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BACKGROUND

HD's business

HD was a large producer of branded appliances primarily used in residential households. For the period 2015-2019 the industry posted modest annual unit sales growth of 1.8% despite positive market conditions including a strong housing market and product innovations. Competition from inexpensive imports and aggressive pricing by Mass Merchandisers Limited has reduced growth to 2.5% annually over the period. Under its CEO Benjamin White's leadership, HD operated much as it always had, with three notable exceptions. First, the company completed an IPO (Initial Public Offering) in 2014. This provided a measure of liquidity for founders' descendants who, collectively, owned 62% of the outstanding shares following the IPO. Second, beginning in the 2010s, HD has gradually moved its production abroad. Finally, HD had undertaken a strategy focused on rounding out and complementing its product offerings by acquiring small independent manufacturers and/or the kitchen appliance product lines of large diversified manufacturers. Thus far, all acquisitions had been for cash or HD stock.

HD's historical performance

During the year ended December 31, 2019, HD earned net income of $8.25 billion on revenue of $83.18 billion. Exhibits 1 and 2 present the company's recent financial statements. The company's 2019 EBIT margin of nearly 7.0% was average within the peer group. During 2015- 2019, compounded annual returns for HD shareholders (including dividends and stock price appreciation) was approximately 11.1% per year. This was higher than the ASX S&P200, which returned approximately 5% per year. However, it was well below the 16% annual compounded return earned by shareholders of HD's peer group during the same period.

HD's financial policies

HD's financial position was conservative and very much in keeping with HD's longstanding practice and, with its management style. In recent years the company's largest uses of cash have been common dividends and cash consideration paid in various acquisitions. Dividends per share had risen only modestly during 2015-2019. However, as the company issued new shares in connection with some of its acquisitions, the number of shares outstanding increased to approximately 1.27 billion by the end of 2019.