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Wal-Mart 10-K 2010
Portions of the Annual Report

EXHIBIT 13

Five-Year Financial Summary

Wal-Mart Stores, Inc.

(Amounts in millions except per share and unit count data)

 

As of and for the Fiscal Years Ended January 31,

   2010     2009     2008     2007     2006  

Operating Results (1)

          

Net sales

   $ 405,046      $ 401,087      $ 373,821      $ 344,759      $ 308,945   

Net sales increase

     1.0     7.3     8.4     11.6     9.8

Comparable sales in the United States (2)

     -0.8     3.5     1.6     2.0     3.4

Walmart U.S.

     -0.7     3.2     1.0     1.9     3.0

Sam’s Club

     -1.4     4.9     4.9     2.5     5.0

Gross profit margin

     24.8     24.2     24.0     23.4     23.1

Operating, selling, general and administrative expenses, as a percentage of net sales

     19.7     19.3     19.0     18.5     18.0

Operating income

   $ 23,950      $ 22,798      $ 21,952      $ 20,497      $ 18,693   

Income from continuing operations attributable to Walmart

     14,414        13,254        12,863        12,189        11,386   

Per share of common stock:

          

Income from continuing operations attributable to Walmart, diluted

   $ 3.72      $ 3.35      $ 3.16      $ 2.92      $ 2.72   

Dividends

     1.09        0.95        0.88        0.67        0.60   
                                        

Financial Position

          

Inventories

   $ 33,160      $ 34,511      $ 35,159      $ 33,667      $ 31,910   

Property, equipment and capital lease assets, net

     102,307        95,653        96,867        88,287        77,863   

Total assets

     170,706        163,429        163,514        151,587        138,793   

Long-term debt, including obligations under capital leases

     36,401        34,549        33,402        30,735        30,096   

Total Walmart shareholders’ equity

     70,749        65,285        64,608        61,573        53,171   
                                        

Unit Counts

          

Walmart U.S. Segment

     3,708        3,656        3,550        3,443        3,289   

International Segment

     4,112        3,605        3,098        2,734        2,158   

Sam’s Club Segment

     596        602        591        579        567   
                                        

Total units

     8,416        7,863        7,239        6,756        6,014   
                                        

 

(1)

In connection with the company’s finance transformation project, we reviewed and adjusted the classification of certain revenue and expense items within our Consolidated Statements of Income for financial reporting purposes. Although the reclassifications impacted net sales, gross margin and operating, selling, general and administrative expenses, they did not impact operating income or income from continuing operations attributable to Walmart. The changes were effective February 1, 2009 and have been reflected for fiscal periods 2010, 2009 and 2008.

 

(2)

Comparable store and club sales include fuel. For fiscal 2006, we considered comparable sales to be sales at stores that were open as of February 1st of the prior fiscal year and which had not been converted, expanded or relocated since that date. Fiscal 2008 and fiscal 2007 comparable sales includes all stores and clubs that have been open for at least the previous 12 months. Additionally, for those fiscal years, stores and clubs that are relocated, expanded or converted are excluded from comparable sales for the first 12 months following the relocation, expansion or conversion. Fiscal 2010 and 2009 comparable sales included sales from stores and clubs open for the previous 12 months, including remodels, relocations and expansions. Fiscal 2008 and prior fiscal years comparable sales do not reflect reclassifications effective February 1, 2009, as noted above.

 

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Table of contents

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   3

Consolidated Statements of Income

   19

Consolidated Balance Sheets

   20

Consolidated Statements of Shareholders’ Equity

   21

Consolidated Statements of Cash Flows

   22

Notes to Consolidated Financial Statements

   23

Report of Independent Registered Public Accounting Firm

   49

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

   50

Management’s Report to our Shareholders

   51

Fiscal 2010 End-of-Year Store Count

   53

Board of Directors

   55

Corporate and Stock Information

   56

 

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Wal-Mart Stores, Inc.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Overview

Wal-Mart Stores, Inc. (“Walmart,” the “company” or “we”) operates retail stores in various formats around the world and is committed to saving people money so they can live better. We earn the trust of our customers every day by providing a broad assortment of quality merchandise and services at every day low prices (“EDLP”), while fostering a culture that rewards and embraces mutual respect, integrity and diversity. EDLP is our pricing philosophy under which we price items at a low price every day so that our customers trust that our prices will not change under frequent promotional activity. Our focus for Sam’s Club is to provide exceptional value on brand name merchandise at “members only” prices for both business and personal use. Internationally, we operate with similar philosophies. Our fiscal year ends on January 31 for our U.S., Canada and Puerto Rico operations. Our fiscal year ends on December 31 for all other operations.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. We also discuss certain performance metrics that management uses to assess our performance. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the company as a whole. This discussion should be read in conjunction with our Consolidated Financial Statements as of January 31, 2010, and the year then ended and accompanying notes.

Our operations comprise three business segments: Walmart U.S., International and Sam’s Club. The Walmart U.S. segment includes the Company’s mass merchant concept in the United States operating under the “Walmart” or “Wal-Mart” brand, as well as walmart.com. The International segment consists of the Company’s operations outside of the 50 United States. The Sam’s Club segment includes the warehouse membership clubs in the United States, as well as samsclub.com.

Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss segment operating income and comparable store sales. The company measures the results of its segments using, among other measures, each segment’s operating income which includes certain corporate overhead allocations. From time to time, we revise the measurement of each segment’s operating income, including any corporate overhead allocations, as dictated by the information regularly reviewed by our chief operating decision maker. When we do so, the segment operating income for each segment affected by the revisions is restated for all periods presented to maintain comparability.

In connection with the company’s finance transformation project, we reviewed and adjusted the classification of certain revenue and expense items within our Consolidated Statements of Income for financial reporting purposes. The reclassifications did not impact operating income or consolidated net income attributable to Walmart. The changes were effective February 1, 2009 and have been reflected in all periods presented.

Comparable store sales is a measure which indicates the performance of our existing U.S. stores by measuring the growth in sales for such stores for a particular period over the corresponding period in the prior year. In fiscal 2008, our method of calculating comparable store sales included all stores and clubs that were open for at least the previous 12 months. Additionally, stores and clubs that were relocated, expanded or converted were excluded from comparable store sales for the first 12 months following the relocation, expansion or conversion. During fiscal year 2008, the company reviewed its definition of comparable store sales for consistency with other retailers. As a result of that review, since February 1, 2008, Walmart’s definition of comparable store sales includes sales from stores and clubs open for the previous 12 months, including remodels, relocations and expansions. Changes in format continue to be excluded from comparable store sales when the conversion is accompanied by a relocation or expansion that results in a change in square footage of more than five percent. Since the impact of this revision is inconsequential, the company will not restate comparable store sales results for previously reported years. Comparable store sales are also referred to as “same-store” sales by others within the retail industry. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of comparable store sales is not necessarily comparable to similarly titled measures reported by other companies.

In discussions of our consolidated results and the operating results of our International segment, we sometimes refer to the impact of changes in currency exchange rates. When we refer to changes in currency exchange rates or currency exchange rate fluctuations, we are referring to the differences between the currency exchange rates we use to convert the International segment’s operating results from local currencies into U.S. dollars for reporting purposes. The impacts of currency exchange rate fluctuations are typically calculated as the difference between current period activity translated using the current period’s currency exchange rates and the comparable prior year period’s currency exchange rates, respectively. We use this method for all countries where the functional currency is not U.S. denominated.

 

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The Retail Industry

We operate in the highly competitive retail industry in both the United States and the countries we serve internationally. We face strong sales competition from other discount, department, drug, variety and specialty stores, warehouse clubs, and supermarkets, many of which are national, regional or international chains, as well as internet-based retailers and catalog businesses. We compete with a number of companies for prime retail site locations, as well as in attracting and retaining quality employees (whom we call “associates”). We, along with other retail companies, are influenced by a number of factors including, but not limited to: general economic conditions, cost of goods, consumer disposable income, consumer debt levels and buying patterns, consumer credit availability, interest rates, customer preferences, unemployment, labor costs, inflation, deflation, currency exchange fluctuations, fuel and energy prices, weather patterns, climate change, catastrophic events, competitive pressures and insurance costs. Further information on risks to our company can be located in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2010.

Company Performance Metrics

The company’s performance metrics emphasize three priorities for improving shareholder value: growth, leverage and returns. The company’s priority of growth focuses on sales growth; the priority of leverage encompasses the company’s metric to increase our operating income at a faster rate than the growth in net sales by growing our operating, selling, general and administrative expenses (“operating expenses”) at a slower rate than the growth of our net sales; and the priority of returns focuses on how efficiently the company employs our assets through return on investment (“ROI”) and how effectively the company manages working capital through free cash flow.

Growth

Net Sales

 

     Fiscal Years Ended January 31,  
     2010     2009     2008  
(Dollar amounts in millions)    Net sales    Percent
of total
    Percent
increase
    Net sales    Percent
of total
    Percent
increase
    Net sales    Percent
of total
 

Walmart U.S.

   $ 258,229    63.8   1.1   $ 255,348    63.7   6.9   $ 238,915    63.9

International

     100,107    24.7   1.3     98,840    24.6   9.1     90,570    24.2

Sam’s Club

     46,710    11.5   -0.4     46,899    11.7   5.8     44,336    11.9
                                           

Net Sales

   $ 405,046    100.0   1.0   $ 401,087    100.0   7.3   $ 373,821    100.0
                                           

Our net sales increased by 1.0% and 7.3% in fiscal 2010 and 2009, respectively, when compared to the previous fiscal year. Net sales in fiscal 2010 increased due to increased customer traffic, continued global expansion activities and the acquisition of our Chilean subsidiary, Distribución y Servicio (“D&S”) in January 2009, offset primarily by a $9.8 billion unfavorable currency exchange rate impact in our International segment and price deflation in certain merchandise categories in our Walmart U.S. segment. Net sales in fiscal 2009 increased due to our global expansion activities and comparable store sales increases, offset by a $2.3 billion unfavorable currency exchange rate impact. Despite the unfavorable impact of currency exchanges rates, the International segment’s net sales as a percentage of total company net sales increased in fiscal 2010 and 2009, respectively. Volatility in currency exchange rates may continue to impact the International segment’s net sales in the future.

Comparable Store Sales

 

     Fiscal Years Ended January 31,  
     2010     2009     2008  

Walmart U.S.

   -0.7   3.2   1.0

Sam’s Club (1)

   -1.4   4.9   4.9
                  

Total U.S.

   -0.8   3.5   1.6

 

(1) Sam’s Club comparable club sales include fuel. Fuel sales had a negative impact of 2.1 percentage points in fiscal year 2010, and positive impact of 1.2 and 0.7 percentage points in fiscal years 2009 and 2008, respectively, on comparable club sales.

Comparable store sales is a measure which indicates the performance of our existing U.S. stores by measuring the growth in sales for such stores for a particular period over the corresponding period in the prior year. Comparable store sales in the

 

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United States decreased 0.8% in fiscal 2010 and increased 3.5% in fiscal 2009. Although customer traffic increased in fiscal 2010, comparable store sales in the United States were lower than fiscal 2009 due to deflation in certain merchandise categories and lower fuel prices. Comparable store sales in the United States in fiscal 2009 were higher than fiscal 2008 due to an increase in customer traffic, as well as an increase in average transaction size per customer.

As we continue to add new stores in the United States, we do so with an understanding that additional stores may take sales away from existing units. We estimate the negative impact on comparable store sales as a result of opening new stores was approximately 0.6% in fiscal 2010 and 1.1% in fiscal 2009. With our planned slower new store growth, we expect the impact of new stores on comparable store sales to stabilize over time.

Leverage

 

     Fiscal Years Ended January 31,  
     2010     2009     2008  
(Dollar amounts in millions)    Operating
income
    Percent
of total
    Percent
increase
    Operating
income
    Percent
of total
    Percent
increase
    Operating
income
    Percent
of total
 

Walmart U.S.

   $ 19,522      81.5   5.2   $ 18,562      81.4   6.8   $ 17,383      79.2

International

     5,033      21.0   1.9     4,940      21.7   4.6     4,725      21.5

Sam’s Club

     1,512      6.3   -8.1     1,646      7.2   -0.1     1,648      7.5

Other

     (2,117   -8.8   -9.9     (2,350   -10.3   30.3     (1,804   -8.2
                                              

Total operating income

   $ 23,950      100.0   5.1   $ 22,798      100.0   3.9   $ 21,952      100.0
                                              

We believe growing operating income at a faster rate than net sales growth is a meaningful measure because it indicates how effectively we manage costs and leverage operating expenses. Our objective is to grow operating expenses at a slower rate than net sales.

Operating Expenses

In fiscal 2010, operating expenses increased 2.7% when compared to fiscal 2009 while net sales increased 1.0% over the same period. Operating expenses grew at a faster rate than net sales due to higher health benefit costs, restructuring charges and higher advertising expenses. In fiscal 2009, operating expenses increased 9.3% compared to fiscal 2008 while net sales increased 7.3% over the same period. Operating expenses grew at a faster rate than net sales in fiscal 2009 primarily due to higher utility costs, legal matters, higher health benefit costs and increased corporate expenses.

Operating Income

For fiscal 2010, we met our objective of growing operating income at a faster rate than net sales. Our operating income increased by 5.1% when compared to fiscal 2009, while net sales increased by 1.0% over the same period. Our Walmart U.S. and International segments met this objective. Our Sam’s Club segment fell short of this objective primarily due to a $174 million charge to restructure its operations, including the closure of 10 clubs. For fiscal 2009, we did not meet our objective because our operating income increased by 3.9% when compared to fiscal 2008, while net sales increased by 7.3% over the same period. The Walmart U.S. and Sam’s Club segments fell short of this objective due to increases in operating expenses. The International segment fell short of this objective due to accruals for certain legal matters and fluctuations in currency exchange rates.

Returns

Return on Investment

Management believes return on investment is a meaningful metric to share with investors because it helps investors assess how effectively Walmart is employing its assets. Trends in ROI can fluctuate over time as management balances long-term potential strategic initiatives with any possible short-term impacts. ROI was 19.3 percent for both fiscal years ended January 31, 2010 and 2009.

We define ROI as adjusted operating income (operating income plus interest income, depreciation and amortization and rent expense) for the fiscal year divided by average invested capital during that period. We consider average invested capital to be the average of our beginning and ending total assets of continuing operations plus accumulated depreciation and amortization less accounts payable and accrued liabilities for that period, plus a rent factor equal to the rent for the fiscal year multiplied by a factor of eight.

 

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ROI is considered a non-GAAP financial measure under the SEC’s rules. We consider return on assets (“ROA”) to be the financial measure computed in accordance with GAAP that is the most directly comparable financial measure to ROI as we calculate that financial measure. ROI differs from ROA (which is income from continuing operations for the fiscal year divided by average total assets of continuing operations for the period) because ROI: adjusts operating income to exclude certain expense items and adds interest income; adjusts total assets from continuing operations for the impact of accumulated depreciation and amortization, accounts payable and accrued liabilities; and incorporates a factor of rent to arrive at total invested capital.

Although ROI is a standard financial metric, numerous methods exist for calculating a company’s ROI. As a result, the method used by management to calculate ROI may differ from the methods other companies use to calculate their ROI. We urge you to understand the methods used by another company to calculate its ROI before comparing our ROI to that of such other company.

The calculation of ROI along with a reconciliation to the calculation of ROA, the most comparable GAAP financial measurement, is as follows:

 

      For the Years Ended
January 31,
     

(Dollar amounts in millions)

   2010     2009      

CALCULATION OF RETURN ON INVESTMENT

      
Numerator       

Operating income (1)

   $ 23,950      $ 22,798     

+ Interest income (1)

     181        284     

+ Depreciation and amortization (1)

     7,157        6,739     

+ Rent (1)

     1,808        1,751     
                  

= Adjusted operating income

   $ 33,096      $ 31,572     
                  
Denominator       

Average total assets of continuing operations (2)

   $ 166,900      $ 162,891     

+ Average accumulated depreciation and amortization (2)

     38,359        33,317     

- Average accounts payable (2)

     29,650        29,597     

- Average accrued liabilities (2)

     18,423        16,919     

+ Rent * 8

     14,464        14,008     
                  

= Average invested capital

   $ 171,650      $ 163,700     
                  
Return on investment (ROI)      19.3     19.3  
                  

CALCULATION OF RETURN ON ASSETS

      
Numerator       

Income from continuing operations (1)

   $ 14,927      $ 13,753     
                  
Denominator       

Average total assets of continuing operations (2)

   $ 166,900      $ 162,891     
                  
Return on assets (ROA)      8.9     8.4  
                  
     As of January 31,

Certain Balance Sheet Data

   2010     2009     2008

Total assets of continuing operations (1)

   $ 170,566      $ 163,234      $ 162,547

Accumulated depreciation and amortization

     41,210        35,508        31,125

Accounts payable

     30,451        28,849        30,344

Accrued liabilities

     18,734        18,112        15,725

 

(1) Based on continuing operations only and therefore excludes the impact of closing 23 stores and the divesture of other properties of The Seiyu, Ltd. (now Walmart Japan) pursuant to a restructuring program adopted during the third quarter of fiscal 2009. All of these activities have been disclosed as discontinued operations. Total assets as of January 31, 2010, 2009 and 2008 in the table above exclude assets of discontinued operations that are reflected in the Consolidated Balance Sheets of $140 million, $195 million and $967 million, respectively.

 

(2) The average is based on the addition of the account balance at the end of the current period to the account balance at the end of the prior period and dividing by 2.

Free Cash Flow

We define free cash flow as net cash provided by operating activities of continuing operations in a period minus payments for property and equipment made in that period. We generated positive free cash flow of $14.1 billion, $11.6 billion and $5.7 billion for the years ended January 31, 2010, 2009 and 2008, respectively. The increase in our free cash flow is primarily the result of improved operating results and inventory management.

Free cash flow is considered a non-GAAP financial measure under the SEC’s rules. Management believes, however, that free cash flow, which measures our ability to generate additional cash from our business operations, is an important financial

 

6


measure for use in evaluating the company’s financial performance. Free cash flow should be considered in addition to, rather than as a substitute for, income from continuing operations as a measure of our performance and net cash provided by operating activities as a measure of our liquidity.

Additionally, our definition of free cash flow is limited, in that it does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statement of cash flows.

Although other companies report their free cash flow, numerous methods may exist for calculating a company’s free cash flow. As a result, the method used by our management to calculate free cash flow may differ from the methods other companies use to calculate their free cash flow. We urge you to understand the methods used by another company to calculate its free cash flow before comparing our free cash flow to that of such other company.

The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities of continuing operations, a GAAP measure, which we believe to be the GAAP financial measure most directly comparable to free cash flow, as well as information regarding net cash used in investing activities and net cash used in financing activities.

 

      Fiscal Years Ended January 31,  

Amounts in millions

   2010     2009     2008  

Net cash provided by operating activities

   $ 26,249      $ 23,147      $ 20,642   

Payments for property and equipment

     (12,184     (11,499     (14,937
                        

Free cash flow

   $ 14,065      $ 11,648      $ 5,705   
                        

Net cash used in investing activities

   $ (11,620   $ (10,742   $ (15,670

Net cash used in financing activities

   $ (14,191   $ (9,918   $ (7,422

 

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Results of Operations

The following discussion of our Results of Operations is based on our continuing operations and excludes any results or discussion of our discontinued operations.

Unusual or infrequent items that impacted our income from continuing operations during the fiscal years ended 2010, 2009 and 2008 were as follows:

 

   

In fiscal 2010, the company announced several organizational changes, including the closure of 10 Sam’s Clubs, designed to strengthen and streamline our operations. As a result, we recorded $260 million in pre-tax restructuring charges.

 

   

In fiscal 2010, we recorded $372 million in net tax benefits primarily from the repatriation of certain non-U.S. earnings that increased U.S. foreign tax credits.

 

   

In fiscal 2009, the company settled 63 wage and hour class action lawsuits. As a result of the settlement, the company recorded a pre-tax charge of approximately $382 million during the fourth quarter of fiscal 2009.

 

   

In fiscal 2008, we reduced our accrued liabilities for our general liability and worker’s compensation claims. As a result, operating expenses were reduced by a pre-tax amount of $298 million.

Consolidated Results of Operations

 

Fiscal Year

   Net Sales (1)    % Change
from Prior
Fiscal Year
    Operating
Income (1)
   Operating Income
as a Percentage of
Net Sales
    Comp Sales     Unit Counts    Square
Footage (2)

2010

   $ 405,046    1.0   $ 23,950    5.9   -0.8   8,416    952,204

2009

     401,087    7.3     22,798    5.7   3.5   7,863    918,008

2008

     373,821    8.4     21,952    5.9   1.6   7,239    867,448

 

(1) Amounts in millions
(2) Amounts in thousands

Our consolidated net sales increased by 1.0% and 7.3% in fiscal 2010 and 2009, respectively, when compared to the previous fiscal year. Net sales in fiscal 2010 increased due to increased customer traffic, continued global expansion activities and the acquisition of D&S in January 2009, offset primarily by a $9.8 billion unfavorable currency exchange rate impact in our International segment and price deflation in certain merchandise categories in our Walmart U.S. segment. Net sales in fiscal 2009 increased due to our global store expansion activities, comparable store sales increases, offset by a $2.3 billion unfavorable currency exchange rate impact. Volatility in currency exchange rates may continue to impact the International segment’s net sales in the future.

Our gross profit, as a percentage of net sales, (our “gross profit margin”) was 24.8%, 24.2% and 24.0% in fiscal 2010, 2009 and 2008, respectively. Our Walmart U.S. and International segment sales yield higher gross profit margins than our Sam’s Club segment. In fiscal 2010, gross profit margin increased primarily due to the continued focus on enhanced merchandising strategies and better inventory management in our Walmart U.S. and Sam’s Club segments. The gross profit margin increase in fiscal 2009 compared to fiscal 2008 was primarily due to lower inventory shrinkage and less markdown activity as a result of more effective merchandising in the Walmart U.S. segment.

Operating expenses, as a percentage of net sales, were 19.7%, 19.3% and 19.0% for fiscal 2010, 2009 and 2008, respectively. In fiscal 2010, operating expenses increased primarily due to higher health benefit costs, a pre-tax charge of $260 million relating to the restructuring of U.S. operations and higher advertising expenses. In fiscal 2009, operating expenses increased primarily due to higher utility costs, a pre-tax charge of approximately $382 million resulting from the settlement of 63 wage and hour class action lawsuits, higher health benefit costs and increased corporate expenses compared to fiscal 2008.

Our effective income tax rate was 32.4% for fiscal year 2010 and 34.2% for fiscal years 2009 and 2008. The fiscal 2010 effective tax rate decreased compared to fiscal 2009 due to $372 million in net tax benefits that primarily resulted from the repatriation of certain non-U.S. earnings that increased our utilization of U.S. foreign tax credits.

As a result of the factors discussed above, we reported $14.9 billion, $13.8 billion and $13.3 billion of income from continuing operations for the fiscal years ended January 31, 2010, 2009 and 2008, respectively.

 

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Walmart U.S. Segment

 

Fiscal Year

   Net Sales (1)    % Change
from Prior
Fiscal Year
    Operating
Income (1)
   Operating Income
as a Percentage of
Net Sales
    Comp Sales     Unit Counts    Square
Footage (2)

2010

   $ 258,229    1.1   $ 19,522    7.6   -0.7   3,708    602,908

2009

     255,348    6.9     18,562    7.3   3.2   3,656    589,299

2008

     238,915    5.6     17,383    7.3   1.0   3,550    566,629

 

(1) Amounts in millions
(2) Amounts in thousands

The segment net sales growth in fiscal 2010 resulted from an increase in customer traffic and strength in our grocery and health and wellness categories, as well as our continued expansion activities. In fiscal 2009, the segment net sales growth resulted from comparable store sales increase of 3.2%, in addition to our expansion activities. Strength in the grocery, health and wellness and entertainment categories, as well as strong seasonal sales throughout the year also contributed to the fiscal 2009 net sales increase.

Comparable store sales were lower in fiscal 2010, despite increased customer traffic, due to a decrease in average transaction size per customer driven by price deflation in certain merchandise categories. Comparable store sales were higher in fiscal 2009 due to an increase in customer traffic, as well as an increase in average transaction size per customer.

In fiscal 2010, gross profit margin increased 0.7 percentage points compared to the prior year due to more effective merchandising, better inventory management and lower inventory shrinkage. In fiscal 2009, gross profit margin increased 0.4 percentage points compared to the prior year primarily due to decreased markdown activity and lower inventory shrinkage. The improvements in both years were attributable to merchandising initiatives which have improved space allocation, enhanced our price leadership and increased supply chain efficiencies.

Segment operating expenses, as a percentage of segment net sales, increased by 0.4 percentage points in fiscal 2010 compared to fiscal 2009 due to lower segment net sales increases compared to the prior year, higher health benefit costs, higher advertising expenses and a pre-tax charge of $73 million relating to the restructuring of Walmart U.S. operations. Segment operating expenses, as a percentage of segment net sales, increased 0.4 percentage points in fiscal 2009 compared to the prior year due to hurricane-related expenses, higher bonus payments for store associates, higher utility costs and an increase in health benefit costs.

International Segment

 

Fiscal Year

   Net Sales (1)    % Change
from Prior
Fiscal Year
    Operating
Income (1)
   Operating Income
as a Percentage of
Net Sales
    Unit Counts    Square
Footage (2)

2010

   $ 100,107    1.3   $ 5,033    5.0   4,112    269,894

2009

     98,840    9.1     4,940    5.0   3,605    248,803

2008

     90,570    17.8     4,725    5.2   3,098    222,583

 

(1) Amounts in millions
(2) Amounts in thousands

At January 31, 2010, our International segment was comprised of our wholly-owned subsidiaries operating in Argentina, Brazil, Canada, Japan, Puerto Rico and the United Kingdom, our majority-owned subsidiaries operating in five countries in Central America, and in Chile and Mexico, our joint ventures in India and China and our other controlled subsidiaries in China.

The fiscal 2010 increase in the International segment’s net sales primarily resulted from our expansion activities and the inclusion of the results of D&S, acquired in January 2009, offset by the unfavorable impact of changes in currency exchange rates of $9.8 billion. For additional information regarding our acquisitions, refer to Note 9 to the Consolidated Financial Statements. The fiscal 2009 increase in the International segment’s net sales was primarily due to net sales growth from existing units and our international expansion program, offset by the unfavorable impact of changes in currency exchange rates of $2.3 billion.

 

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In fiscal 2010, the International segment’s gross profit margin increased 0.2 percentage points compared to the prior year. The increase was primarily driven by currency exchange rate fluctuations and the inclusion of D&S. In fiscal 2009, the International segment’s gross profit margin decreased 0.2 percentage points compared to the prior year. The decrease was primarily driven by growth in lower margin fuel sales in the United Kingdom and the transition to EDLP as a strategy in Japan.

Segment operating expenses, as a percentage of segment net sales, increased 0.3 percentage points in fiscal 2010 compared to the prior year primarily as a result of the inclusion of D&S, acquired in January 2009. Segment operating expenses, as a percentage of segment net sales, in fiscal 2009 were consistent with fiscal 2008.

In fiscal 2010, currency exchange rate changes unfavorably impacted operating income by $540 million. In fiscal 2009, currency exchange rate changes unfavorably impacted operating income by $266 million. Volatility in currency exchange rates may continue to impact the International segment’s operating results in the future.

Sam’s Club Segment

 

Fiscal Year

   Net Sales (1)    % Change
from Prior
Fiscal Year
    Operating
Income (1)
   Operating Income
as a Percentage of
Net Sales
    Comp Sales     Unit Counts    Square
Footage (2)

2010

   $ 46,710    -0.4   $ 1,512    3.2   -1.4   596    79,401

2009

     46,899    5.8     1,646    3.5   4.9   602    79,906

2008

     44,336    6.6     1,648    3.7   4.9   591    78,236

 

(1) Amounts in millions
(2) Amounts in thousands

The decrease in net sales for the Sam’s Club segment in fiscal 2010 primarily resulted from lower fuel prices compared to the previous fiscal year. In fiscal 2009, the segment net sales growth resulted from comparable club sales increases, including fuel, of 4.9% and continued club expansion activities.

Comparable club sales decreased during fiscal 2010 due to the negative impact of 2.1 percentage points from lower fuel prices when compared to the previous fiscal year, partially offset by sales increases in fresh food, consumables and certain health and wellness categories. In fiscal 2009, comparable club sales increased due to growth in food, pharmacy, electronics and certain consumables categories, as well as an increase in both member traffic and average transaction size per member. Fuel sales had a positive impact of 1.2 percentage points in fiscal 2009 on comparable club sales.

Gross profit margin increased 0.6 percentage points during fiscal 2010 compared to the prior year due to continued strength in sales of consumable, fresh food and other food-related categories. Gross profit margin increased 0.1 percentage points during fiscal 2009 compared to the prior year due to strong sales in fresh food and other food-related categories, consumable categories and the positive impact of a higher fuel gross profit rate.

Segment operating expenses, as a percentage of segment net sales, increased 0.8 percentage points in fiscal 2010 compared to the prior year due primarily to a pre-tax charge of $174 million related to the restructuring of Sam’s Club operations, including the closure of 10 clubs. Segment operating expenses, as a percentage of segment net sales, increased 0.2 percentage points in fiscal 2009 compared to the prior year. In fiscal 2009, operating expense increases were impacted by higher utility and health benefit costs and hurricane related expenses.

Membership and other income, as a percentage of segment net sales, decreased slightly for fiscal 2010 when compared to fiscal 2009. Membership and other income, as a percentage of segment net sales, decreased slightly for fiscal 2009 when compared to fiscal 2008.

Liquidity and Capital Resources

Cash flows provided by operating activities supply us with a significant source of liquidity. We use these cash flows, supplemented with long-term debt and short-term borrowings, to fund our operations and global expansion activities. Generally, some or all of the remaining free cash flow funds the dividends on our common stock and share repurchases.

 

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     Fiscal Years Ended January 31,  

(Amounts in millions)

   2010     2009     2008  

Net cash provided by operating activities

   $ 26,249      $ 23,147      $ 20,642   

Payments for property and equipment

     (12,184     (11,499     (14,937
                        

Free cash flow

   $ 14,065      $ 11,648      $ 5,705   
                        

Net cash used in investing activities

   $ (11,620   $ (10,742   $ (15,670

Net cash used in financing activities

   $ (14,191   $ (9,918   $ (7,422

Cash flow provided by operating activities was $26.2 billion, $23.1 billion and $20.6 billion for the years ended January 31, 2010, 2009 and 2008, respectively. The increases in cash flows provided by operating activities for each fiscal year were primarily attributable to an increase in income from continuing operations and improved working capital management.

Working Capital

Current liabilities exceeded current assets at January 31, 2010, by $7.2 billion, an increase of $789 million from January 31, 2009. Our ratio of current assets to current liabilities was 0.9 at January 31, 2010 and 2009. We generally have a working capital deficit due to our efficient use of cash in funding operations and in providing returns to shareholders in the form of stock repurchases and payment of dividends.

Capital Resources

During fiscal 2010, we issued $5.5 billion of long-term debt. The net proceeds from the issuance of such long-term debt were used for general corporate purposes. During fiscal 2009, we issued $6.6 billion of long-term debt. Those net proceeds were used to repay outstanding commercial paper indebtedness and for other general corporate purposes.

Management believes that cash flows from continuing operations and proceeds from the issuance of short-term borrowings will be sufficient to finance seasonal buildups in merchandise inventories and meet other cash requirements. If our operating cash flows are not sufficient to pay dividends and to fund our capital expenditures, we anticipate funding any shortfall in these expenditures with a combination of short-term borrowings and long-term debt. We plan to refinance existing long-term debt as it matures and may desire to obtain additional long-term financing for other corporate purposes. We anticipate no difficulty in obtaining long-term financing in view of our credit rating and favorable experiences in the debt market in the recent past. The following table details the ratings of the credit rating agencies that rated our outstanding indebtedness at January 31, 2010. The rating agency ratings are not recommendations to buy, sell or hold our commercial paper or debt securities. Each rating may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating.

 

Rating agency

   Commercial paper    Long-term debt

Standard & Poor’s

   A-1+    AA

Moody’s Investors Service

   P-1    Aa2

Fitch Ratings

   F1+    AA

DBRS Limited

   R-1(middle)    AA

To monitor our credit rating and our capacity for long-term financing, we consider various qualitative and quantitative factors. We monitor the ratio of our debt to our total capitalization as support for our long-term financing decisions. At January 31, 2010 and January 31, 2009, the ratio of our debt to total capitalization was 36.9% and 39.3%, respectively. For the purpose of this calculation, debt is defined as the sum of short-term borrowings, long-term debt due within one year, obligations under capital leases due in one year, long-term debt and long-term obligations under capital leases. Total capitalization is defined as debt plus total Walmart shareholders’ equity. Our ratio of debt to our total capitalization decreased in fiscal 2010 primarily due to a decrease in short-term borrowings.

Global Expansion Activities

Cash paid for property and equipment was $12.2 billion, $11.5 billion and $14.9 billion during the fiscal years ended January 31, 2010, 2009 and 2008, respectively. These expenditures primarily relate to new store growth, as well as remodeling costs for existing stores.

We expect to incur capital expenditures of approximately $13.0 billion to $15.0 billion in fiscal 2011. We plan to finance this expansion and any acquisitions of other operations that we may make during fiscal 2011 primarily out of cash flows from operations.

 

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Fiscal 2011 capital expenditures will include the addition of the following new, relocated and expanded units in the U.S.:

 

      Fiscal Year 2011
Projected Unit Growth

Walmart U.S. Segment

   145-160

Sam’s Club Segment

   5-10
    

Total U.S.

   150-170
    

Additionally, the international segment expects to add more than 600 units during fiscal year 2011.

The following represents an allocation of our capital expenditures:

 

      Allocation of Capital Expenditures  
     Projected     Actual  

Capital Expenditures

   Fiscal Year 2011     Fiscal Year 2010     Fiscal Year 2009  

New stores, including expansions and relocations

   31   29   34

Remodels

   15   17   10

Information systems, distribution and other

   21   23   20
                  

Total United States

   67   69   64

International

   33   31   36
                  

Total Capital Expenditures

   100   100   100
                  

Common Stock Dividends

We paid dividends of $1.09 per share in fiscal 2010, representing a 15% increase over fiscal 2009. The fiscal 2009 dividend of $0.95 per share represented an 8% increase over fiscal 2008. We have increased our dividend every year since the first dividend was declared in March 1974.

On March 4, 2010, the company’s Board of Directors approved an increase in the annual dividend for fiscal 2011 to $1.21 per share, an increase of 11% over the dividends paid in fiscal 2010. The annual dividend will be paid in four quarterly installments on April 5, 2010, June 1, 2010, September 7, 2010 and January 3, 2011 to holders of record on March 12, May 14, August 13 and December 10, 2010, respectively.

Company Share Repurchase Program

From time to time, we have repurchased shares of our common stock under a $15.0 billion share repurchase program authorized by our Board of Directors on June 4, 2009 and announced on June 5, 2009, which replaced and terminated a $15.0 billion share repurchase program approved by our Board of Directors on May 31, 2007 and announced on June 1, 2007. As was the case with the replaced share repurchase program, the new program has no expiration date or other restrictions limiting the period over which we can make our share repurchases, and will expire only when and if we have repurchased $15.0 billion of our shares under the program or we terminate or replace the program. Any repurchased shares are constructively retired and returned to unissued status. We spent $7.3 billion, $3.5 billion and $7.7 billion in share repurchases during fiscal year 2010, 2009 and 2008, respectively. We consider several factors in determining when to execute the share repurchases, including among other things, our current cash needs, our capacity for leverage, our cost of borrowings and the market price of our common stock. As of January 31, 2010, the program had approximately $9.2 billion remaining authorization for share repurchases.

 

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Contractual Obligations and Other Commercial Commitments

The following table sets forth certain information concerning our obligations and commitments to make contractual future payments, such as debt and lease agreements, and contingent commitments:

 

          Payments due during fiscal years ending January 31,

(Amounts in millions)

   Total    2011    2012-2013    2014-2015    Thereafter

Recorded Contractual Obligations:

              

Long-term debt

   $ 37,281    $ 4,050    $ 6,049    $ 6,899    $ 20,283

Short-term borrowings

     523      523      —        —        —  

Capital lease obligations

     5,584      607      1,103      959      2,915

Unrecorded Contractual Obligations:

              

Non-cancelable operating leases

     13,099      1,275      2,318      2,029      7,477

Interest on long-term debt

     29,296      1,762      3,138      2,697      21,699

Trade letters of credit

     2,370      2,370      —        —        —  

Purchase obligations

     4,283      2,936      1,014      248      85
                                  

Total commercial commitments

   $ 92,436    $ 13,523    $ 13,622    $ 12,832    $ 52,459
                                  

Additionally, the company has approximately $11.2 billion in undrawn lines of credit and standby letters of credit which, if drawn upon, would be included in the liabilities section of the Consolidated Balance Sheets.

Purchase obligations include legally binding contracts such as firm commitments for inventory and utility purchases, as well as commitments to make capital expenditures, software acquisition/license commitments and legally binding service contracts. Purchase orders for the purchase of inventory and other services are not included in the table above. Purchase orders represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current inventory needs and are fulfilled by our suppliers within short time periods. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.

The expected timing for payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid with respect to some unrecorded contractual commitments may be different depending on the timing of receipt of goods or services or changes to agreed-upon amounts for some obligations.

In addition to the amounts shown in the table above, $1.0 billion of unrecognized tax benefits are considered uncertain tax positions and have been recorded as liabilities, the timing of the payment associated with these liabilities is uncertain. Refer to Note 8 to the Consolidated Financial Statements for additional discussion on unrecognized tax benefits.

Off Balance Sheet Arrangements

In addition to the unrecorded contractual obligations discussed and presented above, the company has made certain guarantees as discussed below for which the timing of payment, if any, is unknown.

In connection with certain debt financing, we could be liable for early termination payments if certain unlikely events were to occur. At January 31, 2010, the aggregate termination payment would have been $109 million. The two arrangements pursuant to which these payments could be made will expire in fiscal 2011 and fiscal 2019.

In connection with the development of our grocery distribution network in the United States, we have agreements with third parties which would require us to purchase or assume the leases on certain unique equipment in the event the agreements are terminated. These agreements, which can be terminated by either party at will, cover up to a five-year period and obligate the company to pay up to approximately $41 million upon termination of some or all of these agreements.

The company has potential future lease commitments for land and buildings for approximately 348 future locations. These lease commitments have lease terms ranging from 1 to 40 years and provide for certain minimum rentals. If executed, payments under operating leases would increase by $59 million for fiscal 2011, based on current cost estimates.

Market Risk

In addition to the risks inherent in our operations, we are exposed to certain market risks, including changes in interest rates and changes in currency exchange rates.

 

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The analysis presented for each of our market risk sensitive instruments is based on a 10% change in interest or currency exchange rates. These changes are hypothetical scenarios used to calibrate potential risk and do not represent our view of future market changes. As the hypothetical figures discussed below indicate, changes in fair value based on the assumed change in rates generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. The effect of a variation in a particular assumption is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which may magnify or counteract the sensitivities.

At January 31, 2010 and 2009, we had $37.3 billion and $37.2 billion, respectively, of long-term debt outstanding. Our weighted average effective interest rate on long-term debt, after considering the effect of interest rate swaps, was 4.5% and 4.4% at January 31, 2010 and 2009, respectively. A hypothetical 10% increase in interest rates in effect at January 31, 2010 and 2009 would have increased annual interest expense on borrowings outstanding at those dates by $9 million and $16 million, respectively.

At January 31, 2010 and 2009, we had $523 million and $1.5 billion, respectively, of outstanding commercial paper and short-term borrowing obligations. The weighted average interest rate, including fees, on these obligations at January 31, 2010 and 2009 was 1.8% and 0.9%, respectively. A hypothetical 10% increase in these rates in effect at January 31, 2010 and 2009 would have increased the annual interest expense for the respective outstanding balances by $1 million.

We enter into interest rate swaps to minimize the risks and costs associated with financing activities, as well as to maintain an appropriate mix of fixed and floating-rate debt. Our preference is to maintain between 40% and 60% of our debt portfolio, including interest rate swaps, in floating-rate debt. The swap agreements are contracts to exchange fixed- or variable-rates for variable- or fixed-interest rate payments periodically over the life of the instruments. The aggregate fair value of these swaps represented a gain of $240 million and $304 million at January 31, 2010 and 2009, respectively. A hypothetical increase or decrease of 10% in interest rates from the level in effect at January 31, 2010, would have resulted in a loss or gain in value of the swaps of $25 million and $24 million, respectively. A hypothetical increase or decrease of 10% in interest rates from the level in effect at January 31, 2009, would have resulted in a loss or gain in value of the swaps of $17 million.

We hold currency swaps to hedge the currency exchange component of our net investments in the United Kingdom. In fiscal 2010, we entered into currency swaps to hedge the currency exchange rate fluctuation exposure associated with the forecasted payments of principal and interest of non-U.S. denominated debt. The aggregate fair value of these swaps at January 31, 2010 and 2009 represented a gain of $475 million and $526 million, respectively. A hypothetical 10% increase or decrease in the currency exchange rates underlying these swaps from the market rate would have resulted in a loss or gain in the value of the swaps of $58 million and $150 million at January 31, 2010 and January 31, 2009, respectively. A hypothetical 10% change in interest rates underlying these swaps from the market rates in effect at January 31, 2010 would have resulted in a loss or gain in value of the swaps of $11 million and $30 million, respectively, on the value of the swaps.

In addition to currency swaps, we have designated debt of approximately £3.0 billion as of January 31, 2010 and 2009, as a hedge of our net investment in the United Kingdom. At January 31, 2010, a hypothetical 10% increase or decrease in value of the U.S. dollar relative to the British pound would have resulted in a gain or loss in the value of the debt of $480 million. At January 31, 2009, a hypothetical 10% increase or decrease in value of the U.S. dollar relative to the British pound would have resulted in a gain or loss in the value of the debt of $440 million. In addition, we have designated debt of approximately ¥437.4 billion as of January 31, 2010 and 2009, as a hedge of our net investment in Japan. At January 31, 2010, a hypothetical 10% increase or decrease in value of the U.S. dollar relative to the Japanese yen would have resulted in a gain or loss in the value of the debt of $485 million. At January 31, 2009, a hypothetical 10% increase or decrease in value of the U.S. dollar relative to the Japanese yen would have resulted in a gain or loss in the value of the debt of $443 million.

Summary of Critical Accounting Policies

Management strives to report the financial results of the company in a clear and understandable manner, although in some cases accounting and disclosure rules are complex and require us to use technical terminology. In preparing our Consolidated Financial Statements, we follow accounting principles generally accepted in the United States. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations as reflected in our financial statements. These judgments and estimates are based on past events and expectations of future outcomes. Actual results may differ from our estimates.

Management continually reviews its accounting policies, how they are applied and how they are reported and disclosed in our financial statements. Following is a summary of our more significant accounting policies and how they are applied in preparation of the financial statements.

 

14


Inventories

We value our inventories at the lower of cost or market as determined primarily by the retail method of accounting, using the last-in, first-out (“LIFO”) method for substantially all our Walmart U.S. segment’s merchandise. Sam’s Club merchandise and merchandise in our distribution warehouses are valued based on weighted average cost using the LIFO method. Inventories for international operations are primarily valued by the retail method of accounting and are stated using the first-in, first-out (“FIFO”) method.

Under the retail method, inventory is stated at cost, which is determined by applying a cost-to-retail ratio to each merchandise grouping’s retail value. The FIFO cost-to-retail ratio is based on the initial margin of beginning inventory plus the fiscal year purchase activity. The cost-to-retail ratio for measuring any LIFO reserves is based on the initial margin of the fiscal year purchase activity less the impact of any markdowns. The retail method requires management to make certain judgments and estimates that may significantly impact the ending inventory valuation at cost as well as the amount of gross profit recognized. Judgments made include recording markdowns used to sell through inventory and shrinkage. When management determines the salability of inventory has diminished, markdowns for clearance activity and the related cost impact are recorded at the time the price change decision is made. Factors considered in the determination of markdowns include current and anticipated demand, customer preferences and age of merchandise, as well as seasonal and fashion trends. Changes in weather patterns and customer preferences related to fashion trends could cause material changes in the amount and timing of markdowns from year to year.

When necessary, the company records a LIFO provision for a quarter for the estimated annual effect of inflation, and these estimates are adjusted to actual results determined at year-end. Our LIFO provision is calculated based on inventory levels, markup rates and internally generated retail price indices. At January 31, 2010 and 2009, our inventories valued at LIFO approximated those inventories as if they were valued at FIFO.

The company provides for estimated inventory losses (“shrinkage”) between physical inventory counts on the basis of a percentage of sales. The provision is adjusted annually to reflect the historical trend of the actual physical inventory count results.

Impairment of Assets

We evaluate long-lived assets other than goodwill and assets with indefinite lives for indicators of impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. Management’s judgments regarding the existence of impairment indicators are based on market conditions and our operational performance, such as operating income and cash flows. The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally at the individual store level or, in certain circumstances, at the market group level. The variability of these factors depends on a number of conditions, including uncertainty about future events and changes in demographics. Thus our accounting estimates may change from period to period. These factors could cause management to conclude that impairment indicators exist and require that impairment tests be performed, which could result in management determining that the value of long-lived assets is impaired, resulting in a write-down of the long-lived assets.

Goodwill and other indefinite-lived acquired intangible assets are not amortized, but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the value of a certain asset may be impaired. This evaluation requires management to make judgments relating to future cash flows, growth rates, and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, the company has generated sufficient returns to recover the cost of goodwill and other indefinite-lived acquired intangible assets. Because of the nature of the factors used in these tests, if different conditions occur in future periods, future operating results could be materially impacted.

Income Taxes

The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in our financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the financial statements as appropriate. We account for uncertain tax positions by determining the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. This determination requires the use of judgment in assessing the timing and amounts of deductible and taxable items.

 

15


Self-Insurance

We use a combination of insurance, self-insured retention and self-insurance for a number of risks, including, but not limited to, workers’ compensation, general liability, vehicle liability, and the company’s obligation for employee-related health care benefits. Liabilities associated with the risks that we retain are estimated by considering historical claims experience, including frequency, severity, demographic factors and other actuarial assumptions. In calculating our liability, we analyze our historical trends, including loss development, and apply appropriate loss development factors to the incurred costs associated with the claims made against our self-insured program. The estimated accruals for these liabilities could be significantly affected if future occurrences or loss development differ from these assumptions. For example, for our workers’ compensation and general liability accrual, a 1% increase or decrease to the assumptions for claims costs or loss development factors would increase or decrease our self-insurance accrual by $26 million.

In fiscal 2008, our actuarially determined ultimate loss estimates were reduced primarily for our fiscal 2004 through 2007 workers’ compensation and general liability claims. The reductions in ultimate loss estimates resulted primarily from improved claims handling experience, which impacts loss development factors and other actuarial assumptions. Due to the beneficial change in estimate of our ultimate losses, accrued liabilities for general liability and workers’ compensation claims were reduced by $298 million, or $196 million after tax, resulting in an increase in net income per basic and diluted common share of $0.05 for the second quarter of fiscal year 2008.

 

16


Forward-Looking Statements

This Annual Report contains statements that Walmart believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Those statements are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. Those forward-looking statements include statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations: under the captions “Company Performance Metrics—GrowthNet Sales” and “Results of Operations—Consolidated Results of Operations” with respect to the volatility of currency exchange rates possibly continuing to affect our International segment’s net sales; under the caption “Company Performance Metrics—GrowthComparable Store Sales” regarding the effect of the opening of new stores on comparable store sales stabilizing over time; under the caption “Liquidity and Capital Resources—Capital Resources” with respect to our ability to finance seasonal build-ups in inventories and to meet other cash requirements with cash flows from operations and short-term borrowings, our ability to fund certain cash flow shortfalls by short-term borrowings and long-term debt, our plan to refinance long-term debt as it matures, our anticipated funding of any shortfall in cash to pay dividends and make capital expenditures through short-term borrowings and long-term debt, our plan to refinance existing long-term debt as it matures, and our ability to sell our long-term securities; under the caption “Liquidity and Capital Resources—Global Expansion Activities” with respect to the our capital expenditures in fiscal 2011, how we will finance expansion and any acquisitions made during fiscal 2011, the anticipated number of new stores and clubs to be opened in the United States and internationally and the anticipated allocation of capital expenditures in fiscal 2011; under the caption “Liquidity and Capital Resources—Common Stock Dividends”, as well as in Note 1 to our Consolidated Financial Statements, regarding the payment of dividends in fiscal 2011; and under the caption “Liquidity and Capital Resources—Off Balance Sheet Arrangements” with respect to the amount of increases in payments under operating leases if certain leases are executed. These forward-looking statements also include statements in Note 8 to our Consolidated Financial Statements regarding the possible reduction of U.S. tax liability on accumulated but undistributed earnings of our non-U.S. subsidiaries, the realization of certain deferred tax assets, possible reduction of unrecognized tax benefits, the reasons for such reductions and the magnitude of their impact on our results of operations and financial condition, the possible timing of the resolution of certain tax matters and how the resulting tax items will be recorded, and the possibility that the resolution of certain non-U.S. federal income tax matters could result in a material liability for us. In addition, these statements include a statement in the material entitled “Our Financial Priorities” relating to Walmart continuing to grow around the world. The letter of our President and Chief Executive Officer appearing in this Annual Report includes forward-looking statements that relate to: Walmart continuing to expand into new channels so customers can shop and experience Walmart when, where and how they want, Walmart growing operating expenses slower than sales and operating income faster than sales; Walmart doing even more to leverage the size, scale, expenses and expertise of the total company, Walmart continuing to make investments in technology, Walmart planning to move quickly and being a more innovative company; Walmart expanding our commitment to inclusion and providing career opportunities to associates, especially women; Walmart building on our leading in sustainability through continued work on its Sustainable Product Index and new commitment to reduce green gas emissions, Walmart living and upholding our culture, showing that we respect individual people, putting customers first and driving changes need to be an even better company, and Walmart making the absolute most of our opportunity to lead as a retailer, as a company and as people. Forward-looking statements appear elsewhere in this Annual Report: under the caption “Walmart U.S. —Saving Customers Money So They Can Live Better” and relate to management’s expectations that growth will come from additional penetration into more metropolitan markets, as well as new formats and stronger integration with our online business and for global sourcing initiatives to strengthen our Walmart U.S. segment’s efforts to drive down the cost of goods and pass the savings on to customers. Moreover, forward-looking statements appear under the caption “Walmart International— Growing Globally To Serve More Customers” and relate to management’s expectations for our International segment to continue an aggressive pace through acquisitions and strong organic growth and to grow in our International segment’s countries by winning locally. In addition, a forward-looking statement appears under the caption “Walmart— Helping People Live Better Worldwide” regarding driving product innovation, increasing supply chain transparency and creating a single source for product sustainability. The forward-looking statements described above are identified by the use in such statements of one or more of the words or phrases “anticipate,” “could reduce,” “expect,” “grow,” “is expected,” “may be reduced,” “may continue,” “plan,” “will always put,” “will be,” “will be included,” “will be paid,” “will be recorded,” “will be resolved,” “will build,” “will come,” “will continue,” “will do,” “will drive,” “will expand,” “will grow,” “will live and uphold, “will show,” “will strengthen,” and “would increase,” and other similar words or phrases. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. These statements discuss, among other things, expected growth, future revenues, future cash flows, future capital expenditures, future performance, future initiatives and the anticipation and expectations of Walmart and its management as to future occurrences and trends.

The forward-looking statements included in this Annual Report and that we make elsewhere are subject to certain factors, in the United States and internationally, that could affect our business operations, financial performance, business strategy, plans, goals and objectives. Those factors include, but are not limited to: general economic conditions, including the current economic downturn and disruption in the financial markets, unemployment levels, consumer credit availability, levels of consumer

 

17


disposable income, consumer spending patterns and debt levels, inflation, deflation, the cost of the goods we sell, labor costs, transportation costs, the cost of diesel fuel, gasoline, natural gas and electricity, the cost of healthcare benefits, accident costs, our casualty and other insurance costs, information security costs, the cost of construction materials, availability of acceptable building sites for new stores, clubs and other formats, competitive pressures, accident-related costs, weather patterns, catastrophic events, storm and other damage to our stores and distribution centers, climate change, weather-related closing of stores, availability and transport of goods from domestic and foreign suppliers, currency exchange fluctuations and volatility, trade restrictions, changes in tariff and freight rates, adoption of or changes in tax and other laws and regulations that affect our business, costs of compliance with laws and regulations, the outcome of legal proceedings to which we are a party, interest rate fluctuations, changes in employment legislation and other capital markets, economic and geo-political conditions and events, including civil unrest and terrorist attacks. Moreover, we typically earn a disproportionate part of our annual operating income in the fourth quarter as a result of the seasonal buying patterns. Those buying patterns are difficult to forecast with certainty. The foregoing list of factors that may affect our performance is not exclusive. Other factors and unanticipated events could adversely affect our business operations and financial performance. We discuss certain of these matters more fully, as well as certain risk factors that may affect our business operations, financial condition, results of operations and liquidity in other of our filings with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K. We filed our Annual Report on Form 10-K for the year ended January 31, 2010, with the SEC on March 30, 2010. The forward-looking statements described above are made based on knowledge of our business and the environment in which we operate. However, because of the factors described and listed above, as well as other factors, or as a result of changes in facts, assumptions not being realized or other circumstance, actual results may materially differ from anticipated results described or implied in these forward-looking statements. We cannot assure the reader that the results or developments expected or anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. You are urged to consider all of these risks, uncertainties and other factors carefully in evaluating the forward-looking statements and not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Annual Report speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances, except as may be required by applicable law.

 

18


WAL-MART STORES, INC.

Consolidated Statements of Income

 

(Amounts in millions except per share data)                   

Fiscal Years Ended January 31,

   2010     2009     2008  

Revenues:

      

Net sales

   $ 405,046      $ 401,087      $ 373,821   

Membership and other income

     3,168        3,287        3,202   
                        
     408,214        404,374        377,023   

Costs and expenses:

      

Cost of sales

     304,657        304,056        284,137   

Operating, selling, general and administrative expenses

     79,607        77,520        70,934   
                        

Operating income

     23,950        22,798        21,952   

Interest:

      

Debt

     1,787        1,896        1,863   

Capital leases

     278        288        240   

Interest income

     (181     (284     (309
                        

Interest, net

     1,884        1,900        1,794   
                        

Income from continuing operations before income taxes

     22,066        20,898        20,158   

Provision for income taxes:

      

Current

     7,643        6,564        6,897   

Deferred

     (504     581        (8
                        
     7,139        7,145        6,889   
                        

Income from continuing operations

     14,927        13,753        13,269   

Income (loss) from discontinued operations, net of tax

     (79     146        (132
                        

Consolidated net income

     14,848        13,899        13,137   

Less consolidated net income attributable to noncontrolling interest

     (513     (499     (406
                        

Consolidated net income attributable to Walmart

   $ 14,335      $ 13,400      $ 12,731   
                        

Basic net income per common share:

      

Basic income per common share from continuing operations attributable to Walmart

   $ 3.73      $ 3.36      $ 3.16   

Basic income (loss) per common share from discontinued operations attributable to Walmart

     (0.02     0.04        (0.03
                        

Basic net income per common share attributable to Walmart

   $ 3.71      $ 3.40      $ 3.13   
                        

Diluted net income per common share:

      

Diluted income per common share from continuing operations attributable to Walmart

   $ 3.72      $ 3.35      $ 3.16   

Diluted income (loss) per common share from discontinued operations attributable to Walmart

     (0.02     0.04        (0.03
                        

Diluted net income per common share attributable to Walmart

   $ 3.70      $ 3.39      $ 3.13   
                        

Weighted-average number of common shares:

      

Basic

     3,866        3,939        4,066   

Diluted

     3,877        3,951        4,072   
                        

Dividends declared per common share

   $ 1.09      $ 0.95      $ 0.88   
                        

See accompanying notes.

 

19


WAL-MART STORES, INC.

Consolidated Balance Sheets

 

      January 31,  
(Amounts in millions except per share data)    2010     2009  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 7,907      $ 7,275   

Receivables, net

     4,144        3,905   

Inventories

     33,160        34,511   

Prepaid expenses and other

     2,980        3,063   

Current assets of discontinued operations

     140        195   
                

Total current assets

     48,331        48,949   

Property and equipment:

    

Land

     22,591        19,852   

Buildings and improvements

     77,452        73,810   

Fixtures and equipment

     35,450        29,851   

Transportation equipment

     2,355        2,307   
                

Property and equipment

     137,848        125,820   

Less accumulated depreciation

     (38,304     (32,964
                

Property and equipment, net

     99,544        92,856   

Property under capital leases:

    

Property under capital leases

     5,669        5,341   

Less accumulated amortization

     (2,906     (2,544
                

Property under capital leases, net

     2,763        2,797   

Goodwill

     16,126        15,260   

Other assets and deferred charges

     3,942        3,567   
                

Total assets

   $ 170,706      $ 163,429   
                

LIABILITIES AND EQUITY

    

Current liabilities:

    

Short-term borrowings

   $ 523      $ 1,506   

Accounts payable

     30,451        28,849   

Accrued liabilities

     18,734        18,112   

Accrued income taxes

     1,365        677   

Long-term debt due within one year

     4,050        5,848   

Obligations under capital leases due within one year

     346        315   

Current liabilities of discontinued operations

     92        83   
                

Total current liabilities

     55,561        55,390   

Long-term debt

     33,231        31,349   

Long-term obligations under capital leases

     3,170        3,200   

Deferred income taxes and other

     5,508        6,014   

Redeemable noncontrolling interest

     307        397   

Commitments and contingencies

    

Equity:

    

Preferred stock ($0.10 par value; 100 shares authorized, none issued)

     —          —     

Common stock ($0.10 par value; 11,000 shares authorized, 3,786 and 3,925 issued and outstanding at January 31, 2010 and January 31, 2009, respectively)

     378        393   

Capital in excess of par value

     3,803        3,920   

Retained earnings

     66,638        63,660   

Accumulated other comprehensive loss

     (70     (2,688
                

Total Walmart shareholders’ equity

     70,749        65,285   

Noncontrolling interest

     2,180        1,794   
                

Total equity

     72,929        67,079   
                

Total liabilities and equity

   $ 170,706      $ 163,429   
                

See accompanying notes.

 

20


WAL-MART STORES, INC.

Consolidated Statements of Shareholders’ Equity

 

(Amounts in millions except per share data)

   Number of
Shares
    Common
Stock
    Capital in
Excess of
Par Value
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Walmart
Shareholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 

Balances – February 1, 2007

   4,131      $ 413      $ 2,834      $ 55,818      $ 2,508      $ 61,573      $ 2,160      $ 63,733   

Consolidated net income

           12,731          12,731        406        13,137   

Other comprehensive income

             1,356        1,356        8        1,364   

Cash dividends ($0.88 per share)

           (3,586       (3,586       (3,586

Purchase of Company stock

   (166     (17     (190     (7,484       (7,691       (7,691

Other

   8        1        384            385        (635     (250

Adoption of accounting for uncertainty in income taxes

           (160       (160       (160
                                                              

Balances – January 31, 2008

   3,973      $ 397      $ 3,028      $ 57,319      $ 3,864      $ 64,608      $ 1,939      $ 66,547   

Consolidated net income

           13,400          13,400        499        13,899   

Other comprehensive income

             (6,552     (6,552     (371     (6,923

Cash dividends ($0.95 per share)

           (3,746       (3,746       (3,746

Purchase of Company stock

   (61     (6     (95     (3,315       (3,416       (3,416

Other

   13        2        987        2          991        (273     718   
                                                              

Balances – January 31, 2009

   3,925      $ 393      $ 3,920      $ 63,660      $ (2,688   $ 65,285      $ 1,794      $ 67,079   

Consolidated net income (excludes redeemable noncontrolling interest)

           14,335          14,335        499        14,834   

Other comprehensive income

             2,618        2,618        64        2,682   

Cash dividends ($1.09 per share)

           (4,217       (4,217       (4,217

Purchase of Company stock

   (145     (15     (246     (7,136       (7,397       (7,397

Purchase of redeemable noncontrolling interest

         (288         (288       (288

Other

   6          417        (4       413        (177     236   
                                                              

Balances – January 31, 2010

   3,786      $ 378      $ 3,803      $ 66,638      $ (70   $ 70,749      $ 2,180      $ 72,929   
                                                              

 

Fiscal years ended January 31,

   2010     2009     2008  

Comprehensive Income:

      

Consolidated net income (1)

   $ 14,848      $ 13,899      $ 13,137   

Other comprehensive income:

      

Currency translation (2)

     2,854        (6,860     1,226   

Net change in fair values of derivatives

     94        (17     —     

Minimum pension liability

     (220     (46     138   
                        

Total comprehensive income

     17,576        6,976        14,501   

Less amounts attributable to the noncontrolling interest:

      

Net income (1)

     (513     (499     (406

Currency translation (2)

     (110     371        (8
                        

Amounts attributable to the noncontrolling interest

     (623     (128     (414
                        

Comprehensive income attributable to Walmart

   $ 16,953      $ 6,848      $ 14,087   
                        

 

(1)

Includes $14 million in fiscal 2010 that is related to the redeemable noncontrolling interest.

(2)

Includes $46 million in fiscal 2010 that is related to the redeemable noncontrolling interest.

See accompanying notes

 

21


WAL-MART STORES, INC.

Consolidated Statements of Cash Flows

 

(Amounts in millions)                   

Fiscal Year Ended January 31,

   2010     2009     2008  

Cash flows from operating activities:

      

Consolidated net income

   $ 14,848      $ 13,899      $ 13,137   

Loss (income) from discontinued operations, net of tax

     79        (146     132   
                        

Income from continuing operations

     14,927        13,753        13,269   

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

      

Depreciation and amortization

     7,157        6,739        6,317   

Deferred income taxes

     (504     581        (8

Other operating activities

     301        769        504   

Changes in certain assets and liabilities, net of effects of acquisitions:

      

Increase in accounts receivable

     (297     (101     (564

Decrease (increase) in inventories

     2,265        (220     (775

Increase (decrease) in accounts payable

     1,052        (410     865   

Increase in accrued liabilities

     1,348        2,036        1,034   
                        

Net cash provided by operating activities

     26,249        23,147        20,642   

Cash flows from investing activities:

      

Payments for property and equipment

     (12,184     (11,499     (14,937

Proceeds from disposal of property and equipment

     1,002        714        957   

Proceeds from (payments for) disposal of certain international operations, net

     —          838        (257

Investment in international operations, net of cash acquired

     —          (1,576     (1,338

Other investing activities

     (438     781        (95
                        

Net cash used in investing activities

     (11,620     (10,742     (15,670

Cash flows from financing activities:

      

Increase (decrease) in short-term borrowings, net

     (1,033     (3,745     2,376   

Proceeds from issuance of long-term debt

     5,546        6,566        11,167   

Payment of long-term debt

     (6,033     (5,387     (8,723

Dividends paid

     (4,217     (3,746     (3,586

Purchase of Company stock

     (7,276     (3,521     (7,691

Purchase of redeemable noncontrolling interest

     (436     —          —     

Payment of capital lease obligations

     (346     (352     (343

Other financing activities

     (396     267        (622
                        

Net cash used in financing activities

     (14,191     (9,918     (7,422

Effect of exchange rates on cash and cash equivalents

     194        (781     252   
                        

Net increase (decrease) in cash and cash equivalents

     632        1,706        (2,198

Cash and cash equivalents at beginning of year (1)

     7,275        5,569        7,767   
                        

Cash and cash equivalents at end of year (2)

   $ 7,907      $ 7,275      $ 5,569   
                        

Supplemental disclosure of cash flow information

      

Income tax paid

   $ 7,389      $ 6,596      $ 6,299   

Interest paid

     2,141        1,787        1,622   

Capital lease obligations incurred

     61        284        447   
                        

 

(1) Includes cash and cash equivalents of discontinued operations of $51 million at February 1, 2007.
(2) Includes cash and cash equivalents of discontinued operations of $77 million at January 31, 2008.

See accompanying notes.

 

22


Notes to Consolidated Financial Statements

Wal-Mart Stores, Inc.

Note 1. Summary of Significant Accounting Policies

General

Wal-Mart Stores, Inc. (“Walmart,” the “company” or “we”) operates retail stores in various formats around the world and is committed to saving people money so they can live better. We earn the trust of our customers every day by providing a broad assortment of quality merchandise and services at every day low prices (“EDLP”) while fostering a culture that rewards and embraces mutual respect, integrity and diversity. EDLP is our pricing philosophy under which we price items at a low price every day so our customers trust that our prices will not change under frequent promotional activity. Our fiscal year ends on January 31.

Consolidation

The Consolidated Financial Statements include the accounts of Wal-Mart Stores, Inc. and its subsidiaries. Intercompany transactions have been eliminated in consolidation. Investments in which the company has a 20% to 50% voting interest and where the company exercises significant influence over the investee are accounted for using the equity method. These investments are immaterial to our company.

The company’s operations in Argentina, Brazil, Chile, China, Costa Rica, El Salvador, Guatemala, Honduras, India, Japan, Mexico, Nicaragua and the United Kingdom are consolidated using a December 31 fiscal year-end, generally due to statutory reporting requirements. There were no significant intervening events in January 2010 which materially affected the financial statements. The company’s operations in Canada and Puerto Rico are consolidated using a January 31 fiscal year-end.

The company consolidates the accounts of certain variable interest entities where it has been determined that Walmart is the primary beneficiary of those entities’ operations. The assets, liabilities and results of operations of these entities are not material to the company.

Cash and Cash Equivalents

The company considers investments with a maturity of three months or less when purchased to be cash equivalents. The majority of payments due from banks for third-party credit card, debit card and electronic benefit transactions (“EBT”) process within 24-48 hours, except for transactions occurring on a Friday, which are generally processed the following Monday. All credit card, debit card and EBT transactions that process in less than seven days are classified as cash and cash equivalents. The amounts due from banks for these transactions classified as cash totaled $2.6 billion and $2.0 billion at January 31, 2010 and 2009, respectively. In addition, cash and cash equivalents includes restricted cash related to cash collateral holdings from various counterparties as required by certain derivative and trust agreements of $469 million and $577 million at January 31, 2010 and 2009, respectively.

Receivables

Receivables consist primarily of amounts due from:

 

   

insurance companies resulting from our pharmacy sales;

 

   

banks for customer credit card, debit card and EBT transactions that take in excess of seven days to process;

 

   

suppliers for marketing or incentive programs;

 

   

consumer financing programs in certain international subsidiaries; and

 

   

real estate transactions.

We establish a reserve for uncollectible receivables based on historical trends in collection of past due amounts and write-off history. Our reserve for uncollectible receivables, which relates primarily to our consumer financing programs, was $298 million and $188 million at January 31, 2010 and 2009, respectively.

Inventories

The company values inventories at the lower of cost or market as determined primarily by the retail method of accounting, using the last-in, first-out (“LIFO”) method for substantially all of the Walmart U.S. segment’s merchandise inventories. Sam’s Club merchandise and merchandise in our distribution warehouses are valued based on the weighted average cost using the

 

23


LIFO method. Inventories of International operations are primarily valued by the retail method of accounting, using the first-in, first-out (“FIFO”) method. At January 31, 2010 and 2009, our inventories valued at LIFO approximate those inventories as if they were valued at FIFO.

Capitalized Interest

Interest costs capitalized on construction projects were $85 million, $88 million and $150 million in fiscal 2010, 2009 and 2008, respectively.

Long-Lived Assets

Long-lived assets are stated at cost. Management reviews long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows, which is at the individual store level or in certain circumstances a market group of stores. Undiscounted cash flows expected to be generated by the related assets are estimated over the asset’s useful life based on updated projections. If the evaluation indicates that the carrying amount of the asset may not be recoverable, any potential impairment is measured based upon the fair value of the related asset or asset group as determined by an appropriate market appraisal or other valuation technique. Impairment charges were $429 million, $262 million and $210 million for fiscal years 2010, 2009 and 2008, respectively, and are classified in operating, selling, general and administrative expenses on the accompanying Consolidated Statements of Income. See Note 15 for further information regarding the impairment charges recorded in fiscal 2010.

Goodwill and Other Acquired Intangible Assets

Goodwill represents the excess of purchase price over fair value of net assets acquired, and is allocated to the appropriate segment when acquired. Other acquired intangible assets are stated at the fair value acquired as determined by a valuation technique commensurate with the intended use of the related asset. Goodwill and indefinite-lived other acquired intangible assets are not amortized; rather they are evaluated for impairment annually during our fourth fiscal quarter, or whenever events or changes in circumstances indicate that the value of the asset may be impaired. Definite-lived other acquired intangible assets are considered long-lived assets and are amortized on a straight-line basis over the periods that expected economic benefits will be provided.

Indefinite-lived other acquired intangible assets are included in other assets and deferred charges on the accompanying Consolidated Balance Sheets. These assets are evaluated for impairment based on their fair values using valuation techniques which are updated annually based on the most recent variables and assumptions. There were no impairment charges related to indefinite-lived intangible assets recorded during the fiscal years ended January 31, 2010, 2009 and 2008.

Goodwill is evaluated for impairment by determining the fair value of the related reporting unit. Fair value is measured based on discounted cash flow method and relative market-based approaches. The analyses require significant management judgment to evaluate the capacity of an acquired business to perform within projections. The company has never recorded impairment charges related to goodwill.

The following table reflects goodwill activity for fiscal years 2010 and 2009:

 

(Amounts in millions)

   International     Sam’s Club    Total  

February 1, 2008

   $ 15,574      $ 305    $ 15,879   

Currency translation

     (2,020     —        (2,020

Acquisitions

     1,500        —        1,500   

Other

     (99     —        (99
                       

January 31, 2009

   $ 14,955      $ 305    $ 15,260   

Currency translation

     970        —        970   

Other

     (104     —        (104
                       

January 31, 2010

   $ 15,821      $ 305    $ 16,126   
                       

During fiscal 2010, the International segment’s goodwill balance increased $970 million related to currency exchange fluctuations. Other goodwill activity of $104 million includes adjustments made in finalizing the allocation of the purchase price for Distribución y Servicio (“D&S”) . During fiscal 2009, the International segment’s goodwill balance decreased $619 million primarily from the strengthening of the U.S. dollar against most major currencies, partially offset by goodwill recorded in connection with the

 

24


acquisition of a majority interest in D&S and the purchase of the remaining minority shares of The Seiyu Ltd. These acquisitions and disposal are discussed in further detail in Note 9.

Leases

The company estimates the expected term of a lease by assuming the exercise of renewal options where an economic penalty exists that would preclude the abandonment of the lease at the end of the initial non-cancelable term and the exercise of such renewal is at the sole discretion of the company. This expected term is used in the determination of whether a store lease is a capital or operating lease and in the calculation of straight-line rent expense. Additionally, the useful life of leasehold improvements is limited by the expected lease term or the economic life of the asset, whichever is shorter. If significant expenditures are made for leasehold improvements late in the expected term of a lease and renewal is reasonably assumed, the useful life of the leasehold improvement is limited to the end of the renewal period or economic life of the asset, whichever is shorter.

Rent abatements and escalations are considered in the calculation of minimum lease payments in the company’s capital lease tests and in determining straight-line rent expense for operating leases.

Currency Translation

The assets and liabilities of all international subsidiaries are translated from the respective local currency to the U.S. dollar using exchange rates at the balance sheet date. The income statements of international subsidiaries are translated from the respective local currency to the U.S. dollar using average exchange rates for the period. Related translation adjustments are recorded as a component of accumulated other comprehensive income (loss).

Revenue Recognition

The company recognizes sales revenue net of sales taxes and estimated sales returns at the time it sells merchandise to the customer. Customer purchases of shopping cards are not recognized as revenue until the card is redeemed and the customer purchases merchandise by using the shopping card. The company also recognizes revenue from service transactions at the time the service is performed. Generally, revenue from services is classified as a component of net sales on our consolidated statements of income.

Sam’s Club Membership Fee Revenue Recognition

The company recognizes Sam’s Club membership fee revenue both in the United States and internationally over the term of the membership, which is 12 months. The following table details deferred revenue, membership fees received from members and the amount of revenue recognized in earnings for each of the fiscal years 2010, 2009 and 2008.

 

(Amounts in millions)

   Deferred
Membership
Fee Revenue
 

Balance at February 1, 2007

   $ 535   

Membership fees received

     1,054   

Membership fee revenue recognized

     (1,038
        

Balance at January 31, 2008

   $ 551   

Membership fees received

     1,044   

Membership fee revenue recognized

     (1,054
        

Balance at January 31, 2009

   $ 541   

Membership fees received

     1,048   

Membership fee revenue recognized

     (1,057
        

Balance at January 31, 2010

   $ 532   
        

Sam’s Club membership fee revenue is included in membership and other income in the revenues section of the accompanying Consolidated Statements of Income. The deferred membership fee is included in accrued liabilities on the accompanying Consolidated Balance Sheets.

 

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Cost of Sales

Cost of sales includes actual product cost, the cost of transportation to the company’s warehouses, stores and clubs from suppliers, the cost of transportation from the company’s warehouses to the stores and clubs and the cost of warehousing for our Sam’s Club segment.

Payments from Suppliers

Walmart receives money from suppliers for various programs, primarily volume incentives, warehouse allowances and reimbursements for specific programs such as markdowns, margin protection and advertising. Substantially all payments from suppliers are accounted for as a reduction of purchases and recognized in our Consolidated Statements of Income when the related inventory is sold.

Operating, Selling, General and Administrative Expenses

Operating, selling, general and administrative expenses include all operating costs of the company except those costs related to the transportation of products from the supplier to the warehouses, stores or clubs, the costs related to the transportation of products from the warehouses to the stores or clubs and the cost of warehousing for our Sam’s Club segment. As a result, the cost of warehousing and occupancy for our Walmart U.S. and International segments’ distribution facilities is included in operating, selling, general and administrative expenses. Because we do not include the cost of our Walmart U.S. and International segments’ distribution facilities in cost of sales, our gross profit and gross profit as a percentage of net sales (our “gross profit margin”) may not be comparable to those of other retailers that may include all costs related to their distribution facilities in cost of sales and in the calculation of gross profit.

Advertising Costs

Advertising costs are expensed as incurred and were $2.4 billion, $2.1 billion and $1.8 billion in fiscal 2010, 2009 and 2008, respectively. Advertising costs consist primarily of print, television and digital advertisements. Advertising reimbursements received from suppliers are generally accounted for as a reduction of purchases and recognized in our Consolidated Statements of Income when the related inventory is sold.

Pre-Opening Costs

The costs of start-up activities, including organization costs, related to new store openings, store remodels, expansions and relocations are expensed as incurred. Pre-opening costs totaled $227 million, $289 million and $353 million for the years ended January 31, 2010, 2009 and 2008, respectively.

Depreciation and Amortization

Depreciation and amortization for financial statement purposes are provided on the straight-line method over the estimated useful lives of the various assets. Depreciation expense, including amortization of property under lease, for fiscal years 2010, 2009 and 2008 was $7.2 billion, $6.7 billion and $6.3 billion, respectively. For income tax purposes, accelerated methods of depreciation are used with recognition of deferred income taxes for the resulting temporary differences. Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the remaining expected lease term. Estimated useful lives for financial statement purposes are as follows:

 

Buildings and improvements

   5–40 years

Fixtures and equipment

   3–20 years

Transportation equipment

   4–15 years

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated 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 in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

 

26


The company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The company records interest and penalties related to unrecognized tax benefits in interest expense and operating, selling, general and administrative expenses, respectively, in the company’s Consolidated Statements of Income.

Estimates and Assumptions

The preparation of our Consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities. They also affect the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Reclassifications

In connection with the company’s finance transformation project, we reviewed and adjusted the classification of certain revenue and expense items within our Consolidated Statements of Income for financial reporting purposes. The reclassifications did not impact operating income or consolidated net income attributable to Walmart. The changes were effective February 1, 2009 and have been reflected in all periods presented.

Subsequent Events

On March 4, 2010, the company’s Board of Directors approved an increase in the annual dividend for fiscal 2011 to $1.21 per share, an increase of 11% over the dividend paid in fiscal 2010. The annual dividend will be paid in four quarterly installments on April 5, 2010, June 1, 2010, September 7, 2010 and January 3, 2011 to holders of record on March 12, May 14, August 13 and December 10, 2010, respectively.

 

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Note 2. Accrued Liabilities

Accrued liabilities consist of the following:

 

     January 31,

(Amounts in millions)

   2010    2009

Accrued wages and benefits

   $ 5,986    $ 5,577

Self-insurance

     3,224      3,108

Other

     9,524      9,427
             

Total accrued liabilities

   $ 18,734    $ 18,112
             

Self-Insurance

The company uses a combination of insurance, self-insured retention and self-insurance for a number of risks, including, but not limited to, workers’ compensation, general liability, vehicle liability, property and the company’s obligation for employee-related health care benefits. Liabilities associated with these risks are estimated by considering historical claims experience, demographic factors, frequency and severity factors and other actuarial assumptions. In estimating our liability for such claims, we periodically analyze our historical trends, including loss development, and apply appropriate loss development factors to the incurred costs associated with the claims.

Note 3. Net Income Per Common Share

Basic net income per common share attributable to Walmart is based on the weighted-average number of outstanding common shares. Diluted net income per common share attributable to Walmart is based on the weighted-average number of outstanding common shares adjusted for the dilutive effect of stock options and other share-based awards. The dilutive effect of stock options and other share-based awards was 11 million, 12 million and 6 million shares in fiscal 2010, 2009 and 2008, respectively. The company had approximately 5 million, 6 million and 62 million option shares outstanding at January 31, 2010, 2009 and 2008, respectively, which were not included in the diluted net income per share calculation because their effect would be antidilutive.

For purposes of determining consolidated net income per common share attributable to Walmart, income from continuing operations attributable to Walmart and the (loss) gain from discontinued operations, net of tax, are as follows:

 

     Fiscal Year Ended January 31,  

(Amounts in millions)

   2010     2009     2008  

Income from continuing operations

   $ 14,927      $ 13,753      $ 13,269   

Less consolidated net income attributable to noncontrolling interest

     (513     (499     (406
                        

Income from continuing operations attributable to Walmart

     14,414        13,254        12,863   

Income (loss) from discontinued operations, net of tax

     (79     146        (132
                        

Consolidated net income attributable to Walmart

   $ 14,335      $ 13,400      $ 12,731   
                        

 

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Note 4. Short-term Borrowings and Long-term Debt

Information on short-term borrowings and interest rates is as follows:

 

     Fiscal Year Ended January 31,  

(Dollar amounts in millions)

   2010     2009     2008  

Maximum amount outstanding at any month-end

   $ 4,536      $ 7,866      $ 9,176   

Average daily short-term borrowings

     1,596        4,520        5,657   

Weighted-average interest rate

     0.5     2.1     4.9

Short-term borrowings consist of commercial paper and lines of credit. Short term borrowings outstanding at January 31, 2010 and 2009 were $523 million and $1.5 billion, respectively. The company has certain lines of credit totaling $9.0 billion, most of which were undrawn as of January 31, 2010. Of the $9.0 billion in lines of credit, $8.6 billion is committed with 34 financial institutions. In conjunction with these lines of credit, the company has agreed to observe certain covenants, the most restrictive of which relates to maximum amounts of secured debt and long-term leases. Committed lines of credit are primarily used to support commercial paper. The portion of committed lines of credit used to support commercial paper remained undrawn as of January 31, 2010. The committed lines of credit mature at various times starting between June 2010 and June 2012, carry interest rates in some cases equal to the company’s one-year credit default swap mid-rate spread and in other cases LIBOR plus 15 basis points and incur commitment fees of 4.0 to 10.0 basis points on undrawn amounts.

The company had trade letters of credit outstanding totaling $2.4 billion at January 31, 2010 and 2009. At January 31, 2010 and 2009, the company had standby letters of credit outstanding totaling $2.4 billion and $2.0 billion, respectively. These letters of credit were issued primarily for the purchase of inventory and self-insurance purposes.

 

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Long-term debt consists of:

 

(Dollar amounts in millions)         January 31,

Interest Rate

  

Maturity Date by Fiscal Year

   2010    2009

1.200 – 10.96%

   Notes due 2010    $ —      $ 5,656

5.250%

   Notes due 2036      4,098      3,954

0.184 – 10.880%

   Notes due 2011(1)      3,972      2,952

5.625%

   Notes due 2035      1,598      —  

6.500%

   Notes due 2038      3,000      3,000

0.750 – 15.27%

   Notes due 2014      3,919      4,822

1.200 – 4.125%

   Notes due 2012      4,481      5,353

5.750 – 7.550%

   Notes due 2031      1,799      1,727

4.875 – 6.200%

   Notes due 2039      3,598      2,954

2.950 – 6.500%

   Notes due 2019(1)      1,769      1,305

3.750 – 5.375%

   Notes due 2018      1,032      1,006

3.150 – 6.630%

   Notes due 2016      766      940

5.875%

   Notes due 2028      777      772

1.600 – 5.000%

   Notes due 2013      1,363      561

6.750%

   Notes due 2024      262      263

2.300 – 3.000%

   Notes due 2015      2,704      575

2.000 – 2.500%

   Notes due 2017      27      32

4.125%

   Notes due 2020      6      507

4.200 – 5.500%

   Notes due 2021      6      7

4.200 – 5.500%

   Notes due 2022      6      8

4.200 – 5.500%

   Notes due 2023      8      10

4.200 – 5.500%

   Notes due 2025      16      17

4.200 – 5.500%

   Notes due 2026      20      20

4.200 – 5.500%

   Notes due 2027      23      19

4.200 – 5.500%

   Notes due 2029      1,401      12

Other (mortgages and sale/leasebacks) (2)

   Due 2011 – 2038      630      725
                

Total

      $ 37,281    $ 37,197
                

 

(1)

Notes due in 2011 and 2019 both include $500 million put options. Contains early termination arrangements totaling $109 million.

 

(2)

Includes adjustments to debt hedged by derivatives.

The company has $1.0 billion in debt with embedded put options. The holders of one $500 million debt issuance may require the company to repurchase the debt at par plus accrued interest at any time. One issuance of money market puttable reset securities in the amount of $500 million is structured to be remarketed in connection with the annual reset of the interest rate. If, for any reason, the remarketing of the notes does not occur at the time of any interest rate reset, the holders of the notes must sell, and the company must repurchase, the notes at par. All of these issuances have been classified as long-term debt due within one year in the Consolidated Balance Sheets.

Long-term debt is unsecured except for $267 million, which is collateralized by property with an aggregate carrying amount of approximately $1.2 billion. Annual maturities of long-term debt during the next five years and thereafter are:

 

(Amounts in millions)

Fiscal Year

   Annual
Maturity

2011

   $ 4,050

2012

     4,611

2013

     1,438

2014

     4,150

2015

     2,749

Thereafter

     20,283
      

Total

   $ 37,281
      

 

30


The company has entered into sale/leaseback transactions involving buildings while retaining title to the underlying land. These transactions were accounted for as financings and are included in long-term debt and the annual maturities schedules above. The resulting obligations mature as follows during the next five years and thereafter:

 

(Amounts in millions)

Fiscal Year

   Annual
Maturity

2011

   $ 10

2012

     10

2013

     10

2014

     7

2015

     7

Thereafter

     277
      

Total

   $ 321
      

Note 5. Fair Value Measurements

The company records and discloses certain financial and non-financial assets and liabilities at their fair value. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.

Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

   

Level 1, defined as observable inputs such as quoted prices in active markets;

 

   

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

 

   

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the company to develop our own assumptions.

The disclosure of fair value of certain financial assets and liabilities that are recorded at cost are as follows:

Cash and cash equivalents: The carrying amount approximates fair value due to the short maturity of these instruments.

Long-term debt: The fair value is based on the company’s current incremental borrowing rate for similar types of borrowing arrangements or, where applicable, quoted market prices. The cost and fair value of our debt as of January 31, 2010 and 2009 is as follows:

 

     January 31, 2010    January 31, 2009

(Amounts in millions)

   Cost    Fair Value    Cost    Fair Value

Long-term debt

   $ 37,281    $ 39,055    $ 37,197    $ 37,862

 

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Additionally, as of January 31, 2010 and 2009, the company held certain derivative asset and liability positions that are required to be measured at fair value on a recurring basis. The majority of the Company’s derivative instruments relate to interest rate swaps. The fair values of these interest rate swaps have been measured in accordance with Level 2 inputs of the fair value hierarchy. As of January 31, 2010 and 2009, the notional amounts and fair values of these interest rate swaps are as follows (asset/(liability)):

 

(Amounts in millions)    January 31, 2010     January 31, 2009  

Derivative financial instruments designated for hedging:

   Notional Amount    Fair Value     Notional Amount    Fair Value  

Receive fixed-rate, pay floating rate interest rate swaps designated as fair value hedges

   $ 4,445    $ 260      $ 5,195    $ 321   

Receive fixed-rate, pay fixed-rate cross-currency interest rate swaps designated as net investment hedges (Cross-currency notional amount: GBP 795 at January 31, 2010 and 2009)

     1,250      189        1,250      526   

Receive floating-rate, pay fixed-rate interest rate swaps designated as cash flow hedges

     638      (20     462      (17

Receive fixed-rate, pay fixed-rate cross-currency interest rate swaps designated as cash flow hedges

     2,902      286        —        —     
                              

Total

   $ 9,235    $ 715      $ 6,907    $ 830   
                              

The fair values above are the estimated amounts the company would receive or pay upon a termination of the agreements relating to such instruments as of the reporting dates.

Note 6. Derivative Financial Instruments

The company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates, as well as to maintain an appropriate mix of fixed- and floating-rate debt. Use of derivative financial instruments in hedging programs subjects the company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative instrument will change. In a hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the company’s derivative financial instruments is used to measure interest to be paid or received and does not represent the company’s exposure due to credit risk. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) from the counterparty when appropriate.

The company’s transactions are with counterparties rated “A+” or better by nationally recognized credit rating agencies. In connection with various derivative agreements with counterparties, the company held cash collateral from these counterparties of $323 million and $440 million at January 31, 2010 and 2009, respectively. It is our policy to record cash collateral exclusive of any derivative asset, and any collateral holdings are reflected in our accrued liabilities as amounts due to the counterparties. Furthermore, as part of the master netting arrangements with these counterparties, the company is also required to post collateral if the derivative liability position exceeds $150 million. The company has no outstanding collateral postings and in the event of providing cash collateral, the company would record the posting as a receivable exclusive of any derivative liability.

When the company uses derivative financial instruments for purposes of hedging its exposure to interest and currency exchange rates, the contract terms of a hedge instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative instrument is a hedge, depending on the nature of the hedge, changes in the fair value of the instrument will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or be recognized in accumulated other comprehensive loss until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings. Instruments that do not meet the criteria for hedge accounting, or contracts for which the company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of change.

Fair Value Instruments

The company is party to receive fixed-rate, pay floating-rate interest rate swaps to hedge the fair value of fixed-rate debt. Under certain swap agreements, the company pays floating-rate interest and receives fixed-rate interest payments periodically over the life of the instruments. The notional amounts are used to measure interest to be paid or received and do not represent the exposure due to credit loss. The company’s interest rate swaps that receive fixed-interest rate payments and pay floating-interest rate payments are designated as fair value hedges. As the specific terms and notional amounts of the derivative instruments match those of the instruments being hedged, the derivative instruments were assumed to be perfectly effective hedges and all changes in fair value of the hedges were recorded in long-term debt and accumulated other comprehensive loss on the accompanying Consolidated Balance Sheets with no net impact on the income statement. These fair value instruments will mature on various dates ranging from February 2011 to May 2014.

 

32


Net Investment Instruments

At January 31, 2010 and 2009, the company is party to cross-currency interest rate swaps that hedge its net investment in the United Kingdom. The agreements are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. All changes in the fair value of these instruments are recorded in accumulated other comprehensive loss, offsetting the currency translation adjustment that is also recorded in accumulated other comprehensive loss. These instruments will mature on dates ranging from 2029 to March 2034.

The company has approximately £3.0 billion of outstanding debt that is designated as a hedge of the company’s net investment in the United Kingdom as of January 31, 2010 and 2009. The company also has outstanding approximately ¥437.4 billion of debt that is designated as a hedge of the company’s net investment in Japan at January 31, 2010 and 2009. Any translation of non-U.S.-denominated debt is recorded in accumulated other comprehensive loss, offsetting the currency translation adjustment that is also recorded in accumulated other comprehensive loss. These instruments will mature on dates ranging from January 2011 to January 2039.

Cash Flow Instruments

The company is party to receive floating-rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain non-U.S.-denominated debt. The swaps are designated as cash flow hedges of interest expense risk. Changes in the non-U.S. benchmark interest rate result in reclassification of amounts from accumulated other comprehensive loss to earnings to offset the floating-rate interest expense. These cash flow instruments will mature on dates ranging from August 2013 to August 2014.

The company is also party to receive fixed-rate, pay fixed-rate cross-currency interest rate swaps to hedge the currency exposure associated with the forecasted payments of principal and interest of non-U.S.-denominated debt. The swaps are designated as cash flow hedges of the currency risk related to payments on the non-U.S.-denominated debt. Changes in the currency exchange rate result in reclassification of amounts from accumulated other comprehensive loss to earnings to offset the re-measurement (loss) gain on the non-U.S.-denominated debt. These cash flow instruments will mature on dates ranging from September 2029 to March 2034. Any ineffectiveness with these instruments is expected to be immaterial.

Financial Statement Presentation

Hedging instruments with an unrealized gain are recorded on the Consolidated Balance Sheets in other assets and deferred charges, based on maturity date. Those instruments with an unrealized loss are recorded in accrued liabilities or deferred income taxes and other, based on maturity date.

As of January 31, 2010 and 2009, our financial instruments were classified as follows in the accompanying Consolidated Balance Sheets:

 

     January 31, 2010    January 31, 2009

(Amounts in millions)

   Fair Value
Instruments
   Net Investment
Hedge
   Cash Flow
Instruments
   Fair Value
Instruments
   Net Investment
Hedge
   Cash Flow
Instruments

Balance Sheet Classification:

                 

Other assets and deferred charges

   $ 260    $ 189    $ 286    $ 321    $ 526    $ —  
                                         

Total assets

   $ 260    $ 189    $ 286    $ 321    $ 526    $ —  
                                         

Long-term debt

   $ 260    $ —      $ —      $ 321    $ —      $ —  

Deferred income taxes and other

     —        —        20      —        —        17
                                         

Total liabilities

   $ 260    $ —      $ 20    $ 321    $ —      $ 17
                                         

 

33


Note 7. Accumulated Other Comprehensive Income

Amounts included in accumulated other comprehensive income (loss) for the company’s derivative instruments and minimum pension liabilities are recorded net of the related income tax effects. The following table provides further detail regarding changes in the composition of accumulated other comprehensive income (loss) for the fiscal years ended January 31, 2010, 2009 and 2008:

 

(Amounts in millions)

   Currency
Translation
    Derivative
Instruments
    Minimum
Pension Liability
    Total  

Balances at February 1, 2007

   $ 2,875      $ —        $ (367   $ 2,508   

Currency translation adjustment

     1,218        —          —          1,218   

Subsidiary minimum pension liability

     —          —          138        138   
                                

Balances at February 1, 2008

   $ 4,093      $ —        $ (229   $ 3,864   

Currency translation adjustment

     (6,489     —          —          (6,489

Net change in fair value of derivatives

     —          (17     —          (17

Subsidiary minimum pension liability

     —          —          (46     (46
                                

Balances at February 1, 2009

   $ (2,396   $ (17   $ (275   $ (2,688

Currency translation adjustment

     2,744        —          —          2,744   

Net change in fair value of derivatives

     —          94        —          94   

Subsidiary minimum pension liability

     —          —          (220     (220
                                

Balances at January 31, 2010

   $ 348      $ 77      $ (495   $ (70
                                

The currency translation adjustment includes a net translation loss of $545 million, a gain of $1.2 billion and a loss of $9 million at January 31, 2010, 2009 and 2008, respectively, related to net investment hedges of our operations in the United Kingdom and Japan. For fiscal 2010, we reclassified $83 million from accumulated other comprehensive loss to earnings to offset currency translation losses on the re-measurement of non-U.S. denominated debt.

Note 8. Income Taxes

A summary of the provision for income taxes is as follows:

 

     Fiscal Year Ended January 31,  

(Amounts in millions)

   2010     2009     2008  

Current:

      

U.S. federal

   $ 5,798      $ 4,771      $ 5,145   

U.S. state and local

     599        564        524   

International

     1,246        1,229        1,228   
                        

Total current tax provision

     7,643        6,564        6,897   
                        

Deferred:

      

U.S. federal

     (449     614        12   

U.S. state and local

     78        41        6   

International

     (133     (74     (26
                        

Total deferred tax provision

     (504     581        (8
                        

Total provision for income taxes

   $ 7,139      $ 7,145      $ 6,889   
                        

Income from Continuing Operations

The components of income from continuing operations before income taxes is as follows:

 

     Fiscal Year Ended January 31,

(Amounts in millions)

   2010    2009    2008

U.S.

   $ 17,652    $ 16,239    $ 15,820

International

     4,414      4,659      4,338
                    

Total income from continuing operations before income taxes

   $ 22,066    $ 20,898    $ 20,158
                    

 

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Deferred Taxes

The significant components of our deferred tax account balances are as follows:

 

     January 31,  

(Amounts in millions)

   2010     2009  

Deferred tax assets:

    

Loss and tax credit carryforwards

   $ 2,713      $ 1,603   

Accrued liabilities

     3,141        2,548   

Equity compensation

     267        206   

Other

     751        437   
                

Total deferred tax assets

     6,872        4,794   

Valuation allowance

     (2,167     (1,852
                

Deferred tax assets, net of valuation allowance

     4,705        2,942   
                

Deferred tax liabilities:

    

Property and equipment

     4,015        3,257   

Inventories

     1,120        1,079   

Other

     609        211   
                

Total deferred tax liabilities

     5,744        4,547   
                

Net deferred tax liabilities

   $ 1,039      $ 1,605   
                

The deferred taxes noted above are classified as follows in the accompanying Consolidated Balance Sheets:

 

     January 31,

(Amounts in millions)

   2010    2009

Balance Sheet Classification:

     

Assets:

     

Prepaid expenses and other

   $ 1,386    $ 1,293

Other assets and deferred charges

     331      202
             

Asset subtotals

     1,717      1,495

Liabilities:

     

Accrued liabilities

     34      24

Deferred income taxes and other

     2,722      3,076
             

Liability subtotals

     2,756      3,100
             

Net deferred tax liabilities

   $ 1,039    $ 1,605
             

Effective Tax Rate Reconciliation

A reconciliation of the significant differences between the effective income tax rate and the federal statutory rate on pretax income is as follows:

 

     Fiscal Year Ended January 31,  
     2010     2009     2008  

U.S. statutory tax rate

   35.0   35.0   35.0

U.S. state income taxes, net of federal income tax benefit

   2.0   1.9   1.7

Income taxes outside the U.S.

   -1.6   -1.7   -1.7

Net impact of repatriated foreign earnings

   -3.4   -1.1   -0.7

Other, net

   0.4   0.1   -0.1
                  

Effective income tax rate

   32.4   34.2   34.2
                  

Unremitted Earnings

United States income taxes have not been provided on accumulated but undistributed earnings of its non-U.S. subsidiaries of approximately $13.7 billion and $12.7 billion as of January 31, 2010 and 2009, respectively, as the company intends to permanently reinvest these amounts. However, if any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable because of the complexities with its hypothetical calculation.

 

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Net Operating Losses, Tax Credit Carryforwards and Valuation Allowances

At January 31, 2010, the company had international net operating loss and capital loss carryforwards totaling approximately $4.6 billion. Of these carryforwards, approximately $3.0 billion will expire, if not utilized, in various years through 2020. The remaining carryforwards have no expiration. At January 31, 2010, the company had foreign tax credit carryforwards of $1.1 billion, which will expire in various years through 2020 if not utilized.

As of January 31, 2010, the company has provided a valuation allowance of approximately $2.2 billion on deferred tax assets associated primarily with net operating loss and capital loss carryforwards from our international operations for which management has determined it is more likely than not that the deferred tax asset will not be realized. The $315 million net change in the valuation allowance during fiscal 2010 related to releases arising from the use of net operating loss carryforwards, increases in foreign net operating losses arising in fiscal 2010 and fluctuations in currency exchange rates. Management believes that it is more likely than not that we will fully realize the remaining domestic and international deferred tax assets.

Uncertain Tax Positions

As of February 1, 2007, the company adopted a new accounting policy for recording uncertain tax positions. The benefits of uncertain tax positions are recorded in our financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities.

As of January 31, 2010 and 2009, the amount of unrecognized tax benefits related to continuing operations was $1.0 billion, of which, the amount of unrecognized tax benefits that would affect the company’s effective tax rate is $671 million and $582 million for January 31, 2010 and 2009, respectively.

A reconciliation of unrecognized tax benefits from continuing operations is as follows:

 

     January 31,  

(Amounts in millions)

   2010     2009  

Beginning balance

   $ 1,017      $ 868   

Increases related to prior year tax positions

     129        296   

Decreases related to prior year tax positions

     (33     (34

Increases related to current year tax positions

     246        129   

Settlements during the period

     (340     (238

Lapse of statute of limitation

     —          (4
                

Ending balance

   $ 1,019      $ 1,017   
                

Unrecognized tax benefits related to continuing operations increased by approximately $2 million and $149 million for fiscal years 2010 and 2009, respectively.

The company classifies interest and penalties related to uncertain tax benefits as interest expense and as operating, selling, general and administrative expenses, respectively. Accrued interest decreased by $29 million during fiscal 2010 and increased by $47 million during fiscal 2009. During the fiscal years ended January 31, 2010 and 2009, the company recorded accrued interest of $231 million and $260 million, respectively. Accrued penalties totaled $2 million at January 31, 2010 and 2009. There were no changes to accrued penalties during the year.

During the next twelve months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits by between $350 million and $500 million, either because the tax positions are sustained on audit or because the company agrees to their disallowance. The company does not expect any change to have a significant impact on its results of operations or financial position.

At January 31, 2010 and 2009, the company had an unrecognized tax benefit of $1.7 billion which is related to an ordinary worthless stock deduction from the fiscal 2007 disposition of its German operations. Of this, $63 million was recognized in discontinued operations during fiscal 2009 following the resolution of a gain contingency on a discontinued operation sold in fiscal 2004. When effectively settled, any additional benefit will be recorded in discontinued operations. If some portion of the ordinary loss is determined to be a capital loss, the resulting deferred tax asset will be included with the company's non-current assets of discontinued operations. The company cannot predict the ultimate outcome of this matter; however, it is reasonably possible it will be resolved in the next twelve months.

 

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The company is subject to income tax examinations for its U.S. federal income taxes generally for the fiscal years 2009 and 2010, with fiscal years 2004 through 2008 remaining open for a limited number of issues. The company is also subject to income tax examinations for non-U.S. income taxes for the tax years 2003 through 2010, and for state and local income taxes for the fiscal years generally 2006 through 2009 and from 1998 for a limited number of issues.

Non-Income Taxes

Additionally, the company is subject to tax examinations for payroll, value added, sales-based and other taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from the taxing authorities. Where appropriate, the company has made accruals for these matters which are reflected in the company’s Consolidated Financial Statements. While these matters are individually immaterial, a group of related matters, if decided adversely to the company, may result in a liability material to the company's financial condition or results of operations.

Note 9. Acquisitions, Investments and Disposals

Acquisitions and Investments

In February 2007, the company announced the purchase of a 35% interest in Bounteous Company Limited (“BCL”). BCL operated 101 hypermarkets in 34 cities in China under the Trust-Mart banner. The purchase price for the 35% interest was $264 million. As additional consideration, the company paid $376 million to extinguish a third party loan issued to the selling BCL shareholders that is secured by the pledge of the remaining equity of BCL. Concurrent with its initial investment in BCL, the company entered into a stockholders agreement which provides the company with voting rights associated with a portion of the common stock of BCL securing the loan, amounting to an additional 30% of the aggregate outstanding shares. Pursuant to the purchase agreement, which was recently amended, the company is committed to purchase the remaining interest in BCL on or before November 26, 2010, subject to certain conditions. Under the terms of the original share purchase agreement, the final purchase price for the remaining interest will be approximately $320 million, net of loan repayments and subject to reduction under certain circumstances.

After closing the acquisition, the company began consolidating BCL using a December 31 fiscal year-end. The company’s Consolidated Statements of Income for fiscal 2008 include the results of BCL for the period commencing upon the acquisition of the company’s interest in BCL and ending December 31, 2007. BCL’s results of operations were not material to the company in fiscal 2008. Assets recorded in the acquisition were approximately $1.6 billion, including approximately $1.1 billion in goodwill, and liabilities assumed were approximately $1.0 billion.

In August 2007, Walmart and Bharti Enterprises, an Indian company, established a joint venture called Bharti Walmart Private Limited to conduct wholesale cash-and-carry and back-end supply chain management operations in India in compliance with Government of India guidelines. The first wholesale facility opened in fiscal 2010. The joint venture supplies merchandise to Bharti Retail, an affiliate of Bharti Enterprises that is developing a chain of retail stores in India. Bharti Retail has entered into a franchise agreement with an Indian subsidiary of Walmart under which such subsidiary provides technical support to Bharti Retail’s retail business.

In January 2009, the company completed a tender offer for the shares of D&S, acquiring approximately 58.2% of the outstanding D&S shares. As of the acquisition date, D&S had 197 stores, 10 shopping centers and 85 PRESTO financial services branches throughout Chile. The purchase price for the D&S shares in the offer was approximately $1.55 billion. As of January 31, 2009, the preliminary allocation of the purchase price resulted in recording approximately $3.6 billion in assets, including approximately $1.0 billion in goodwill and liabilities assumed of approximately $1.7 billion. The noncontrolling interest was approximately $395 million, all of which was redeemable. The final purchase price allocation had an insignificant impact to the preliminary assets and liabilities recorded at the time of acquisition. In March 2009, the company paid $436 million to acquire a portion of the redeemable noncontrolling interest in D&S through a second tender offer as required by the Chilean securities laws increasing its ownership stake in D&S to 74.6%. This transaction resulted in a $148 million acquisition of that portion of the redeemable noncontrolling interest and the remaining $288 million is reflected as a reduction of Walmart shareholders’ equity. Additionally, the former D&S controlling shareholders still hold a put option that is exercisable beginning in January 2011 through January 2016. During the exercise period, the put option allows each former controlling shareholder the right to require the company to purchase up to all of their shares of D&S (approximately 25.1%) owned at fair market value at the time of an exercise, if any.

 

37


On February 15, 2010, our majority-owned subsidiary Wal-Mart de Mexico (“Walmex”) completed the acquisition of the noncontrolling interest in our Central American subsidiary that had been held by third parties. The consideration paid consisted of $111 million in cash and $2.3 billion in shares in our majority-owned subsidiary Walmex. The effect of this transaction on the consolidated company will be a purchase of the outstanding noncontrolling interest of our Central American business, with the company’s ownership of Walmex at approximately 68.5%.

Disposals

In fiscal 2008, the company recorded a charge of $153 million to discontinued operations related to the settlement of a post-closing adjustment and certain other indemnification obligations resulting from the disposal of its German operations in fiscal 2007.

During fiscal 2009, the company disposed of Gazeley Limited (“Gazeley”), an ASDA commercial property development subsidiary in the United Kingdom. Consequently, the results of operations associated with Gazeley are presented as discontinued operations in our Consolidated Statements of Income and Consolidated Balance Sheets for all periods presented. The cash flows related to this operation were insignificant for all periods presented. In the third quarter of fiscal 2009, the company recognized approximately $212 million, after tax, in operating profits and gains from the sale of Gazeley. The transaction continues to remain subject to certain indemnification obligations. The company’s operations in the United Kingdom are consolidated using a December 31 fiscal year-end. Since the sale of Gazeley closed in July 2008, the company recorded the gain to discontinued operations in the third quarter of fiscal 2009.

During the third quarter of fiscal 2009, the company initiated a restructuring program under which the company’s Japanese subsidiary, The Seiyu Ltd., to close approximately 23 stores and dispose of certain excess properties and was substantially completed in fiscal 2010. This restructuring involved incurring costs associated with lease termination obligations, asset impairment charges and employee separation benefits. The costs associated with this restructuring are presented as discontinued operations in our Consolidated Statements of Income and Consolidated Balance Sheets for all periods presented. The cash flows and accrued liabilities related to this restructuring were insignificant for all periods presented. The company recognized approximately $79 million and $122 million, after tax, in restructuring expenses and operating results as discontinued operations, for the fiscal years ended January 31, 2010 and 2009, respectively. Costs were recorded for lease termination obligations and employee separation benefits; additional costs are not expected to be material.

In addition, the company recorded a $63 million benefit to discontinued operations in fiscal 2009, from the successful resolution of a tax contingency related to McLane Company, Inc., a former Walmart subsidiary sold in fiscal 2004.

Net sales related to our discontinued operations were not significant during fiscal years 2010, 2009 and 2008. The net income or losses related to our discontinued operations, including the gain and (losses) upon disposition, are as follows:

 

     January 31,  

(Amounts in millions)

   2010     2009     2008  

Germany

   $ —        $ —        $ (153

McLane

     —          63        —     

Gazeley

     —          212        39   

Seiyu

     (79     (122     (18

Other

     —          (7     —