EX-13 7 g75478ex13.txt THE REGISTRANT'S ANNUAL REPORT CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Year Ended ------------------------------------------------------- amounts in millions,except per share data FEBRUARY 3, 2002 January 28, 2001 January 30, 2000 --------------------------------------------------------------------------------------------------------------------------------- NET SALES $ 53,553 $ 45,738 $ 38,434 Cost of Merchandise Sold 37,406 32,057 27,023 --------------------------------------------------------------------------------------------------------------------------------- Gross Profit 16,147 13,681 11,411 Operating Expenses: Selling and Store Operating 10,163 8,513 6,819 Pre-Opening 117 142 113 General and Administrative 935 835 671 --------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 11,215 9,490 7,603 --------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 4,932 4,191 3,808 Interest Income (Expense): Interest and Investment Income 53 47 37 Interest Expense (28) (21) (41) --------------------------------------------------------------------------------------------------------------------------------- Interest,net 25 26 (4) --------------------------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 4,957 4,217 3,804 Income Taxes 1,913 1,636 1,484 --------------------------------------------------------------------------------------------------------------------------------- NET EARNINGS $ 3,044 $ 2,581 $ 2,320 =================================================== BASIC EARNINGS PER SHARE $ 1.30 $ 1.11 $ 1.03 Weighted Average Number of Common Shares Outstanding 2,335 2,315 2,244 =================================================== DILUTED EARNINGS PER SHARE $ 1.29 $ 1.10 $ 1.00 Weighted Average Number of Common Shares Outstanding Assuming Dilution 2,353 2,352 2,342 ===================================================
See accompanying notes to consolidated financial statements. 24 The Home Depot,Inc.and Subsidiaries CONSOLIDATED BALANCE SHEETS
amounts in millions, except share data FEBRUARY 3, 2002 January 28,2001 ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and Cash Equivalents $ 2,477 $ 167 Short-Term Investments,including current maturities of long-term investments 69 10 Receivables, net 920 835 Merchandise Inventories 6,725 6,556 Other Current Assets 170 209 ---------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 10,361 7,777 ---------------------------------------------------------------------------------------------------------------------------------- Property and Equipment, at cost: Land 4,972 4,230 Buildings 7,698 6,167 Furniture, Fixtures and Equipment 3,403 2,877 Leasehold Improvements 750 665 Construction in Progress 1,049 1,032 Capital Leases 257 261 ---------------------------------------------------------------------------------------------------------------------------------- 18,129 15,232 Less Accumulated Depreciation and Amortization 2,754 2,164 ---------------------------------------------------------------------------------------------------------------------------------- Net Property and Equipment 15,375 13,068 ---------------------------------------------------------------------------------------------------------------------------------- Notes Receivable 83 77 Cost in Excess of the Fair Value of Net Assets Acquired,net of accumulated amortization of $49 at February 3, 2002 and $41 at January 28, 2001 419 314 Other 156 149 ---------------------------------------------------------------------------------------------------------------------------------- $ 26,394 $ 21,385 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 3,436 $ 1,976 Accrued Salaries and Related Expenses 717 627 Sales Taxes Payable 348 298 Other Accrued Expenses 933 752 Deferred Revenue 851 650 Income Taxes Payable 211 78 Current Installments of Long-Term Debt 5 4 ---------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 6,501 4,385 ---------------------------------------------------------------------------------------------------------------------------------- Long-Term Debt, excluding current installments 1,250 1,545 Other Long-Term Liabilities 372 249 Deferred Income Taxes 189 195 Minority Interest -- 7 STOCKHOLDERS' EQUITY Common Stock, par value $0.05. Authorized:10,000,000,000 shares; issued and outstanding - 2,345,888,000 shares at February 3, 2002 and 2,323,747,000 shares at January 28, 2001 117 116 Paid-In Capital 5,412 4,810 Retained Earnings 12,799 10,151 Accumulated Other Comprehensive Loss (220) (67) ---------------------------------------------------------------------------------------------------------------------------------- 18,108 15,010 Less Unearned Compensation 26 6 ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 18,082 15,004 ---------------------------------------------------------------------------------------------------------------------------------- $ 26,394 $ 21,385 ============================
See accompanying notes to consolidated financial statements. The Home Depot,Inc. and Subsidiaries 25 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accu- mulated Other Compre- Total Common Stock hensive Stock- Compre- amounts in millions, ---------------- Paid-In Retained Income holders' hensive except per share data Shares Amount Capital Earnings (Loss) Other Equity Income(1) ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 1999 2,213 $111 $2,817 $ 5,876 $ (61) $ (3) $ 8,740 =============================================================================== Shares Issued Under Employee Stock Purchase and Option Plans 19 1 273 -- -- -- 274 Tax Effect of Sale of Option Shares by Employees -- -- 132 -- -- -- 132 Conversion of 3 1/4% Convertible Subordinated Notes, net 72 3 1,097 -- -- -- 1,100 Net Earnings -- -- -- 2,320 -- -- 2,320 $ 2,320 Translation Adjustments -- -- -- -- 34 -- 34 34 Unearned Compensation -- -- -- -- -- (4) (4) Cash Dividends ($0.11 per share) -- -- -- (255) -- -- (255) ------- Comprehensive Income for Fiscal 1999 $ 2,354 ------------------------------------------------------------------------------------------------------------------ ======= BALANCE, JANUARY 30, 2000 2,304 $115 $4,319 $ 7,941 $ (27) $ (7) $ 12,341 =============================================================================== Shares Issued Under Employee Stock Purchase and Option Plans 20 1 348 -- -- -- 349 Tax Effect of Sale of Option Shares by Employees -- -- 137 -- -- -- 137 Net Earnings -- -- -- 2,581 -- -- 2,581 $ 2,581 Translation Adjustments -- -- -- -- (40) -- (40) (40) Stock Compensation Expense -- -- 6 -- -- -- 6 Unearned Compensation -- -- -- -- -- 1 1 Cash Dividends ($0.16 per share) -- -- -- (371) -- -- (371) ------- Comprehensive Income for Fiscal 2000 $ 2,541 ------------------------------------------------------------------------------------------------------------------ ======= BALANCE, JANUARY 28, 2001 2,324 $116 $4,810 $ 10,151 $ (67) $ (6) $ 15,004 =============================================================================== Shares Issued Under Employee Stock Purchase and Option Plans 22 1 448 -- -- -- 449 Tax Effect of Sale of Option Shares by Employees -- -- 138 -- -- -- 138 Net Earnings -- -- -- 3,044 -- -- 3,044 $ 3,044 Translation Adjustments -- -- -- -- (124) -- (124) (124) Unrealized Loss on Derivatives -- -- -- -- (29) -- (29) (18) Stock Compensation Expense -- -- 16 -- -- -- 16 Unearned Compensation -- -- -- -- -- (20) (20) Cash Dividends ($0.17 per share) -- -- -- (396) -- -- (396) ------- Comprehensive Income for Fiscal 2001 $ 2,902 ------------------------------------------------------------------------------------------------------------------ ======= BALANCE, FEBRUARY 3, 2002 2,346 $117 $5,412 $ 12,799 $(220) $(26) $ 18,082 ===============================================================================
(1) Components of comprehensive income are reported net of related taxes. See accompanying notes to consolidated financial statements. 26 The Home Depot,Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ---------------------------------------------------- amounts in millions FEBRUARY 3, 2002 January 28,2001 January 30,2000 ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATIONS: Net Earnings $ 3,044 $ 2,581 $ 2,320 Reconciliation of Net Earnings to Net Cash Provided by Operations: Depreciation and Amortization 764 601 463 Increase in Receivables, net (119) (246) (85) Increase in Merchandise Inventories (166) (1,075) (1,142) Increase in Accounts Payable and Accrued Liabilities 2,078 754 820 Increase in Income Taxes Payable 272 151 93 Other 90 30 (23) ---------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operations 5,963 2,796 2,446 ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures, net of $5, $16 and $37 of non-cash capital expenditures in fiscal 2001, 2000 and 1999, respectively (3,393) (3,558) (2,581) Payments for Businesses Acquired, net (190) (26) (101) Proceeds from Sale of Business, net 64 -- -- Proceeds from Sales of Property and Equipment 126 95 87 Purchases of Investments (85) (39) (32) Proceeds from Maturities of Investments 25 30 30 Other (13) (32) (25) ---------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (3,466) (3,530) (2,622) ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: (Repayments) Issuance of Commercial Paper Obligations, net (754) 754 (246) Proceeds from Long-Term Debt 532 32 522 Repayments of Long-Term Debt -- (29) (14) Proceeds from Sale of Common Stock, net 445 351 267 Cash Dividends Paid to Stockholders (396) (371) (255) Minority Interest Contributions to Partnership -- -- 7 ---------------------------------------------------------------------------------------------------------------------------------- Net Cash (Used In) Provided by Financing Activities (173) 737 281 ---------------------------------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents (14) (4) 1 ---------------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 2,310 (1) 106 Cash and Cash Equivalents at Beginning of Year 167 168 62 ---------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 2,477 $ 167 $ 168 ============================================= SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS MADE FOR: Interest, net of interest capitalized $ 18 $ 16 $ 26 Income Taxes $ 1,685 $ 1,386 $ 1,396 =============================================
See accompanying notes to consolidated financial statements. The Home Depot, Inc. and Subsidiaries 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Home Depot, Inc. and subsidiaries (the "Company") operates Home Depot stores, which are full-service, warehouse-style stores averaging approximately 109,000 square feet in size. The stores stock approximately 40,000 to 50,000 different kinds of building materials, home improvement supplies and lawn and garden products that are sold primarily to do-it-yourselfers, but also to home improvement contractors, tradespeople, and building maintenance professionals. In addition, the Company operates EXPO Design Center stores, which offer products and services primarily related to design and renovation projects, and Villager's Hardware stores, which offer products and services for home enhancement and smaller project needs in a convenience hardware store format. Additionally, the Company operates one Home Depot Floor Store, a test store that offers only flooring products and installation services. At the end of fiscal 2001, the Company was operating 1,333 stores, including 1,201 Home Depot stores, 41 EXPO Design Center stores, 4 Villager's Hardware stores and 1 Home Depot Floor Store in the United States; 78 Home Depot stores in Canada; 4 Home Depot stores in Argentina, which were sold on February 18, 2002; and 4 Home Depot stores in Mexico. Included in the Company's Consolidated Balance Sheet at February 3, 2002, were $946 million of net assets of the Canada, Argentina and Mexico operations. Also included in consolidated results are several wholly- owned subsidiaries. The Company offers facilities maintenance and repair products, as well as wallpaper and custom window treatments via direct shipment through subsidiaries Maintenance Warehouse and National Blinds and Wallpaper, Inc. Georgia Lighting is a specialty lighting designer, distributor and retailer to both commercial and retail customers. The Company offers plumbing, HVAC and other professional plumbing products through wholesale plumbing distributors Apex Supply Company and Your "other" Warehouse. FISCAL YEAR The Company's fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. Fiscal year 2001, which ended February 3, 2002, consisted of 53 weeks. Fiscal years 2000 and 1999, which ended January 28, 2001 and January 30, 2000, respectively, consisted of 52 weeks. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority-owned partnership, The Home Depot Chile S.A. In October 2001, the Company sold its interest in The Home Depot Chile S.A. All significant intercompany transactions have been eliminated in consolidation. Stockholders' equity, share and per share amounts for all periods presented have been adjusted for a three-for-two stock split effected in the form of a stock dividend on December 30, 1999. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company's cash and cash equivalents are carried at fair market value and consist primarily of commercial paper, money market funds, U.S. government agency securities and tax-exempt notes and bonds. MERCHANDISE INVENTORIES The majority of the Company's inventory is stated at the lower of cost (first-in, first-out) or market, as determined by the retail inventory method. Certain subsidiaries and distribution centers value inventories at the lower of cost (first-in, first-out) or market, as determined by the cost method. These inventories represent approximately 6% of total inventory. INVESTMENTS The Company's investments, consisting primarily of high-grade debt securities, are recorded at fair value and are classified as available-for-sale. INCOME TAXES The Company provides for federal, state and foreign income taxes currently payable, as well as for those deferred because of timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Federal, state and foreign incentive tax credits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. Non-U.S. subsidiaries, which are consolidated for financial reporting, are not eligible to be included in consolidated U.S. federal income tax returns. Separate provisions for income taxes have been determined for these entities. The Company intends to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes for non-U.S. subsidiaries was required for any year presented. 28 The Home Depot, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DEPRECIATION AND AMORTIZATION The Company's buildings, furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Improvements to leased premises are amortized using the straight-line method over the life of the lease or the useful life of the improvement, whichever is shorter. The Company's property and equipment is depreciated using the following estimated useful lives:
Life ------------------------------------------------------ Buildings 10-45 years Furniture, fixtures and equipment 5-20 years Leasehold improvements 5-30 years Computer software 3-5 years ------------------------------------------------------
REVENUES The Company recognizes revenue, net of estimated returns, at the time the customer takes possession of merchandise or receives services. When the Company collects payment from customers before ownership of the merchandise has passed or the service has been performed, the amount received is recorded as a deferred revenue liability. SELF INSURANCE The Company is self-insured for certain losses related to general liability, product liability and workers' compensation. The Company has stop loss coverage to limit the exposure arising from these claims. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. The expected ultimate cost of claims is estimated based upon analysis of historical data and actuarial estimates. ADVERTISING Television and radio advertising production costs along with media placement costs are expensed when the advertisement appears. Included in current assets are $15 million and $20 million at the end of fiscal years 2001 and 2000, respectively, relating to prepayments of production costs for print and broadcast advertising. SHIPPING AND HANDLING COSTS The Company accounts for certain shipping and handling costs related to the shipment of product to customers from vendors as cost of goods sold. However, costs of shipments to customers by the Company are classified as selling and store operating expenses. The costs of shipments included in selling and store operating expenses amounted to $122 million, $73 million and $40 million in fiscal years 2001, 2000 and 1999, respectively. COST IN EXCESS OF THE FAIR VALUE OF NET ASSETS ACQUIRED Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 40 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining useful life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted cash flows using a discount rate reflecting the Company's average cost of funds. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. Impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. Accordingly, when the Company commits to relocate or close a store, the estimated unrecoverable costs are charged to selling and store operating expense. Such costs include the estimated loss on the sale of land and buildings, the book value of abandoned fixtures, equipment and leasehold improvements, and a provision for the present value of future lease obligations, less estimated sublease income. STOCK COMPENSATION Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" encourages the use of a fair-value-based method of accounting. As allowed by SFAS 123, the Company has elected to account for its stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Under APB 25, compensation expense is recorded on the date of grant if the current market price of the underlying stock exceeds the exercise price. The Company complies with the disclosure requirements of SFAS 123. DERIVATIVES On January 29, 2001, the Company adopted Statement of Financial Accounting Standards Nos. 133, 137, and 138 (collectively "SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires an entity to measure derivatives at fair value and recognize these assets or liabilities on the balance sheet. Recognition of changes in the fair value of a derivative in the income statement or other accumulated comprehensive income (loss) depends on the intended use of the derivative and its designation. The Company designates its derivatives based upon criteria established by SFAS 133. The Company's objective for holding derivative instruments is to decrease the volatility of earnings and cash flow associated with fluctuations in interest rates and foreign currencies. The Home Depot, Inc. and Subsidiaries 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMPREHENSIVE INCOME Comprehensive income includes net earnings adjusted for certain revenues, expenses, gains and losses that are excluded from net earnings under generally accepted accounting principles. Examples include foreign currency translation adjustments and unrealized gains and losses on certain hedge transactions. FOREIGN CURRENCY TRANSLATION The assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current rate of exchange on the last day of the reporting period, revenues and expenses are translated at the average monthly exchange rates, and equity transactions are translated using the actual rate on the day of the transaction. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses in preparing these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. RECLASSIFICATIONS Certain amounts in prior fiscal years have been reclassified to conform with the presentation adopted in the current fiscal year. NOTE 2. LONG-TERM DEBT The Company's long-term debt at the end of fiscal 2001 and fiscal 2000 consisted of the following (amounts in millions):
FEBRUARY 3, 2002 January 28,2001 ---------------------------------------------------------------------------------- Commercial Paper; weighted average interest rate of 6.1% at January 28, 2001 $ -- $ 754 6 1/2% Senior Notes; due September 15, 2004; interest payable semi-annually on March 15 and September 15 500 500 5 3/8% Senior Notes; due April 1, 2006; interest payable semi-annually on April 1 and October 1 500 -- Capital Lease Obligations; payable in varying installments through January 31, 2027 232 230 Other 23 65 ---------------------------------------------------------------------------------- Total long-term debt 1,255 1,549 Less current installments 5 4 ---------------------------------------------------------------------------------- Long-term debt,excluding current installments $1,250 $1,545 ===========================
The Company has a commercial paper program with maximum available borrowings up to $1 billion. In connection with the program, the Company has a back-up credit facility with a consortium of banks for up to $800 million. The credit facility, which expires in September 2004, contains various restrictive covenants, none of which are expected to materially impact the Company's liquidity or capital resources. Commercial paper borrowings of $754 million outstanding at January 28, 2001, were classified as noncurrent pursuant to the Company's intent and ability to finance this obligation on a long-term basis. The Company issued $500 million of 5 3/8% Senior Notes in fiscal 2001 and $500 million of 6 1/2% Senior Notes in fiscal 1999, collectively referred to as "Senior Notes." The Senior Notes may be redeemed by the Company at any time, in whole or in part, at a redemption price plus accrued interest up to the redemption date. The redemption price is equal to the greater of (1) 100% of the principal amount of the Senior Notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest to maturity. The Senior Notes are not subject to sinking fund requirements. Interest expense in the accompanying Consolidated Statements of Earnings is net of interest capitalized of $84 million, $73 million and $45 million in fiscal 2001, 2000 and 1999, respectively. Maturities of long-term debt are $5 million for fiscal 2002, $6 million for fiscal 2003, $507 million for fiscal 2004, $8 million for fiscal 2005 and $509 million for fiscal 2006. As of February 3, 2002, the market values of the publicly traded 5 3/8% and 6 1/2% Senior Notes were approximately $511 million and $531 million, respectively. The estimated fair value of all other long-term borrowings, excluding capital lease obligations, approximated the carrying value of $23 million. These fair values were estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar liabilities. NOTE 3. INCOME TAXES The provision for income taxes consisted of the following (in millions):
Fiscal Year Ended --------------------------------------------------------------------- FEBRUARY 3, 2002 January 28, 2001 January 30, 2000 -------------------------------------------------------------------------------------------------- Current: U.S. $ 1,594 $ 1,267 $ 1,209 State 265 216 228 Foreign 60 45 45 -------------------------------------------------------------------------------------------------- 1,919 1,528 1,482 -------------------------------------------------------------------------------------------------- Deferred: U.S. (12) 98 9 State (1) 9 (4) Foreign 7 1 (3) -------------------------------------------------------------------------------------------------- (6) 108 2 -------------------------------------------------------------------------------------------------- Total $ 1,913 $ 1,636 $ 1,484 =============================================================
30 The Home Depot, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's combined federal, state and foreign effective tax rates for fiscal years 2001, 2000 and 1999, net of offsets generated by federal, state and foreign tax incentive credits, were approximately 38.6%, 38.8%, and 39.0%, respectively. A reconciliation of income tax expense at the federal statutory rate of 35% to actual tax expense for the applicable fiscal years is as follows (in millions):
Fiscal Year Ended --------------------------------------------------------------------- FEBRUARY 3, 2002 January 28, 2001 January 30, 2000 -------------------------------------------------------------------------------------------------- Income taxes at U.S. statutory rate $ 1,735 $ 1,476 $ 1,331 State income taxes, net of federal income tax benefit 172 146 145 Foreign rate differences 4 5 2 Other, net 2 9 6 -------------------------------------------------------------------------------------------------- Total $ 1,913 $ 1,636 $ 1,484 =============================================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of February 3, 2002 and January 28, 2001 were as follows (in millions):
FEBRUARY 3, 2002 January 28,2001 ----------------------------------------------------------------------------------- Deferred Tax Assets: Accrued self-insurance liabilities $ 220 $ 151 Other accrued liabilities 138 118 Net loss on disposition 31 -- ----------------------------------------------------------------------------------- Total gross deferred tax assets 389 269 Valuation allowance (31) -- ----------------------------------------------------------------------------------- Deferred tax assets, net of valuation allowance 358 269 ----------------------------------------------------------------------------------- Deferred Tax Liabilities: Accelerated depreciation (492) (389) Other (55) (75) ----------------------------------------------------------------------------------- Total gross deferred tax liabilities (547) (464) ----------------------------------------------------------------------------------- Net deferred tax liability $ (189) $ (195) ===========================
A valuation allowance was established in fiscal 2001 for a deferred tax asset generated from the net loss on disposition of a business. Company management believes the existing net deductible temporary differences comprising the deferred tax assets, net of the valuation allowance, will reverse during periods in which the Company generates net taxable income. NOTE 4. EMPLOYEE STOCK PLANS The 1997 Omnibus Stock Incentive Plan ("1997 Plan") provides that incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock and deferred shares may be issued to selected associates, officers and directors of the Company. The maximum number of shares of the Company's common stock available for issuance under the 1997 Plan is the lesser of 225 million shares or the number of shares carried over from prior plans plus one-half percent of the total number of outstanding shares as of the first day of each fiscal year. In addition, restricted shares issued under the 1997 Plan may not exceed 22.5 million shares. As of February 3, 2002, there were 121 million shares available for future grants under the 1997 Plan. Under the 1997 Plan, the Company has granted incentive and non-qualified options for 143 million shares, net of cancellations (of which 76 million had been exercised). Incentive stock options typically vest at the rate of 25% per year commencing on the first anniversary date of the grant and expire on the tenth anniversary date of the grant. The non-qualified options have similar terms but typically commence vesting on the second anniversary of the date of grant. Under the 1997 Plan, 712,000 shares of restricted stock have been issued, net of cancellations (the restrictions on 4,600 shares have lapsed). Generally, the restrictions on 25% of the restricted shares lapse upon the third and sixth year anniversaries of the date of issuance with the restrictions on the remaining 50% of the restricted shares lapsing upon attainment of age 62. The fair value of the restricted shares is expensed over the period during which the restrictions lapse. The Company recorded compensation expense related to restricted stock in the amount of $3 million and $455,000 in fiscal 2001 and 2000, respectively. Under the Non-Qualified Stock Option and Deferred Stock Unit Plans and Agreements, the Company issued 2.5 million non-qualified stock options with an exercise price of $40.75 per share in fiscal 2000. In addition, the Company granted 629,000 deferred stock units and 750,000 deferred stock units in fiscal years 2001 and 2000, respectively, to several key officers vesting at various dates. Each deferred stock unit entitles the officer to one share of common stock to be received up to five years after the vesting date of the deferred stock unit, subject to certain deferral rights of the officer. The fair value of the deferred stock units on the grant dates was $27 million and $31 million for deferred units granted in fiscal 2001 and 2000, respectively. These amounts are being amortized based upon the vesting dates. The Company recorded stock compensation expense related to deferred stock units in the amount of $16 million and $6 million in fiscal 2001 and 2000, respectively. The per share weighted average fair value of stock options granted during fiscal years 2001, 2000 and 1999 was $20.51, The Home Depot, Inc. and Subsidiaries 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $31.96 and $18.86, respectively. The fair value of these options was determined at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Fiscal Year Ended -------------------------------------------------------- FEBRUARY 3, 2002 January 28,2001 January 30,2000 ----------------------------------------------------------------------------------- Risk-free interest rate 5.1% 6.4% 5.1% Expected volatility of common stock 48.1% 54.6% 51.6% Dividend yield 0.4% 0.3% 0.3% Expected option term 6 years 7 years 5 years ===============================================
The Company applies APB 25 in accounting for its stock plans and, accordingly, no compensation costs have been recognized in the Company's financial statements for incentive or non-qualified stock options granted. If, under SFAS 123, the Company determined compensation costs based on the fair value at the grant date for its stock options, net earnings and earnings per share would have been reduced to the pro forma amounts below (in millions, except per share data):
Fiscal Year Ended -------------------------------------------------------------- FEBRUARY 3, 2002 January 28,2001 January 30,2000 ----------------------------------------------------------------------------------------- Net Earnings As reported $3,044 $2,581 $2,320 Pro forma $2,800 $2,364 $2,186 Basic Earnings per Share As reported $ 1.30 $ 1.11 $ 1.03 Pro forma $ 1.20 $ 1.02 $ 0.97 Diluted Earnings per Share As reported $ 1.29 $ 1.10 $ 1.00 Pro forma $ 1.19 $ 1.01 $ 0.94 ====================================================
The following table summarizes options outstanding at February 3, 2002, January 28, 2001 and January 30, 2000 and changes during the fiscal years ended on these dates (shares in thousands):
Weighted Number Average of Shares Option Price ---------------------------------------------------------------------- Outstanding at January 31,1999 71,592 $13.45 Granted 14,006 37.81 Exercised (13,884) 10.88 Cancelled (3,295) 18.88 ---------------------------------------------------------------------- Outstanding at January 30,2000 68,419 $18.79 Granted 14,869 49.78 Exercised (14,689) 13.15 Cancelled (2,798) 30.51 ---------------------------------------------------------------------- Outstanding at January 28,2001 65,801 $26.46 Granted 25,330 40.33 Exercised (16,614) 15.03 Cancelled (5,069) 39.20 ---------------------------------------------------------------------- Outstanding at February 3,2002 69,448 $33.33 ========================= Exercisable 26,777 $22.68 =========================
The following table summarizes information regarding stock options outstanding as of February 3, 2002 (shares in thousands):
Weighted Weighted Weighted Average Average Average Range of Options Remaining Outstanding Options Exercisable Exercise Prices Outstanding Life (Yrs) Option Price Exercisable Option Price ----------------------------------------------------------------------------------------------- $ 6.00 to 12.00 11,999 4.1 $10.10 11,631 $10.00 12.00 to 20.00 1,732 5.6 17.10 1,560 17.30 20.00 to 30.00 9,714 6.1 21.80 5,456 21.70 30.00 to 42.00 34,271 8.8 39.30 6,037 38.90 42.00 to 54.00 11,732 8.3 51.70 2,093 52.80 ----------------------------------------------------------------------------------------------- 69,448 7.0 $33.33 26,777 $22.68 =======================================================================
In addition, the Company had 48 million shares available for future grants under the Employee Stock Purchase Plan ("ESPP") at February 3, 2002. The ESPP enables the Company to grant substantially all full-time associates options to purchase up to 152 million shares of common stock, of which 104 million shares have been exercised from inception of the plan, at a price equal to the lower of 85% of the stock's fair market value on the first day or the last day of the purchase period. During fiscal 2001, 5.5 million shares were purchased under the ESPP at an average price of $35.87 per share. At February 3, 2002, there were 2.8 million options outstanding, net of cancellations, at an average price of $37.26 per share. NOTE 5. LEASES The Company leases certain retail locations, office space, warehouse and distribution space, equipment and vehicles. While the majority of the leases are operating leases, certain retail locations are leased under capital leases. As leases expire, it can be expected that in the normal course of business, leases will be renewed or replaced. The Company has two off-balance sheet lease agreements totaling $882 million comprised of an initial lease agreement of $600 million and a subsequent agreement of $282 million. Off-balance sheet leases include leases created under structured financing arrangements. These lease agreements totaling $882 million involve a special purpose entity which meets the criteria established by generally accepted accounting principles and is not owned by or affiliated with the Company, its management or officers. The Company financed a portion of its new stores opened in fiscal 1997 through 2001, as well as a distribution center and office buildings, under these lease agreements. Under both agreements, the lessor purchases the properties, pays for the construction costs and subsequently leases the facilities to the Company. The lease term for the $600 million agreement expires in 2004 and includes four 2-year renewal options. The lease term for the $282 million agreement expires in 2008 with no renewal options. Both lease agreements provide for substantial residual value guarantees and include purchase options at original cost on each property. 32 The Home Depot, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company also leases an import distribution facility, including its related equipment, under an off-balance sheet lease arrangement totaling $85 million. The lease for the import distribution facility expires in 2005 and has four 5-year renewal options. The lease agreement provides for substantial residual value guarantees and includes purchase options at the higher of the cost or fair market value of the assets. The maximum amount of the residual value guarantees relative to the assets under the off-balance sheet lease agreements described above is projected to be $799 million. As the leased assets are placed into service, the Company estimates its liability under the residual value guarantees and records additional rent expense on a straight-line basis over the remaining lease terms. Total rent expense, net of minor sublease income, for the fiscal years ended February 3, 2002, January 28, 2001 and January 30, 2000, was $522 million, $479 million and $389 million, respectively. Real estate taxes, insurance, maintenance and operating expenses applicable to the leased property are obligations of the Company under the lease agreements. Certain store leases provide for contingent rent payments based on percentages of sales in excess of specified minimums. Contingent rent expense for the fiscal years ended February 3, 2002, January 28, 2001, and January 30, 2000 was approximately $10 million, $9 million and $11 million, respectively. The approximate future minimum lease payments under capital and operating leases, including off-balance sheet leases, at February 3, 2002 were as follows (in millions):
Capital Operating Fiscal Year Leases Leases ---------------------------------------------------------------------- 2002 $ 41 $ 517 2003 42 495 2004 43 447 2005 44 415 2006 44 394 Thereafter 577 5,139 ---------------------------------------------------------------------- 791 $7,407 ====== Less imputed interest 559 ------------------------------------------------------- Net present value of capital lease obligations 232 Less current installments 4 ------------------------------------------------------- Long-term capital lease obligations, excluding current installments $228 ====
Short-term and long-term obligations for capital leases are included in the Company's Consolidated Balance Sheets in Current Installments of Long-Term Debt and Long-Term Debt, respectively. The assets under capital leases recorded in Net Property and Equipment, net of amortization, totaled $199 million and $213 million at February 3, 2002 and January 28, 2001, respectively. NOTE 6. EMPLOYEE BENEFIT PLANS The Company maintains a defined contribution plan ("401(k)") that covers substantially all associates meeting certain service requirements. The Company makes weekly matching cash contributions to purchase shares of the Company's common stock, up to specified percentages of associates' contributions as approved by the Board of Directors. The Company also maintains a 401(k) Restoration Plan to provide certain associates deferred compensation that they would have received under the 401(k) matching contribution if not for the maximum compensation limits under the Internal Revenue Code. The Company funds the 401(k) Restoration Plan through contributions made to a "rabbi trust," which are then used to purchase shares of the Company's common stock in the open market. Compensation expense related to this plan for fiscal years 2001, 2000 and 1999 was not material. During February 1999, the Company made its final contribution to the Employee Stock Ownership Plan and Trust ("ESOP"), which was originally established during fiscal 1988. The Company's combined contributions to the 401(k) and ESOP were $97 million, $84 million and $57 million for fiscal years 2001, 2000 and 1999, respectively. At February 3, 2002, the 401(k) and the ESOP held a total of 33 million shares of the Company's common stock in trust for plan participants. NOTE 7. BASIC AND DILUTED EARNINGS PER SHARE The calculations of basic and diluted earnings per share for fiscal years 2001, 2000 and 1999 were as follows (amounts in millions, except per share data):
Fiscal Year Ended ------------------------------------------------------------------ FEBRUARY 3, 2002 January 28, 2001 January 30, 2000 ----------------------------------------------------------------------------------------------------------------------------- Calculation of Basic Earnings Per Share: Net earnings $ 3,044 $ 2,581 $ 2,320 Weighted average number of common shares outstanding 2,335 2,315 2,244 ----------------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share $ 1.30 $ 1.11 $ 1.03 ----------------------------------------------------------------------------------------------------------------------------- Calculation of Diluted Earnings Per Share: Net earnings $ 3,044 $ 2,581 $ 2,320 Tax-effected interest expense attributable to 3 1/4% Notes -- -- 17 ----------------------------------------------------------------------------------------------------------------------------- Net earnings assuming dilution $ 3,044 $ 2,581 $ 2,337 ----------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding 2,335 2,315 2,244 Effect of potentially dilutive securities: 3 1/4% Notes -- -- 51 Employee Stock Plans 18 37 47 ----------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding assuming dilution 2,353 2,352 2,342 ----------------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share $ 1.29 $ 1.10 $ 1.00 =========================================================
The Home Depot, Inc. and Subsidiaries 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Employee stock plans represent shares granted under the Company's employee stock purchase plan and stock option plans, as well as shares issued for deferred compensation stock plans. For fiscal year 1999, shares issuable upon conversion of the Company's 3 1/4% Notes, issued in October 1996 and converted in 1999, were included in weighted average shares outstanding assuming dilution for purposes of calculating diluted earnings per share. To calculate diluted earnings per share, net earnings are adjusted for tax-effected net interest and issue costs on the 3 1/4% Notes (prior to conversion to equity in October 1999) and divided by weighted average shares outstanding assuming dilution. NOTE 8. COMMITMENTS AND CONTINGENCIES At February 3, 2002, the Company was contingently liable for approximately $557 million under outstanding letters of credit issued for certain business transactions, including insurance programs, import inventory purchases and construction contracts. In addition, the Company has certain off-balance sheet leases that include residual value guarantees contingent on the value of underlying assets at the end of the lease term. The estimated maximum amount of the residual value guarantees at the end of the lease terms is $799 million. These leases expire at various terms from 2004 through 2008 with some containing renewal options through 2025. The Company is involved in litigation arising from the normal course of business. In management's opinion, this litigation is not expected to materially impact the Company's consolidated results of operations or financial condition. NOTE 9. ACQUISITIONS AND DISPOSITIONS In 2001, the Company acquired Your "other" Warehouse and TotalHOME de Mexico, S.A. de C.V. These acquisitions were accounted for under the purchase method of accounting. In October 2001, the Company sold all of the assets of The Home Depot Chile S.A., resulting in a gain of $31 million included in selling and store operating expenses. On February 18, 2002, the Company sold all of the assets of The Home Depot Argentina S.R.L. In connection with the sale, the Company received proceeds comprised of cash and secured notes. An impairment charge of $45 million was recorded in selling and store operating expenses in fiscal 2001 to write down the net assets of The Home Depot Argentina S.R.L. to fair value. During fiscal 2000, Maintenance Warehouse, a wholly-owned subsidiary of the Company, acquired N-E Thing Supply Company, Inc. The Company acquired Apex Supply Company, Inc. and Georgia Lighting, Inc. in fiscal 1999. These acquisitions were recorded under the purchase method of accounting. Pro forma results of operations for fiscal years 2001, 2000 and 1999 would not be materially different as a result of the acquisitions discussed above and therefore are not presented. NOTE 10. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the fiscal years ended February 3, 2002 and January 28, 2001 (dollars in millions, except per share data):
Increase (Decrease) Basic Diluted In Comparable Gross Net Earnings Earnings Net Sales Store Sales Profit Earnings Per Share Per Share ----------------------------------------------------------------------------------------------------------------------------- Fiscal year ended February 3, 2002: First quarter $12,200 (3)% $ 3,655 $ 632 $0.27 $0.27 Second quarter 14,576 1% 4,326 924 0.40 0.39 Third quarter 13,289 0% 4,010 778 0.33 0.33 Fourth quarter 13,488 5% 4,156 710 0.30 0.30 ----------------------------------------------------------------------------------------------------------------------------- Fiscal year $53,553 0% $16,147 $3,044 $1.30 $1.29 ================================================================================= Fiscal year ended January 28, 2001: First quarter $11,112 7% $ 3,274 $ 629 $0.27 $0.27 Second quarter 12,618 6% 3,739 838 0.36 0.36 Third quarter 11,545 4% 3,450 650 0.28 0.28 Fourth quarter 10,463 0% 3,217 465 0.20 0.20 ----------------------------------------------------------------------------------------------------------------------------- Fiscal year $45,738 4% $13,681 $2,581 $1.11 $1.10 =================================================================================
Note: The quarterly data may not sum to fiscal year totals due to rounding. 34 The Home Depot, Inc. and Subsidiaries MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements presented in this Annual Report have been prepared with integrity and objectivity and are the responsibility of the management of The Home Depot, Inc. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and properly reflect certain estimates and judgments based upon the best available information. The Company maintains a system of internal accounting controls, which is supported by an internal audit program and is designed to provide reasonable assurance, at an appropriate cost, that the Company's assets are safeguarded and transactions are properly recorded. This system is continually reviewed and modified in response to changing business conditions and operations and as a result of recommendations by the external and internal auditors. In addition, the Company has distributed to associates its policies for conducting business affairs in a lawful and ethical manner. The financial statements of the Company have been audited by KPMG LLP, independent auditors. Their accompanying report is based upon an audit conducted in accordance with auditing standards generally accepted in the United States of America, including the related review of internal accounting controls and financial reporting matters. The Audit Committee of the Board of Directors, consisting solely of outside directors, meets five times a year with the independent auditors, the internal auditors and representatives of management to discuss auditing and financial reporting matters. The Audit Committee, acting on behalf of the stockholders, maintains an ongoing appraisal of the internal accounting controls, the activities of the outside auditors and internal auditors and the financial condition of the Company. Both the Company's independent auditors and the internal auditors have free access to the Audit Committee. /s/ Carol B. Tome Carol B. Tome Executive Vice President and Chief Financial Officer INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders The Home Depot, Inc.: We have audited the accompanying consolidated balance sheets of The Home Depot, Inc. and subsidiaries as of February 3, 2002 and January 28, 2001 and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended February 3, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Home Depot, Inc. and subsidiaries as of February 3, 2002 and January 28, 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended February 3, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Atlanta, Georgia February 26, 2002 The Home Depot, Inc. and Subsidiaries 35