
Shares Issued Under Employee
Stock Purchase and Option Plans 16 1 366 -- --
Tax Effect of Sale of Option Shares
by Employees -- -- 68 -- --
Translation Adjustments -- -- -- -- 109
Realized Loss on Derivative -- -- -- -- 29
Stock Compensation Expense -- -- 12 -- --
Repurchase of Common Stock -- -- -- -- --
Cash Dividends ($0.21 per share) -- -- -- (492) --
Comprehensive Income
----- ----- ------ -------- -----
BALANCE, FEBRUARY 2, 2003 2,362 $118 $5,858 $ 15,971 $ (82)
===== ===== ====== ======== =====
Total
Treasury Stock Unearned Stockholders' Comprehensive
Shares Amount Compensation Equity Income(1)
------- ------- ------------ ------------- -------------
BALANCE, JANUARY 30, 2000 -- $ -- $ (7) $ 12,341
===== ======= ===== ========
Net Earnings -- -- -- 2,581 $ 2,581
Shares Issued Under Employee
Stock Purchase and Option Plans -- -- 1 350
Tax Effect of Sale of Option Shares
by Employees -- -- -- 137
Translation Adjustments -- -- -- (40) (40)
Stock Compensation Expense -- -- -- 6
Cash Dividends ($0.16 per share) -- -- -- (371)
-------
Comprehensive Income $ 2,541
------ ------- ---- -------- -------
BALANCE, JANUARY 28, 2001 -- $ -- $ (6) $ 15,004
====== ======= ==== ========
Net Earnings -- -- -- 3,044 $ 3,044
Shares Issued Under Employee
Stock Purchase and Option Plans -- -- (20) 429
Tax Effect of Sale of Option Shares
by Employees -- -- -- 138
Translation Adjustments -- -- -- (124) (124)
Unrealized Loss on Derivative -- -- -- (29) (18)
Stock Compensation Expense -- -- -- 16
Cash Dividends ($0.17 per share) -- -- -- (396)
-------
Comprehensive Income $ 2,902
------ ------- ---- -------- -------
BALANCE, FEBRUARY 3, 2002 -- $ -- $(26) $ 18,082
====== ======= ==== ========
Net Earnings -- -- -- 3,664 $ 3,664
Shares Issued Under Employee
Stock Purchase and Option Plans -- -- (37) 330
Tax Effect of Sale of Option Shares
by Employees -- -- -- 68
Translation Adjustments -- -- -- 109 109
Realized Loss on Derivative -- -- -- 29 18
Stock Compensation Expense -- -- -- 12
Repurchase of Common Stock (69) (2,000) -- (2,000)
Cash Dividends ($0.21 per share) -- -- -- (492)
Comprehensive Income $ 3,791
------ ------- ---- -------- -------
BALANCE, FEBRUARY 2, 2003 (69) $(2,000) $(63) $ 19,802
====== ======= ==== ========
(1) Components of comprehensive income are reported net of related income
taxes.
See accompanying notes to consolidated financial statements.
30 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE HOME DEPOT, INC. AND SUBSIDIARIES
Fiscal Year Ended(1)
----------------------------------------------
February 2, February 3, January 28,
amounts in millions 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS:
Net Earnings $ 3,664 $ 3,044 $ 2,581
Reconciliation of Net Earnings to Net Cash Provided by Operations:
Depreciation and Amortization 903 764 601
Increase in Receivables, net (38) (119) (246)
Increase in Merchandise Inventories (1,592) (166) (1,075)
Increase in Accounts Payable and Accrued Liabilities 1,394 1,878 268
Increase in Deferred Revenue 147 200 486
Increase in Income Taxes Payable 83 272 151
Increase (Decrease) in Deferred Income Taxes 173 (6) 108
Other 68 96 (78)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations 4,802 5,963 2,796
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, net of $49, $5 and $16 of non-cash
capital expenditures in fiscal 2002, 2001 and 2000, respectively (2,749) (3,393) (3,558)
Payments for Businesses Acquired, net (235) (190) (26)
Proceeds from Sales of Businesses, net 22 64 --
Proceeds from Sales of Property and Equipment 105 126 95
Purchases of Investments (583) (85) (39)
Proceeds from Maturities of Investments 506 25 30
Other -- (13) (32)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,934) (3,466) (3,530)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) Issuances of Commercial Paper Obligations, net -- (754) 754
Proceeds from Long-Term Debt 1 532 32
Repayments of Long-Term Debt -- -- (29)
Repurchase of Common Stock (2,000) -- --
Proceeds from Sale of Common Stock, net 326 445 351
Cash Dividends Paid to Stockholders (492) (396) (371)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (2,165) (173) 737
- -------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 8 (14) (4)
- -------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (289) 2,310 (1)
Cash and Cash Equivalents at Beginning of Year 2,477 167 168
- -------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,188 $ 2,477 $ 167
=========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS MADE FOR:
Interest, net of interest capitalized $ 50 $ 18 $ 16
Income Taxes $ 1,951 $ 1,685 $ 1,386
=========================================================================================================================
(1) Fiscal years ended February 2, 2003, and January 28, 2001, include 52
weeks. Fiscal year ended February 3, 2002, includes 53 weeks.
See accompanying notes to consolidated financial statements.
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE HOME DEPOT, INC. AND SUBSIDIARIES
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS, CONSOLIDATION AND PRESENTATION
The Home Depot, Inc. and subsidiaries (the "Company") operate Home Depot stores,
which are full-service, warehouse-style stores averaging approximately 108,000
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, Home Depot
Landscape Supply stores which service landscape professionals and garden
enthusiasts with lawn, landscape and garden products and Home Depot Supply
stores serving primarily professional customers. The Company also operates one
Home Depot Floor Store, a test store that offers only flooring products and
installation services. At the end of fiscal 2002, the Company was operating
1,532 stores in total, which included 1,370 Home Depot stores, 52 EXPO Design
Center stores, 5 Home Depot Supply stores, 3 Home Depot Landscape Supply stores
and 1 Home Depot Floor Store in the United States ("U.S."); 89 Home Depot stores
in Canada and 12 Home Depot stores in Mexico. Included in the Company's
Consolidated Balance Sheet at February 2, 2003, were $1.2 billion of net assets
of the Canada and Mexico operations.
The consolidated results include several wholly-owned subsidiaries. The Company
offers facilities maintenance and repair products as well as wallpaper and
custom window treatments via direct shipment through its subsidiaries,
Maintenance Warehouse America Corp. and National Blinds and Wallpaper, Inc.
(doing business as Designplace Direct). Georgia Lighting, Inc. 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, Inc. and
Home Depot Your "other" Warehouse, LLC. The Company also arranges for the
provision of flooring installation services to homebuilders through HD Builder
Solutions Group, Inc. The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
FISCAL YEAR
The Company's fiscal year is a 52 or 53-week period ending on the Sunday nearest
to January 31. Fiscal years 2002 and 2000, which ended February 2, 2003, and
January 28, 2001, respectively, include 52 weeks. Fiscal year 2001, which ended
February 3, 2002, includes 53 weeks.
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 high-grade
commercial paper, money market funds, U.S. government agency securities and
tax-exempt notes and bonds.
ACCOUNTS RECEIVABLE
The Company has an agreement with a third-party service provider who manages the
Company's private label credit card program and directly extends credit to
customers. The Company's valuation reserve related to accounts receivable was
not material as of February 2, 2003 and February 3, 2002.
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 record inventories at
lower of cost (first-in, first-out) or market, as determined by the cost method.
These inventories represent approximately 7% 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 due to 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 income 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.
32 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
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 purposes, 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 recorded in the accompanying Consolidated Statements of
Earnings.
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 assets 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 equipment and 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
receives payment from customers before the customer has taken possession of the
merchandise or the service has been performed, the amount received is recorded
in Deferred Revenue in the accompanying Consolidated Balance Sheets.
SERVICE REVENUES
Total revenues include service revenues generated through a variety of
installation and home maintenance programs in Home Depot and EXPO stores as well
as through the Company's subsidiary, HD Builder Solutions Group, Inc. In these
programs, the customer selects and purchases materials for a project and the
Company provides or arranges professional installation. When the Company
subcontracts the installation of a project and the subcontractor provides
material as part of the installation, both the material and labor are included
in service revenues. The Company recognizes this revenue when the service for
the customer is completed. All payments received prior to the completion of
services are recorded in Deferred Revenue in the accompanying Consolidated
Balance Sheets. Net service revenues, including the impact of deferred revenue,
were $2.0 billion, $1.6 billion and $1.3 billion for the fiscal years 2002, 2001
and 2000, respectively.
SELF INSURANCE
The Company is self-insured for certain losses related to general liability,
product liability, workers' compensation and medical 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 first appears. Included in Current
Assets in the accompanying Consolidated Balance Sheets are $20 million and $15
million at the end of fiscal years 2002 and 2001, respectively, relating to
prepayments of production costs for print and broadcast advertising.
Gross advertising expense is classified as Selling and Store Operating
Expenses and was $895 million, $817 million and $722 million, in fiscal years
2002, 2001 and 2000, respectively. Advertising allowances earned from vendors
fully offset gross advertising expenses. In fiscal 2002, 2001 and 2000,
advertising allowances exceeded gross advertising expense by $30 million, $31
million and $62 million, respectively. These excess amounts were recorded as a
reduction in Cost of Merchandise Sold in the accompanying Consolidated
Statements of Earnings.
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 Merchandise Sold.
However, cost of shipping and handling to customers by the Company is classified
as Selling and Store Operating Expenses. The cost of shipping and handling,
including internal costs and payments to third parties, classified as Selling
and Store Operating Expenses was $341 million, $278 million and $226 million in
fiscal years 2002, 2001 and 2000, respectively.
COST IN EXCESS OF THE FAIR VALUE OF NET ASSETS ACQUIRED
Goodwill represents the excess of purchase price over fair value of net assets
acquired. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," the Company stopped
amortizing goodwill effective February 4, 2002. Amortization expense was $8
million in both fiscal 2001 and fiscal 2000. The Company assesses the
recoverability of goodwill at least annually by determining whether the fair
value of each reporting entity supports its carrying value. The Company
completed its assessment of goodwill for fiscal 2002 and recorded an impairment
charge of $1.3 million.
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 33
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. When the
Company commits to relocate or close a location, a charge is recorded to Selling
and Store Operating Expenses to write down the related assets to the estimated
net recoverable value.
In August 2002, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." In accordance with SFAS No. 146,
the Company recognizes Selling and Store Operating Expense for the net present
value of future lease obligations, less estimated sublease income when the
location closes. Prior to the adoption of SFAS No. 146, the Company recognized
this Selling and Store Operating Expense when the Company committed to a plan to
relocate or close a location.
STOCK-BASED COMPENSATION
During fiscal 2002 and all fiscal years prior, the Company elected to account
for its stock-based compensation plans under Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," which requires
the recording of compensation expense for some, but not all, stock-based
compensation rather than the alternative accounting permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation."
The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based compensation (amounts in millions, except per share
data):
Fiscal Year Ended
February 2, February 3, January 28,
2003 2002 2001
- ------------------------------------------------------------------
Net Earnings
As reported $3,664 $3,044 $2,581
Pro forma $3,414 $2,800 $2,364
Basic Earnings per Share
As reported $ 1.57 $ 1.30 $ 1.11
Pro forma $ 1.46 $ 1.20 $ 1.02
Diluted Earnings per Share
As reported $ 1.56 $ 1.29 $ 1.10
Pro forma $ 1.46 $ 1.19 $ 1.01
- -----------------------------------------------------------------
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," was issued, which provides three
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based compensation in accordance with SFAS No.
123. Effective February 3, 2003, the Company adopted the fair value method of
recording compensation expense related to all stock options granted after
February 2, 2003, in accordance with SFAS Nos. 123 and 148. Accordingly, the
fair value of stock options as determined on the date of grant using the
Black-Scholes option-pricing model will be expensed over the vesting period of
the related stock options. The estimated negative impact on diluted earnings per
share is approximately $.02 for fiscal 2003. The actual impact may differ from
this estimate as the estimate is based upon a number of factors including, but
not limited to, the number of stock options granted and the fair value of the
stock options on the date of grant.
DERIVATIVES
The Company measures derivatives at fair value and recognizes these assets or
liabilities on the Consolidated Balance Sheets. Recognition of changes in the
fair value of a derivative in the Consolidated Statements of Earnings or
Consolidated Statements of Stockholders' Equity and Comprehensive Income depends
on the intended use of the derivative and its designation. The Company
designates derivatives based upon criteria established by SFAS Nos. 133 and 138,
"Accounting for Derivative Instruments and Hedging Activities." The Company's
primary objective for holding derivative instruments is to decrease the
volatility of earnings and cash flow associated with fluctuations in interest
rates.
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.
34 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
RECLASSIFICATIONS
Certain amounts in prior fiscal years have been reclassified to conform with the
presentation adopted in the current fiscal year.
2 LONG-TERM DEBT
The Company's long-term debt at the end of fiscal 2002 and fiscal 2001 consisted
of the following (amounts in millions):
February 2, February 3,
2003 2002
- -----------------------------------------------------------------------
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 1 500 500
Capital Lease Obligations;
payable in varying installments
through May 31, 2027 277 232
Other 51 23
- -----------------------------------------------------------------------
Total long-term debt 1,328 1,255
Less current installments 7 5
- -----------------------------------------------------------------------
Long-term debt, excluding current installments $1,321 $1,250
=======================================================================
The Company has a commercial paper program with maximum available
borrowings for 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.
The Company had $500 million of 6 1/2% Senior Notes and $500 million of
5 3/8% Senior Notes outstanding as of February 2, 2003, 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 $59 million, $84 million and $73 million in
fiscal years 2002, 2001 and 2000, respectively. Maturities of long-term debt are
$7 million for fiscal 2003, $507 million for fiscal 2004, $8 million for fiscal
2005, $509 million for fiscal 2006 and $11 million for fiscal 2007.
As of February 2, 2003, the market values of the publicly traded 6 1/2% and
5 3/8% Senior Notes were approximately $537 million and $538 million,
respectively. The estimated fair value of all other long-term borrowings,
excluding capital lease obligations, approximated the carrying value of $51
million. These fair values were estimated using a discounted cash flow analysis
based on the Company's incremental borrowing rate for similar liabilities.
3 INCOME TAXES
The provision for income taxes consisted of the following (in millions):
Fiscal Year Ended
February 2, February 3, January 28,
2003 2002 2001
- -------------------------------------------------------------------------------
Current:
Federal $ 1,679 $ 1,594 $1,267
State 239 265 216
Foreign 117 60 45
- -------------------------------------------------------------------------------
2,035 1,919 1,528
===============================================================================
Deferred:
Federal 174 (12) 98
State 1 (1) 9
Foreign (2) 7 1
173 (6) 108
- -------------------------------------------------------------------------------
Total $ 2,208 $ 1,913 $1,636
===============================================================================
The Company's combined federal, state and foreign effective tax rates for
fiscal years 2002, 2001 and 2000, net of offsets generated by federal, state and
foreign tax incentive credits, were approximately 37.6%, 38.6% and 38.8%,
respectively.
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 35
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 2, February 3, January 28,
2003 2002 2001
- ---------------------------------------------------------------------------
Income taxes at federal
statutory rate $ 2,055 $1,735 $1,476
State income taxes, net
of federal income
tax benefit 156 172 146
Foreign rate differences (1) 4 5
Other, net (2) 2 9
- ---------------------------------------------------------------------------
Total $ 2,208 $1,913 $1,636
===========================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of February
2, 2003, and February 3, 2002, were as follows (in millions):
February 2, February 3,
2003 2002
- -------------------------------------------------------------------------
Deferred Tax Assets:
Accrued self-insurance liabilities $ 305 $ 220
Other accrued liabilities 92 138
Net loss on disposition of business 31 31
- -------------------------------------------------------------------------
Total gross deferred tax assets 428 389
Valuation allowance (31) (31)
- -------------------------------------------------------------------------
Deferred tax assets, net of
valuation allowance 397 358
- -------------------------------------------------------------------------
Deferred Tax Liabilities:
Accelerated depreciation (571) (492)
Accelerated inventory deduction (149) --
Other (39) (55)
- -------------------------------------------------------------------------
Total gross deferred tax liabilities (759) (547)
- -------------------------------------------------------------------------
Net deferred tax liability $(362) $(189)
=========================================================================
A valuation allowance existed as of February 2, 2003, and February 3, 2002,
due to the uncertainty of capital loss utilization. Management believes the
existing net deductible temporary differences comprising the deferred tax assets
will reverse during periods in which the Company generates net taxable income.
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 shares, performance shares, performance units 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 authorized for issuance
under the 1997 Plan includes the number of shares carried over from prior plans
and the number of shares authorized but unissued in the prior year, plus
one-half percent of the total number of outstanding shares as of the first day
of each fiscal year. As of February 2, 2003, there were 108 million shares
available for future grants under the 1997 Plan.
Under the 1997 Plan, as of February 2, 2003, the Company had granted
incentive and non-qualified stock options for 167 million shares, net of
cancellations (of which 86 million had been exercised). Incentive stock options
and non-qualified 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.
Under the 1997 Plan, as of February 2, 2003, 2 million shares of
restricted stock had 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 remaining 50% of the restricted shares lapsing upon the associate's
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 of $3 million in both fiscal
2002 and 2001 and $455,000 in fiscal 2000.
As of February 2, 2003, there were 2.5 million non-qualified stock options
and 1.4 million deferred stock units outstanding under non-qualified stock
option and deferred stock unit plans that are not part of the 1997 Plan. The 2.5
million non-qualified stock options have an exercise price of $40.75 per share
and were granted in fiscal 2000. During fiscal years 2002, 2001 and 2000, the
Company granted 0, 629,000 and 750,000 deferred stock units, 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 over the vesting periods.
36 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
The Company recorded stock compensation expense related to deferred stock units
of $12 million, $16 million and $6 million in fiscal 2002, 2001 and 2000,
respectively.
The per share weighted average fair value of stock options granted during
fiscal years 2002, 2001 and 2000 was $17.34, $20.51 and $31.96, 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 2, February 3, January 28,
2003 2002 2001
- --------------------------------------------------------------------------------
Risk-free interest rate 4.0% 5.1% 6.4%
Assumed volatility 44.3% 48.1% 54.6%
Assumed dividend yield 0.5% 0.4% 0.3%
Assumed lives of options 5 years 6 years 7 years
================================================================================
The Company applies APB 25 in accounting for its stock-based compensation
plans and, accordingly, no compensation expense has been recognized in the
Company's financial statements for incentive or non-qualified stock options
granted. If, under SFAS No. 123, the Company determined compensation expense
based on the fair value at the grant date for its stock options, as computed and
disclosed above, 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 2, February 3, January 28,
2003 2002 2001
- ------------------------------------------------------------------------------
Net earnings,
as reported $ 3,664 $ 3,044 $ 2,581
Add: Stock-based
compensation expense
included in reported net
earnings, net of related
tax effects 10 13 4
Deduct: Total stock-based
compensation expense
determined under
fair value based method
for all awards, net of
related tax effects (260) (257) (221)
- ------------------------------------------------------------------------------
Pro forma net earnings $ 3,414 $ 2,800 $ 2,364
==============================================================================
Earnings per share:
Basic-- as reported $ 1.57 $ 1.30 $ 1.11
Basic-- pro forma $ 1.46 $ 1.20 $ 1.02
Diluted--as reported $ 1.56 $ 1.29 $ 1.10
Diluted--pro forma $ 1.46 $ 1.19 $ 1.01
==============================================================================
The following table summarizes stock options outstanding at February 2, 2003,
February 3, 2002 and January 28, 2001, and changes during the fiscal years ended
on these dates (shares in thousands):
Weighted
Number Average
of Shares Option Price
- --------------------------------------------------------------------------
Outstanding at January 30, 2000 68,419 $ 18.79
==========================================================================
Granted 14,869 49.78
Exercised (14,689) 13.15
Canceled (2,798) 30.51
- --------------------------------------------------------------------------
Outstanding at January 28, 2001 65,801 $ 26.46
==========================================================================
Granted 25,330 40.33
Exercised (16,614) 15.03
Canceled (5,069) 39.20
- --------------------------------------------------------------------------
Outstanding at February 3, 2002 69,448 $ 33.33
==========================================================================
Granted 31,656 40.86
Exercised (9,908) 18.27
Canceled (8,030) 42.74
- --------------------------------------------------------------------------
Outstanding at February 2, 2003 83,166 $ 37.09
==========================================================================
Exercisable 29,431 $ 29.48
==========================================================================
The following table summarizes information regarding stock options outstanding
at February 2, 2003 (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 7,090 3.5 $10.24 7,090 $10.24
12.01 to 20.00 1,191 4.7 17.21 1,191 17.21
20.01 to 30.00 7,438 5.6 22.19 6,090 21.78
30.01 to 42.00 41,745 8.4 37.67 11,161 39.12
42.01 to 54.00 25,702 8.5 48.80 3,899 52.48
- ------------------------------------------------------------------------------------------------
83,166 7.7 $37.09 29,431 $29.48
================================================================================================
The Company maintains two employee stock purchase plans (U.S. and non-U.S.
plans). The plan for U.S. associates is a tax-qualified plan under Section 423
of the Internal Revenue Code. The non-U.S. plan is not a Section 423 plan. The
Company had 43 million shares available for issuance under the Employee Stock
Purchase Plans ("ESPPs") at February 2, 2003. The ESPPs allow associates to
purchase up to 152 million shares of common stock, of which 109 million shares
have been purchased 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. These shares were included in the pro forma calculation of
stock-based compensation expense.
During fiscal 2002, 5.2 million shares were purchased under the ESPPs at an
average price of $30.89 per share. At February 2, 2003, there were 2.3 million
shares outstanding, net of cancellations, at an average price of $34.09 per
share.
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 37
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,
certain leases will be renewed or replaced.
The Company has two off-balance sheet lease agreements under which the
Company leases assets totaling $882 million comprised of an initial lease
agreement of $600 million and a subsequent agreement of $282 million. These two
leases were created under structured financing arrangements and involve a
special purpose entity which meets the criteria for non-consolidation
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 years 1997 through 2002, 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 fiscal 2006 and has three two-year renewal
options. The lease term for the $282 million agreement expires in 2008 with no
renewal option. Both lease agreements provide for substantial residual value
guarantees and include purchase options at original cost of each property.
Events or circumstances that would require the Company to perform under the
guarantees include 1) initial default on the leases with the assets sold for
less than book value, or 2) the Company's decision not to purchase the assets at
the end of the leases and the sale of the assets results in proceeds less than
the initial book value of the assets. The Company's guarantees are limited to
82% of the initial book value of the assets.
The Company also leases an import distribution facility, including its
related equipment, under an off-balance sheet lease created as part of a
structured financing arrangement totaling $85 million. The lease for the import
distribution facility expires in fiscal 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 three off-balance sheet lease agreements described above is estimated
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 2, 2003, February 3, 2002 and January 28, 2001, was $533 million, $522
million and $479 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
2, 2003, February 3, 2002 and January 28, 2001, was approximately $8 million,
$10 million and $9 million, respectively.
The approximate future minimum lease payments under capital and all other
leases, including off-balance sheet leases, at February 2, 2003, were as follows
(in millions):
Capital Operating
Fiscal Year Leases Leases
- -----------------------------------------------------------------------
2003 $ 44 $ 541
2004 45 512
2005 44 476
2006 46 440
2007 47 424
Thereafter through 2033 608 4,915
- -----------------------------------------------------------------------
834 $7,308
======
Less imputed interest 557
- -----------------------------------------------------------------------
Net present value of
capital lease obligations 277
Less current installments 5
- -----------------------------------------------------------------------
Long-term capital lease obligations,
excluding current installments $ 272
=======================================================================
Short-term and long-term obligations for capital leases are included in the
accompanying Consolidated Balance Sheets in Other Accrued Expenses and Long-Term
Debt, respectively. The assets under capital leases recorded in Property and
Equipment, net of amortization, totaled $235 million and $199 million at
February 2, 2003 and February 3, 2002, respectively.
38 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
6 EMPLOYEE BENEFIT PLANS
The Company maintains three active defined contribution retirement plans (the
"Plans"). All associates satisfying certain service requirements are eligible to
participate in the Plans. The Company makes cash contributions each payroll
period 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's contributions to the Plans were $99 million, $97 million and
$84 million for fiscal years 2002, 2001 and 2000, respectively. At February 2,
2003, the Plans held a total of 33 million shares of the Company's common stock
in trust for plan participants.
The Company also maintains a restoration plan to provide certain associates
deferred compensation that they would have received under the Plans as a
matching contribution if not for the maximum compensation limits under the
Internal Revenue Code. The Company funds the restoration plan through
contributions made to a grantor 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 2002, 2001 and 2000 was not material.
7 BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES
The reconciliation of basic to diluted weighted average common shares for fiscal
years 2002, 2001 and 2000 was as follows (amounts in millions):
Fiscal Year Ended
February 2, February 3, January 28,
2003 2002 2001
- ---------------------------------------------------------------------------
Weighted average
common shares 2,336 2,335 2,315
Effect of potentially
dilutive securities:
Stock Plans 8 18 37
- ---------------------------------------------------------------------------
Diluted weighted average
common shares 2,344 2,353 2,352
===========================================================================
Stock plans include shares granted under the Company's employee stock
purchase plans and stock incentive plans, as well as shares issued for deferred
compensation stock plans. Options to purchase 72.1 million, 11.2 million and
10.9 million shares of common stock at February 2, 2003, February 3, 2002 and
January 28, 2001, respectively, were excluded from the computation of diluted
earnings per share because their effect would have been anti-dilutive.
8 COMMITMENTS AND CONTINGENCIES
At February 2, 2003, the Company was contingently liable for approximately $930
million under outstanding letters of credit issued for certain business
transactions, including insurance programs, import inventory purchases and
construction contracts. The Company's letters of credit are primarily
performance-based and are not based on changes in variable components, a
liability or an equity security of the other party.
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.
9 ACQUISITIONS AND DISPOSITIONS
In October 2002, the Company acquired substantially all of the assets of
FloorWorks, Inc. and Arvada Hardwood Floor Company, and common stock of Floors,
Inc., three flooring installation companies primarily servicing the new home
builder industry. These acquisitions were accounted for under the purchase
method of accounting.
In June 2002, the Company acquired the assets of Madereria Del Norte, S.A.
de C.V, a four-store chain of home improvement stores in Juarez, Mexico. The
acquisition was accounted for under the purchase method of accounting.
In fiscal 2001, the Company acquired Your "other" Warehouse and Soluciones
Para Las Casas de Mexico, S. de R.L. de C.V. These acquisitions were accounted
for under the purchase method of accounting.
Pro forma results of operations for fiscal years 2002, 2001 and 2000 would
not be materially different as a result of the acquisitions discussed above and
therefore are not presented.
In February 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 notes. An impairment charge of $45 million was recorded in
Selling and Store Operating Expenses in the accompanying Consolidated Statements
of Earnings in fiscal 2001 to write down the net assets of The Home Depot
Argentina S.R.L. to fair value.
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 in the accompanying Consolidated Statements of Earnings.
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 39
10 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly consolidated results of operations
for the fiscal years ended February 2, 2003 and February 3, 2002 (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 2, 2003:(1)
First quarter $ 14,282 5 % $ 4,360 $ 856 $ 0.36 $ 0.36
Second quarter 16,277 1 % 4,946 1,182 0.50 0.50
Third quarter 14,475 (2)% 4,580 940 0.40 0.40
Fourth quarter 13,213 (6)% 4,222 686 0.30 0.30
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal year $ 58,247 0 % $ 18,108 $ 3,664 $ 1.57 $ 1.56
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal year ended February 3, 2002:(1)
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
(1) Fiscal year ended February 2, 2003 includes 52 weeks and fiscal year ended
February 3, 2002 includes 53 weeks.
Note: The quarterly data may not sum to fiscal year totals due to rounding.
40 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
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. In addition, a telephonic meeting is held prior to each
quarterly earnings release. The Audit Committee retains the independent auditors
and regularly reviews 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 2, 2003 and February 3, 2002 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 2, 2003. 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 2, 2003 and February 3, 2002, and
the results of their operations and their cash flows for each of the years in
the three-year period ended February 2, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Atlanta, Georgia
February 24, 2003
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 41
10-YEAR SUMMARY OF FINANCIAL AND OPERATING RESULTS
THE HOME DEPOT, INC. AND SUBSIDIARIES
5-Year 10-Year
Compound Annual Compound Annual
amounts in millions, except where noted Growth Rate Growth Rate 2002 2001(1)
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA
Net sales 19.2% 23.3% $ 58,247 $ 53,553
Net sales increase(%) -- -- 8.8 17.1
Earnings before provision for income taxes 25.3 26.1 5,872 4,957
Net earnings 25.9 26.0 3,664 3,044
Net earnings increase(%) -- -- 20.4 17.9
Diluted earnings per share($)(2) 24.6 24.1 1.56 1.29
Diluted earnings per share increase(%) -- -- 20.9 17.3
Diluted weighted average number of common shares 0.5 1.1 2,344 2,353
Gross margin - % of sales -- -- 31.1 30.2
Selling and store operating expense - % of sales -- -- 19.2 19.0
Pre-opening expense - % of sales -- -- 0.2 0.2
General and administrative expense - % of sales -- -- 1.7 1.7
Net interest income (expense) - % of sales -- -- 0.1 --
Earnings before provision for income taxes - % of sales -- -- 10.1 9.3
Net earnings - % of sales -- -- 6.3 5.7
=================================================================================================================================
BALANCE SHEET DATA AND FINANCIAL RATIOS
Total assets 21.7% 22.5% $ 30,011 $ 26,394
Working capital 14.1 17.0 3,882 3,860
Merchandise inventories 18.3 24.4 8,338 6,725
Net property and equipment 21.4 26.7 17,168 15,375
Long-term debt 0.3 4.6 1,321 1,250
Stockholders' equity 22.8 24.0 19,802 18,082
Book value per share ($) 21.0 22.0 8.38 7.71
Long-term debt-to-equity (%) -- -- 6.7 6.9
Current ratio -- -- 1.48:1 1.59:1
Inventory turnover -- -- 5.3x 5.4x
Return on invested capital (%) -- -- 18.8 18.3
=================================================================================================================================
STATEMENT OF CASH FLOWS DATA
Depreciation and amortization 26.1% 29.1% $ 903 $ 764
Capital expenditures(3) 13.4 20.2 2,749 3,398
Cash dividends per share ($) 28.5 26.5 0.21 0.17
=================================================================================================================================
STORE DATA (4)
Number of stores 19.7% 21.8% 1,532 1,333
Square footage at fiscal year-end 20.3 23.0 166 146
Increase in square footage (%) -- -- 14.1 18.5
Average square footage per store (in thousands) 0.4 1.0 108 109
=================================================================================================================================
STORE SALES AND OTHER DATA
Comparable store sales increase (%)(5) -- -- -- --
Weighted average weekly sales per operating store (in
thousands)(4) (1.4)% 0.6% $ 772 $ 812
Weighted average sales per square foot ($)(4,5) (1.8) (0.4) 370 388
Number of customer transactions(4) 16.1 19.9 1,161 1,091
Average sale per transaction ($)(4) 2.5 2.7 49.43 48.64
Number of associates at fiscal year-end 17.7 21.9 280,900 256,300
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Fiscal years 2001 and 1996 include 53 weeks; all other fiscal years reported
include 52 weeks.
(2) Diluted earnings per share for fiscal 1997, excluding a $104 million
non-recurring charge, were $0.55.
(3) Excludes payments for businesses acquired (net, in millions) for fiscal
years 2002 ($235), 2001 ($190), 2000 ($26), 1999 ($101), 1998 ($6) and 1997
($61).
42 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
2000 1999 1998 1997 1996(1) 1995 1994 1993
===================================================================================================================================
STATEMENT OF EARNINGS DATA
Net sales $ 45,738 $ 38,434 $ 30,219 $ 24,156 $ 19,535 $ 15,470 $ 12,477 $ 9,239
Net sales increase(%) 19.0 27.2 25.1 23.7 26.3 24.0 35.0 29.2
Earnings before provision for income taxes 4,217 3,804 2,654 1,898 1,535 1,195 980 737
Net earnings 2,581 2,320 1,614 1,160 938 732 605 457
Net earnings increase(%) 11.3 43.7 31.9 23.7 28.2 21.0 32.2 26.1
Diluted earnings per share($)(2) 1.10 1.00 0.71 0.52 0.43 0.34 0.29 0.22
Diluted earnings per share increase(%) 10.0 40.8 29.1 20.9 26.5 17.2 31.8 22.2
Diluted weighted average number of common shares 2,352 2,342 2,320 2,287 2,195 2,151 2,142 2,132
Gross margin - % of sales 29.9 29.7 28.5 28.1 27.8 27.7 27.9 27.7
Selling and store operating expense - % of sales 18.6 17.8 17.7 17.8 18.0 18.0 17.8 17.6
Pre-opening expense - % of sales 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.4
General and administrative expense - % of sales 1.8 1.7 1.7 1.7 1.7 1.7 1.8 2.0
Net interest income (expense) - % of sales -- -- -- -- 0.1 0.1 (0.1) 0.3
Earnings before provision for income taxes
- - % of sales 9.2 9.9 8.8 7.9 7.9 7.7 7.8 8.0
Net earnings - % of sales 5.6 6.0 5.3 4.8 4.8 4.7 4.8 5.0
===================================================================================================================================
BALANCE SHEET DATA AND FINANCIAL RATIOS
Total assets $ 21,385 $ 17,081 $ 13,465 $ 11,229 $ 9,342 $ 7,354 $ 5,778 $ 4,701
Working capital 3,392 2,734 2,076 2,004 1,867 1,255 919 994
Merchandise inventories 6,556 5,489 4,293 3,602 2,708 2,180 1,749 1,293
Net property and equipment 13,068 10,227 8,160 6,509 5,437 4,461 3,397 2,371
Long-term debt 1,545 750 1,566 1,303 1,247 720 983 874
Stockholders' equity 15,004 12,341 8,740 7,098 5,955 4,988 3,442 2,814
Book value per share ($) 6.46 5.36 3.95 3.23 2.75 2.32 1.69 1.39
Long-term debt-to-equity (%) 10.3 6.1 17.9 18.4 20.9 14.4 28.6 31.1
Current ratio 1.77:1 1.75:1 1.73:1 1.82:1 2.01:1 1.89:1 1.76:1 2.02:1
Inventory turnover 5.1x 5.4x 5.4x 5.4x 5.6x 5.5x 5.7x 5.9x
Return on invested capital (%) 19.6 22.5 19.3 16.1 16.3 16.3 16.5 13.9
===================================================================================================================================
STATEMENT OF CASH FLOWS DATA
Depreciation and amortization $ 601 $ 463 $ 373 $ 283 $ 232 $ 181 $ 130 $ 90
Capital expenditures(3) 3,574 2,618 2,094 1,464 1,248 1,308 1,220 900
Cash dividends per share ($) 0.16 0.11 0.08 0.06 0.05 0.04 0.03 0.02
===================================================================================================================================
STORE DATA(4)
Number of stores 1,134 930 761 624 512 423 340 264
Square footage at fiscal year-end 123 100 81 66 54 44 35 26
Increase in square footage (%) 22.6 23.5 22.8 23.1 21.6 26.3 33.2 26.3
Average square footage per store (in thousands) 108 108 107 106 105 105 103 100
===================================================================================================================================
STORE SALES AND OTHER DATA
Comparable store sales increase (%)(5) 4 10 7 7 7 3 8 7
Weighted average weekly sales per operating
store (in thousands)(4) $ 864 $ 876 $ 844 $ 829 $ 803 $ 787 $ 802 $ 764
Weighted average sales per square foot ($)(4,5) 415 423 410 406 398 390 404 398
Number of customer transactions(4) 937 797 665 550 464 370 302 236
Average sale per transaction ($)(4) 48.65 47.87 45.05 43.63 42.09 41.78 41.29 39.13
Number of associates at fiscal year-end 227,300 201,400 156,700 124,400 98,100 80,800 67,300 50,600
- -----------------------------------------------------------------------------------------------------------------------------------
(4) Includes all retail locations in excess of 50,000 square feet and therefore
excludes Apex Supply Company, Georgia Lighting, Maintenance Warehouse, Your
"other" Warehouse, Designplace Direct (formerly National Blinds and
Wallpaper) and HD Builder Solutions Group locations.
(5) Adjusted to reflect the first 52 weeks of the 53-week fiscal years in 2001
and 1996.
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 43
CORPORATE AND STOCKHOLDER INFORMATION
THE HOME DEPOT, INC. AND SUBSIDIARIES
STORE SUPPORT CENTER
The Home Depot, Inc.
2455 Paces Ferry Road, NW
Atlanta, GA 30339-4024
Telephone: (770) 433-8211
THE HOME DEPOT WEB SITE
www.homedepot.com
TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company, N.A.
P.O. Box 43016
Providence, RI 02940-3010
Telephone: (800) 577-0177
Internet address: www.equiserve.com
INDEPENDENT AUDITORS
KPMG LLP
Suite 2000
303 Peachtree Street, NE
Atlanta, GA 30308
STOCK EXCHANGE LISTING
New York Stock Exchange
Trading symbol - HD
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:00 a.m., Central Time, on
May 30, 2003, at The Field Museum of Natural History, James Simpson Theatre,
1400 South Lake Shore Drive, Chicago, IL 60605.
NUMBER OF STOCKHOLDERS
As of March 24, 2003, there were approximately 207,516 stockholders of record
and approximately 2,273,112 individual stockholders holding stock under
nominee security position listings.
DIVIDENDS DECLARED PER COMMON SHARE
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------
Fiscal 2002 $0.05 $0.05 $0.06 $0.06
Fiscal 2001 $0.04 $0.04 $0.05 $0.05
===================================================================
DIRECT STOCK PURCHASE/DIVIDEND REINVESTMENT PLAN
New investors may make an initial investment, and stockholders of record may
acquire additional shares of The Home Depot, Inc.'s common stock through the
Company's direct stock purchase and dividend reinvestment plan. Subject to
certain requirements, initial cash investments, cash dividends and/or additional
optional cash purchases may be invested through this plan.
To obtain enrollment materials, including the prospectus, access The Home
Depot web site, or call 1-877-HD-SHARE. For all other communications regarding
these services, contact the Transfer Agent and Registrar.
FINANCIAL AND OTHER COMPANY INFORMATION
To request a copy of the Company's Annual Report on Form 10-K for the fiscal
year ended February 2, 2003 (without exhibits), to be mailed to you at no cost,
please contact:
The Home Depot, Inc.
Investor Relations
2455 Paces Ferry Road, NW
Atlanta, GA 30339-4024
Telephone: (770) 384-4388
In addition, financial reports, recent filings with the Securities and
Exchange Commission (including Form 10-K), store locations, news releases and
other Company information are available on The Home Depot web site.
QUARTERLY STOCK PRICE RANGE
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------
Fiscal 2002
High $52.28 $49.25 $34.82 $29.18
Low $45.17 $27.15 $23.13 $20.10
Fiscal 2001
High $49.00 $53.73 $50.90 $52.04
Low $38.11 $44.60 $30.30 $37.15
- ----------------------------------------------------------
ABOUT THIS REPORT:
Consistent with The Home Depot's commitment to the environment, portions of this
report are printed on paper that is certified in accordance with the Principles
and Criteria of the Forest Stewardship Council (FSC). This certification ensures
that the fiber from which the paper is manufactured comes partially from
certified forests that are managed in a way that is socially beneficial,
environmentally responsible and economically viable. The paper used in the cover
consists of at least 24.1% FSC fiber and at least 21.6% post consumer fiber
while the financial section of this report consists of at least 32% FSC fiber
and at least 11.7% post consumer fiber.
Design: Corporate Reports Inc./Atlanta, GA
Principal Photography: Mike Hemberger
Other Photography: Phillip Vullo
Printer: Wallace/Hillside Printing
44 THE HOME DEPOT, INC. 2002 ANNUAL REPORT
HOME DEPOT BOARD OF DIRECTORS
AND LEADERSHIP TEAM
[PHOTO]
<Table>
<Caption>
DIRECTORS
Gregory D. Brenneman 1,2 William S. Davila 1,2 Bonnie G. Hill 1,4* Board of Directors
Chairman and President Emeritus President Committee Membership:
Chief Executive Officer The Vons Companies, Inc. B. Hill Enterprises, LLC 1 Audit
TurnWorks, Inc. 2 Compensation
Claudio X. Gonzalez 1,2* Kenneth G. Langone 3,4,5* 3 Executive
Richard H. Brown 4,5 Chairman and Lead Director; Chairman of the 4 Human Resources
Former Chairman and Chief Executive Officer Board, Chief Executive Officer, 5 Nominating and Corporate
Chief Executive Officer Kimberly-Clark de Mexico, and President Governance
Electronic Data Systems S.A. de C.V. Invemed Associates, Inc. 6 IT Advisory Council
Corporation * Chair
Richard A. Grasso, 2,5,6 Robert L. Nardelli 3*
John L. Clendenin 1*,3,5 Chairman and Chairman, President, and
Retired Chairman, President, Chief Executive Officer Chief Executive Officer
and Chief Executive Officer New York Stock Exchange The Home Depot, Inc.
BellSouth Corporation
Milledge A. Hart, III 3,4,5,6* Roger S. Penske 4,5,6
Berry R. Cox 2,3,6 Chairman of the Board Chairman of the Board
Chairman Hart Group, Inc. Penske Corporation
Berry R. Cox, Inc.
LEADERSHIP TEAM
Robert L. Nardelli Dennis M. Donovan Wayne Gibson James A. Stoddart
Chairman, President, and Executive Vice President, Senior Vice President, Division President, HD Supply
Chief Executive Officer Human Resources Global Logistics
Thomas V. Taylor, Jr.
Francis S. Blake Jerry W. Edwards Bruce A. Merino Division President, Eastern
Executive Vice President, Executive Vice President, Division President, Western
Business Development Merchandising Annette M. Verschuren
and Corporate Operations William E. Patterson Division President, Canada
Frank L. Fernandez Division President, Central
John H. Costello Executive Vice President, Robert J. Wittman
Executive Vice President, Secretary, and General Counsel Eric V. Peterson Division President,
Chief Marketing Officer Division President, Northwest EXPO Design Center
Carol B. Tome
Robert P. DeRodes Executive Vice President, Troy A. Rice
Executive Vice President, Chief Financial Officer Senior Vice President,
Chief Information Officer Operations
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The Home Depot, Inc. and Subsidiaries
at March 24, 2003