Home Depot 2005 Annual Report Download - page 58

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The following table illustrates the effect on Net Earnings and Earnings per Share as if the Company
had applied the fair value recognition provisions of SFAS 123 to all stock-based compensation in each
period (amounts in millions, except per share data):
Fiscal Year Ended
January 29, January 30, February 1,
2006 2005 2004
Net Earnings, as reported $5,838 $5,001 $4,304
Add: Stock-based compensation expense included
in reported Net Earnings, net of related tax
effects 110 79 42
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of related tax effects (197) (237) (279)
Pro forma net earnings $5,751 $4,843 $4,067
Earnings per Share:
Basic – as reported $ 2.73 $ 2.27 $ 1.88
Basic – pro forma $ 2.69 $ 2.19 $ 1.78
Diluted – as reported $ 2.72 $ 2.26 $ 1.88
Diluted – pro forma $ 2.68 $ 2.19 $ 1.78
In April 2005, the Securities and Exchange Commission issued guidance delaying the effective date of
SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123(R)’’), therefore it will now be
effective for The Home Depot in the first quarter of fiscal 2006. The Company intends to adopt
SFAS 123(R) using the modified-prospective method, therefore, in addition to continuing to recognize
stock-based compensation expense for all share-based payments awarded since the adoption of
SFAS 123 in fiscal 2003, the Company will also begin expensing unvested options granted prior to 2003
upon the adoption of SFAS 123(R). The Company currently estimates the impact of adopting
SFAS 123(R) will be a reduction of Earnings before Provision for Income Taxes of approximately
$40 million for fiscal 2006.
Derivatives
The Company measures its derivatives at fair value and recognizes these assets or liabilities on the
Consolidated Balance Sheets. The Company’s primary objective for entering into derivative instruments
is to manage its exposure to interest rate fluctuations, as well as to maintain an appropriate mix of
fixed and variable rate debt. At January 29, 2006, the Company had several outstanding interest rate
swaps, accounted for as fair value hedges, with a notional amount of $475 million that swap fixed rate
interest on the Company’s $500 million 53⁄8% Senior Notes for variable interest rates equal to LIBOR
plus 30 to 245 basis points and expire on April 1, 2006. At January 29, 2006, the fair market value of
these agreements was a liability of $1 million, which is the estimated amount that the Company would
have paid to settle similar interest rate swap agreements at current interest rates.
Comprehensive Income
Comprehensive Income includes Net Earnings adjusted for certain revenues, expenses, gains and losses
that are excluded from Net Earnings under generally accepted accounting principles. Adjustments to
Net Earnings are primarily for foreign currency translation adjustments.
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