1
EXHIBIT 13
2
EXHIBIT 13
The Home Depot, Inc. and Subsidiaries
Amounts in Millions, except where noted
10-Year Selected Financial
and Operating Highlights Excerpts
1997 1996(1) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA
Net sales $ 24,156 $19,535 $15,470 $ 12,477 $ 9,239
Net sales increase (%) 23.7 26.3 24.0 35.0 29.2
Earnings before taxes(2) 2,002 1,535 1,195 980 737
Net earnings(2) 1,224 938 732 605 457
Net earnings increase (%)(2) 30.5 28.2 21.0 32.2 26.1
Diluted earnings per share ($)(2,3,4,5) 1.64 1.29 1.02 .88 .67
Diluted earnings per share increase (%)(2) 27.1 26.5 15.9 31.3 21.8
Weighted average number of common shares
outstanding assuming dilution(3,4) 762 732 717 714 711
Gross margin - % of sales 28.1 27.8 27.7 27.9 27.7
Store selling and operating expense - % of sales 17.8 18.0 18.0 17.8 17.6
Pre-opening expense - % of sales .3 .3 .4 .4 .4
General and administrative expense - % of sales 1.7 1.7 1.7 1.8 2.0
Net interest income (expense) - % of sales - .1 .1 (.1) .3
Earnings before taxes - % of sales(2) 8.3 7.9 7.7 7.8 8.0
Net earnings - % of sales(2) 5.1 4.8 4.7 4.8 5.0
BALANCE SHEET DATA AND FINANCIAL RATIOS
Total assets $ 11,229 $ 9,342 $ 7,354 $ 5,778 $ 4,701
Working capital 2,004 1,867 1,255 919 994
Merchandise inventories 3,602 2,708 2,180 1,749 1,293
Net property and equipment 6,509 5,437 4,461 3,397 2,371
Long-term debt 1,303 1,247 720 983 874
Stockholders' equity 7,098 5,955 4,988 3,442 2,814
Book value per share ($)(3) 9.70 8.26 6.97 5.06 4.17
Long-term debt to equity (%) 18.4 20.9 14.4 28.6 31.1
Current ratio 1.82:1 2.01:1 1.89:1 1.76:1 2.02:1
Inventory turnover 5.4x 5.6x 5.5x 5.7x 5.9x
Return on beginning equity (%) 19.5 18.8 21.3 21.5 19.9
STATEMENT OF CASH FLOWS DATA
Depreciation and amortization $ 283 $ 232 $ 181 $ 130 $ 90
Capital expenditures 1,525 1,248 1,308 1,220 900
Cash dividends per share ($)(3) .19 .15 .13 .10 .07
STORE DATA(6)
Number of stores 624 512 423 340 264
Number of states 41 38 31 28 23
Number of Canadian provinces 4 3 3 3 -
Square footage at year-end 66 54 44 35 26
Increase in square footage (%) 23.1 21.6 26.3 33.2 26.3
Average square footage per store (in thousands) 106 105 105 103 100
STORE SALES AND OTHER DATA(6)
Comparable store sales increase (%)(7) 7 7 3 8 7
Average total company weekly sales $ 465 $ 369 $ 298 $ 240 $ 178
Weighted average weekly sales per 829 803 787 802 764
operating store (in thousands)
Weighted average sales per square foot ($)(7) 406 398 390 404 398
Number of customer transactions 550 464 370 302 236
Average sale per transaction ($) 43.63 42.09 41.78 41.29 39.13
Number of associates at year-end (actual) 124,400 98,100 80,800 67,300 50,600
- --------------------------------------------------------------------------------------------------------
(1) Fiscal years 1996 and 1990 consisted of 53 weeks; all other years reported
consisted of 52 weeks.
(2) Excludes the effect of the $104 million non-recurring charge in fiscal 1997.
(3) All share and per share data have been adjusted for a three-for-two stock
split on July 3, 1997.
(4) Share and per share data have been restated for the adoption of SFAS 128
"Earnings per Share."
(5) Diluted earnings per share for fiscal 1997, including the $104 million
non-recurring charge, were $1.55 (see note 9 of the Notes to Consolidated
Financial Statements).
(6) Excludes Maintenance Warehouse and National Blind & Wallpaper Factory.
(7) Adjusted to reflect the first 52 weeks of the 53-week fiscal years in 1996
and 1990.
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.
SELECTED CONSOLIDATED
STATEMENTS OF EARNINGS DATA
PERCENTAGE
INCREASE (DECREASE)
FISCAL YEAR(1) OF DOLLAR AMOUNTS
--------------------------------------------------------------------
1997 1996
1997 1996 1995 VS. 1996 VS. 1995
- --------------------------------------------------------------------------------------------------------------------------------
NET SALES 100.0% 100.0% 100.0% 23.7% 26.3%
Gross Profit 28.1 27.8 27.7 24.8 26.8
Operating Expenses:
Selling and Store Operating 17.8 18.0 18.0 21.8 26.5
Pre-Opening 0.3 0.3 0.4 19.7 4.5
General and Administrative 1.7 1.7 1.7 27.2 20.3
Non-Recurring Charge 0.4 - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 20.2 20.0 20.1 24.8 25.6
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 7.9 7.8 7.6 24.7 30.0
Interest Income (Expense):
Interest and Investment Income 0.2 0.1 0.1 73.8 30.5
Interest Expense (0.2) - - 160.8 287.8
- --------------------------------------------------------------------------------------------------------------------------------
Interest, net - 0.1 0.1 (73.7) (38.6)
Minority Interest - - - 87.9 NM(2)
- --------------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 7.9 7.9 7.7 23.7 28.4
Income Taxes 3.1 3.1 3.0 23.7 28.7
- --------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS 4.8% 4.8% 4.7% 23.7% 28.2%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED SALES DATA
Number of Transactions (000s) 550,226 464,089 370,317 18.6% 25.3%
Average Sale per Transaction $ 43.63 $ 42.09 $ 41.78 3.7 0.7
Weighted Average Weekly Sales per Operating Store $ 829,000 $ 803,000 $ 787,000 3.2 2.0
Weighted Average Sales per Square Foot $ 405.56 $ 398.29(3) $ 390.32 1.8 2.0
- --------------------------------------------------------------------------------------------------------------------------------
(1)Fiscal years 1997, 1996 and 1995 refer to the fiscal years ended February 1,
1998; February 2, 1997; and January 28, 1996, respectively.
(2)Not meaningful.
(3)Adjusted to reflect the first 52 weeks of the 53-week fiscal year in 1996.
The Home Depot
17
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
THE HOME DEPOT, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS: Certain written and oral statements made by the
Company 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.
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 1, 1998 COMPARED TO FEBRUARY 2, 1997
Fiscal 1997 consisted of 52 weeks compared to 53 weeks in fiscal 1996. Net sales
for fiscal 1997 increased 24% to $24.2 billion from $19.5 billion in fiscal
1996. This increase was attributable to, among other things, full year sales
from the 89 new stores opened during fiscal 1996, a 7% comparable 52-week
store-for-store sales increase, and 112 new store openings and 5 store
relocations during fiscal 1997. The total increase in sales was partially offset
by one less week of sales in fiscal 1997 versus fiscal 1996.
Gross profit as a percent of sales was 28.1% for fiscal 1997 compared to
27.8% for fiscal 1996. The increase was primarily attributable to a lower cost
of merchandise as a percent of sales resulting from product line reviews and
other merchandising initiatives begun in fiscal 1996 and continued through
fiscal 1997. In addition, lower and more stable lumber costs, sales mix changes,
and better inventory shrink results contributed to the gross profit improvement.
Operating expenses as a percent of sales were 20.2% for fiscal 1997 compared
to 20.0% for fiscal 1996. Operating expenses for fiscal 1997 included a
non-recurring charge of $104 million related to the settlements of a class
action gender discrimination lawsuit and three other gender discrimination
lawsuits. The non-recurring charge includes expected payments of $65 million to
the plaintiff class members and $22.5 million to the plaintiffs' attorneys and
approximately $17 million for other related internal costs, including
implementation or enhancement of certain human resources programs, as well as
the settlement terms of the three other lawsuits. Excluding the non-recurring
charge, operating expenses as a percent of sales were 19.7% for fiscal 1997.
Selling and store operating expenses as a percent of sales decreased to 17.8%
in fiscal 1997 from 18.0% in fiscal 1996. The decrease in selling and store
operating expenses was primarily attributable to lower net advertising expenses
resulting from higher cooperative advertising participation by vendors and
increased use of national advertising, as well as lower medical insurance costs
primarily due to a higher percentage of the Company's associates using
in-network providers. Partially offsetting these decreases were higher store
payroll expenses as a percent of sales, mainly due to increased focus on certain
higher margin merchandise categories that require more labor hours to support,
such as flooring and other decor areas.
Pre-opening expenses as a percent of sales were 0.3% for both fiscal 1997 and
fiscal 1996. The Company opened 112 new stores and relocated 5 stores in fiscal
1997, and opened 89 new stores and relocated 7 stores in fiscal 1996.
Pre-opening expenses averaged $559,000 per store in fiscal 1997 compared to
$570,000 per store in fiscal 1996.
General and administrative expenses as a percent of sales were 1.7% for both
fiscal 1997 and fiscal 1996. Incremental expenses related to long-term growth
and business planning initiatives incurred in fiscal 1997 were partially offset
by efficiencies realized from increased sales.
Interest and investment income as a percent of sales increased to 0.2% in
fiscal 1997 from 0.1% in fiscal 1996 due to a full year of investment income
earned in fiscal 1997 from the proceeds of the issuance of $1.1 billion of the
Company's 3-1/4% Convertible Subordinated Notes ("3-1/4% Notes") in October 1996
(see Liquidity and Capital Resources). Interest expense as a percent of sales
was 0.2% in fiscal 1997 compared to 0% in fiscal 1996. The increase from the
prior year was primarily attributable to a full year of interest expense on the
3-1/4% Notes in fiscal 1997, compared to a partial year of interest expense on
the 3-1/4% Notes and lower levels of long-term debt prior to issuance of the
3-1/4% Notes in fiscal 1996.
The Company's combined federal and state effective income tax rate was 38.9%
for both fiscal 1997 and fiscal 1996. The Company currently expects the
effective tax rate to increase to 39.3% in fiscal 1998, due to higher effective
state tax rates and a reduction in tax-exempt interest income as investment
balances decline.
Net earnings as a percent of sales were 4.8% for both fiscal 1997 and fiscal
1996, reflecting a higher gross profit percentage and lower selling and store
operating expenses as a percent of sales, offset by non-recurring charge
recorded during fiscal 1997, as described above. Diluted earnings per share
were $1.55 for fiscal 1997 compared to $1.29 for fiscal 1996. Excluding the
non-recurring charge, diluted earnings per share were $1.64 for fiscal 1997.
THE HOME DEPOT
18
5
FISCAL YEAR ENDED FEBRUARY 2, 1997 COMPARED TO JANUARY 28, 1996
Net sales for fiscal 1996 increased 26% to $19.5 billion from $15.5 billion
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 sales
mix changes.
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 fiscal 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 in fiscal 1996 than in fiscal 1995 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 in fiscal 1996 were higher
as a percent of sales than in 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 for fiscal 1996 and 1995.
Investment income in fiscal 1996 was primarily generated from the net proceeds
of the 3-1/4% Notes issued in October 1996. Interest expense also increased due
to the higher level of long-term debt 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 were 4.8% for fiscal 1996 compared to 4.7%
for fiscal 1995, reflecting higher gross profit and lower operating expenses,
partially offset by the higher effective income tax rate, as described above.
Diluted earnings per share were $1.29 for fiscal 1996 compared to $1.02 for
fiscal 1995.
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 137 new stores and relocate 6
existing stores during fiscal 1998. It is anticipated that approximately 78% of
these locations will be owned, and the remainder will be leased. The Company
also plans to open approximately 170 stores, including relocations, in fiscal
1999. In June 1996, the Company entered into a $300 million operating lease
agreement for the purpose of financing construction costs of certain new stores.
The Company increased its available funding under the operating lease agreement
to $600 million in May 1997. Under the agreement, the lessor purchases the
properties, pays for the construction costs and subsequently leases the
facilities to the Company. The lease provides for substantial residual value
guarantees and includes purchase options at original cost on each property. The
Company financed a portion of new stores opened in fiscal 1997 under the
agreement and anticipates utilizing this facility to finance selected new stores
planned in fiscal 1998 and an office building in fiscal 1999. In addition, some
planned locations for fiscal 1998 will be leased individually, and it is
expected that many locations may be obtained through 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
$13.1 million per location. The cost to remodel and fixture stores to be leased
is expected to average approximately $2.4 million per store. In addition, each
new store will require approximately $3.6 million to finance inventories, net of
vendor financing.
During fiscal 1996, the Company issued, through a public offering, $1.1
billion 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 by the Company,
at a conversion price of $46.0833 per share, subject to adjustment under certain
conditions. The 3-1/4% Notes may be redeemed, at the option of the Company, at
any time on or after October 2, 1999, in whole or in part, at a redemption price
of 100.813% of the principal amount and after October 1, 2000, at 100% of the
principal amount. The Company used the net proceeds from the offering to repay
outstanding commercial paper obligations, to finance a portion of the Company's
capital expenditure program, including planned store expansions and renovations,
and for general corporate purposes. The remaining proceeds were invested in
short-term securities.
THE HOME DEPOT
19
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
THE HOME DEPOT, INC. AND SUBSIDIARIES
The Company has a commercial paper program that allows borrowings up to a
maximum of $800 million. As of February 1, 1998, there were no borrowings
outstanding under the program. In connection with the program, the Company has a
back-up credit facility with a consortium of banks for up to $800 million. The
credit facility, which expires in December 2000, contains various restrictive
covenants, none of which is expected to impact the Company's liquidity or
capital resources.
As of February 1, 1998, the Company had $174 million in cash and cash
equivalents and short-term investments, as well as $15 million in long-term
investments. Management believes that its current cash position, the proceeds
from short-term and long-term investments, internally generated funds, funds
available from its $800 million commercial paper program, funds available from
the $600 million 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 expansions and renovations, through the
next several fiscal years.
YEAR 2000: The Company is currently addressing a universal situation commonly
referred to as the "Year 2000 Problem." The Year 2000 Problem relates to the
inability of certain computer software programs to properly recognize and
process date-sensitive information relative to the year 2000 and beyond. During
fiscal 1997, the Company developed a plan to devote the necessary resources to
identify and modify systems impacted by the Year 2000 Problem, or implement new
systems to become year 2000 compliant in a timely manner. The cost of executing
this plan is not expected to have a material impact on the Company's results of
operations or financial condition. In addition, the Company has contacted its
major suppliers and vendors to ensure their awareness of the Year 2000 Problem.
If the Company, its suppliers or vendors are unable to resolve issues related to
the year 2000 on a timely basis, it could result in a material financial risk.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." Comprehensive income includes
not only net earnings, but also 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 investments. SFAS 130 requires that all items required to be
recognized as components of comprehensive income be reported in a financial
statement with equal prominence to the other financial statements. SFAS 130 is
effective for interim and annual periods beginning after December 15, 1997.
Adoption of SFAS 130 is not expected to materially impact the Company's reported
results, since each component of comprehensive income is currently reported
separately in both Stockholders' Equity on the Consolidated Balance Sheets and
in the Consolidated Statements of Stockholders' Equity.
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
20
7
CONSOLIDATED STATEMENTS OF EARNINGS
THE HOME DEPOT, INC. AND SUBSIDIARIES
AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA
FISCAL YEAR ENDED
---------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
(52 WEEKS) (53 WEEKS) (52 WEEKS)
- ------------------------------------------------------------------------------------------------
NET SALES $ 24,156 $ 19,535 $ 15,470
Cost of Merchandise Sold 17,375 14,101 11,184
- ------------------------------------------------------------------------------------------------
Gross Profit 6,781 5,434 4,286
Operating Expenses:
Selling and Store Operating 4,287 3,521 2,784
Pre-Opening 65 55 52
General and Administrative 413 324 270
Non-Recurring Charge (note 9) 104 - -
- ------------------------------------------------------------------------------------------------
Total Operating Expenses 4,869 3,900 3,106
- ------------------------------------------------------------------------------------------------
OPERATING INCOME 1,912 1,534 1,180
Interest Income (Expense):
Interest and Investment Income 44 25 19
Interest Expense (note 2) (42) (16) (4)
- ------------------------------------------------------------------------------------------------
Interest, net 2 9 15
Minority Interest (note 11) (16) (8) -
- ------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 1,898 1,535 1,195
Income Taxes (note 3) 738 597 463
NET EARNINGS $ 1,160 $ 938 $ 732
================================================================================================
BASIC EARNINGS PER SHARE (note 8) $ 1.59 $ 1.30 $ 1.03
Weighted Average Number of Common Shares Outstanding 729 719 709
================================================================================================
DILUTED EARNINGS PER SHARE (note 8) $ 1.55 $ 1.29 $ 1.02
Weighted Average Number of Common Shares
Outstanding Assuming Dilution 762 732 717
================================================================================================
See accompanying notes to consolidated financial statements.
THE HOME DEPOT
21
8
CONSOLIDATED BALANCE SHEETS
THE HOME DEPOT, INC. AND SUBSIDIARIES
AMOUNTS IN MILLIONS, EXCEPT SHARE DATA
FEBRUARY 1, FEBRUARY 2,
1998 1997
- --------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 172 $ 146
Short-Term Investments, including current maturities of long-term
investments (note 7) 2 413
Receivables, net 556 388
Merchandise Inventories 3,602 2,708
Other Current Assets 128 54
- --------------------------------------------------------------------------------------------------------
Total Current Assets 4,460 3,709
- --------------------------------------------------------------------------------------------------------
Property and Equipment, at cost:
Land 2,194 1,855
Buildings 3,041 2,470
Furniture, Fixtures and Equipment 1,370 1,084
Leasehold Improvements 383 340
Construction in Progress 336 284
Capital Leases (notes 2 and 5) 163 117
- --------------------------------------------------------------------------------------------------------
7,487 6,150
Less Accumulated Depreciation and Amortization 978 713
- --------------------------------------------------------------------------------------------------------
Net Property and Equipment 6,509 5,437
- --------------------------------------------------------------------------------------------------------
Long-Term Investments (note 7) 15 8
Notes Receivable 27 40
Cost in Excess of the Fair Value of Net Assets Acquired, net of accumulated
amortization of $18 at February 1, 1998 and $15 at February 2, 1997 140 87
Other 78 61
- --------------------------------------------------------------------------------------------------------
$ 11,229 $9,342
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 1,358 $1,090
Accrued Salaries and Related Expenses 312 249
Sales Taxes Payable 143 129
Other Accrued Expenses 530 323
Income Taxes Payable 105 49
Current Installments of Long-Term Debt (notes 2 and 5) 8 2
- --------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,456 1,842
- --------------------------------------------------------------------------------------------------------
Long-Term Debt, excluding current installments (notes 2 and 5) 1,303 1,247
Other Long-Term Liabilities 178 134
Deferred Income Taxes (note 3) 78 66
Minority Interest (note 11) 116 98
STOCKHOLDERS' EQUITY (notes 2, 4 and 6)
Common Stock, par value $0.05. Authorized: 1,000,000,000 shares; issued
and outstanding -732,108,000 shares at February 1, 1998 and 720,773,000
shares at February 2, 1997 37 36
Paid-in Capital 2,662 2,511
Retained Earnings 4,430 3,407
Cumulative Translation Adjustments (28) 2
- --------------------------------------------------------------------------------------------------------
7,101 5,956
Less: Shares Purchased for Compensation Plans (notes 4 and 6) 3 1
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 7,098 5,955
- --------------------------------------------------------------------------------------------------------
Commitments and Contingencies (notes 5, 10 and 11) $ 11,229 $9,342
========================================================================================================
See accompanying notes to consolidated financial statements.
THE HOME DEPOT
22
9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THE HOME DEPOT, INC. AND SUBSIDIARIES
AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA
UNREALIZED
COMMON STOCK CUMULATIVE GAIN(LOSS) ON NOTES
----------------- PAID-IN RETAINED TRANSLATION INVESTMENTS, RECEIVABLE
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS NET FROM ESOP
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 29, 1995 680 $34 $1,515 $ 1,937 $(11) $(1) $(32)
============================================================================================================================
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) 5 - 68 - - - -
Tax Effect of Sale of Option Shares
by Employees - - 10 - - - -
Cumulative Translation Adjustments - - - - 5 - -
Repayments of Notes Receivable
from ESOP, net (note 6) - - - - - - 15
Conversion of 4-1/2% Convertible
Subordinated Notes, net 31 2 803 - - - -
Unrealized Gain on Investments, - - - - - 1 -
net (note 7)
Net Earnings - - - 732 - - -
Cash Dividends ($0.13 per share) - - - (90) - - -
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 28, 1996 716 $36 $2,396 $ 2,579 $ (6) $ - $(17)
============================================================================================================================
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) 5 - 104 - - - -
Tax Effect of Sale of Option Shares
by Employees - - 11 - - - -
Cumulative Translation Adjustments - - - - 8 - -
Repayments of Notes Receivable
from ESOP, net (note 6) - - - - - - 17
Shares Purchased for Compensation Plans
(notes 4 and 6) - - - - - - -
Net Earnings - - - 938 - - -
Cash Dividends ($0.15 per share) - - - (110) - - -
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 2, 1997 721 $36 $2,511 $ 3,407 $ 2 $ - $ -
============================================================================================================================
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) 4 - 124 - - - -
Tax Effect of Sale of Option Shares
by Employees - - 26 - - - -
Cumulative Translation Adjustments - - - - (30) - -
Immaterial Pooling of Interests 7 1 1 2 - - -
Shares Purchased for Compensation Plans
(notes 4 and 6) - - - - - - -
Net Earnings - - - 1,160 - - -
Cash Dividends ($0.19 per share) - - - (139) - - -
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 1, 1998 732 $37 $2,662 $ 4,430 $(28) $ - $ -
============================================================================================================================
SHARES
PURCHASED FOR TOTAL
COMPENSATION STOCKHOLDERS'
PLANS EQUITY
- -------------------------------------------------------------------
BALANCE, JANUARY 29, 1995 $ - $ 3,442
===================================================================
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4)
Tax Effect of Sale of Option Shares - 68
by Employees - 10
Cumulative Translation Adjustments - 5
Repayments of Notes Receivable
from ESOP, net (note 6) - 15
Conversion of 4-1/2% Convertible
Subordinated Notes, net - 805
Unrealized Gain on Investments, - 1
net (note 7)
Net Earnings - 732
Cash Dividends ($0.13 per share) - (90)
- -----------------------------------------------------------------
BALANCE, JANUARY 28, 1996 - $ 4,988
=================================================================
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) - 104
Tax Effect of Sale of Option Shares
by Employees - 11
Cumulative Translation Adjustments - 8
Repayments of Notes Receivable
from ESOP, net (note 6) - 17
Shares Purchased for Compensation Plans
(notes 4 and 6) (1) (1)
Net Earnings - 938
Cash Dividends ($0.15 per share) - (110)
- -----------------------------------------------------------------
BALANCE, FEBRUARY 2, 1997 (1) $ 5,955
=================================================================
Shares Sold Under Employee Stock
Purchase and Option Plans,
net of retirements (note 4) - 124
Tax Effect of Sale of Option Shares
by Employees - 26
Cumulative Translation Adjustments - (30)
Immaterial Pooling of Interests - 4
Shares Purchased for Compensation Plans
(notes 4 and 6) (2) (2)
Net Earnings - 1,160
Cash Dividends ($0.19 per share) - (139)
- -----------------------------------------------------------------
BALANCE, FEBRUARY 1, 1998 (3) $ 7,098
=================================================================
See accompanying notes to consolidated financial statements.
THE HOME DEPOT
23
10
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE HOME DEPOT, INC. AND SUBSIDIARIES
AMOUNTS IN MILLIONS
FISCAL YEAR ENDED
----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
(52 WEEKS) (53 WEEKS) (52 WEEKS)
- ----------------------------------------------------------------------------------------------------------------
CASH PROVIDED FROM OPERATIONS:
Net Earnings $ 1,160 $ 938 $ 732
Reconciliation of Net Earnings to Net Cash Provided by Operations:
Depreciation and Amortization 283 232 181
Deferred Income Tax (Benefit) Expense (28) 29 18
Increase in Receivables, net (166) (58) (70)
Increase in Merchandise Inventories (885) (525) (429)
Increase in Accounts Payable and Accrued Expenses 577 434 215
Increase in Income Taxes Payable 83 25 36
Other 5 25 30
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations 1,029 1,100 713
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, net of $44, $54 and $30 of non-cash
capital expenditures in fiscal 1997, 1996 and 1995, respectively (1,481) (1,194) (1,278)
Proceeds from Sales of Property and Equipment 85 22 29
Proceeds from Sales of Investments - 41 31
Purchases of Investments (194) (409) (370)
Proceeds from Maturities of Investments 599 27 416
Repayments of Advances Secured by Real Estate, net 20 6 (5)
- ----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (971) (1,507) (1,177)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments of) Issuance of Commercial Paper Obligations, net - (620) 520
Proceeds from Long-Term Borrowings, net 15 1,093 -
Repayments of Notes Receivable from ESOP - 17 15
Principal Repayments of Long-Term Debt (40) (3) (23)
Proceeds from Sale of Common Stock, net 122 104 68
Cash Dividends Paid to Stockholders (139) (110) (90)
Minority Interest Contributions to Partnership 10 19 26
- ----------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (32) 500 516
- ----------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 26 93 52
Cash and Cash Equivalents at Beginning of Year 146 53 1
- ----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 172 $ 146 $ 53
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS MADE FOR:
Interest, net of interest capitalized $ 42 $ 3 $ 22
Income Taxes $ 685 $ 548 $ 408
================================================================================================================
See accompanying notes to consolidated financial statements.
THE HOME DEPOT
24
11
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 106,000 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. At the end of fiscal 1997, the Company was operating 624 stores,
including 587 Home Depot stores and 5 EXPO Design Center stores in the United
States and 32 Home Depot stores in Canada. During fiscal 1998, the Company plans
to open two stores in Santiago, Chile. Included in the Company's Consolidated
Balance Sheets at February 1, 1998 are $405 million of net assets of the
Canadian and Chilean operations.
FISCAL YEAR - The Company's fiscal year is a 52- or 53-week period ending on the
Sunday nearest to January 31. Fiscal years 1997 and 1995, which ended February
1, 1998 and January 28, 1996, respectively, consisted of 52 weeks while fiscal
1996, which ended February 2, 1997, consisted of 53 weeks.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries, and its majority-owned
partnerships. All significant intercompany transactions have been eliminated in
consolidation.
Stockholders' equity, share and per share amounts for all periods presented
have been adjusted for a three-for-two stock split effected in the form of a
stock dividend on July 3, 1997.
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 primarily of commercial paper, money market funds, U.S.
government agency securities and tax-exempt notes and bonds.
INVESTMENTS - The Company classifies its investments into 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 classified as 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 versus tax
purposes. Federal and state incentive tax credits are recorded as a reduction of
income taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates is recognized as income or expense in the period that includes the
enactment date.
The Company and its eligible subsidiaries file a consolidated U.S. federal
income tax return. Non-U.S. subsidiaries, which are consolidated for financial
reporting, are not eligible to be included in consolidated U.S. federal income
tax returns, and separate provisions for income taxes have been determined for
these entities. Except for return of capital and selected dividends, the Company
intends to reinvest the unremitted earnings of its non-U.S. subsidiaries and
postpone their remittance indefinitely. Accordingly, no provision for U.S.
income taxes for non-U.S. subsidiaries was required for any year presented.
DEPRECIATION AND AMORTIZATION - The Company's buildings, furniture, fixtures and
equipment are depreciated using the straight-line method over the estimated
useful lives of the assets. Improvements to leased premises are amortized using
the straight-line method over the life of the lease or the useful life of the
improvement, whichever is shorter. The Company's property and equipment is
depreciated using the following estimated useful lives:
LIFE
- -------------------------------------------------------------------
Buildings 10-45 years
Furniture, fixtures and equipment 5-20 years
Leasehold improvements 5-30 years
- -------------------------------------------------------------------
THE HOME DEPOT
25
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE HOME DEPOT, INC. AND SUBSIDIARIES
The cost in excess of the fair value of net assets acquired (as discussed
below) is 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.
STORE PRE-OPENING COSTS - Non-capital expenditures associated with opening new
stores are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS - During fiscal 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." SFAS 121 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 the sale of land and
buildings, the book value of abandoned fixtures, equipment and leasehold
improvements, and a provision for the present value of future lease obligations,
less estimated sub-lease income. The implementation of SFAS 121 did not have a
material impact on the Company's results of operations.
EARNINGS PER SHARE - During the fourth quarter of fiscal 1997, the Company
implemented 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. 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 is calculated using the "if converted" method for
convertible securities and the treasury stock method for options and warrants as
previously prescribed by Accounting Principles Board Opinion No. 15, "Earnings
Per Share." Accordingly, the effect of shares issuable under the Company's stock
plans and shares issuable upon conversion of the Company's convertible debt are
included in the calculation of diluted EPS. The implementation of SFAS 128,
which also required the restatement of previously reported EPS, did not have a
material impact on the Company's reported EPS for any periods presented.
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 1996, the Company adopted Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." SFAS 123 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. Under SFAS
123, companies may, however, 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 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 elected to account for such plans under the provisions of APB No. 25.
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 both Canada and Chile. The assets and liabilities denominated in
foreign currency are translated into U.S. dollars at the current rate of
exchange on the last day of the reporting period, 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.
THE HOME DEPOT
26
13
NOTE 2 - LONG-TERM DEBT. The Company's long-term debt at the end of fiscal 1997
and 1996 consisted of the following (amounts in millions):
FEBRUARY 1, 1998 FEBRUARY 2, 1997
- ------------------------------------------------------------------------------------------------------------------------
3-1/4% Convertible Subordinated Notes, due October 1, 2001; convertible into
shares of common stock of the Company at a conversion price of $46.0833 per
share; redeemable by the Company at a premium, plus accrued interest,
beginning October 2, 1999 $1,104 $1,104
Capital Lease Obligations, payable in varying installments
through January 31, 2019 (see note 5) 151 106
Installment Notes Payable; interest imputed at rates between
6.1% and 10.5%; payable in varying installments through 2017 32 30
Unsecured Bank Loan, floating interest rate averaging 6.05% in
fiscal 1997; payable in August 2002 15 -
Variable Rate Industrial Revenue Bonds; secured by letters of
credit or land; interest rates averaging 4.2% during fiscal 1997;
payable in varying installments through 2011 9 9
- ------------------------------------------------------------------------------------------------------------------------
Total long-term debt 1,311 1,249
Less current installments 8 2
- ------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current installments $1,303 $1,247
========================================================================================================================
In October 1996, the Company issued, through a public offering, $1.1 billion
of 3-1/4% Convertible Subordinated Notes ("3-1/4% Notes") due October 1, 2001.
The 3-1/4% Notes were issued at par and are convertible into shares of common
stock at any time prior to maturity, unless previously redeemed by the Company,
at a conversion price of $46.0833 per share, subject to adjustment under certain
conditions. The 3-1/4% Notes may be redeemed by the Company at any time on or
after October 2, 1999, in whole or in part, at a redemption price of 100.813% of
the principal amount and after October 1, 2000, at 100% of the principal amount.
The 3-1/4% Notes are not subject to sinking fund provisions.
The Company has an $800 million commercial paper program supported by a
back-up credit facility with an available commitment amount of $800 million. 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
facility place limitations on total Company indebtedness, subsidiary
indebtedness and liens. As of February 1, 1998, 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.
THE HOME DEPOT
27
14
Interest expense in the accompanying Consolidated Statements of Earnings is
net of interest capitalized of $19 million in fiscal 1997, $23 million in fiscal
1996 and $21 million in fiscal 1995.
Maturities of long-term debt (excluding the 3-1/4% Notes) are $8 million for
fiscal 1998, $8 million for fiscal 1999, $4 million for fiscal 2000, $3 million
for fiscal 2001 and $19 million for fiscal 2002.
The estimated fair value of the 3-1/4% Notes, which are publicly traded, was
approximately $1.5 billion based on the market price at February 1, 1998. The
estimated fair value of all other long-term borrowings was approximately $318
million compared to the carrying value of $207 million. These fair values were
estimated using a discounted cash flow analysis based on the Company's
incremental borrowing rate for similar liabilities.
NOTE 3 - INCOME TAXES. The provision for income taxes consisted of the following
(in millions):
FISCAL YEAR ENDED
----------------------------------------------------------
FEBRUARY 1, 1998 FEBRUARY 2, 1997 JANUARY 28, 1996
- --------------------------------------------------------------------------------------
Current:
U.S. $ 653 $ 486 $ 394
State 98 72 55
Foreign 15 10 (4)
- --------------------------------------------------------------------------------------
766 568 445
- --------------------------------------------------------------------------------------
Deferred:
U.S. (31) 23 14
State 1 6 3
Foreign 2 - 1
- --------------------------------------------------------------------------------------
(28) 29 18
- --------------------------------------------------------------------------------------
Total $ 738 $ 597 $ 463
======================================================================================
The Company's combined federal and state effective tax rate for fiscal years
1997, 1996 and 1995, net of offsets generated by federal and state tax incentive
credits, was approximately 38.9%, 38.9% and 38.8%, 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 millions):
FISCAL YEAR ENDED
------------------------------------------------------------
FEBRUARY 1, 1998 FEBRUARY 2, 1997 JANUARY 28, 1996
- ---------------------------------------------------------------------------------------------------------
Income taxes at U.S. statutory rate $ 664 $ 537 $ 418
State income taxes, net of federal income
tax benefit 65 51 37
Foreign rate differences 2 2 (2)
Other, net 7 7 10
Total $ 738 $ 597 $ 463
========================================================================================================
THE HOME DEPOT
27
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE HOME DEPOT, INC. AND SUBSIDIARIES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of February
1, 1998 and February 2, 1997 were as follows (in millions):
FISCAL YEAR ENDED
--------------------------------------------
FEBRUARY 1, 1998 FEBRUARY 2, 1997
Deferred Tax Assets
- ----------------------------------------------------------------------------------------
Accrued self-insurance liabilities $ 92 $ 68
Other accrued liabilities 104 46
Total gross deferred tax assets 196 114
Deferred Tax Liabilities
Accelerated depreciation (196) (153)
Other (38) (27)
- ----------------------------------------------------------------------------------------
Total gross deferred tax liabilities (234) (180)
- ----------------------------------------------------------------------------------------
Net deferred tax liability $ (38) $ (66)
========================================================================================
No valuation allowance was recorded against the deferred tax assets at
February 1, 1998 or February 2, 1997. 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 1997 Omnibus Stock Incentive Plan ("1997
Plan"), which is an amendment and restatement of the 1991 Omnibus Stock Option
Plan ("1991 Plan"), provides that incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock and deferred shares may be
issued to selected associates, officers and directors of the Company. The
maximum number of shares of the Company's common stock available for issuance
under the 1997 Plan is the lesser of 50 million shares, or the number of shares
carried over from prior plans plus one-half percent of the total number of
outstanding shares as of the first day of each fiscal year. In addition,
restricted shares issued under the 1997 Plan may not exceed 5 million shares. As
of February 1, 1998, the maximum shares available for future grants under the
1997 Plan were 44,951,621.
Under the 1997 Plan, incentive and non-qualified options for 1,347,515
shares, net of cancellations (of which none had been exercised), have been
granted at prices ranging from $38.33 to $55.81 per share. Incentive stock
options
THE HOME DEPOT
28
16
vest at the rate of 25% per year commencing on the first anniversary date of the
grant and expire on the tenth anniversary date of the grant. The non-qualified
options have similar terms; however, vesting does not generally begin until the
second anniversary date of the grant. During fiscal 1997, 48,852 shares of
restricted stock were issued. The restricted shares vest over varying terms and
are generally based on the attainment of certain performance goals. The expected
fair value of the restricted shares on the vesting dates will be charged to
expense ratably over the vesting periods.
Under the Non-Qualified Stock Option Plan of 1984 ("1984 Plan") options for
1,018,679 shares, net of cancellations (of which 968,056 had been exercised),
were granted at prices ranging from $1.02 to $6.57 per share as of February 1,
1998. Such options may be exercised at varying rates commencing on the first
anniversary date of the grant and expire 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 Plan.
Under the 1991 Plan, which became effective June 1, 1991, options for
27,110,901 shares, net of cancellations (of which 6,600,024 had been exercised),
had been granted at prices ranging from $16.33 to $35.58 per share as of
February 1, 1998. The 1991 Plan expired on February 28, 1997, and the shares
available for grant were carried over to the 1997 Plan.
The per share weighted average fair value of stock options granted during
fiscal years 1997, 1996 and 1995 was $12.60, $9.25 and $9.84, 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. Expected volatility was based on stock prices
for the fiscal year the grant occurred and the two previous fiscal years. 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 each option was estimated based on the exercise history from previous grants.
The Company applies APB No. 25 in accounting for its stock plans and,
accordingly, no compensation costs have been recognized in the Company's
financial statements for incentive or non-qualified stock options granted. If,
under SFAS 123, the Company determined compensation costs based on the fair
value at the grant date for its stock options, net earnings and earnings per
share would have been reduced to the pro forma amounts below (in millions,
except per share data):
FISCAL YEAR
--------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------
Net Earnings
As reported $ 1,160 $ 938 $ 732
Pro forma $ 1,118 $ 916 $ 726
Basic Earnings per Share
As reported $ 1.59 $ 1.30 $ 1.03
Pro forma $ 1.53 $ 1.27 $ 1.02
Diluted Earnings per Share
As reported $ 1.55 $ 1.29 $ 1.02
Pro forma $ 1.51 $ 1.27 $ 1.02
- ---------------------------------------------------------------------
Under SFAS 123, stock options granted prior to fiscal 1995 are not required
to be included as compensation in determining pro forma net earnings. To
determine pro forma net earnings, reported net earnings were adjusted for
compensation costs calculated for options granted during fiscal 1997, 1996 and
1995.
THE HOME DEPOT
28
17
The following table summarizes shares outstanding under the various stock
option plans at February 1, 1998, February 2, 1997 and January 28, 1996 and
changes during the fiscal years ended on these dates (shares in thousands):
NUMBER AVERAGE
PRICE OF SHARES OPTION PRICE
- --------------------------------------------------------------
Outstanding at January 29, 1995 13,037 $ 20.38
Granted 10,812 26.91
Exercised (2,882) 10.49
Cancelled (5,982) 28.95
- --------------------------------------------------------------
Outstanding at January 28, 1996 14,985 23.58
Granted 7,219 29.13
Exercised (2,991) 19.47
Cancelled (1,144) 26.23
- --------------------------------------------------------------
Outstanding at February 2, 1997 18,069 26.31
Granted 8,619 43.73
Exercised (3,431) 26.46
Cancelled (1,348) 30.55
- --------------------------------------------------------------
Outstanding at February 1, 1998 21,909 $ 30.23
==============================================================
Exercisable 5,714 $ 24.72
==============================================================
During fiscal 1997, the Company adopted the Non-Employee Directors' Deferred
Stock Compensation Plan ("Directors' Plan"). The maximum number of shares
available for issuance under the Directors' Plan is 500,000. The Directors' Plan
allows the Company's non-employee directors to elect to receive deferred
compensation in the form of shares of common stock of the Company in lieu of
cash compensation. If a director elects to receive stock, the Company
establishes a stock unit account for the director, which is credited for the
amount of the director's fees divided by the fair market value of the stock on
the date the fees would have been paid. A distribution is made when a
non-employee director ceases to be a director of the Company.
In addition, the Company had 5,816,369 shares available for future grants
under the Employee Stock Purchase Plan ("ESPP") at February 1, 1998. The ESPP
enables the Company to grant substantially all full-time associates options to
purchase up to 33,206,250 shares of common stock, of which 27,389,881 shares
have been exercised from inception of the plan, at a price equal to the lower of
85% of the stock's fair market value on the first day or the last day of the
purchase period. 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 1997, options for 1,311,548 shares
were exercised at an average price of $29.42 per share. At February 1, 1998,
there were 1,009,491 options outstanding, net of cancellations, at an average
price of $36.17 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 million operating lease
agreement for the purpose of financing construction costs for selected new
stores planned to open primarily in 1997. The Company increased its available
funding under the operating lease agreement to $600 million in May 1997. Under
the agreement, the lessor purchases the properties, pays for the construction
costs and subsequently 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. The Company financed a portion of its new stores in
fiscal 1997 under the agreement and anticipates utilizing this facility to
finance selected new stores planned in fiscal 1998 and an office building in
fiscal 1999.
During 1995, the Company entered into two operating lease arrangements under
which the Company leases an import distribution facility, including its related
equipment,
THE HOME DEPOT
29
18
and an office building for store support functions. 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 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 $634 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 1, 1998, February 2, 1997 and January 28, 1996 was $262 million, $219
million and $200 million, 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 1,
1998, February 2, 1997 and January 28, 1996 were approximately $10 million, $10
million and $9 million, respectively.
THE HOME DEPOT
29
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE HOME DEPOT, INC. AND SUBSIDIARIES
The approximate future minimum lease payments under capital and operating
leases at February 1, 1998 were as follows (in millions):
FISCAL YEAR CAPITAL LEASES OPERATING LEASES
- ---------------------------------------------------------------------------------------
1998 $ 24 $ 294
1999 24 291
2000 24 264
2001 24 245
2002 24 236
Thereafter 336 2,701
- ---------------------------------------------------------------------------------------
456 $ 4,031
Less: Imputed interest (305) =======
- -----------------------------------------------------------------
Net present value of capital lease obligations 151
Less: Current installments (1)
- -----------------------------------------------------------------
Long-term capital lease obligations,
excluding current installments $ 150
=======================================================================================
Short-term and long-term obligations for capital leases are included in the
Company's Consolidated Balance Sheets in Current Installments of Long-Term Debt
and Long-Term Debt, respectively. The assets under capital leases recorded in
Net Property and Equipment, net of amortization, totaled $147 million and $106
million at February 1, 1998 and February 2, 1997, 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 401(k) 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 1, 1998, the ESOP held a total of 10,161,277 shares of
the Company's common stock in trust for plan participants' accounts. The ESOP
purchased the shares in the open market with contributions received from the
Company in fiscal 1997, and from the proceeds of loans obtained from the Company
during fiscal 1992, 1990 and 1989 totaling approximately $81 million. All loans
payable to the Company in connection with the purchase of such shares have been
paid in full.
The Company's common stock purchased by the ESOP from the loan proceeds 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 401(k) Trustee is required to use to make payments for
any loan interest and principal due 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. If no shares
are available in the "suspense account," Company contributions to the ESOP are
used to purchase shares on the open market, which are then allocated to
participants' accounts. As of February 1, 1998, there were no shares held in
suspense by the trustee.
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
1997, 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 $33 million
and $25 million for fiscal years 1997 and 1996, respectively. Contributions to
the ESOP totaled $14 million for fiscal year 1995.
NOTE 7 - INVESTMENTS The Company's investments were recorded at fair value, were
all classified as available-for-sale, and consisted of the following at February
1, 1998 and February 2, 1997 (in millions):
FEBRUARY 1, 1998 FEBRUARY 2, 1997
- ------------------------------------------------------------------------------
Tax-exempt notes and bonds $ - $ 193
U.S. Treasury securities - 198
U.S. Government agency securities 1 1
Corporate obligations - 14
Corporate asset-backed securities 1 15
Other 15 -
- ------------------------------------------------------------------------------
Total $ 17 $ 421
==============================================================================
Short-term investments, including current
maturities of long-term investments $ 2 $ 413
Long-term investments 15 8
- ------------------------------------------------------------------------------
Total $ 17 $ 421
==============================================================================
Fair value at February 1, 1998 and February 2, 1997 approximated amortized
cost. There were no sales of investments available-for-sale during the fiscal
year ended February 1, 1998. For the fiscal year ended February 2, 1997,
proceeds from sales of investments available-for-sale were $41 million, and
gross gains realized on sales were $55,000. For the fiscal year ended January
28, 1996, proceeds from sales of investments available-for-sale were $31
million, and gross gains of $790,000 and gross losses of $69,000 were realized
on those sales.
THE HOME DEPOT
30
20
NOTE 8 - BASIC AND DILUTED EARNINGS PER SHARE During fiscal 1997, the Company
adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share." The calculations of basic and diluted earnings per share
for fiscal years 1997, 1996 and 1995 are as follows (amounts in millions, except
per share data):
FISCAL YEAR ENDED
------------------------------------------------------------
FEBRUARY 1, 1998 FEBRUARY 2, 1997 JANUARY 28, 1996
(52 WEEKS) (53 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE
Net earnings available to
common shareholders $1,160 $938 $732
Weighted average number of
common shares outstanding 729 719 709
- -------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.59 $1.30 $1.03
=============================================================================================================
CALCULATION OF DILUTED EARNINGS PER SHARE
Net earnings available to
common shareholders $1,160 $938 $732
Tax-effected interest expense attributable to:
3-1/4% Convertible Subordinated Notes 23 8 -
4-1/2% Convertible Subordinated Notes - - 2
- -------------------------------------------------------------------------------------------------------------
Net earnings available to common
shareholders assuming dilution $1,183 $946 $734
- -------------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 729 719 709
Effect of potentially dilutive securities:
3-1/4% Convertible Subordinated Notes 24 8 -
4-1/2% Convertible Subordinated Notes - - 5
Employee stock plans 9 5 3
- -------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding assuming dilution 762 732 717
- -------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ 1.55 $1.29 $1.02
=============================================================================================================
Employee stock plans represent shares granted under the Company's employee
stock purchase plan and stock option plans, as well as shares issued for
deferred compensation stock plans. For fiscal years 1997 and 1996, shares
issuable upon conversion of the Company's 3-1/4% Notes, issued in October 1996,
were included in weighted average shares assuming dilution for purposes of
calculating diluted earnings per share. To calculate diluted earnings per share,
net earnings are adjusted for tax-effected net interest and issue costs on the
3-1/4% Notes and divided by weighted average shares assuming dilution. For
fiscal year 1995, the Company's 4-1/2% Convertible Subordinated Notes, issued
in 1990, were included in the diluted earnings per share calculation prior to
conversion in March 1995.
NOTE 9 - LAWSUIT SETTLEMENTS On September 19, 1997, the Company, without
admitting any wrongdoing, entered into a settlement agreement with plaintiffs in
the class action lawsuit Butler et. al. v. Home Depot, Inc., in which the
plaintiffs had asserted claims of gender discrimination. The Company
subsequently reached agreements to settle three other individual lawsuits, each
of which involved claims of gender discrimination.
As a result of these agreements, the Company recorded a pre-tax non-recurring
charge of $104 million in fiscal 1997. The non-recurring charge includes
expected payments of $65 million to the plaintiff class members and $22.5
million to the plaintiffs' attorneys in Butler, and approximately $17 million
for other related internal costs, including implementation or enhancement of
certain human resources programs, as well as the settlement terms of the three
other lawsuits. Excluding the non-recurring charge, diluted earnings per share
for fiscal 1997 were $1.64 compared to $1.55 as reported.
NOTE 10 - COMMITMENTS AND CONTINGENCIES At February 1, 1998, the Company was
contingently liable for approximately $288 million under outstanding letters of
credit issued in connection with purchase commitments.
The Company is involved in litigation arising from the normal course of
business. In management's opinion, this litigation is not expected to materially
impact the Company's consolidated results of operations or financial condition.
NOTE 11 - 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, which was operating seven warehouse-style home improvement stores in
Ontario, Canada. Subsequent to the acquisition, The Home Depot Canada has opened
25 additional stores, which are located in the Provinces of Ontario, British
Columbia, Alberta and Manitoba. 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 cash purchase price for the 75% interest in Aikenhead's was approximately
$162 million 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
$68 million was recorded as goodwill and is being amortized over 40 years.
THE HOME DEPOT
31
21
NOTES
Note 12 - QUARTERLY FINANCIAL DATA - The following is a summary of the unaudited
quarterly results of operations for the fiscal years ended February 1, 1998 and
February 2, 1997 (in millions, except per share data):
PERCENT INCREASE
IN COMPARABLE BASIC EARNINGS DILUTED EARNINGS
NET SALES STORE SALES GROSS PROFIT NET EARNINGS PER SHARE PER SHARE
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal year ended February 1, 1998:
First quarter $ 5,657 11% $1,552 $ 259 $0.36 $0.35
Second quarter 6,550 5% 1,800 358 0.49 0.48
Third quarter 6,217 7% 1,726 236 0.32 0.32
Fourth quarter 5,732 6% 1,703 307 0.42 0.41
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal year $24,156 7% $6,781 $1,160 $1.59 $1.55
============================================================================================================================
Fiscal year ended February 2, 1997:
First quarter $ 4,362 3% $1,220 $ 195 $0.27 $0.27
Second quarter 5,293 9% 1,437 270 0.38 0.37
Third quarter 4,922 7% 1,338 222 0.31 0.31
Fourth quarter 4,958 7% 1,439 251 0.35 0.34
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal year $19,535 7% $5,434 $ 938 $1.30 $1.29
============================================================================================================================
THE HOME DEPOT
32
22
The approximate future minimum lease payments under capital and operating
leases at February 1, 1998 were as follows (in millions):
FISCAL YEAR CAPITAL LEASES OPERATING LEASES
- ---------------------------------------------------------------------------------------
1998 $ 24 $ 294
1999 24 291
2000 24 264
2001 24 245
2002 24 236
Thereafter 336 2,701
- ---------------------------------------------------------------------------------------
456 $ 4,031
Less: Imputed interest (305) =======
- -----------------------------------------------------------------
Net present value of capital lease obligations 151
Less: Current installments (1)
- -----------------------------------------------------------------
Long-term capital lease obligations,
excluding current installments $ 150
=======================================================================================
Short-term and long-term obligations for capital leases are included in the
Company's Consolidated Balance Sheets in Current Installments of Long-Term Debt
and Long-Term Debt, respectively. The assets under capital leases recorded in
Net Property and Equipment, net of amortization, totaled $147 million and $106
million at February 1, 1998 and February 2, 1997, 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 401(k) 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 1, 1998, the ESOP held a total of 10,161,277 shares of
the Company's common stock in trust for plan participants' accounts. The ESOP
purchased the shares in the open market with contributions received from the
Company in fiscal 1997, and from the proceeds of loans obtained from the Company
during fiscal 1992, 1990 and 1989 totaling approximately $81 million. All loans
payable to the Company in connection with the purchase of such shares have been
paid in full.
The Company's common stock purchased by the ESOP from the loan proceeds 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 401(k) Trustee is required to use to make payments for
any loan interest and principal due 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. If no shares
are available in the "suspense account," Company contributions to the ESOP are
used to purchase shares on the open market, which are then allocated to
participants' accounts. As of February 1, 1998, there were no shares held in
suspense by the trustee.
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
1997, 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 $33 million
and $25 million for fiscal years 1997 and 1996, respectively. Contributions to
the ESOP totaled $14 million for fiscal year 1995.
NOTE 7 - INVESTMENTS The Company's investments were recorded at fair value, were
all classified as available-for-sale, and consisted of the following at February
1, 1998 and February 2, 1997 (in millions):
FEBRUARY 1, 1998 FEBRUARY 2, 1997
- ------------------------------------------------------------------------------
Tax-exempt notes and bonds $ - $ 193
U.S. Treasury securities - 198
U.S. Government agency securities 1 1
Corporate obligations - 14
Corporate asset-backed securities 1 15
Other 15 -
- ------------------------------------------------------------------------------
Total $ 17 $ 421
==============================================================================
Short-term investments, including current
maturities of long-term investments $ 2 $ 413
Long-term investments 15 8
- ------------------------------------------------------------------------------
Total $ 17 $ 421
==============================================================================
Fair value at February 1, 1998 and February 2, 1997 approximated amortized
cost. There were no sales of investments available-for-sale during the fiscal
year ended February 1, 1998. For the fiscal year ended February 2, 1997,
proceeds from sales of investments available-for-sale were $41 million, and
gross gains realized on sales were $55,000. For the fiscal year ended January
28, 1996, proceeds from sales of investments available-for-sale were $31
million, and gross gains of $790,000 and gross losses of $69,000 were realized
on those sales.
NOTE 8 - BASIC AND DILUTED EARNINGS PER SHARE During fiscal 1997, the Company
adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share." The calculations of basic and diluted earnings per share
for fiscal years 1997, 1996 and 1995 are as follows (amounts in millions, except
per share data):
FISCAL YEAR ENDED
------------------------------------------------------------
FEBRUARY 1, 1998 FEBRUARY 2, 1997 JANUARY 28, 1996
(52 WEEKS) (53 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE
Net earnings available to
common shareholders $1,160 $938 $732
Weighted average number of
common shares outstanding 729 719 709
- -------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.59 $1.30 $1.03
=============================================================================================================
CALCULATION OF DILUTED EARNINGS PER SHARE
- -------------------------------------------------------------------------------------------------------------
Net earnings available to
common shareholders $1,160 $938 $732
Tax-effected interest expense attributable to:
3-1/4% Convertible Subordinated Notes 23 8 -
4-1/2% Convertible Subordinated Notes - - 2
- -------------------------------------------------------------------------------------------------------------
Net earnings available to common
shareholders assuming dilution $1,183 $946 $734
- -------------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 729 719 709
Effect of potentially dilutive securities:
3-1/4% Convertible Subordinated Notes 24 8 -
4-1/2% Convertible Subordinated Notes - - 5
Employee stock plans 9 5 3
- -------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding assuming dilution 762 732 717
- -------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ 1.55 $1.29 $1.02
=============================================================================================================
Employee stock plans represent shares granted under the Company's employee
stock purchase plan and stock option plans, as well as shares issued for
deferred compensation stock plans. For fiscal years 1997 and 1996, shares
issuable upon conversion of the Company's 3-1/4% Notes, issued in October 1996,
were included in weighted average shares assuming dilution for purposes of
calculating diluted earnings per share. To calculate diluted earnings per share,
net earnings are adjusted for tax-effected net interest and issue costs on the
3-1/4% Notes and divided by weighted average shares assuming dilution. For
fiscal year 1995, the Company's 4-1/2% Convertible Subordinated Notes, issued
in 1990, were included in the diluted earnings per share calculation prior to
conversion in March 1995.
NOTE 9 - LAWSUIT SETTLEMENTS On September 19, 1997, the Company, without
admitting any wrongdoing, entered into a settlement agreement with plaintiffs in
the class action lawsuit Butler et. al. v. Home Depot, Inc., in which the
plaintiffs had asserted claims of gender discrimination. The Company
subsequently reached agreements to settle three other individual lawsuits, each
of which involved claims of gender discrimination.
As a result of these agreements, the Company recorded a pre-tax non-recurring
charge of $104 million in fiscal 1997. The non-recurring charge includes
expected payments of $65 million to the plaintiff class members and $22.5
million to the plaintiffs' attorneys in Butler, and approximately $17 million
for other related internal costs, including implementation or enhancement of
certain human resources programs, as well as the settlement terms of the three
other lawsuits. Excluding the non-recurring charge, diluted earnings per share
for fiscal 1997 were $1.64 compared to $1.55 as reported.
NOTE 10 - COMMITMENTS AND CONTINGENCIES At February 1, 1998, the Company was
contingently liable for approximately $288 million under outstanding letters of
credit issued in connection with purchase commitments.
The Company is involved in litigation arising from the normal course of
business. In management's opinion, this litigation is not expected to materially
impact the Company's consolidated results of operations or financial condition.
NOTE 11 - 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, which was operating seven warehouse-style home improvement stores in
Ontario, Canada. Subsequent to the acquisition, The Home Depot Canada has opened
25 additional stores, which are located in the Provinces of Ontario, British
Columbia, Alberta and Manitoba. 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 cash purchase price for the 75% interest in Aikenhead's was approximately
$162 million 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
$68 million was recorded as goodwill and is being amortized over 40 years.
Note 12 - QUARTERLY FINANCIAL DATA - The following is a summary of the unaudited
quarterly results of operations for the fiscal years ended February 1, 1998 and
February 2, 1997 (in millions, except per share data):
PERCENT INCREASE
IN COMPARABLE BASIC EARNINGS DILUTED EARNINGS
NET SALES STORE SALES GROSS PROFIT NET EARNINGS PER SHARE PER SHARE
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal year ended February 1, 1998:
First quarter $ 5,657 11% $1,552 $ 259 $0.36 $0.35
Second quarter 6,550 5% 1,800 358 0.49 0.48
Third quarter 6,217 7% 1,726 236 0.32 0.32
Fourth quarter 5,732 6% 1,703 307 0.42 0.41
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal year $24,156 7% $6,781 $1,160 $1.59 $1.55
============================================================================================================================
Fiscal year ended February 2, 1997:
First quarter $ 4,362 3% $1,220 $ 195 $0.27 $0.27
Second quarter 5,293 9% 1,437 270 0.38 0.37
Third quarter 4,922 7% 1,338 222 0.31 0.31
Fourth quarter 4,958 7% 1,439 251 0.35 0.34
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal year $19,535 7% $5,434 $ 938 $1.30 $1.29
============================================================================================================================
23
[KPMG PEAT MARWICK LOGO]
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 1, 1998 and February 2, 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended February 1, 1998.
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 audits 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 1, 1998, and February 2, 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended February 1, 1998 in conformity with generally
accepted accounting principles.
Atlanta, Georgia
March 13, 1998 KPMG Peat Marwick LLP
THE HOME DEPOT
33