<<

. 80
( 208 .)



>>

1991 through December 1, 2010 4,400,000 ”
95„8% Industrial Revenue Bond, secured by a letter of credit, payable
on December 1, 1993, with interest payable semi-annually 4,200,000 4,200,000




The Home Depot
*Variable Rate Industrial Revenue Bond, secured by land, pay-
able in annual installments of $233,000 with interest payable
semi-annually 3,267,000 3,500,000
Other 108,000 179,000
Total long-term debt 210,325,000 118,229,000
Less current portion 10,382,000 287,000
Long-term debt, excluding current portion $199,943,000 $117,942,000


*The interest rates on the variable rate industrial revenue bonds are related to various short-term municipal money market composite rates.




Maturities of long-term debt are approximately $10,382,000 for ¬scal 1986 and
$234,000 for each of the next four subsequent years.
During the ¬scal year ended February 2, 1986, the Company entered into a new unse-
cured revolving line of credit for a maximum of $200,000,000, subject to certain limita-
tions, of which $88,000,000 is outstanding at year-end. Commitment amounts under the
agreement decrease by $15,000,000 on July 31, 1990, by $20,000,000 each six
months from that date through January 31, 1993, by $35,000,000 on July 31, 1993,
and with the remaining $50,000,000 commitment expiring on January 31, 1994. Maxi-
mum borrowings outstanding within the commitment limits may not exceed speci¬ed per-
centages of inventories, land and buildings, and ¬xtures and equipment, all as de¬ned in
the Agreement. Under certain conditions, the commitments may be extended and/or
increased. An annual commitment fee of 1„4% to 3„8% is required to be paid on the unused
portion of the revolving line of credit. Interest rates speci¬ed may be increased by a max-
imum of 3„8 of 1% based on speci¬ed ratios of interest rate coverage and debt to equity.
Under the revolving credit agreement, the Company is required, among other things,
to maintain during ¬scal year 1985 a minimum tangible net worth (de¬ned to include the
convertible subordinated debentures) of $150,000,000 (increasing annually to
$213,165,000 by January 3, 1989), a debt to tangible net worth ratio of no more than 2
to 1, a current ratio of not less than 1.5 to 1, and a ratio of earnings before interest
expense and income taxes to interest expense, net, of not less than 2 to 1. The Company
was in compliance with all restrictive covenants as of February 2, 1986. The restrictive
covenants related to the letter of credit agreements securing the industrial revenue bonds
and the convertible subordinated debentures are no more restrictive than those under the
revolving line of credit agreement.
371
Financial Analysis




9-55 Part 2 Business Analysis and Valuation Tools




Interest expense in the accompanying consolidated statements of earnings is net of
interest capitalized of $3,429,000 in ¬scal 1985 and $1,462,000 in ¬scal 1984.

4. Income Taxes
The provision for income taxes consists of the following:

Fiscal Year Ended
February 1, February 3, January 29,
1986 1985 1984
The Home Depot




Current:
$(578,000)
Federal $9,083,000 $6,916,000
366,000
State 1,539,000 1,096,000
(212,000) 10,622,000 8,012,000
Deferred:
3,306,000
Federal 1,464,000 713,000
306,000
State 44,000 ”
3,612,000 1,508,000 713,000
$3,400,000
Total $12,130,000 $8,725,000



The effective tax rates for ¬scal 1985, 1984, and 1983 were 29.3%, 46.2%, and
46.0%, respectively. A reconciliation of income tax expense at Federal statutory rates to
actual tax expense for the applicable ¬scal years follows:

Fiscal Year Ended
February 2, February 3, January 29,
1986 1985 1984

Income taxes at Federal statutory
rate, net of surtax exemption $5,345,000 $12,076,000 $8,734,000
State income taxes, net of Fed-
eral income tax bene¬t 363,000 855,000 592,000
Investment and targeted jobs
tax credits (2,308,000) (800,000) (747,000)
Other, net ” (1,000) 146,000
$3,400,000 $12,130,000 $8,725,000
372 Financial Analysis




9-56
Financial Analysis




Deferred income taxes arise from differences in the timing of reporting income for
¬nancial statement and income tax purposes. The sources of these differences and the tax
effect of each are as follows:

Fiscal Year Ended
February 2, February 3, January 29,
1986 1985 1984

$2,526,000
Accelerated depreciation $1,159,000 $713,000
855,000
Interest capitalization 349,000 ”
231,000
Other, net ” ”




The Home Depot
$3,612,000 $1,508,000 $713,000



5. Leases
The Company leases certain retail locations, of¬ce, and warehouse and distribution
space, equipment, and vehicles under operating leases. All leases will expire within the
next 25 years; however, it can be expected that in the normal course of business, leases
will be renewed or replaced. Total rent expense, net of minor sublease income for the ¬s-
cal years ended February 2, 1986, February 3, 1985 and January 29, 1984 amounted to
approximately $12,737,000, $6,718,000 and $4,233,000, respectively. Under the
building leases, real estate taxes, insurance, maintenance, and operating expenses appli-
cable to the leased property are obligations of the Company. Certain of the store leases
provide for contingent rentals based on percentages of sales in excess of speci¬ed mini-
mums. Contingent rentals for ¬scal years ended February 2, 1986, February 3, 1985 and
January 29, 1984 were approximately $650,000, $545,000 and $111,000.
The approximate future minimum lease payments under operating leases at February
2, 1986 are as follows:

Fiscal Year

1986 $ 16,093,000
1987 16,668,000
1988 16,345,000
1989 16,086,000
1990 16,129,000
Thereafter 171,455,000
$252,776,000
373
Financial Analysis




9-57 Part 2 Business Analysis and Valuation Tools




7. Disposition of Property and Equipment

During the fourth quarter of ¬scal year 1985, the Company disposed of certain proper-
ties and equipment at a net gain of $1,317,000. The properties represented real estate
located in Detroit, Houston and Tucson, and the equipment represented the trade-in of
cash registers of current generation point of sale equipment. Under the terms of the
Detroit real estate sale, the purchaser will either assume the bond obligations of the
Company of $10,100,000 after February 2, 1986 or pay the Company the funds dis-
bursed under the bonds in order for the Company to prepay the total amount outstand-
ing. Included in accounts receivable at February 2, 1986 is $13,800,000 related to these
transactions.
The Home Depot




8. Commitments and Contingencies

At February 2, 1986, the Company was contingently liable for approximately
$5,300,000 under outstanding letters of credit issued in connection with purchase com-
mitments.

The Company has litigation arising from the normal course of business. In manage-
ment™s opinion, this litigation will not materially affect the Company™s ¬nancial condition.


9. Quarterly Financial Data (Unaudited)

The following is a summary of the unaudited quarterly results of operations for ¬scal
years ended February 2, 1986 and February 3, 1985:

Net Earnings per
Net Common and Common
Net Sales Gross Pro¬t Earnings Equivalent Share

Fiscal year ended February 2, 1986:
First Quarter $145,048,000 $ 36,380,000 $ 1,945,000 $ .08
Second Quarter 174,239,000 45,572,000 2,499,000 .10
Third Quarter 177,718,000 46,764,000 1,188,000 .05
Fourth Quarter 203,724,000 52,741,000 2,587,000 .10
$700,729,000 $181,457,000 $ 8,219,000 $ .33

Fiscal year ended February 3, 1985:
First Quarter $ 95,872,000 $ 25,026,000 $ 3,437,000 $ .14
Second Quarter 119,068,000 29,185,000 3,808,000 .15
Third Quarter 100,459,000 27,658,000 3,280,000 .13
Fourth Quarter 117,380,000 32,450,000 3,597,000 .14
$432,779,000 $114,319,000 $14,122,000 $ .56
374 Financial Analysis




9-58
Financial Analysis




AUDITORS™ REPORT

The Board of Directors and Stockholders,
The Home Depot, Inc.:

We have examined the consolidated balance sheets of The Home Depot, Inc. and subsid-
iary as of February 2, 1986 and February 3, 1985 and the related consolidated state-
ments of earnings, stockholders™ equity, and changes in ¬nancial position for each of the
years in the three-year period ended February 2, 1986. Our examinations were made in
accordance with generally accepted auditing standards, and, accordingly, included such
tests of the accounting records and such other auditing procedures as we considered nec-
essary in the circumstances.




The Home Depot
In our opinion, the aforementioned consolidated ¬nancial statements present fairly the
¬nancial position of The Home Depot, Inc. and subsidiary at February 2, 1986 and Feb-
ruary 3, 1985, and the results of their operations and the changes in their ¬nancial posi-
tion for each of the years in the three-year period ended February 2, 1986, in conformity
with generally accepted accounting principles applied on a consistent basis.

PEAT, MARWICK, MITCHELL & CO.
Atlanta, Georgia
March 24, 1986
10
10 P ro s p e c t ive An a lys i s : F o r e c as t i n g
Introduction
chapter




M ost ¬nancial statement analysis tasks are undertaken with a for-
ward-looking decision in mind”and much of the time, it is useful to summarize the
view developed in the analysis with an explicit forecast. Managers need forecasts for
planning and to provide performance targets; analysts need forecasts to help communi-

<<

. 80
( 208 .)



>>