Home Depot : ASU 2014-09 Supplemental Material

Forward-looking Statements

Certain statements contained herein constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements may relate to, among other things, the demand for our products and services; net sales growth; comparable sales; effects of competition; implementation of store, interconnected retail, supply chain and technology initiatives; issues related to the payment methods we accept; state of the economy; state of the residential construction, housing and home improvement markets; state of the credit markets, including mortgages, home equity loans and consumer credit; demand for credit offerings; inventory and in-stock positions; management of relationships with our suppliers and vendors; continuation of share repurchase programs; net earnings performance; earnings per share; dividend targets; capital allocation and expenditures; liquidity; return on invested capital; expense leverage; stock-based compensation expense; commodity price inflation and deflation; the ability to issue debt on terms and at rates acceptable to us; the impact and expected outcome of investigations, inquiries, claims and litigation; the effect of accounting charges; the effect of adopting certain accounting standards; the impact of the Tax Cuts and Jobs Act of 2017; store openings and closures; guidance for fiscal 2018 and beyond; financial outlook; and the integration of acquired companies into our organization and the ability to recognize the anticipated synergies and benefits of those acquisitions. These forward-looking statements are based on currently available information and current assumptions, expectations and projections about future events, and actual results could differ materially from our expectations and projections. You should not rely on our forward-looking statements as they speak only as of the date hereof, and we undertake no obligation to update these statements to reflect subsequent events or circumstances except as may be required by law. Additional information regarding risks and uncertainties is described in Item 1A, "Risk Factors," and elsewhere in our Annual Report on Form 10-K for our fiscal year ended January 28, 2018 and our subsequent Quarterly Reports on Form 10-Q.

Overview

• During the first quarter of fiscal 2018, the Company adopted ASU No. 2014-09, also referred to as ASC 606, which pertains to revenue recognition. The adoption of this standard will not materially impact our consolidated financial statements or related disclosures.

• Under ASU No. 2014-09, we have changed the presentation of certain expenses and cost reimbursements associated with our private label credit card program, certain expenses related to the sale of our gift cards to customers, and gift card breakage income. We have also changed our recognition of gift card breakage income to be recognized proportionately as redemption occurs, rather than based on historical redemption patterns.

• We have adopted this standard on a modified retrospective basis. In accordance therewith, we will not recast financial information prior to fiscal 2018.

• The consolidated statements of earnings for the three and six months ended July 29, 2018 and the consolidated balance sheet as of July 29, 2018 reflect the effect of this accounting policy adoption.

  • For the three months ended July 29, 2018, the impact of adoption was an increase of $33 million to net sales, a decrease of $119 million to cost of sales, and a corresponding increase of $152 million to operating expenses.

  • For the six months ended July 29, 2018, the impact of adoption was an increase of $66 million to net sales, a decrease of $217 million to cost of sales, and a corresponding increase of $283 million to operating expenses.

  • There is no impact from our adoption on operating income, net earnings or earnings per share for the three and six months ended July 29, 2018.

  • The consolidated balance sheet reflects the cumulative impact of adoption using the modified retrospective method as well as the impact of recording the sales return allowance on a gross basis rather than as a net liability.

• The fiscal 2017 pro forma information included herein is presented for informational purposes only as the modified retrospective method does not permit recasting pre-adoption financial information.

QTD 2018 Income Statement - Impact of Adoption

We adopted ASU No. 2014-09, which pertains to revenue recognition, in the first quarter of fiscal 2018. The following table shows the impact of adopting ASU No. 2014-09 on our consolidated statement of earnings for the three months ended July 29, 2018. The implementation of this accounting standard resulted in an increase in net sales, gross profit, and total operating expenses and a decrease in cost of sales. There was no impact on operating income, net earnings, or earnings per share.

in millions

Three months ended July 29, 2018

Actuals As ReportedASC 606 Impact

Actuals Excluding Impact

Basis Point

Impact

Net sales(1) (2) (3)

$

Cost of sales(1)

Gross profit(1) (2) (3)

30,463 $ 20,098 10,365

33 $ 30,430 (119) 20,217 152 10,213

Gross profit % 34.02% 33.56% -46

Operating expenses(2) (3)

5,464

152 5,312

Operating expenses % sales 17.94% 17.46% -48

Operating income

Operating income %

4,90116.09%

-

4,90116.11%

2

Interest & other, net Earnings before tax

246

-

246

4,655 - 4,655

Income tax

1,149 - 1,149

Effective tax rate

24.7% 24.7%

Net earnings

$

3,506

$

-$

3,506

• (1) ASC 606 impact reflects reclassification of expenses and cost of sales to net sales related to our private label credit card.

• (2) ASC 606 impact reflects reclassification of sales commissions on the third-party sale of gift cards from net sales to expenses.

• (3) ASC 606 impact reflects reclassification of gift card breakage income from expenses to net sales.

YTD 2018 Income Statement - Impact of Adoption

We adopted ASU No. 2014-09, which pertains to revenue recognition, in the first quarter of fiscal 2018. The following table shows the impact of adopting ASU No. 2014-09 on our consolidated statement of earnings for the six months ended July 29, 2018. The implementation of this accounting standard resulted in an increase in net sales, gross profit, and total operating expenses and a decrease in cost of sales. There was no impact on operating income, net earnings, or earnings per share.

in millions

Six months ended July 29, 2018

Actuals As ReportedASC 606 Impact

Actuals Excluding Impact

Basis Point

Impact

Net sales(1) (2) (3)

$

Cost of sales(1)

Gross profit(1) (2) (3)

55,410 $ 36,428 18,982

66 $ 55,344 (217) 36,645 283 18,699

Gross profit % 34.26% 33.79% -47

Operating expenses(2) (3)

10,700

283 10,417

Operating expenses % sales 19.31% 18.82% -49

Operating income

Operating income %

8,28214.95%

-

8,28214.96%

1

Interest & other, net Earnings before tax

485

-

485

7,797 - 7,797

Income tax

1,887 - 1,887

Effective tax rate

24.2% 24.2%

Net earnings

$

5,910

$

-$

5,910

• (1) ASC 606 impact reflects reclassification of expenses and cost of sales to net sales related to our private label credit card.

• (2) ASC 606 impact reflects reclassification of sales commissions on the third-party sale of gift cards from net sales to expenses.

• (3) ASC 606 impact reflects reclassification of gift card breakage income from expenses to net sales.