1
EXHIBIT 13
TEN YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
[Excerpts]
The Home Depot, Inc. and Subsidiaires
AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED
5-Year Annual 10-Year Annual
Compound Compound
Growth Rate Growth Rate 1996(1) 1995
- --------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA
Net sales 30.6% 34.5% $19,535,503 $15,470,358
Net sales increase (%) -- -- 26.3 24.0
Earnings before taxes 31.1 41.7 1,534,769 1,195,303
Net earnings 30.4 44.4 937,739 731,523
Net earnings increase (%) -- -- 28.2 21.0
Net earnings per share ($) 26.5 35.9 1.94 1.54
Net earnings per share increase (%) -- -- 26.0 16.7
Weighted average number of shares 3.2 6.1 487,752 477,977
Gross margin - % of sales -- -- 27.8 27.7
Store selling and operating expense - % of sales -- -- 18.0 18.0
Pre-opening expense - % of sales -- -- .3 .4
General and administrative expense - % of sales -- -- 1.7 1.7
Net interest income (expense) - % of sales -- -- .1 .1
Earnings before taxes - % of sales -- -- 7.9 7.7
Net earnings - % of sales -- -- 4.8 4.7
========================================================================================================
BALANCE SHEET DATA AND FINANCIAL RATIOS
Total assets 30.1% 37.2% $ 9,341,710 $ 7,354,033
Working capital 24.5 35.3 1,867,247 1,255,487
Merchandise inventories 32.5 32.1 2,708,283 2,180,318
Net property and equipment 34.1 41.5 5,437,046 4,461,024
Long-term debt 35.7 26.7 1,246,593 720,080
Stockholders' equity 28.6 43.3 5,955,186 4,987,766
Book value per share ($) 25.3 36.3 12.39 10.45
Long-term debt to equity (%) -- -- 20.9 14.4
Current ratio -- -- 2.01:1 1.89:1
Inventory turnover -- -- 5.6x 5.5x
Return on beginning equity (%) -- -- 18.8 21.3
========================================================================================================
STATEMENT OF CASH FLOWS DATA
Depreciation and amortization 34.8% 38.9% $ 232,340 $ 181,205
Capital expenditures 23.6 37.3 1,248,211 1,308,375
Cash dividends per share ($) 35.7 -- .23 .19
========================================================================================================
STORE DATA
Number of stores 24.1% 23.9% 512 423
Number of states 20.4 18.4 38 31
Number of Canadian provinces -- -- 3 3
Square footage at year-end 26.8 27.3 53,926 44,356
Change in square footage (%) -- -- 21.6 26.3
Average square footage per store 2.0 2.8 105 105
========================================================================================================
STORE SALES AND OTHER DATA
Comparable store sales increase (%) (2) -- -- 7 3
Average total company weekly sales 30.1% 34.2% $ 368,594 $ 297,507
Weighted average weekly sales per operating store 4.9 8.5 803 787
Weighted average sales per square foot ($) (2) 2.7 5.6 398 390
Number of customer transactions 26.0 29.9 464,089 370,317
Average sale per transaction ($) 3.7 3.5 42.09 41.78
Number of associates at year-end (actual) 28.5 31.0 98,100 80,800
========================================================================================================
2
TEN YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
[Excerpts]
The House Depot, Inc. and Subsidiaries
AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED
1994 1993 1992
- -------------------------------------------------------------------------------------------
Net sales $ 12,476,697 $9,238,763 $7,148,436
Net sales increase (%) 35.0 29.2 39.2
Earnings before taxes 979,751 736,871 575,973
Net earnings 604,501 457,401 362,863
Net earnings increase (%) 32.2 26.1 45.6
Net earnings per share ($) 1.32 1.01 .82
Net earnings per share increase (%) 30.7 23.2 36.7
Weighted average number of shares 475,947 453,037 444,989
Gross margin - % of sales 27.9 27.7 27.6
Store selling and operating expense - % of sales 17.8 17.6 17.4
Pre-opening expense - % of sales .4 .4 .4
General and administrative expense - % of sales 1.8 2.0 2.1
Net interest income (expense) - % of sales (.1) .3 .4
Earnings before taxes - % of sales 7.8 8.0 8.1
Net earnings - % of sales 4.8 5.0 5.1
===========================================================================================
BALANCE SHEET DATA AND FINANCIAL RATIOS
Total assets $ 5,778,041 $4,700,889 $3,931,790
Working capital 918,724 993,963 807,028
Merchandise inventories 1,749,312 1,293,477 939,824
Net property and equipment 3,397,237 2,370,904 1,607,984
Long-term debt 983,369 874,048 843,672
Stockholders' equity 3,442,223 2,814,100 2,304,081
Book value per share ($) 7.59 6.26 5.20
Long-term debt to equity (%) 28.6 31.1 36.6
Current ratio 1.76:1 2.02:1 2.07:1
Inventory turnover 5.7x 5.9x 6.3x
Return on beginning equity (%) 21.5 19.9 21.5
===========================================================================================
STATEMENT OF CASH FLOWS DATA
Depreciation and amortization $ 129,609 $ 89,839 $ 69,536
Capital expenditures 1,220,180 900,452 437,278
Cash dividends per share ($) .15 .11 .08
===========================================================================================
STORE DATA
Number of stores 340 264 214
Number of states 28 23 19
Number of Canadian provinces 3 -- --
Square footage at year-end 35,133 26,383 20,897
Change in square footage (%) 33.2 26.3 26.8
Average square footage per store 103 100 98
===========================================================================================
STORE SALES AND OTHER DATA
Comparable store sales increase (%) (2) 8 7 15
Average total company weekly sales $ 239,936 $ 177,669 $ 137,470
Weighted average weekly sales per operating store 802 764 724
Weighted average sales per square foot ($) (2) 404 398 387
Number of customer transactions 302,181 236,101 189,493
Average sale per transaction ($) 41.29 39.13 37.72
Number of associates at year-end (actual) 67,300 50,600 38,900
===========================================================================================
(1) Fiscal year 1996 consisted of 53 weeks; all other years reported consisted
of 52 weeks.
(2) Adjusted to reflect the first 52 weeks of the 53-week fiscal year in 1996.
3
Management's Discussion and Analysis of Results
of Operations and Financial Condition
THE HOME DEPOT, INC. AND SUBSIDIARIES
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 (DECREASE)
OF DOLLAR AMOUNTS
FISCAL YEAR(1) ------------------------
SELECTED CONSOLIDATED ------------------------------------ 1996 1995
STATEMENTS OF EARNINGS DATA 1996 1995 1994 VS. 1995 VS. 1994
- ---------------------------------------------------------------------------------------------------------------
NET SALES 100.0% 100.0% 100.0% 26.3% 24.0%
GROSS PROFIT 27.8 27.7 27.9 26.8 23.0
OPERATING EXPENSES:
Selling and Store Operating 18.0 18.0 17.8 26.5 25.6
Pre-Opening 0.3 0.4 0.4 4.5 2.0
General and Administrative 1.7 1.7 1.8 20.3 16.9
- ---------------------------------------------------------------------------------------------------------------
Total Operating Expenses 20.0 20.1 20.0 25.6 24.3
- ---------------------------------------------------------------------------------------------------------------
OPERATING INCOME 7.8 7.6 7.9 30.0 19.6
INTEREST INCOME (EXPENSE):
Interest and Investment Income 0.1 0.1 0.2 30.5 (31.3)
Interest Expense - - (0.3) 287.8 (88.5)
- ---------------------------------------------------------------------------------------------------------------
Interest, Net 0.1 0.1 (0.1) (38.6) NM(2)
MINORITY INTEREST - - - NM(2) (92.1)
- ---------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 7.9 7.7 7.8 28.4 22.0
INCOME TAXES 3.1 3.0 3.0 28.7 23.6
- ---------------------------------------------------------------------------------------------------------------
NET EARNINGS 4.8% 4.7% 4.8% 28.2% 21.0%
===============================================================================================================
SELECTED CONSOLIDATED SALES DATA
Numer of Transactions (000s) 464,089 370,317 302,181 25.3% 22.5%
Average Sale Per Transaction $ 42.09 $ 41.78 $ 41.29 0.7 1.2
Weighted Average Weekly Sales Per Operating Store $803,000 $787,000 $802,000 2.0 (1.9)
Weighted Average Sales Per Square Foot $ 398.29(3) $ 390.32 $ 404.04 2.0 (3.4)
- ---------------------------------------------------------------------------------------------------------------
(1)Fiscal years 1996, 1995 and 1994 refer to the fiscal years ended February 2,
1997; January 28, 1996; and January 29, 1995, respectively.
(2)Not meaningful.
(3)Adjusted to reflect the first 52 weeks of the 53-week fiscal year in 1996.
FORWARD-LOOKING STATEMENTS: Certain written and oral statements made by or with
the approval of an authorized executive officer of the Company may constitute
"forward-looking statements" as defined under the Private Securities Litigation
Reform Act of 1995. Words or phrases such as "should result, are expected to, we
anticipate, we estimate, we project" or similar expressions are intended to
identify forward-looking statements. These statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from the Company's historical experience and its present expectations or
projections. These risks and uncertainties include, but are not limited to,
unanticipated weather conditions, stability of costs and availability of
sourcing channels, conditions affecting the acquisition, development and
ownership of real estate, and the impact of competition. Caution should be taken
not to place undue reliance on any such forward-looking statements since such
statements speak only as of the date of the making of such statements.
The Home Depot 15
4
Management's Discussion and Analysis of Results of Operations and Financial
Condition (continued)
THE HOME DEPOT, INC. AND SUBSIDIARIES
Results of Operations: For an understanding of the significant factors that
influenced the Company's performance during the past three fiscal years, the
following discussion should be read in conjunction with the consolidated
financial statements presented in this annual report.
FISCAL YEAR ENDED FEBRUARY 2, 1997 COMPARED TO JANUARY 28, 1996
Fiscal 1996 consisted of 53 weeks compared to 52 weeks in fiscal 1995. Sales for
fiscal 1996 increased 26% to $19,535,503,000 from $15,470,358,000 in fiscal
1995. This increase was attributable to, among other things, full year sales
from the 83 new stores opened during fiscal 1995, a 7% comparable
store-for-store sales increase, and 89 new store openings and 7 store
relocations during fiscal 1996. A portion of this increase was also attributable
to the additional week of sales in fiscal 1996.
Gross profit as a percent of sales was 27.8% for fiscal 1996 compared to
27.7% for fiscal 1995. The improvement resulted primarily from more effective
buying practices, which resulted in lowering the cost of merchandise, and to
changes in merchandise mix.
Operating expenses as a percent of sales were 20.0% for fiscal 1996
compared to 20.1% for fiscal 1995. Selling and store operating expenses as a
percent of sales were 18.0% for both fiscal 1996 and 1995. Net advertising
expenses decreased from fiscal 1995 primarily due to economies realized from
increased national advertising. In addition, fixed occupancy expenses as a
percent of sales were slightly lower than last year due to higher sales volumes
related to the extra week in fiscal 1996. These decreases in selling and store
operating expenses were offset by higher expenses, as a percent of sales,
related to store management bonuses and the employee stock ownership plan. In
addition, expenses associated with store relocations were higher as a percent
of sales than fiscal 1995 primarily due to the adoption in fiscal 1996 of a new
accounting standard which changed the timing of recognition of these expenses.
Pre-opening expenses as a percent of sales decreased to 0.3% in fiscal 1996
from 0.4% in fiscal 1995 due to efficiencies achieved in the new store opening
process in fiscal 1996.
Interest and investment income was 0.1% of sales in fiscal 1996 and 1995.
Investment income in fiscal 1996 was primarily generated from the net proceeds
of the $1,104,000,000 3-1/4% Convertible Subordinated Notes ("3-1/4% Notes")
issued in October 1996. A portion of the proceeds from the 3-1/4% Notes was used
to repay commercial paper obligations (see Liquidity and Capital Resources).
Interest expense also increased due to the higher borrowings associated with
the 3-1/4% Notes.
The Company's combined federal and state effective income tax rate was
38.9% for fiscal 1996 compared to 38.8% in fiscal 1995. This increase was
principally attributable to lower tax-advantaged investments and a higher
effective state income tax rate, partially offset by various federal and state
tax credits.
Net earnings as a percent of sales was 4.8% for fiscal 1996 compared to
4.7% for fiscal 1995, reflecting higher gross profit and lower operating
expenses partially offset by a higher effective income tax rate, as described
above. Earnings per share was $1.94 for fiscal 1996 compared to $1.54 for
fiscal 1995.
FISCAL YEAR ENDED JANUARY 28, 1996 COMPARED TO JANUARY 29, 1995
Sales for fiscal year 1995 increased 24% to $15,470,358,000 from
$12,476,697,000 in fiscal 1994. This increase was attributable to, among other
things, full year sales from the 69 new stores opened during fiscal 1994, a 3%
comparable store-for-store sales increase, and 83 new store openings and 5
store relocations during fiscal 1995.
Gross profit as a percent of sales was 27.7% for fiscal 1995 compared to
27.9% for fiscal 1994. The lower gross profit percentage resulted primarily
from maintaining competitive pressure in many markets as well as changes in
merchandise mix.
Operating expenses as a percent of sales increased to 20.1% in fiscal 1995
compared to 20.0% in fiscal 1994. Selling and store operating expenses as a
percent of sales increased to 18.0% in fiscal 1995 compared to 17.8% in fiscal
1994. This increase was attributable to, among other things, higher store
payroll expenses due to higher average hourly wage rates resulting from a
greater percentage of long-term versus newly-hired associates, and higher
credit card costs due to an increased percentage of credit sales. The increase
in selling and store operating expenses as a percent of sales was partially
offset by lower general and administrative expenses as a percent of sales due
to continued emphasis on controlling costs.
Interest and investment income as a percent of sales decreased to 0.1% in
fiscal 1995 compared to 0.2% in fiscal 1994. This decrease was attributable to
a lower investment base due to the utilization of funds for capital expansion,
partially offset by higher yields. Interest expense as a percent of sales
decreased to less than 0.1% for fiscal 1995 compared to 0.3% for fiscal 1994.
This decrease was attributable to the conversion to common stock of the 4-1/2%
Convertible Subordinated Notes on March 31, 1995, and higher capitalized
interest.
The Company's combined federal and state effective income tax rate was
38.8% for fiscal 1995 compared to 38.3% for fiscal 1994. This increase was
attributable to lower tax-advantaged investments, a higher effective state
income tax rate and the expiration of targeted jobs tax credits.
Net earnings as a percent of sales was 4.7% for fiscal 1995 compared to
4.8% for fiscal 1994, reflecting lower gross profit, higher operating expenses
and a higher effective income tax rate, partially offset by lower interest
expense, as described above. Earnings per share was $1.54 for fiscal 1995
compared to $1.32 for fiscal 1994.
16 The Home Depot
5
Liquidity And Capital Resources: Cash flow generated from store operations
provides the Company with a significant source of liquidity. Additionally, a
significant portion of the Company's inventory is financed under vendor credit
terms.
The Company plans to open approximately 111 new stores and relocate 7
existing stores during fiscal 1997. It is anticipated that approximately 71% of
these locations will be owned and the remainder will be leased. The Company
also plans to open approximately 140 stores, including relocations, in fiscal
1998. In June 1996, the Company entered into a $300,000,000 operating lease
agreement for the purpose of financing construction costs of new stores. Under
the agreement, the lessor will purchase the properties, pay for the
construction costs and subsequently lease the facilities to the Company. The
lease provides for substantial residual value guarantees to the lessor and
includes purchase options at original cost on each property. This agreement
will primarily cover selected new stores planned to open in fiscal 1997. In
addition, some planned locations for fiscal 1997 will be leased individually,
and it is expected that many locations may be obtained through the purchase of
pre-existing leasehold interests, the acquisition of land parcels and the
construction or purchase of buildings. While the cost of new stores to be
constructed and owned by the Company varies widely, principally due to land
costs, new store costs are currently estimated to average approximately
$13,300,000 per location. The Company may purchase leasehold interests at
varying amounts depending upon the value of such properties. The cost to
remodel and fixture stores to be leased is expected to average approximately
$2,400,000 per store. In addition, each new store will require approximately
$3,100,000 to finance inventories, net of vendor financing.
During fiscal 1996, the Company issued, through a public offering,
$1,104,000,000 of 3-1/4% Convertible Subordinated Notes due October 1, 2001.
The 3-1/4% Notes were issued at par and are convertible into shares of the
Company's common stock at any time prior to maturity, unless previously
redeemed, at a conversion price of $69.125 per share, subject to adjustment
under certain conditions. The 3-1/4% Notes may be redeemed at any time on or
after October 2, 1999, at the option of the Company, in whole or in part, at a
redemption price of 100.813% of their principal amount and after October 1,
2000, at 100% of their principal amount. The Company used a portion of the net
proceeds from the offering to repay outstanding commercial paper obligations,
to finance a portion of the Company's capital expenditure program, including
planned store expansions and renovations, and for general corporate purposes.
The remaining proceeds were primarily invested in short-term securities and are
planned to be used for future capital expenditures and general corporate
purposes.
During fiscal 1995, the Company increased its commercial paper program to
a maximum of $800,000,000. As of February 2, 1997, there was no commercial
paper outstanding under the program. In connection with the commercial paper
program, the Company has a back-up credit facility with a consortium of banks
for $800,000,000. The facility expires in December 2000. The facility contains
various restrictive covenants, none of which is expected to impact the
Company's liquidity or capital resources.
As of February 2, 1997, the Company had $558,436,000 in cash and cash
equivalents and short-term investments, as well as $8,480,000 in long-term
investments. Management believes that its current cash position, the proceeds
from short-term and long-term investments, internally generated funds, funds
available from its $800,000,000 commercial paper program, funds available from
the $300,000,000 operating lease agreement, and/or the ability to obtain
alternate sources of financing should enable the Company to complete its
capital expenditure programs, including store expansion and renovation, through
the next several fiscal years.
Recent Developments: On January 16, 1997, the Company entered into a definitive
agreement with Maintenance Warehouse/America Corp. ("Maintenance Warehouse") to
acquire Maintenance Warehouse through the exchange of all the common stock of
Maintenance Warehouse for shares of The Home Depot common stock. Maintenance
Warehouse, which had sales of approximately $130 million in 1996, is the
leading direct-mail marketer of maintenance, repair and operations products
serving the U.S. building and facilities management market. The San Diego-based
company will continue to operate under its own name as a subsidiary of The Home
Depot. This transaction will be accounted for as a pooling of interests. The
all-stock transaction was completed on March 14, 1997.
On January 28, 1997, the Company signed a letter of intent to form a joint
venture with S.A.C.I. Falabella, a leading department store retailer in Chile,
to facilitate The Home Depot's entry into the Chilean market. The first Home
Depot store in Chile is expected to open in the first half of fiscal 1998. The
Home Depot's controlling share of the joint venture will be 66.67%. The
alliance with S.A.C.I. Falabella is expected to enhance Home Depot's presence
in the Chilean market, offer attractive real estate opportunities and provide
assistance with, among other things, systems, credit marketing and distribution
logistics.
Recent Accounting Pronouncements: In March 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share." SFAS 128 requires companies with complex
capital structures that have publicly held common stock or common stock
equivalents to present both basic and diluted earnings per share ("EPS") on the
face of the income statement. The presentation of basic EPS replaces the
presentation of primary EPS currently required by Accounting Principles Board
Opinion No. 15 ("APB No. 15"), "Earnings Per Share." Basic EPS is calculated as
income available to common stockholders divided by the weighted average number
of common shares outstanding during the period. Diluted EPS (previously
referred to as fully diluted EPS) is calculated using the "if converted" method
for convertible securities and the treasury stock method for options and
warrants as prescribed by APB No. 15. This statement is effective for financial
statements issued for interim and annual periods ending after December 15,
1997. The Company does not believe the adoption of SFAS 128 in fiscal 1997 will
have a significant impact on the Company's reported EPS.
Impact Of Inflation And Changing Prices: Although the Company cannot accurately
determine the precise effect of inflation on its operations, it does not
believe inflation has had a material effect on sales or results of operations.
The Home Depot 17
6
Consolidated Statements of Earnings
THE HOME DEPOT, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
FISCAL YEAR ENDED
-------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
(53 WEEKS) (52 WEEKS) (52 WEEKS)
- ---------------------------------------------------------------------------------------------------------
NET SALES $19,535,503 $15,470,358 $12,476,697
COST OF MERCHANDISE SOLD 14,101,423 11,184,772 8,991,204
- ---------------------------------------------------------------------------------------------------------
GROSS PROFIT 5,434,080 4,285,586 3,485,493
OPERATING EXPENSES:
Selling and Store Operating 3,521,429 2,783,956 2,216,921
Pre-Opening 54,709 52,342 51,307
General and Administrative 324,292 269,464 230,456
- ---------------------------------------------------------------------------------------------------------
Total Operating Expenses 3,900,430 3,105,762 2,498,684
- ---------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,533,650 1,179,824 986,809
INTEREST INCOME (EXPENSE):
Interest and Investment Income 25,577 19,597 28,510
Interest Expense (note 2) (16,087) (4,148) (35,949)
- ---------------------------------------------------------------------------------------------------------
Interest, Net 9,490 15,449 (7,439)
MINORITY INTEREST (note 9) (8,371) 30 381
- ---------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 1,534,769 1,195,303 979,751
INCOME TAXES (note 3) 597,030 463,780 375,250
- ---------------------------------------------------------------------------------------------------------
NET EARNINGS $ 937,739 $ 731,523 $ 604,501
=========================================================================================================
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 1.94 $ 1.54 $ 1.32
=========================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES 487,752 477,977 475,947
=========================================================================================================
See accompanying notes to consolidated financial statements.
18 The Home Depot
7
Consolidated Balance Sheets
THE HOME DEPOT, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
FEBRUARY 2, JANUARY 28,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 146,006 $53,269
Short-Term Investments, including current maturities of long-term investments (note 7) 412,430 54,756
Receivables, Net 388,416 325,384
Merchandise Inventories 2,708,283 2,180,318
Other Current Assets 54,238 58,242
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 3,709,373 2,671,969
- ---------------------------------------------------------------------------------------------------------------------
Property and Equipment, at cost:
Land 1,855,251 1,510,619
Buildings 2,470,310 1,885,742
Furniture, Fixtures and Equipment 1,083,638 857,082
Leasehold Improvements 339,498 314,933
Construction in Progress 284,369 308,365
Capital Leases (notes 2 and 5) 116,750 92,154
- ---------------------------------------------------------------------------------------------------------------------
6,149,816 4,968,895
Less Accumulated Depreciation and Amortization 712,770 507,871
- ---------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 5,437,046 4,461,024
- ---------------------------------------------------------------------------------------------------------------------
Long-Term Investments (note 7) 8,480 25,436
Notes Receivable 39,518 54,715
Cost in Excess of the Fair Value of Net Assets Acquired, net of accumulated
amortization of $14,864 at February 2, 1997 and $10,536 at January 28, 1996 86,540 87,238
Other 60,753 53,651
- ---------------------------------------------------------------------------------------------------------------------
$9,341,710 $7,354,033
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $1,089,736 $ 824,808
Accrued Salaries and Related Expenses 249,356 198,208
Sales Taxes Payable 129,284 113,066
Other Accrued Expenses 322,503 242,859
Income Taxes Payable 48,728 35,214
Current Installments of Long-Term Debt (notes 2, 5 and 6) 2,519 2,327
- ---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,842,126 1,416,482
- ---------------------------------------------------------------------------------------------------------------------
Long-Term Debt, excluding current installments (notes 2, 5 and 6) 1,246,593 720,080
Other Long-Term Liabilities 134,034 115,917
Deferred Income Taxes (note 3) 66,020 37,225
Minority Interest (note 9) 97,751 76,563
STOCKHOLDERS' EQUITY (notes 2 and 4):
Common Stock, par value $0.05. Authorized: 1,000,000,000 shares; issued and outstanding -
480,515,000 shares at February 2, 1997 and 477,106,000 shares at January 28, 1996 24,026 23,855
Paid-in Capital 2,523,093 2,407,815
Retained Earnings 3,406,592 2,579,059
Cumulative Translation Adjustments 2,173 (6,131)
Unrealized Loss on Investments, Net (168) (47)
- ---------------------------------------------------------------------------------------------------------------------
5,955,716 5,004,551
Less: Notes Receivable From ESOP (note 6) - 16,539
Shares Held in Employee Benefit Trust (note 6) 530 246
- ---------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 5,955,186 4,987,766
- ---------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (notes 5, 8 and 9)
$9,341,710 $7,354,033
=====================================================================================================================
See accompanying notes to consolidated financial statements.
The Home Depot 19
8
Consolidated Statements of Stockholders' Equity
THE HOME DEPOT, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
UNREALIZED
COMMON STOCK CUMULATIVE LOSS ON NOTES
------------ PAID-IN RETAINED TRANSLATION INVESTMENTS, RECEIVABLE
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS NET FROM ESOP
- -------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 30, 1994 449,364 $22,468 $1,436,029 $1,400,575 $ (121) $ - $(44,851)
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) 4,001 200 77,720 - - - -
Tax Effect of Sale of Option Shares
by Employees - - 12,709 - - - -
Cumulative Translation Adjustments - - - - (10,766) - -
Repayments of Notes Receivable
from ESOP, Net (note 6) - - - - - - 13,041
Conversion of 4-1/2% Convertible
Subordinated Notes, Net (note 2) - - 5 - - - -
Unrealized Loss on Investments,
Net (note 7) - - - - - (1,495) -
Net Earnings - - - 604,501 - - -
Cash Dividends ($0.15 per share) - - - (67,792) - - -
- --------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 29, 1995 453,365 $22,668 $1,526,463 $1,937,284 $(10,887) $(1,495) $(31,810)
====================================================================================================================
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) 2,967 148 68,310 - - - -
Tax Effect of Sale of Option Shares
by Employees - - 9,728 - - - -
Cumulative Translation Adjustments - - - - 4,756 - -
Repayments of Notes Receivable
from ESOP, Net (note 6) - - - - - - 15,271
Conversion of 4-1/2% Convertible
Subordinated Notes, Net (note 2) 20,774 1,039 803,314 - - - -
Unrealized Gain on Investments,
Net (note 7) - - - - - 1,448 -
Shares Purchased by
Employee Benefit Trust (note 6) - - - - - - -
Net Earnings - - - 731,523 - - -
Cash Dividends ($0.19 per share) - - - (89,748) - - -
- --------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 28, 1996 477,106 $23,855 $2,407,815 $2,579,059 $(6,131) $ (47) $(16,539)
====================================================================================================================
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) 3,409 171 104,324 - - - -
Tax Effect of Sale of Option Shares
by Employees - - 10,954 - - - -
Cumulative Translation Adjustments - - - - 8,304 - -
Repayments of Notes Receivable
from ESOP, Net (note 6) - - - - - - 16,539
Unrealized Loss on Investments,
Net (note 7) - - - - - (121) -
Shares Purchased by
Employee Benefit Trust (note 6) - - - - - - -
Net Earnings - - - 937,739 - - -
Cash Dividends ($0.23 per share) - - - (110,206) - - -
- --------------------------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 2, 1997 480,515 $24,026 $2,523,093 $3,406,592 $2,173 $(168) $0
====================================================================================================================
SHARES
HELD IN
EMPLOYEE TOTAL
BENEFIT STOCKHOLDERS'
TRUST EQUITY
- -------------------------------------------------------------
BALANCE, JANUARY 30, 1994 $ - $2,814,100
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) - 77,920
Tax Effect of Sale of Option Shares
by Employees - 12,709
Cumulative Translation Adjustments - (10,766)
Repayments of Notes Receivable
from ESOP, Net (note 6) - 13,041
Conversion of 4-1/2% Convertible
Subordinated Notes, Net (note 2) - 5
Unrealized Loss on Investments,
Net (note 7) - (1,495)
Net Earnings - 604,501
Cash Dividends ($0.15 per share) - (67,792)
- -------------------------------------------------------------
BALANCE, JANUARY 29, 1995 - $3,442,223
=============================================================
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) - 68,458
Tax Effect of Sale of Option Shares
by Employees - 9,728
Cumulative Translation Adjustments - 4,756
Repayments of Notes Receivable
from ESOP, Net (note 6) - 15,271
Conversion of 4-1/2% Convertible
Subordinated Notes, Net (note 2) - 804,353
Unrealized Gain on Investments,
Net (note 7) - 1,448
Shares Purchased by
Employee Benefit Trust (note 6) (246) (246)
Net Earnings - 731,523
Cash Dividends ($0.19 per share) - (89,748)
- -------------------------------------------------------------
BALANCE, JANUARY 28, 1996 $(246) $4,987,766
=============================================================
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) - 104,495
Tax Effect of Sale of Option Shares
by Employees - 10,954
Cumulative Translation Adjustments - 8,304
Repayments of Notes Receivable
from ESOP, Net (note 6) - 16,539
Unrealized Loss on Investments,
Net (note 7) - (121)
Shares Purchased by
Employee Benefit Trust (note 6) (284) (284)
Net Earnings - 937,739
Cash Dividends ($0.23 per share) - (110,206)
- -------------------------------------------------------------
BALANCE, FEBRUARY 2, 1997 $(530) $5,955,186
=============================================================
See accompanying notes to consolidated financial statements.
20 The Home Depot
9
Consolidated Statements of Cash Flows
THE HOME DEPOT, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
(53 WEEKS) (52 WEEKS) (52 WEEKS)
- -------------------------------------------------------------------------------------------------------
CASH PROVIDED FROM OPERATIONS:
Net Earnings $ 937,739 $ 731,523 $ 604,501
Reconciliation of Net Earnings to Net Cash Provided by Operations:
Depreciation and Amortization 232,340 181,205 129,609
Deferred Income Tax Expense (Benefit) 28,795 17,976 (2,468)
Increase in Receivables, Net (57,937) (69,907) (69,023)
Increase in Merchandise Inventories (525,154) (429,270) (405,197)
Increase in Accounts Payable and Accrued Expenses 434,259 215,633 280,056
Increase (Decrease) in Income Taxes Payable 24,584 36,159 (11,126)
Other 25,484 29,661 (10,870)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations 1,100,110 712,980 515,482
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, net of $53,789, $30,271 and $31,183 of
non-cash capital expenditures in fiscal 1996, 1995 and 1994,
respectively (1,194,422) (1,278,104) (1,100,654)
Acquisition of Canadian Partnership Interest - - (161,548)
Proceeds from Sales of Property and Equipment 21,775 29,357 49,718
Proceeds from Sales of Investments 40,737 30,721 526,696
Purchases of Investments (409,015) (370,327) (230,538)
Proceeds from Maturities of Investments 27,193 416,316 159,396
Repayments of Advances Secured by Real Estate, Net 6,128 (4,955) 2,650
- -------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,507,604) (1,176,992) (754,280)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments of) Issuance of Commercial Paper Obligations, Net (620,000) 520,000 100,000
Proceeds from Long-Term Borrowings, Net 1,092,960 - -
Repayments of Notes Receivable from ESOP 16,539 15,271 13,041
Principal Repayments of Long-Term Debt (2,723) (22,817) (2,175)
Proceeds from Sale of Common Stock, Net 104,495 68,458 77,926
Cash Dividends Paid to Stockholders (110,206) (89,748) (67,792)
Minority Interest Contributions to Partnership 19,012 24,577 19,031
- -------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 500,077 515,741 140,031
- -------------------------------------------------------------------------------------------------------
Increase (Decrease) in Effect of Exchange Rate Changes on Cash 154 386 (76)
Increase (Decrease) in Cash and Cash Equivalents 92,737 52,115 (98,843)
Cash and Cash Equivalents at Beginning of Year 53,269 1,154 99,997
- -------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 146,006 $ 53,269 $ 1,154
=======================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS MADE FOR:
Interest (net of interest capitalized) $ 3,350 $ 21,685 $ 30,537
Income Taxes $ 547,604 $ 407,643 $ 393,915
=======================================================================================================
See accompanying notes to consolidated financial statements.
The Home Depot 21
10
Notes to Consolidated Financial Statements
THE HOME DEPOT, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Home Depot operates
full-service, warehouse-style stores averaging approximately 105,000 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,
which are sold to do-it-yourselfers and to home improvement, construction,
design, and building maintenance professionals. In addition, the Company
operates design centers, which range from 80,000 to 145,000 square feet in
size. At the end of fiscal 1996, the Company operated 483 Home Depot stores and
5 EXPO Design Centers in 38 states in the United States and 24 Home Depot
stores in 3 Canadian provinces. Included in the Company's Consolidated Balance
Sheet at February 2, 1997 are $357,406,000 of net assets of the Canadian
operations.
FISCAL YEAR - The Company's fiscal year is a 52- or 53-week period ending on
the Sunday nearest to January 31. Fiscal year 1996, which ended February 2,
1997, consisted of 53 weeks. Fiscal years 1995 and 1994, which ended January
28, 1996, and January 29, 1995, respectively, consisted of 52 weeks.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries, and its majority-owned
partnership. All significant intercompany transactions have been eliminated in
consolidation.
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 primarily cash equivalents carried at
fair market value and consist of preferred stocks, commercial paper, money
market funds, U.S. government agency securities and tax-exempt notes and bonds.
INVESTMENTS - The Company classifies its investments in one of three
categories: trading, held-to-maturity, or available-for-sale. Trading
securities, which are bought and held primarily for the purpose of selling them
in the near term, are recorded at fair value with gains and losses included in
earnings. Held-to-maturity securities, which are securities that the Company
has the ability and the intent to hold until maturity, are recorded at
amortized cost and adjusted for amortization or accretion of premiums or
discounts. All other investments not included in trading or held-to-maturity
are classified as available-for-sale. The Company's short-term and long-term
investments, consisting primarily of debt securities, have been designated as
being held available-for-sale and, accordingly, are reported at fair value.
Unrealized gains and losses on securities classified as available-for-sale are
reported as a separate component of stockholders' equity until realized. The
cost of investments sold is determined using the specific identification
method. Estimated market values of investments are based on quoted market
prices on the last business day of the fiscal year. A decline in the market
value of any available-for-sale or held-to-maturity security below cost that is
deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security.
MERCHANDISE INVENTORIES - Inventories are stated at the lower of cost
(first-in, first-out) or market, as determined by the retail inventory method.
INCOME TAXES - The Company provides for federal and state income taxes
currently payable as well as for those deferred because of timing differences
between reporting income and expenses for financial statement purposes and
income and expenses for tax purposes. Federal and state tax incentive credits
were recorded as a reduction of income taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates is recognized as
income or expense in the period that includes the enactment date.
22 The Home Depot
11
DEPRECIATION AND AMORTIZATION ~ The Company's buildings, furniture, fixtures
and equipment are depreciated using the straight-line method over the estimated
useful lives of the assets. Improvements to leased premises are amortized on
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
The cost in excess of the fair value of net assets acquired (as discussed
below) is being amortized on a straight-line basis over 40 years. The cost of
purchased software and associated consulting fees is amortized on a
straight-line basis over periods ranging from three to five years.
NOTES RECEIVABLE - Notes receivable which are issued to real estate developers
in connection with development and construction of stores and underlying real
estate are recorded at cost, less an allowance for impaired notes receivable
when necessary.
PRE-OPENING COSTS - Non-capital expenditures associated with opening new stores
are charged to expense as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS - Effective January 29, 1996, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." This statement requires long-lived assets
to be reviewed for impairment when circumstances indicate the carrying amount
of an asset may not be recoverable. An impairment is recognized to the extent
the sum of undiscounted estimated future cash flows expected to result from the
use of the asset is less than the carrying value. Accordingly, when the Company
commits to relocate or close a store, the estimated unrecoverable costs are
charged to expense. Such costs include the estimated loss on sale of land and
building, the book value of abandoned fixtures, equipment and leasehold
improvements, and a provision for the present value of future lease
obligations, less estimated sub-lease income. The implementation of SFAS 121
did not have a material impact on the Company's results of operations.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - Earnings per common and
common equivalent share are based on the weighted average number of shares and
equivalent shares outstanding, which include shares issuable under the
Company's stock plans and shares issuable upon conversion of the Company's
convertible debt instruments.
The Company's 3-1/4% Convertible Subordinated Notes ("3-1/4% Notes"),
issued in October 1996, are common stock equivalents. For fiscal 1996, the
3-1/4% Notes were dilutive and assumed to be converted for purposes of
calculating earnings per share. Earnings per share is calculated by dividing
net earnings, adjusted for tax-effected net interest and issue costs on the
3-1/4% Notes, by weighted average common and common equivalent shares.
The Company's 4-1/2% Convertible Subordinated Notes ("4-1/2% Notes"),
issued in 1990, were common stock equivalents prior to their conversion in
March 1995. For fiscal years 1995 and 1994, the 4-1/2% Notes were dilutive and,
accordingly, shares issuable upon conversion of the 4-1/2% Notes were included
in the earnings per share calculations prior to conversion.
COST IN EXCESS OF THE FAIR VALUE OF NET ASSETS ACQUIRED - Goodwill, which
represents the excess of purchase price over fair value of net assets acquired,
is amortized on a straight-line basis over 40 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining useful life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds.
STOCK COMPENSATION - During fiscal year 1996, the Company adopted Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," which was effective for fiscal years beginning after
December 15, 1995. The statement encourages the use of a fair-value-based
method of accounting for stock-based awards under which the fair value of
stock options is determined on the date of grant and expensed over the vesting
period. Companies may, however, continue to measure compensation costs for
those plans using the method prescribed by Accounting Principles Board Opinion
No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees." Companies
that continue to apply APB No. 25 are required to include pro forma disclosures
of net earnings and earnings per share as if the fair-value-based method of
accounting had been applied. The Company has elected to continue to account for
such plans under the provisions of APB No. 25.
The Home Depot 23
12
Notes to Consolidated Financial Statements (continued)
THE HOME DEPOT, INC. AND SUBSIDIARIES
EMPLOYEE STOCK OWNERSHIP PLAN - For all shares purchased by the Employee Stock
Ownership Plan and Trust ("ESOP") prior to December 31, 1992, the Company's
contributions to the ESOP are determined based on the ESOP's cost of the shares
released to associates. For shares purchased after December 31, 1992, the
Company's contributions to the ESOP are determined based on the fair value of
the shares released to associates as of the release date.
FOREIGN CURRENCY TRANSLATION - The local currency is used as the functional
currency in Canada. The assets and liabilities denominated in foreign currency
are translated into U.S. dollars at the current rate of exchange existing at
year-end, and revenues and expenses are translated at the average monthly
exchange rates. The translation gains and losses are included as a separate
component of stockholders' equity. Transaction gains and losses included in net
earnings are not material.
USE OF ESTIMATES - Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.
RECLASSIFICATIONS - Certain balances in prior fiscal years have been
reclassified to conform with the presentation adopted in the current fiscal
year.
NOTE 2 - LONG-TERM DEBT The Company's long-term debt at the end of fiscal
1996 and 1995 consisted of the following (amounts in thousands):
FEBRUARY 2, 1997 JANUARY 28, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
3-1/4% Convertible Subordinated Notes, due October 1, 2001; convertible
into shares of common stock of the Company at a conversion price of
$69.125 per share; redeemable by the Company at a premium,
plus accrued interest, beginning October 2, 1999 $1,104,000 $ -
Commercial Paper, at a weighted average interest rate of 5.7% at January 28, 1996 - 620,000
Capital Lease Obligations, payable in varying installments through January 31, 2018 (see note 5) 106,013 82,513
Installment Notes Payable; interest imputed at rates between 7.0% and 11.5%;
payable in varying installments through 2017 29,555 10,089
Variable Rate Industrial Revenue Bonds; secured by letters of credit or land; interest rates
averaging 4.2% during fiscal 1996; payable in varying installments through 1999;
$3,000 payable on December 1, 2010 and $5,200 payable on September 1, 2011 9,133 9,367
Other 411 438
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt 1,249,112 722,407
Less current installments 2,519 2,327
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current installments $1,246,593 $ 720,080
====================================================================================================================================
In October 1996, the Company issued, through a public offering,
$1,104,000,000 of 3-1/4% Convertible Subordinated Notes. The 3-1/4% Notes are
convertible into shares of common stock at any time prior to maturity, unless
previously redeemed, at a conversion price of $69.125 per share, subject to
adjustment under certain conditions. The 3-1/4% Notes may be redeemed, in whole
or in part, during the period beginning October 2, 1999 and ending October 1,
2000 at 100.813% of their principal amount and thereafter at 100% of their
principal amount. The Notes are not subject to sinking fund provisions.
The Company has an $800,000,000 commercial paper program supported by a
back-up credit facility with an available commitment amount of $800,000,000.
The back-up credit facility expires December 20, 2000. Outstanding commercial
paper borrowings are classified as long-term debt, as it is the Company's
intention to refinance them on a long-term basis. Covenants related to the
back-up credit
24 The Home Depot
13
facility place limitations on total Company indebtedness, subsidiary
indebtedness and on liens. As of February 2, 1997, the Company was in
compliance with all restrictive covenants.
The restrictive covenants related to letter of credit agreements securing
the industrial revenue bonds are no more restrictive than those referenced or
described above.
Interest expense in the accompanying Consolidated Statements of Earnings
is net of interest capitalized of $23,307,000 in fiscal 1996, $20,767,000 in
fiscal 1995 and $17,559,000 in fiscal 1994.
Maturities of long-term debt (excluding the 3-1/4% Notes) are $2,519,000
for fiscal 1997, $5,889,000 for fiscal 1998, $6,995,000 for fiscal 1999,
$5,129,000 for fiscal 2000 and $2,919,000 for fiscal 2001.
The estimated fair value of the convertible debt borrowing approximates
its carrying value. The estimated fair value of all other long-term borrowings
was approximately $208,923,000 as compared to its carrying value of
$145,112,000. These fair values were estimated using a discounted cash flow
analysis based on the Company's incremental borrowing rate for similar
liabilities.
NOTE 3 - INCOME TAXES The provision for income taxes consisted of the
following (in thousands):
FISCAL YEAR ENDED
--------------------------------------------------------------------
FEBRUARY 2, 1997 JANUARY 28, 1996 JANUARY 29, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Current:
Federal $492,296 $391,111 $330,232
State 75,939 54,693 47,486
- ------------------------------------------------------------------------------------------------------------------------------------
568,235 445,804 377,718
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 23,015 15,021 (1,875)
State 5,780 2,955 (593)
- ------------------------------------------------------------------------------------------------------------------------------------
28,795 17,976 (2,468)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $597,030 $463,780 $375,250
====================================================================================================================================
The Company's combined federal and state effective tax rate for fiscal
years 1996, 1995 and 1994, net of offsets generated by federal and state tax
incentive credits, was approximately 38.9%, 38.8% and 38.3%, respectively. A
reconciliation of income tax expense at the federal statutory rate of 35% to
actual tax expense for the applicable fiscal years follows (in thousands):
FISCAL YEAR ENDED
-----------------------------------------------------
FEBRUARY 2, 1997 JANUARY 28, 1996 JANUARY 29, 1995
- ------------------------------------------------------------------------------------------------------------
Income taxes at federal statutory rate $537,169 $418,356 $342,913
State income taxes, net of federal income tax benefit 53,117 37,471 30,480
Other, net 6,744 7,953 1,857
- ------------------------------------------------------------------------------------------------------------
Total $597,030 $463,780 $375,250
============================================================================================================
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, 1997 and January 28, 1996 were as follows (in thousands):
FISCAL YEAR ENDED
----------------------------------
FEBRUARY 2, 1997 JANUARY 28, 1996
- ------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Accrued self-insurance liabilities $ 68,341 $ 54,489
Other accrued liabilities 45,714 36,359
- ------------------------------------------------------------------------------------------------------------
Net deferred tax assets 114,055 90,848
- ------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Accelerated depreciation (153,171) (110,342)
Other (26,904) (17,731)
- ------------------------------------------------------------------------------------------------------------
Total gross deferred liabilities (180,075) (128,073)
- ------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ (66,020) $ (37,225)
============================================================================================================
The Home Depot 25
14
Notes to Consolidated Financial Statements (continued)
THE HOME DEPOT, INC. AND SUBSIDIARIES
No valuation allowance was recorded against the deferred tax assets at
February 2, 1997 or January 28, 1996. The Company's management believes the
existing net deductible temporary differences comprising the total gross
deferred tax assets will reverse during periods in which the Company generates
net taxable income.
NOTE 4 - EMPLOYEE STOCK PLANS The Company has stock option plans that provide
for the granting of incentive and non-qualified options to purchase the
Company's common stock to selected key associates, officers and directors.
Under the Employee Incentive Stock Option Plan of 1981, options for
43,358,454 shares, net of cancellations, were granted at $0.16 to $18.83 per
share. As of February 2, 1997, all shares granted, net of cancellations, had
been exercised. The 1981 Plan expired on June 1, 1991, and the shares available
for grant were carried over to the 1991 Omnibus Stock Option Plan.
Under the Non-Qualified Stock Option Plan of 1984, options for 679,124
shares, net of cancellations (of which 627,150 had been exercised), were
granted at $1.53 to $9.86 per share. Such options may be exercised at varying
rates commencing on the first anniversary date of the grant and expiring on the
tenth anniversary date of the grant. The 1984 Plan expired on June 1, 1991, and
the shares available for grant were carried over to the 1991 Omnibus Stock
Option Plan.
The provisions of the 1991 Omnibus Stock Option Plan, which became
effective June 1, 1991, authorize a maximum number of shares available for
grant equal to the cumulative number of shares available the previous year plus
one percent of the number of shares of common stock issued and outstanding at
the beginning of each fiscal year the plan is in effect. Under the 1991 Omnibus
Stock Option Plan, options for 14,125,010 shares, net of cancellations (of
which 2,130,539 had been exercised), have been granted at $24.50 to $53.38 per
share. Incentive stock options vest at the rate of 25% per year commencing with
the first anniversary date of the grant and expire after ten years. The
non-qualified stock options have similar terms, however vesting does not begin
until the second anniversary date of the grant. As of February 2, 1997, the
weighted average remaining life of the options was eight years and the
maximum number of shares available under this plan for future grants was
32,442,861.
The per share weighted average fair value of stock options granted
during fiscal years 1996 and 1995 was $13.86 and $14.74, respectively. These
amounts were determined using the Black Scholes option-pricing model which
values options based on the stock price at the grant date, the expected life of
the option, the estimated volatility of the stock, expected dividend payments,
and the risk free interest rate over the expected life of the option. The
dividend yield was calculated by dividing the current annualized dividend by
the option price for each grant. The expected volatility was based on stock
prices for the three fiscal years prior to the fiscal year the grant occurred.
The risk-free interest rate was the rate available on zero coupon U.S.
government issues with a term equal to the remaining term for each grant.
The expected life of the option was estimated based on the exercise
history from previous grants.
The Company applies APB No. 25 in accounting for its stock option plans
and, accordingly, no compensation cost has been recognized in the Company's
financial statements for stock options granted under any of the stock plans.
If, under SFAS 123, the Company determined compensation cost based on the fair
value at the grant date for its stock options, net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below (amounts
in thousands, except per share data):
FISCAL YEAR ENDED
----------------------------------------
FEBRUARY 2, 1997 JANUARY 28, 1996
- ------------------------------------------------------------------------------------------------------------------------
Net earnings
As reported $937,739 $731,523
Pro forma $915,683 $726,364
Primary earnings per share
As reported $ 1.94 $ 1.54
Pro forma $ 1.90 $ 1.53
- ------------------------------------------------------------------------------------------------------------------------
Under SFAS 123, stock options granted prior to fiscal year 1995 are not
required to be included as compensation in determining pro forma net earnings.
To determine pro forma net earnings, reported net earnings have been adjusted
for compensation costs calculated for vested stock options granted during
fiscal 1996 and 1995.
26 The Home Depot
15
The following summarizes shares outstanding under the various stock option
plans at February 2, 1997, January 28, 1996 and January 29, 1995 and changes
during the fiscal years ended on these dates (shares in thousands):
NUMBER AVERAGE
OF SHARES OPTION PRICE
- ----------------------------------------------------------------------------------------------
Outstanding at January 30, 1994 9,647 $23.50
Granted 1,981 39.29
Exercised (2,631) 10.66
Cancelled (306) 35.35
- ----------------------------------------------------------------------------------------------
Outstanding at January 29, 1995 8,691 30.57
Granted 7,208 40.37
Exercised (1,921) 15.73
Cancelled (3,988) 43.43
- ----------------------------------------------------------------------------------------------
Outstanding at January 28, 1996 9,990 35.37
Granted 4,813 43.69
Exercised (1,994) 29.21
Cancelled (763) 39.34
- ----------------------------------------------------------------------------------------------
OUTSTANDING AT FEBRUARY 2, 1997 12,046 39.46
==============================================================================================
Exercisable 3,491 $35.89
==============================================================================================
In addition, the Company had 4,751,945 shares available for future grants
under the Employee Stock Purchase Plan at February 2, 1997. This plan enables
the Company to grant substantially all full-time associates options to purchase
up to 22,137,500 shares of common stock, of which 17,385,555 shares have been
exercised from inception of the plan. Shares available for future grants may be
exercised 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. Shares purchased may
not exceed the lesser of 20% of the associate's annual compensation, as
defined, or $25,000 of common stock at its fair market value (determined at the
time such option is granted) for any one calendar year. Associates pay for the
shares ratably over a period of one year (the purchase period) through payroll
deductions and cannot exercise their option to purchase any of the shares until
the conclusion of the purchase period. In the event an associate elects not to
exercise such options, the full amount withheld is refundable. During fiscal
1996, options for 1,535,961 shares were exercised at an average price of $33.11
per share. At February 2, 1997, there were 491,084 options outstanding, net of
cancellations, at an average price of $42.71 per share.
NOTE 5 - LEASES The Company leases certain retail locations, office space,
warehouse and distribution space, equipment and vehicles. While the majority of
the leases are operating leases, certain retail locations are leased
under capital leases. As leases expire, it can be expected that, in the normal
course of business, leases will be renewed or replaced.
In June 1996, the Company entered into a $300,000,000 operating lease
agreement for the purpose of financing construction costs for selected new
stores planned to open primarily in 1997. Under the agreement, the lessor
purchases the properties, pays for the construction costs and thereafter leases
the facilities to the Company. The initial lease term is five years with five
2-year renewal options. The lease provides for substantial residual value
guarantees and includes purchase options at original cost on each property.
During 1995, the Company entered into two operating lease arrangements
under which the Company will lease an import distribution facility, including
its related equipment, and an office building for store support associates. The
initial lease terms are five and seven years, respectively, with five 5-year
renewal options for the distribution facility and one 5-year renewal option for
the office building. Both of these leases provide for substantial residual
value guarantees and include purchase options at the higher of the cost or fair
market value of the assets for the import distribution facility lease and at
cost for the office building.
The maximum amount of the residual value guarantees relative to the assets
under these three leases is projected to be $380,420,000. Once the leased
assets are placed into service, the Company will estimate its liability under
the residual value guarantees and will record 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, 1997, January 28, 1996 and January 29, 1995 was $219,240,000,
$199,710,000 and $164,381,000, respectively. Real estate taxes, insurance,
maintenance and operating expenses applicable to the leased property are
obligations of the Company under the building leases. Certain of the store
leases provide for contingent rentals based on percentages of sales in excess
of specified minimums. Contingent rentals for the fiscal years ended February
2, 1997, January 28, 1996 and January 29, 1995 were approximately $9,528,000,
$9,068,000 and $9,744,000, respectively.
The Home Depot 27
16
Notes to Consolidated Financial Statements (continued)
THE HOME DEPOT, INC. AND SUBSIDIARIES
The approximate future minimum lease payments under capital and operating
leases at February 2, 1997 were as follows (in thousands):
FISCAL YEAR CAPITAL LEASES OPERATING LEASES
- ---------------------------------------------------------------------------------------------------------
1997 $ 17,071 $ 242,751
1998 17,076 242,748
1999 17,145 229,403
2000 17,462 205,855
2001 17,488 196,614
Thereafter 243,980 2,295,924
- ---------------------------------------------------------------------------------------------------------
330,222 $3,413,295
==========
Less: Imputed interest (224,209)
- ---------------------------------------------------------------------------------------
Net present value of capital lease obligations 106,013
Less: Current installments (1,265)
- ---------------------------------------------------------------------------------------
Long-term capital lease obligations, excluding current installments $ 104,748
=======================================================================================
Short-term and long-term obligations for capital leases are included in
the Company's Consolidated Balance Sheets in Current Installments of Long-Term
Debt and Long-Term Debt, respectively. The assets under capital leases recorded
in Net Property and Equipment, net of amortization, at February 2, 1997 and
January 28, 1996, totaled $105,942,000 and $85,987,000, respectively.
NOTE 6 - EMPLOYEE BENEFIT PLANS During fiscal 1996, the Company established a
defined contribution plan ("401(k)") pursuant to Section 401(k) of the Internal
Revenue Code. The 401(k) covers substantially all associates that meet certain
service requirements. The Company makes matching contributions on a weekly
basis up to specified percentages of associates' contributions as approved by
the Board of Directors. The Company's contribution is sent to the plan trustee
who purchases shares of the Company's common stock on the open market. These
shares are then allocated to the associates' accounts.
During fiscal 1988, the Company established a leveraged Employee Stock
Ownership Plan and Trust ("ESOP") covering substantially all full-time
associates. At February 2, 1997, the ESOP held a total of 6,682,878 shares of
the Company's common stock in trust for plan participants' accounts. The ESOP
purchased the shares in the open market with the proceeds of loans obtained
from the Company during fiscal 1992, 1990 and 1989 totaling $81,442,000. All
loans payable to the Company in connection with the purchase of such shares
were paid in full as of February 2, 1997. The Company's Board of Directors has
authorized loans to the ESOP of up to $90,000,000. The Company may advance
funds to the ESOP to enable the ESOP to purchase up to an additional $8,558,000
of the Company's common stock in the open market at prices the ESOP deems
desirable.
The Company's common stock purchased by the ESOP is held in a "suspense
account" as collateral for amounts loaned by the Company. At the discretion of
its Board of Directors, the Company makes annual contributions to the ESOP,
which the plan trustee is required to use to make loan interest and principal
payments to the Company. When the Company commits to make contributions to the
ESOP, a portion of the common stock is released from the "suspense account" and
allocated to participating associates. As of February 2, 1997, 6,006,474 shares
had been allocated to participating associates, 676,404 shares were committed
to be released, and there were no shares held in suspense by the trustee. Any
dividends on unallocated shares are used to service the ESOP's debt, to pay
expenses of the ESOP, to purchase additional shares of the Company's common
stock or to purchase other investments. The unpaid portion of the ESOP's
obligation to the Company is recorded as a reduction of stockholders' equity.
The Company adopted a non-qualified ESOP Restoration Plan in fiscal 1994.
The primary purpose of the plan is to provide certain associates deferred
compensation that they would have received under the ESOP if not for the
maximum compensation limits under the Internal Revenue Code of 1986, as
amended. The Company has established a "rabbi trust" to fund the benefits under
the ESOP Restoration Plan. Compensation expense related to this plan for fiscal
years 1996 and 1995 was not material. Funds provided to the trust are primarily
used to purchase shares of the Company's common stock on the open market.
The Company's combined contributions to the 401(k) and ESOP were
$24,617,000 for fiscal year 1996, and contributions to the ESOP were
$14,000,000 and $12,500,000 for fiscal years 1995 and 1994, respectively.
28 The Home Depot
17
NOTE 7 - INVESTMENTS The Company's investments were all classified as
available-for-sale and consisted of the following at February 2, 1997 and
January 28, 1996 (in thousands):
FEBRUARY 2, 1997 JANUARY 28, 1996
- --------------------------------------------------------------------------------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------------
Tax-exempt notes and bonds $193,728 $- $219 $193,509 $56,138 $14 $20 $56,132
U.S. Treasury securities 197,640 - 19 197,621 229 - - 229
U.S. government agency securities 612 - - 612 - - - -
Corporate obligations 13,900 - - 13,900 13,901 - 70 13,831
Preferred stock - - - - 10,000 - - 10,000
Corporate asset-backed securities 15,289 - 21 15,268 - - - -
- --------------------------------------------------------------------------------------------------------------------------
Total $421,169 $- $259 $420,910 $80,268 $14 $90 $80,192
==========================================================================================================================
Short-term investments,
including current maturities
of long-term investments $412,682 $- $252 $412,430 $54,751 $ 7 $ 2 $54,756
Long-term investments 8,487 - 7 8,480 25,517 7 88 25,436
- --------------------------------------------------------------------------------------------------------------------------
Total $421,169 $- $259 $420,910 $80,268 $14 $90 $80,192
==========================================================================================================================
Proceeds from sales of investments available-for-sale for the fiscal year
ended February 2, 1997 were $40,737,000, and gross gains realized on fiscal
year 1996 sales were $55,000. Proceeds from sales of investments
available-for-sale for the fiscal year ended January 28, 1996 were $30,721,000.
Gross gains of $790,000 and gross losses of $69,000 were realized on fiscal
1995 sales. Proceeds from sales of investments available-for-sale for the
fiscal year ended January 29, 1995 were $526,696,000. Gross gains of $1,638,000
and gross losses of $1,251,000 were realized on fiscal year 1994 sales.
NOTE 8 - COMMITMENTS AND CONTINGENCIES At February 2, 1997, the Company was
contingently liable for approximately $104,216,235 under outstanding letters of
credit issued in connection with purchase commitments.
The Company is a defendant in a lawsuit certified for class action status
claiming gender discrimination in the Company's Western division. The action
seeks injunctive and declaratory relief and damages. Discovery is in its final
stage, and a trial is scheduled to begin in the latter part of fiscal 1997. Two
other gender discrimination lawsuits have been filed against the Company, one
in New Orleans and one in New Jersey, seeking class certification. Neither of
these lawsuits has been certified as a class action lawsuit as of February 2,
1997. Although the New Orleans case has been stayed pending the outcome of a
similar, but unrelated, case on appeal, the U.S. Equal Employment Opportunity
Commission ("EEOC") has filed a motion to intervene. The New Jersey case has
been allowed to proceed at this time without class status and only on an
individual plaintiff basis. Management intends to vigorously defend each of the
cases, including the EEOC's attempted intervention. While the ultimate results
of this litigation cannot be determined, management does not expect that the
resolutions of these proceedings will have a material adverse effect on the
consolidated financial position or results of operations of the Company.
The Company is involved in other litigation arising from the normal course
of business. In management's opinion, this litigation will not materially
affect the Company's consolidated financial position or results of operations.
NOTE 9 - ACQUISITION OF INTEREST IN CANADIAN COMPANY Effective February 28,
1994, the Company entered into a partnership ("The Home Depot Canada") with The
Molson Companies and, as a result, acquired 75% of Aikenhead's Home Improvement
Warehouse ("Aikenhead's"), which was operating seven warehouse-style home
improvement stores in Canada. Subsequent to the acquisition, The Home Depot
Canada has opened 17 additional stores in Canada. At any time after the sixth
anniversary of the purchase, the Company has the option to purchase, or the
other partner has the right to cause the Company to purchase, the remaining 25%
of The Home Depot Canada. The option price is based on the lesser of fair
market value or a value to be determined by an agreed-upon formula as of the
option exercise date.
The Home Depot 29
18
Notes to Consolidated Financial Statements (continued)
THE HOME DEPOT, INC. AND SUBSIDIARIES
The purchase price for the 75% interest in Aikenhead's was approximately
$161,548,000 in cash and was accounted for by the purchase method of
accounting. Accordingly, results of the partnership's operations have been
included with those of the Company from the date of acquisition. The excess
purchase price over the estimated fair value of the net assets as of the
acquisition date of $67,626,000 has been recorded as goodwill and is being
amortized over 40 years.
NOTE 10 - QUARTERLY FINANCIAL DATA The following is a summary of the
unaudited quarterly results of operations for the fiscal years ended February
2, 1997 and January 28, 1996 (in thousands, except per share data):
NET EARNINGS
PERCENT INCREASE PER COMMON
IN COMPARABLE AND COMMON
NET SALES STORE SALES GROSS PROFIT NET EARNINGS EQUIVALENT SHARE
- -----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED FEBRUARY 2, 1997:
FIRST QUARTER $ 4,362,215 3% $1,219,930 $195,019 $0.41
SECOND QUARTER 5,292,917 9% 1,436,895 270,174 0.56
THIRD QUARTER 4,921,831 7% 1,338,251 221,371 0.46
FOURTH QUARTER 4,958,540 7% 1,439,004 251,175 0.52
- -----------------------------------------------------------------------------------------------------------------
$19,535,503 7% $5,434,080 $937,739 $1.94
=================================================================================================================
Fiscal year ended January 28, 1996:
First quarter $ 3,568,962 5% $ 997,521 $157,765 $0.34
Second quarter 4,151,722 4% 1,123,046 212,887 0.45
Third quarter 3,997,790 1% 1,076,557 175,473 0.37
Fourth quarter 3,751,884 1% 1,088,462 185,398 0.39
- -----------------------------------------------------------------------------------------------------------------
$15,470,358 3% $4,285,586 $731,523 $1.54
=================================================================================================================
30 The Home Depot
19
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick
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, 1997 and January 28, 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended February 2, 1997.
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 generally accepted auditing
standards. 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, 1997 and January 28, 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended February 2, 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Atlanta, Georgia
March 14, 1997
The Home Depot 31