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Wal-Mart 10-Q 2011
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended July 31, 2011.

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from             to             .

LOGO

Commission file number 1-6991

WAL-MART STORES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   71-0415188

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

702 S.W. 8th Street

Bentonville, Arkansas

  72716
(Address of principal executive offices)   (Zip Code)

(479) 273-4000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check One:

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-Accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Applicable Only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $.10 Par Value – 3,446,636,800 shares as of August 29, 2011.

 

 

 


Table of Contents

Wal-Mart Stores, Inc.

Table of Contents

 

     Page  

Part I. Financial Information

  

Item 1. Financial Statements

  

Condensed Consolidated Statements of Income

     2   

Condensed Consolidated Balance Sheets

     3   

Condensed Consolidated Statement of Shareholders’ Equity

     4   

Condensed Consolidated Statements of Comprehensive Income

     4   

Condensed Consolidated Statements of Cash Flows

     5   

Notes to Condensed Consolidated Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     14   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     23   

Item 4. Controls and Procedures

     23   

Part II. Other Information

  

Item 1. Legal Proceedings

     25   

Item 1A. Risk Factors

     26   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     26   

Item 5. Other Information

     26   

Item 6. Exhibits

     28   

Signatures

     29   

 

1


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Wal-Mart Stores, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

 

     Three Months Ended
July 31,
    Six Months Ended
July 31,
 
(Amounts in millions, except per share data)    2011     2010     2011     2010  

Revenues:

        

Net sales

   $ 108,638      $ 103,016      $ 212,053      $ 202,113   

Membership and other income

     728        710        1,502        1,424   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     109,366        103,726        213,555        203,537   

Costs and expenses:

        

Cost of sales

     81,770        77,438        159,947        152,056   

Operating, selling, general and administrative expenses

     21,213        20,098        41,329        39,554   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,383        6,190        12,279        11,927   

Interest:

        

Debt

     525        477        1,016        932   

Capital leases

     75        65        146        132   

Interest income

     (22     (57     (66     (108
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest, net

     578        485        1,096        956   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     5,805        5,705        11,183        10,971   

Provision for income taxes

     1,868        1,958        3,668        3,780   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     3,937        3,747        7,515        7,191   

Loss from discontinued operations, net of tax

     —          —          (28     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     3,937        3,747        7,487        7,191   

Less consolidated net income attributable to noncontrolling interest

     (136     (151     (287     (294
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income attributable to Walmart

   $ 3,801      $ 3,596      $ 7,200      $ 6,897   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share:

        

Basic income per common share from continuing operations attributable to Walmart

   $ 1.09      $ 0.97      $ 2.07      $ 1.85   

Basic income per common share from discontinued operations attributable to Walmart

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share attributable to Walmart

   $ 1.09      $ 0.97      $ 2.07      $ 1.85   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share:

        

Diluted income per common share from continuing operations attributable to Walmart

   $ 1.09      $ 0.97      $ 2.06      $ 1.84   

Diluted income per common share from discontinued operations attributable to Walmart

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share attributable to Walmart

   $ 1.09      $ 0.97      $ 2.06      $ 1.84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares:

        

Basic

     3,472        3,696        3,486        3,730   

Diluted

     3,485        3,707        3,501        3,744   

Dividends declared per common share

   $ —        $ —        $ 1.46      $ 1.21   

See accompanying notes.

 

2


Table of Contents

Wal-Mart Stores, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

     July  31,
2011
    January  31,
2011
    July  31,
2010
 
(Amounts in millions)       

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 8,102      $ 7,395      $ 10,195   

Receivables, net

     5,265        5,089        4,531   

Inventories

     38,651        36,318        34,793   

Prepaid expenses and other

     3,308        2,960        3,395   

Current assets of discontinued operations

     88        131        131   
  

 

 

   

 

 

   

 

 

 

Total current assets

     55,414        51,893        53,045   

Property and equipment:

      

Property and equipment

     153,985        148,584        142,123   

Less accumulated depreciation

     (45,256     (43,486     (41,012
  

 

 

   

 

 

   

 

 

 

Property and equipment, net

     108,729        105,098        101,111   

Property under capital leases:

      

Property under capital leases

     6,102        5,905        5,720   

Less accumulated amortization

     (3,241     (3,125     (3,017
  

 

 

   

 

 

   

 

 

 

Property under capital leases, net

     2,861        2,780        2,703   

Goodwill

     21,532        16,763        15,993   

Other assets and deferred charges

     5,120        4,129        4,092   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 193,656      $ 180,663      $ 176,944   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

      

Current liabilities:

      

Short-term borrowings

   $ 6,435      $ 1,031      $ 4,639   

Accounts payable

     34,701        33,557        33,953   

Dividends payable

     2,556        —          2,292   

Accrued liabilities

     17,815        18,701        17,547   

Accrued income taxes

     898        157        1,257   

Long-term debt due within one year

     1,787        4,655        5,546   

Obligations under capital leases due within one year

     404        336        346   

Current liabilities of discontinued operations

     28        47        75   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     64,624        58,484        65,655   

Long-term debt

     45,238        40,692        35,629   

Long-term obligations under capital leases

     3,214        3,150        3,073   

Deferred income taxes and other

     7,304        6,682        5,368   

Redeemable noncontrolling interest

     428        408        323   

Commitments and contingencies

      

Equity:

      

Common stock and capital in excess of par value

     3,876        3,929        3,999   

Retained earnings

     62,779        63,967        61,746   

Accumulated other comprehensive income (loss)

     1,286        646        (1,099
  

 

 

   

 

 

   

 

 

 

Total Walmart shareholders’ equity

     67,941        68,542        64,646   

Noncontrolling interest

     4,907        2,705        2,250   
  

 

 

   

 

 

   

 

 

 

Total equity

     72,848        71,247        66,896   
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 193,656      $ 180,663      $ 176,944   
  

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

3


Table of Contents

Wal-Mart Stores, Inc.

Condensed Consolidated Statement of Shareholders’ Equity

(Unaudited)

 

     Common Stock    

Capital in

Excess of

    Retained    

Accumulated

Other

Comprehensive

    

Total

Walmart

Shareholders’

    Noncontrolling     Total  
(Amounts in millions)    Shares     Amount     Par Value     Earnings     Income (Loss)      Equity     Interest     Equity  

Balances – February 1, 2011

     3,516      $ 352      $ 3,577      $ 63,967      $ 646       $ 68,542      $ 2,705      $ 71,247   

Consolidated net income (excludes redeemable noncontrolling interest)

     —          —          —          7,200        —           7,200        258        7,458   

Other comprehensive income

     —          —          —          —          640         640        143        783   

Cash dividends declared ($1.46 per share)

     —          —          —          (5,094     —           (5,094     —          (5,094

Purchase of Company stock

     (63     (6     (122     (3,301     —           (3,429     —          (3,429

Noncontrolling interest acquired

     —          —          —          —          —           —          1,988        1,988   

Other

     9        —          75        7        —           82        (187     (105
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balances – July 31, 2011

     3,462      $ 346      $ 3,530      $ 62,779      $ 1,286       $ 67,941      $ 4,907      $ 72,848   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three Months Ended
July 31,
    Six Months Ended
July 31,
 
(Amounts in millions)        2011             2010             2011             2010      

Consolidated net income

   $ 3,937  1    $ 3,747  1    $ 7,487  2    $ 7,191  2 

Other comprehensive income:

        

Currency translation

     405  3      (896 )3      900  4      (944 )4 

Net change in fair value of derivatives

     65        (108     (113     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 4,407      $ 2,743      $ 8,274      $ 6,222   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less amounts attributable to the noncontrolling interest:

        

Consolidated net income

   $ (136 )1    $ (151 )1    $ (287 )2    $ (294 )2 

Currency translation

     (62 )3      121  3      (147 )4      (60 )4 
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to the noncontrolling interest

     (198     (30     (434     (354
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Walmart

   $ 4,209      $ 2,713      $ 7,840      $ 5,868   
  

 

 

   

 

 

   

 

 

   

 

 

 

  

 

1 Includes $12 million and $5 million for the three months ended July 31, 2011 and 2010, respectively, related to the redeemable noncontrolling interest.

 

2 Includes $29 million and $2 million for the six months ended July 31, 2011 and 2010, respectively, related to the redeemable noncontrolling interest.

 

3 Includes $21 million and $3 million for the three months ended July 31, 2011 and 2010, respectively, related to the redeemable noncontrolling interest.

 

4 Includes $4 million and $29 million for the six months ended July 31, 2011 and 2010, respectively, related to the redeemable noncontrolling interest.

See accompanying notes.

 

4


Table of Contents

Wal-Mart Stores, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended
July 31,
 
(Amounts in millions)    2011     2010  

Cash flows from operating activities:

    

Consolidated net income

   $ 7,487      $ 7,191   

Loss from discontinued operations, net of tax

     28        —     
  

 

 

   

 

 

 

Income from continuing operations

     7,515        7,191   

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

    

Depreciation and amortization

     4,027        3,748   

Other operating activities

     276        (162

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

    

Accounts receivable

     319        (424

Inventories

     (909     (2,086

Accounts payable

     (550     3,090   

Accrued liabilities

     (970     (1,338
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,708        10,019   

Cash flows from investing activities:

    

Payments for property and equipment

     (5,671     (5,554

Proceeds from the disposal of property and equipment

     112        126   

Investments and business acquisitions, net of cash acquired

     (3,501     (108

Other investing activities

     168        (45
  

 

 

   

 

 

 

Net cash used in investing activities

     (8,892     (5,581

Cash flows from financing activities:

    

Net change in short-term borrowings

     5,336        4,120   

Proceeds from issuance of long-term debt

     4,949        6,433   

Payments of long-term debt

     (3,895     (2,639

Dividends paid

     (2,541     (2,260

Purchase of Company stock

     (3,540     (7,112

Other financing activities

     (515     (587
  

 

 

   

 

 

 

Net cash used in financing activities

     (206     (2,045

Effect of exchange rates on cash and cash equivalents

     97        (105
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     707        2,288   

Cash and cash equivalents at beginning of year

     7,395        7,907   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 8,102      $ 10,195   
  

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

Notes to Condensed Consolidated Financial Statements

Wal-Mart Stores, Inc.

Note 1. Basis of Presentation

The condensed consolidated financial statements of Wal-Mart Stores, Inc. and its subsidiaries (“Walmart,” the “Company” or “we”) included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal recurring nature. The condensed consolidated financial statements and notes thereto are presented in accordance with accounting principles generally accepted in the United States (“GAAP”) and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2011. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period’s presentation and did not have an impact on net income.

The Company’s condensed consolidated financial statements are based on a fiscal year ending on January 31 for its U.S. and Canada operations and December 31 for all other operations.

Note 2. 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 Company had approximately 4 million and 19 million stock options outstanding at July 31, 2011 and 2010, respectively, which were not included in the diluted net income per common share attributable to Walmart calculation because their effect would be antidilutive.

The following table provides a reconciliation of the numerators and denominators used to determine basic and diluted net income per common share from continuing operations attributable to Walmart:

 

     Three Months Ended
July 31,
    Six Months Ended
July 31,
 
(Amounts in millions, except per share data)        2011             2010             2011             2010      

Numerator

        

Income from continuing operations

   $ 3,937      $ 3,747      $ 7,515      $ 7,191   

Less consolidated net income attributable to noncontrolling interest

     (136     (151     (287     (294
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to Walmart

   $ 3,801      $ 3,596      $ 7,228      $ 6,897   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

        

Weighted-average common shares outstanding, basic

     3,472        3,696        3,486        3,730   

Dilutive impact of stock-based awards

     13        11        15        14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding, diluted

     3,485        3,707        3,501        3,744   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share from continuing operations attributable to Walmart

        

Basic

   $ 1.09      $ 0.97      $ 2.07      $ 1.85   

Diluted

   $ 1.09      $ 0.97      $ 2.06      $ 1.84   

Note 3. Receivables

Receivables primarily consist of amounts due from:

 

   

insurance companies – resulting from pharmacy sales;

 

   

banks – for customer credit card, debit card and electronic bank transfers that take in excess of seven days to process;

 

   

suppliers – for marketing or incentive programs;

 

   

consumer financing programs (in certain international operations); and

 

   

real estate transactions.

 

6


Table of Contents

Walmart International offers a limited amount of consumer credit products, principally through its operations in Chile, Canada and Mexico. The balance of these receivables was $820 million, net of reserve for doubtful accounts of $84 million, at July 31, 2011, compared to a receivable balance of $460 million, net of reserve for doubtful accounts of $90 million, at July 31, 2010. These balances are included in receivables, net on the accompanying Condensed Consolidated Balance Sheets.

Note 4. 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. The retail method of accounting results in inventory being valued at the lower of cost or market since permanent markdowns are currently taken as a reduction of the retail value of inventory. The Sam’s Club segment’s merchandise is valued based on the weighted-average cost using the LIFO method. Inventories for the Walmart International operations are primarily valued by the retail method of accounting and are stated using the first-in, first-out (“FIFO”) method. At July 31, 2011 and 2010, the Company’s inventories valued at LIFO approximate those inventories as if they were valued at FIFO.

Note 5. Debt

Information on long-term debt issued during the first six months of fiscal 2012 is as follows (amounts in millions):

 

Issue Date

 

Maturity Date

  

Interest Rate

  

Principal Amount

April 18, 2011   April 15, 2014    1.625%    $1,000
April 18, 2011   April 15, 2016    2.800%      1,000
April 18, 2011   April 15, 2021    4.250%      1,000
April 18, 2011   April 15, 2041    5.625%   

  2,000

                Total Issuances        

$5,000

The aggregate net proceeds from these note issuances were approximately $4.9 billion. The notes of each series require semi-annual interest payments on April 15 and October 15 of each year, commencing on October 15, 2011. Unless previously purchased and cancelled, the Company will repay the notes of each series at 100% of the principal amount, together with accrued and unpaid interest thereon, at maturity. The notes of each series are senior, unsecured obligations of the Company.

In June 2011, the Company renewed and extended an existing 364-day revolving credit facility (the “364-day Facility”) and its five-year credit facility (the “5-year Facility”), both of which are used to support its commercial paper program. The size of the 364-day Facility was increased from $9.0 billion to $10.0 billion, while the 5-year Facility was increased from $4.3 billion to $6.3 billion. In conjunction with the 364-day Facility and the 5-year Facility, the Company also renewed an existing stand-by letter of credit facility used to support various potential and actual obligations. The size of the stand-by letter of credit facility remains unchanged at $2.2 billion. Undrawn and drawn fees remained constant or, in some cases, declined from the prior year. The 364-day Facility and the 5-year Facility remained undrawn as of July 31, 2011.

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 financial instrument will change. In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to a derivative financial instrument 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 if their derivative liability position exceeds certain thresholds.

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 $492 million in cash collateral from these counterparties at July 31, 2011. It is the Company’s policy to record cash collateral exclusive of any derivative asset, and any collateral holdings are reflected in its 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 such, the Company would record the posting as a receivable exclusive of any derivative liability.

 

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When the Company uses derivative financial instruments for the purpose of hedging its exposure to interest and currency exchange rate risks, the contractual terms of a hedged 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 financial 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 income (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 during the period. 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 the change.

Fair Value Instruments

The Company is a 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 Company’s 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 the fair value of the hedges were recorded in long-term debt and accumulated other comprehensive income (loss) on the Condensed Consolidated Balance Sheets with no net impact on the Condensed Consolidated Statements of Income. These fair value instruments will mature on dates ranging from April 2012 to May 2014.

Net Investment Instruments

The Company is a 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 income (loss), offsetting the currency translation adjustment that is also recorded in accumulated other comprehensive income (loss). These instruments will mature on dates ranging from October 2023 to February 2030.

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 July 31, 2011 and January 31, 2011. The Company also has outstanding ¥300 billion of debt that is designated as a hedge of the Company’s net investment in Japan at July 31, 2011 and January 31, 2011. Any translation of non-U.S. denominated debt is recorded in accumulated other comprehensive income (loss), offsetting the currency translation adjustment that is also recorded in accumulated other comprehensive income (loss). These instruments will mature on dates ranging from August 2011 to January 2039.

Cash Flow Instruments

The Company is a 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 income (loss) to earnings to offset the floating-rate interest expense. These cash flow instruments will mature on dates ranging from August 2013 to July 2015.

The Company is also a 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 income (loss) to earnings to offset the re-measurement gain or loss on the non-U.S. denominated debt. These cash flow instruments will mature on dates ranging from September 2029 to March 2034. Any ineffectiveness related to these instruments has been and is expected to be immaterial to the Company’s financial condition or results of operations.

Financial Statement Presentation

Hedging instruments with an unrealized gain are recorded on the Condensed Consolidated Balance Sheets as either a current or a non-current asset, based on maturity date, and those hedging instruments with an unrealized loss are recorded as either a current or a non-current liability, based on maturity date.

 

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As of July 31, 2011 and January 31, 2011, the Company’s financial instruments were classified as follows in the accompanying Condensed Consolidated Balance Sheets:

 

     July 31, 2011      January 31, 2011  
(Amounts in millions)    Fair  Value
Instruments
     Net  Investment
Instruments
     Cash  Flow
Instruments
     Fair  Value
Instruments
     Net  Investment
Instruments
     Cash  Flow
Instruments
 

Balance Sheet Classification:

                 

Other assets and deferred charges

   $ 239       $ 210       $ 236       $ 267       $ 233       $ 238   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Asset subtotals

   $ 239       $ 210       $ 236       $ 267       $ 233       $ 238   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt

   $ 239       $ —         $ —         $ 267       $ —         $ —     

Deferred income taxes and other

     —           —           20         —           —           18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liability subtotals

   $ 239       $ —         $ 20       $ 267       $ —         $ 18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 7. 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 ordinary 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 - observable inputs such as quoted prices in active markets;

 

   

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

 

  Level 3 - unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own                 assumptions.

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

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

Short-term debt: The carrying value 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 carrying value and fair value of the Company’s long-term debt as of July 31, 2011 and January 31, 2011 are as follows:

 

Carrying Value Carrying Value Carrying Value Carrying Value
    July 31, 2011     January 31, 2011  
(Amounts in millions)   Carrying Value     Fair Value     Carrying Value     Fair Value  

Long-term debt, including amounts due within one year

  $ 47,025      $ 50,080      $ 45,347      $ 47,012   

Additionally, as of July 31, 2011 and January 31, 2011, 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, using the income approach. As of July 31, 2011 and January 31, 2011, the notional amounts and fair values of these interest rate swaps are as follows (asset/(liability)):

 

     July 31, 2011     January 31, 2011  
(Amounts in millions)    Notional
Amount
     Fair
Value
    Notional
Amount
     Fair
Value
 

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

   $ 3,945       $ 239      $ 4,445       $ 267   

Receive fixed-rate, pay fixed-rate cross-currency interest rate swaps designated as net investment hedges

     1,250         210        1,250         233   

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

     1,262         (20     1,182         (18

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

     3,082         236        2,902         238   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 9,539       $ 665      $ 9,779       $ 720   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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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 8. Accumulated Other Comprehensive Income (Loss)

Amounts included in accumulated other comprehensive income (loss) for the Company’s derivative instruments and minimum pension liabilities are recorded net of their related income tax effect. The following table provides further detail regarding changes in the composition of accumulated other comprehensive income (loss) for the six months ended July 31, 2011:

 

Currency Translation Currency Translation Currency Translation Currency Translation
(Amounts in millions)    Currency Translation
and Other
     Derivative
Instruments
    Minimum
Pension  Liability
    Total  

Balances - February 1, 2011

   $ 1,226       $ 60      $ (640   $ 646   

Currency translation adjustment

     753         —          —          753   

Net change in fair value of derivatives

     —           (113     —          (113
  

 

 

    

 

 

   

 

 

   

 

 

 

Balances - July 31, 2011

   $ 1,979       $ (53   $ (640   $ 1,286   
  

 

 

    

 

 

   

 

 

   

 

 

 

The currency translation adjustment includes a net translation loss of $1.4 billion at July 31, 2011 related to net investment hedges of the Company’s operations in the United Kingdom and Japan. During the six months ended July 31, 2011, the Company reclassified $111 million from accumulated comprehensive income (loss) to earnings from the remeasurements of non-U.S.-denominated debt.

Note 9. Share Repurchases

From time to time, the Company has repurchased shares of its common stock under a $15.0 billion share repurchase program authorized by the Board of Directors on June 3, 2010 and announced on June 4, 2010. On June 2, 2011, the Company’s Board of Directors replaced that share repurchase program, which had approximately $2.1 billion of remaining authorization for share repurchase as of that date, with a new $15.0 billion share repurchase program, announced on June 3, 2011. As a result, the Company terminated and will make no further share repurchases under the program announced on June 4, 2010. Consistent with the replaced share repurchase program, the new program has no expiration date or other restriction limiting the period over which the Company can make share repurchases and will expire only when and if the Company has repurchased $15.0 billion of its shares under the newly authorized program or when it earlier terminates or replaces the newly authorized program. Any repurchased shares are constructively retired and returned to an unissued status.

The Company considers several factors in determining when to execute the share repurchases, including, among other things, its current cash needs, its capacity for leverage, its cost of borrowings and the market price of its common stock. The Company’s share repurchases during the six months ended July 31, 2011 and 2010 were as follows:

 

Share Repurchases

(millions, except per share data)

   Total Number of
Shares  Repurchased
   Average Price Paid per Share    Total Investment

Six months ended July 31, 2011

    65.4    $54.11    $3,540

Six months ended July 31, 2010

   135.6    $52.47    $7,112

Note 10. Legal Proceedings

The Company is involved in a number of legal proceedings. The Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s consolidated financial statements. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and therefore accruals have not been made. However, where a liability is reasonably possible and material, such matters have been disclosed. The Company may enter into discussions regarding settlement of these matters, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company’s shareholders. The matters, or groups of related matters, discussed below, if decided adversely to or settled by the Company, individually or in the aggregate, may result in liability material to the Company’s financial condition or results of operations.

Wage-and-Hour Class Action: The Company is a defendant in Braun/Hummel v. Wal-Mart Stores, Inc., a class action lawsuit commenced in March 2002 in the Court of Common Pleas in Philadelphia, Pennsylvania. The plaintiffs allege that the Company failed to pay class members for all hours worked and prevented class members from taking their full meal and rest breaks. On October 13, 2006, a jury awarded back-pay damages to the plaintiffs of approximately $78 million on their claims for off-the-clock work and missed rest breaks. The jury found in favor of the Company on the plaintiffs’ meal-period claims. On November 14, 2007, the trial judge entered a final judgment in the approximate amount of $188 million, which included the jury’s back-pay award plus statutory penalties, prejudgment interest and attorneys’ fees. By operation of law, post-judgment interest accrues on the judgment

 

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amount at the rate of six percent per annum from the date of entry of the judgment, which was November 14, 2007, until the judgment is paid, unless the judgment is set aside on appeal. The Company believes it has substantial factual and legal defenses to the claims at issue, and on December 7, 2007, the Company filed its Notice of Appeal. The Company filed its opening appellate brief on February 17, 2009, plaintiffs filed their response brief on April 20, 2009, and the Company filed its reply brief on June 5, 2009. Oral argument was held before the Superior Court of Appeals on August 19, 2009. On June 10, 2011, the Superior Court of Appeals issued an opinion upholding the trial court’s certification of the class, the jury’s back pay award, and the awards of statutory penalties and prejudgment interest, but reversing the award of attorneys’ fees and remanding it back to the trial court for a downward adjustment. On July 10, 2011, the Company filed an Application for Rehearing En Banc with regard to the portions of the opinion that held in favor of the plaintiffs, which was denied on August 11, 2011. The Company believes it has substantial factual and legal defenses to the claims at issue, and plans to continue pursuing appellate review.

Gender Discrimination Class Action: The Company is a defendant in Dukes v. Wal-Mart Stores, Inc., which was commenced as a class-action lawsuit in June 2001 in the United States District Court for the Northern District of California, asserting that the Company had engaged in a pattern and practice of discriminating against women in promotions, pay, training and job assignments, and seeking, among other things, injunctive relief, front pay, back pay, punitive damages, and attorneys’ fees. On June 21, 2004, the district court issued an order granting in part and denying in part the plaintiffs’ motion for class certification. As defined by the district court, the class included all women employed at any Wal-Mart domestic retail store at any time since December 26, 1998, who have been or may be subjected to Wal-Mart’s challenged pay and management track promotions policies and practices.

On August 31, 2004, the United States Court of Appeals for the Ninth Circuit granted the Company’s petition for discretionary review of the ruling. On February 6, 2007, a divided three-judge panel of the court of appeals issued a decision affirming the district court’s certification order. On February 20, 2007, the Company filed a petition asking that the decision be reconsidered by a larger panel of the court. On December 11, 2007, the three-judge panel withdrew its opinion of February 6, 2007, and issued a revised opinion. As a result, the Company’s Petition for Rehearing En Banc was denied as moot. The Company filed a new Petition for Rehearing En Banc on January 8, 2008. On February 13, 2009, the court of appeals issued an Order granting the Petition. On April 26, 2010, the Ninth Circuit issued a divided (6-5) opinion affirming certain portions of the district court’s ruling and reversing other portions. On August 25, 2010, the Company filed a petition for a writ of certiorari to the United States Supreme Court seeking review of the Ninth Circuit’s decision. On December 6, 2010, the Supreme Court granted the Company’s petition for writ of certiorari. On June 20, 2011, the Supreme Court issued an opinion reversing the Ninth Circuit and decertifying the class. On June 24, 2011, the plaintiffs filed a Motion to Extend Tolling of the Statute of Limitations, indicating that they intend to pursue both individual claims and “a more narrowly defined class that would comply with the certification standards set forth by the Supreme Court.” On August 19, 2011, the district judge entered an Order granting the motion in part and specifying dates by which any additional claims must be filed. The Company cannot reasonably estimate the possible loss or range of loss that may arise from this litigation.

Hazardous Materials Investigations: On November 8, 2005, the Company received a grand jury subpoena from the United States Attorney’s Office for the Central District of California, seeking documents and information relating to the Company’s receipt, transportation, handling, identification, recycling, treatment, storage and disposal of certain merchandise that constitutes hazardous materials or hazardous waste. The Company has been informed by the U.S. Attorney’s Office for the Central District of California that it is a target of a criminal investigation into potential violations of the Resource Conservation and Recovery Act (“RCRA”), the Clean Water Act and the Hazardous Materials Transportation Statute. This U.S. Attorney’s Office contends, among other things, that the use of Company trucks to transport certain returned merchandise from the Company’s stores to its return centers is prohibited by RCRA because those materials may be considered hazardous waste. The government alleges that, to comply with RCRA, the Company must ship from the store certain materials as “hazardous waste” directly to a certified disposal facility using a certified hazardous waste carrier. The U.S. Attorney’s Office in the Northern District of California subsequently joined in this investigation. The Company contends that the practice of transporting returned merchandise to its return centers for subsequent disposition, including disposal by certified facilities, is compliant with applicable laws and regulations. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.

Note 11. Acquisitions

Significant acquisitions are as follows:

Massmart Holdings Limited (“Massmart”): In June 2011, the Company completed a tender offer for approximately 51% ownership in Massmart, a South African retailer with approximately 290 stores in 13 sub-Saharan African countries. The purchase price for 51% of Massmart was approximately ZAR 16.9 billion ($2.5 billion). The assets acquired were approximately $6.4 billion, including approximately $3.5 billion in goodwill; liabilities assumed were approximately $1.9 billion; and the non-controlling interest was approximately $2.0 billion. As of July 31, 2011, the allocation of the Massmart purchase price to the fair value of the assets acquired and liabilities assumed is preliminary.

 

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Netto Food Stores Limited (“Netto”): In April 2011, the Company completed the regulatory approved acquisition of 147 Netto stores from Dansk Supermarked in the United Kingdom and the Company plans to convert these stores to the ASDA brand by the end of fiscal 2012. The final purchase price for the acquisition was approximately £750 million ($1.2 billion). The assets acquired were approximately $1.3 billion, including approximately $748 million in goodwill, and liabilities assumed were approximately $103 million. As of July 31, 2011, the allocation of the Netto purchase price to the fair value of the assets acquired and liabilities assumed is preliminary.

Bounteous Company Limited (“BCL”): In February 2007, the Company purchased an initial 35% interest in BCL, which operates in China under the Trust-Mart banner. The Company paid $264 million for its initial 35% interest and, as additional consideration, paid $376 million to extinguish a third-party loan issued to the selling BCL shareholders that was secured by the pledge of the remaining equity of BCL. Concurrent with its initial investment in BCL, the Company entered into a Shareholders’ 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 Share Purchase Agreement, the Company was committed to purchase the remaining interest in BCL on or before November 26, 2010, subject to certain conditions. The Company and the selling shareholder have mutually agreed to extend the closing, while certain conditions of the contract are being completed. In April 2011, the Company obtained antitrust clearance and now expects to finalize the other regulatory approvals and complete the transaction by the end of fiscal 2012.

Note 12. Segments

The Company is engaged in the operations of retail stores located in all 50 states of the United States and Puerto Rico, Argentina, Brazil, Canada, Central America, Chile, China, India, Japan, Mexico, sub-Saharan Africa and the United Kingdom. The Company’s operations are conducted in three segments: the Walmart U.S. segment, the Walmart International segment, and the Sam’s Club segment. The Company defines its segments as those business units whose operating results its chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. The Company sells similar individual products and services in each of its segments. It is impractical to segregate and identify revenue for each of these individual products and services.

The Walmart U.S. segment includes the Company’s mass merchant concept in the United States and Puerto Rico operating primarily under the “Walmart” or “Wal-Mart” brands, as well as walmart.com. The Walmart International segment consists of the Company’s operations outside of the United States and Puerto Rico. The Sam’s Club segment includes the warehouse membership clubs in the United States and Puerto Rico, as well as samsclub.com.

Net sales by segment are as follows (amounts in millions):

 

     Three Months Ended
July 31,
     Six Months Ended
July 31,
 
     2011      2010      2011      2010  

Net sales:

           

Walmart U.S.

   $ 64,893       $ 64,654       $ 127,562       $ 126,978   

Walmart International

     30,099         25,901         58,004         50,931   

Sam’s Club

     13,646         12,461         26,487         24,204   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Company

   $ 108,638       $ 103,016       $ 212,053       $ 202,113   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, the Company revises the measurement of each segment’s operating income, including any corporate overhead allocations, as dictated by the information regularly reviewed by its CODM. When the Company does so, the prior period amounts for segment operating income are reclassified to conform to the current period’s presentation. The amounts under the caption “Other” in the table below primarily represent unallocated corporate overhead items.

 

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Operating income by segment and interest expense are as follows (amounts in millions):

 

     Three Months Ended
July  31,
    Six Months Ended
July 31,
 
     2011     2010     2011     2010  

Segment operating income:

        

Walmart U.S.

   $ 4,985      $ 4,881      $ 9,635      $ 9,496   

Walmart International

     1,415        1,299        2,511        2,382   

Sam’s Club

     492        428        951        857   

Other

     (509     (418     (818     (808
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 6,383      $ 6,190      $ 12,279      $ 11,927   

Interest expense, net

     (578     (485     (1,096     (956
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 5,805      $ 5,705      $ 11,183      $ 10,971   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 13. Common Stock Dividends

On March 3, 2011, the Company’s Board of Directors declared an annual dividend for fiscal 2012 of $1.46 per share, an increase of 21% over the per share dividends paid in fiscal 2011. For the fiscal year ending January 31, 2012, the annual dividend will be paid in four quarterly installments according to the following record and payable dates:

 

    

Record Date

      

Payable Date

     
  March 11, 2011     April 4, 2011   
  May 13, 2011     June 6, 2011   
  August 12, 2011     September 6, 2011   
  December 9, 2011     January 3, 2012   

The dividend installments payable on April 4, 2011 and June 6, 2011 were paid as scheduled.

 

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Item 2. 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 activities. 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. and Canada operations and on December 31 for all other operations.

This discussion relates to Walmart and its consolidated subsidiaries and should be read in conjunction with our condensed consolidated financial statements as of July 31, 2011 and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Consolidated Financial Statements as of January 31, 2011, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations. Both are contained in our Annual Report to Shareholders for the fiscal year ended January 31, 2011, and incorporated by reference in, and included as an exhibit to our Annual Report on Form 10-K for the fiscal year ended January 31, 2011.

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 period to period, and the primary factors that accounted for those changes. 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.

Our operations comprise three segments: the Walmart U.S. segment, the Walmart International segment, and the Sam’s Club segment. The Walmart U.S. segment includes the Company’s mass merchant concept in the United States and Puerto Rico operating primarily under the “Walmart” or “Wal-Mart” brands, as well as walmart.com. The Walmart International segment consists of the Company’s operations outside of the United States and Puerto Rico. The Sam’s Club segment includes the warehouse membership clubs in the United States and Puerto Rico, 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 and club sales. The Company measures the results of its segments using, among other measures, each segment’s operating income, including 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 CODM. When we do so, the prior period amounts for segment operating income are reclassified to conform to the current period’s presentation. The amounts representing “Other” in the leverage discussion of the Company’s Performance Metrics are primarily unallocated corporate overhead items.

Comparable store and club sales is a metric which indicates the performance of our existing U.S. stores and clubs by measuring the change in sales for such stores and clubs for a particular period from the corresponding period in the prior year. Walmart’s definition of comparable store and club sales includes sales from stores and clubs open for the previous 12 months, including remodels, relocations and expansions. Changes in format are excluded from comparable store and club sales when the conversion is accompanied by a relocation or expansion that results in a change in square feet of more than five percent. Comparable store and club sales are also referred to as “same-store” sales by others within the retail industry. The method of calculating comparable store and club sales varies across the retail industry. As a result, our calculation of comparable store and club sales is not necessarily comparable to similarly titled measures reported by other companies.

In discussing the consolidated and operating results of our Walmart International segment, we sometimes refer to the effect 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 Walmart International segment’s operating results from local currencies into U.S. dollars for financial 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 denominated in the U.S. dollar.

 

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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 through comparable store or club sales and unit square feet growth; the priority of leverage encompasses the Company’s objective to increase its operating income at a faster rate than the growth in net sales by growing its operating, selling, general and administrative expenses (“operating expenses”) at a slower rate than the growth of its net sales; and the priority of returns focuses on how efficiently the Company employs its assets through return on investment (“ROI”) and how effectively the Company manages working capital through free cash flow.

Growth

Net Sales

 

     Three Months Ended July 31,     Six Months Ended July 31,  
     2011     2010     2011     2010  
(Dollar amounts in millions)    Net Sales      Percent
of Total
    Percent
Change
    Net Sales      Percent
of Total
    Net Sales      Percent
of Total
    Percent
Change
    Net Sales      Percent
of Total
 

Walmart U.S.

   $ 64,893         59.7     0.4   $ 64,654         62.8   $ 127,562         60.1     0.5   $ 126,978         62.8

Walmart International

     30,099         27.7     16.2     25,901         25.1     58,004         27.4     13.9     50,931         25.2

Sam’s Club

     13,646         12.6     9.5     12,461         12.1     26,487         12.5     9.4     24,204         12.0
  

 

 

    

 

 

     

 

 

    

 

 

   

 

 

    

 

 

     

 

 

    

 

 

 

Net sales

   $ 108,638         100.0     5.5   $ 103,016         100.0   $ 212,053         100.0     4.9   $ 202,113         100.0
  

 

 

    

 

 

     

 

 

    

 

 

   

 

 

    

 

 

     

 

 

    

 

 

 

Our consolidated net sales increased 5.5% and 4.9% for the three and six months ended July 31, 2011, respectively, when compared to the three and six months ended July 31, 2010. The increase in net sales is due to our continued expansion activities as we grew year-over-year retail square feet by 5.6%, as well as a currency translation benefit related to the Walmart International operations. The currency translation benefit accounted for $2.3 billion and $3.7 billion of the increase in net sales for the three and six months ended July 31, 2011, respectively. Volatility in currency exchange rates may continue to impact the Company’s net sales in the future.

Calendar Comparable Store and Club Sales

The Company reported U.S. calendar comparable store and club sales for the three and six months ended July 31, 2011 and 2010 as follows:

 

     Three Months Ended July 31,     Six Months Ended July 31,  
         2011             2010             2011             2010             2011             2010             2011             2010      
     With Fuel     Fuel Impact     With Fuel     Fuel Impact  

Walmart U.S.

     -1.1     -1.8     0.0     0.0     -1.0     -1.3     0.0     0.0

Sam’s Club

     9.0     2.6     4.5     1.6     8.9     3.7     4.4     2.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S.

     0.6     -1.1     0.8     0.3     0.6     -0.5     0.8     0.4

Leverage

Operating Income

 

     Three Months Ended July 31,     Six Months Ended July 31,  
     2011     2010     2011     2010  
(Dollar amounts in millions)    Operating
Income
    Percent
of Total
    Percent
Change
    Operating
Income
    Percent
of Total
    Operating
Income
    Percent
of Total
    Percent
Change
    Operating
Income
    Percent
of Total
 

Walmart U.S.

   $ 4,985        78.1     2.1   $ 4,881        78.9   $ 9,635        78.6     1.5   $ 9,496        79.6

Walmart International

     1,415        22.2     8.9     1,299        21.0     2,511        20.4     5.4     2,382        20.0

Sam’s Club

     492        7.7     15.0     428        6.9     951        7.7     11.0     857        7.2

Other

     (509     (8.0 )%      21.8     (418     (6.8 )%      (818     (6.7 )%      1.2     (808     (6.8 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Total operating income

   $ 6,383        100.0     3.1   $ 6,190        100.0   $ 12,279        100.0     3.0   $ 11,927        100.0
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

We believe comparing the growth of our operating expenses to the growth of our net sales and comparing the growth of our operating income to the growth of our net sales are meaningful measures as they indicate how effectively we manage costs and leverage operating expenses. Our objective is to grow operating expenses at a slower rate than net sales and to grow operating income at a faster rate than net sales.

Operating Expenses

For the three and six months ended July 31, 2011, operating expenses increased 5.5% and 4.5%, respectively, when compared to the same periods in the prior year, while net sales increased 5.5% and 4.9% over the same periods, respectively. Our focus on ensuring every day low cost remains a priority throughout the Company.

 

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Operating Income

Our operating income grew by 3.1% and 3.0% for the three and six months ended July 31, 2011, respectively, when compared to the same periods in the prior year, while net sales increased by 5.5% and 4.9%, for the three and six months, respectively, over the prior year. Operating income for the three and six months ended July 31, 2011 included a currency translation benefit of $110 million and $157 million, respectively, from the Walmart International segment. Volatility in currency exchange rates may continue to impact the Company’s operating income in the future.

Returns

Return on Investment

Management believes return on investment (“ROI”) 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 strategic initiatives with possible short-term impacts.

ROI was 18.4% and 19.0% for the trailing 12-month periods ended July 31, 2011 and 2010, respectively. The decline in ROI is primarily attributable to acquisitions and currency translation fluctuations.

We define ROI as adjusted operating income (operating income plus interest income, depreciation and amortization, and rent expense) for the fiscal year or trailing twelve months 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 or trailing twelve months multiplied by a factor of eight.

ROI is considered a non-GAAP financial measure. We consider return on assets (“ROA”) to be the financial measure computed in accordance with generally accepted accounting principles (“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 or trailing twelve months 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 other companies to calculate their ROI before comparing our ROI to that of such other companies.

 

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

 

     For the Trailing Twelve Months Ended
July 31,
 
(Dollar amounts in millions)    2011     2010  
CALCULATION OF RETURN ON INVESTMENT   

Numerator

    

Operating income

   $ 25,894      $ 24,827   

+ Interest income

     159        196   

+ Depreciation and amortization

     7,920        7,448   

+ Rent

     2,110        1,875   
  

 

 

   

 

 

 

= Adjusted operating income

   $ 36,083      $ 34,346   
  

 

 

   

 

 

 

Denominator

    

Average total assets of continuing operations1

   $ 185,191      $ 172,638   

+ Average accumulated depreciation and amortization1

     46,263        41,248   

- Average accounts payable1

     34,327        31,375   

- Average accrued liabilities1

     17,681        17,127   

+ Rent x 8

     16,880        15,000   
  

 

 

   

 

 

 

= Average invested capital

   $ 196,326      $ 180,384   
  

 

 

   

 

 

 

Return on investment (ROI)

     18.4     19.0
  

 

 

   

 

 

 
CALCULATION OF RETURN ON ASSETS   

Numerator

    

Income from continuing operations

   $ 16,283      $ 15,447   
  

 

 

   

 

 

 

Denominator

    

Average total assets of continuing operations1

   $ 185,191      $ 172,638   
  

 

 

   

 

 

 

Return on assets (ROA)

     8.8     8.9
  

 

 

   

 

 

 

 

     As of July 31,  
     2011      2010      2009  

Certain Balance Sheet Data

        

Total assets of continuing operations2

   $ 193,568       $ 176,813       $ 168,462   

Accumulated depreciation and amortization

     48,497         44,029         38,466   

Accounts payable

     34,701         33,953         28,797   

Accrued liabilities

     17,815         17,547         16,706   

 

1 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.

 

2 Based on continuing operations only and therefore excludes the impact of discontinued operations. Total assets as of July 31, 2011, 2010 and 2009 in the table above exclude assets of discontinued operations that are reflected in the Condensed Consolidated Balance Sheets of $88 million, $131 million and $147 million, respectively.

Free Cash Flow

We define free cash flow as net cash provided by operating activities in a period minus payments for property and equipment made in that period. We generated free cash flow of $4.0 billion for the six months ended July 31, 2011, compared to $4.5 billion for the six months ended July 31, 2010. The increase in accounts payables from the timing of payment cycles benefited free cash flow last year.

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

 

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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 statements 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 other companies to calculate their free cash flow before comparing our free cash flow to that of such other companies.

The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, 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.

 

     Six Months Ended July 31,  
(Amounts in millions)    2011     2010  

Net cash provided by operating activities

   $ 9,708      $ 10,019   

Payments for property and equipment

     (5,671     (5,554
  

 

 

   

 

 

 

Free cash flow

   $ 4,037      $ 4,465   
  

 

 

   

 

 

 

Net cash used in investing activities

   $ (8,892   $ (5,581

Net cash used in financing activities

   $ (206   $ (2,045

Results of Operations

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

We had several items that impacted the second quarter. We realized approximately $49 million from mark-to-market loss on foreign currency derivative positions in preparation for completing the Massmart acquisition; Walmart International recorded approximately $36 million in acquisition-related costs for Netto and Massmart; and our U.S. operations realized approximately $30 million in expenses related to storm damage from tornados and floods. All of these items are pre-tax and included in operating expenses. In addition, the Company benefited from an effective tax rate of 32.2% in the second quarter ended July 31, 2011, compared to 34.3% in the second quarter of the prior year.

Consolidated Results of Operations

Three and six months ended July 31, 2011 and 2010

 

     Three Months Ended
July 31,
    Six Months Ended
July 31,
 
(Amounts in millions, except unit counts)    2011     2010     2011     2010  

Net sales

   $ 108,638      $ 103,016      $ 212,053      $ 202,113   

Percentage change from comparable period

     5.5     2.8     4.9     4.4

Total U.S. calendar comparable store and club sales

     0.6     -1.1     0.6     -0.5

Gross profit margin as a percentage of net sales

     24.7     24.8     24.6     24.8

Operating income

   $ 6,383      $ 6,190      $ 12,279      $ 11,927   

Operating income as a percentage of net sales

     5.9     6.0     5.8     5.9

Unit counts

     9,667        8,576        9,667        8,576   

Retail square feet

     1,015        961        1,015        961   

Our consolidated net sales increased 5.5% and 4.9% for the three and six months ended July 31, 2011, respectively, when compared to the three and six months ended July 31, 2010. The increases in net sales are primarily due to our continued expansion activities as we grew year-over-year retail square feet by 5.6%, as well as, a $2.3 billion currency translation benefit. Volatility in currency exchange rates may continue to impact the Company’s net sales in the future.

Our gross profit, as a percentage of net sales (“gross profit margin”), for the three and six months ended July 31, 2011, was relatively flat, when compared to the same periods in the prior year.

 

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Operating expenses, as a percentage of net sales, were 19.5% for the three and six months ended July 31, 2011, and 19.5% and 19.6% for the three and six months ended July 31, 2010, respectively.

Our effective income tax rate was 32.2% and 32.8% for the three and six months ended July 31, 2011, respectively, and 34.3% and 34.5% for the three and six months ended July 31, 2010, respectively. We expect the fiscal 2012 annual effective tax rate to be at the lower end of our range of 33.5% to 34.5%. Significant factors that may impact our effective income tax rate include changes in our assessment of certain tax contingencies, the impact of discrete items and the mix of earnings among our U.S. and international operations where the statutory rates are generally lower than the U.S. statutory rate.

As a result of the factors discussed above, we reported $3.9 billion and $7.5 billion of income from continuing operations for the three and six months ended July 31, 2011, respectively, and $3.7 billion and $7.2 billion for the three and six months ended July 31, 2010, respectively.

Walmart U.S. Segment

Three and six months ended July 31, 2011 and 2010

 

     Three Months Ended
July 31,
    Six Months Ended
July 31,
 
(Amounts in millions, except unit counts)    2011     2010     2011     2010  

Net sales

   $ 64,893      $ 64,654      $ 127,562      $ 126,978   

Percentage change from comparable period

     0.4     0.0     0.5     0.6

Calendar comparable store sales

     -1.1     -1.8     -1.0     -1.3

Operating income

   $ 4,985      $ 4,881      $ 9,635      $ 9,496   

Operating income as a percentage of net sales

     7.7     7.5     7.6     7.5

Unit counts

     3,822        3,765        3,822        3,765   

Retail square feet

     620        609        620        609   

Net sales for the Walmart U.S. segment increased slightly during the three and six months ended July 31, 2011 when compared to the three and six months ended July 31, 2010. The increases in net sales are primarily due to a 1.8% increase in year-over-year retail square feet, partially offset by a decline in comparable store sales. The declines in comparable store sales are primarily due to a decline in customer traffic, partially offset by an increase in average ticket.

Gross profit margin was relatively flat during the three and six months ended July 31, 2011, respectively, compared to the same periods in the prior year, primarily due to increased investment in lower retail price points in certain merchandise categories in the prior period.

Operating expenses, as a percentage of segment net sales, were relatively flat for the three and six months ended July 31, 2011 compared to the three and six months ended July 31, 2010.

Walmart International Segment

Three and six months ended July 31, 2011 and 2010

 

     Three Months Ended
July 31,
    Six Months Ended
July 31,
 
(Amounts in millions, except unit counts)    2011     2010     2011     2010  

Net sales

   $ 30,099      $ 25,901      $ 58,004      $ 50,931   

Percentage change from comparable period

     16.2     11.0     13.9     15.9

Operating income

   $ 1,415      $ 1,299      $ 2,511      $ 2,382   

Operating income as a percentage of net sales

     4.7     5.0     4.3     4.7

Unit counts

     5,236        4,205        5,236        4,205   

Retail square feet

     314        271        314        271   

Net sales for the Walmart International segment increased 16.2% and 13.9% for the three and six months ended July 31, 2011, respectively, when compared to the three and six months ended July 31, 2010. The increases in net sales are due to sales growth, as well as currency exchange translation benefits, which provided a favorable impact of $2.3 billion and $3.7 billion to the Walmart International segment’s net sales for the three and six months ended July 31, 2011, respectively. Volatility in currency exchange rates may continue to impact the Walmart International segment’s net sales in the future.

 

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Gross profit margin was flat for the three and six months ended July 31, 2011 compared to the same period in the prior year.

Operating expenses, as a percentage of segment net sales, increased 43 and 33 basis points for the three and six months ended July 31, 2011, respectively, when compared to the three and six months in the prior year. Acquisition costs related to Netto in the U.K. and Massmart in sub-Saharan Africa are included in operating expenses in the current period.

Sam’s Club Segment

Three and six months ended July 31, 2011 and 2010

We believe the information in the following table under the caption “Excluding Fuel” is useful to investors because it permits investors to understand the effect of the Sam’s Club segment’s fuel sales, which are affected by the volatility of fuel prices, on Sam’s Club’s net sales, percentage change in net sales from the comparable period, calendar comparable club sales, operating income and operating income as a percentage of net sales for the periods presented.

 

     Three Months Ended
July 31,
    Six Months Ended
July 31,
 
(Amounts in millions, except store counts)    2011     2010     2011     2010  

Including Fuel

        

Net sales

   $ 13,646      $ 12,461      $ 26,487      $ 24,204   

Percentage change from comparable period

     9.5     2.2     9.4     3.4

Calendar comparable club sales

     9.0     2.6     8.9     3.7

Operating income

   $ 492      $ 428      $ 951      $ 857   

Operating income as a percentage of net sales

     3.6     3.4     3.6     3.5

Unit counts

     609        606        609        606   

Retail square feet

     81        81        81        81   

Excluding Fuel

        

Net sales

   $ 11,966      $ 11,406      $ 23,258      $ 22,170   

Percentage change from comparable period

     4.9     0.6     4.9     0.9

Calendar comparable club sales

     4.5     1.0     4.5     1.3

Operating income

   $ 467      $ 412      $ 924      $ 842   

Operating income as a percentage of net sales

     3.9     3.6     4.0     3.8

Net sales for the Sam’s Club segment increased 9.5% and 9.4% for the three and six months ended July 31, 2011, respectively, when compared to the three and six months ended July 31, 2010. The net sales increases are primarily due to increases in comparable club sales, driven by increases in fuel sales, customer traffic and average ticket. Higher fuel sales, driven by higher fuel prices and increased gallons sold, positively impacted comparable sales by 4.5% and 4.4%, during the three and six month periods ended July 31, 2011, respectively. Volatility in fuel prices may continue to impact the Sam’s Club segment in the future.

Gross profit margin decreased by 39 and 44 basis points for the three and six months ended July 31, 2011, respectively, compared to the same periods in the prior year. The gross profit margin decrease was driven by the impact of fuel, which negatively impacted the comparison by 48 and 47 basis points for the three and six months ended July 31, 2011, respectively.

Operating expenses, as a percentage of segment net sales, declined by 74 and 66 basis points for the three and six months ended July 31, 2011, respectively, when compared to the same periods in the prior year. Fuel, which positively impacted the comparison by 42 and 41 basis points for the three and six months ended July 31, 2011, respectively, and wage management were the primary drivers of the basis point reduction in operating expenses as a percentage of segment net sales.

Driven by an increase in new member sign-ups and members upgrading to our Plus membership for the three and six month periods ended July 31, 2011, membership income increased 1.2% and 0.8%, respectively, when compared to the three and six months ended July 31, 2010.

 

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Liquidity and Capital Resources

Cash flows provided by operating activities have historically supplied 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, if any, funds all or part of the dividends on our common stock and share repurchases.

 

     Six Months Ended July 31,  
(Amounts in millions)    2011     2010  

Net cash provided by operating activities

   $ 9,708      $ 10,019   

Payments for property and equipment

     (5,671     (5,554
  

 

 

   

 

 

 

Free cash flow

   $ 4,037      $ 4,465   
  

 

 

   

 

 

 

Net cash used in investing activities

   $ (8,892   $ (5,581

Net cash used in financing activities

   $ (206   $ (2,045

Cash Flows from Operating Activities

Cash flows provided by operating activities were $9.7 billion and $10.0 billion for the six months ended July 31, 2011 and 2010, respectively.

Cash Equivalents and Working Capital

Cash and cash equivalents were $8.1 billion and $10.2 billion at July 31, 2011 and 2010, respectively. Our working capital deficits were $9.2 billion and $12.6 billion at July 31, 2011 and 2010, respectively. We generally operate with a working capital deficit due to our efficient use of cash in funding operations and in providing returns to our shareholders in the form of stock repurchases and payments of dividends.

Cash Flows from Investing Activities

Cash flows from investing activities generally consist of payments for property and equipment, which were $5.7 billion and $5.6 billion during the six months ended July 31, 2011 and 2010, respectively. These capital expenditures primarily relate to new store growth and remodeling costs for existing stores. We expect capital expenditures for our fiscal year ending January 31, 2012 to range between $12.5 billion and $13.5 billion, excluding acquisitions. During the six months ended July 31, 2011, cash flows from investing activities also included $3.3 billion related to the acquisitions of Netto and Massmart.

Cash Flows from Financing Activities

Cash flows from financing activities generally consist of transactions related to our short- and long-term debt, as well as dividends paid and the repurchase of Company stock.

Short-Term Borrowings

Short-term borrowings increased by $5.3 billion at July 31, 2011, compared to an increase of $4.1 billion during the same period in the prior year. From time to time, we utilize the liquidity under our short-term borrowing programs to fund our operations, dividend payments, share repurchases, capital expenditures, and for other cash requirements and corporate purposes on an as-needed basis.

Long-Term Debt

Proceeds from the issuance of long-term debt were $4.9 billion and $6.4 billion, for the six months ended July 31, 2011 and 2010, respectively. The proceeds from the issuance of long-term debt were used to pay down or refinance existing debt and for other general corporate purposes.

 

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Information on our significant issuances of long-term debt during the fiscal 2012 year-to-date period is as follows:

 

(Amounts in millions)             

Principal Amount

Issue Date

  

Maturity Date

  

Interest Rate

  
April 18, 2011    April 15, 2014    1.625%    $1,000
April 18, 2011    April 15, 2016    2.800%      1,000
April 18, 2011    April 15, 2021    4.250%      1,000
April 18, 2011    April 15, 2041    5.625%   

  2,000

                  Total Issuances             

$5,000

The notes of each series require semi-annual interest payments on April 15 and October 15 of each year, commencing on October 15, 2011. Unless previously purchased and cancelled, the Company will repay the notes of each series at 100% of their principal amount, together with accrued and unpaid interest thereon, at their maturity. The notes of each series are senior, unsecured obligations of the Company.

Dividends

On March 3, 2011, the Company’s Board of Directors declared an annual dividend for fiscal 2012 of $1.46 per share, an increase of 21% over the per share dividends paid in fiscal 2011. For the fiscal year ending January 31, 2012, the annual dividend will be paid in four quarterly installments according to the following record and payable dates:

 

    

Record Date

      

Payable Date

    
 

March 11, 2011

    April 4, 2011  
 

May 13, 2011

    June 6, 2011  
 

August 12, 2011

    September 6, 2011  
 

December 9, 2011

    January 3, 2012  

The dividend installment payable on April 4, 2011 and June 6, 2011 were paid as scheduled.

Company Share Repurchase Program

From time to time, the Company has repurchased shares of its common stock under a $15.0 billion share repurchase program authorized by the Board of Directors on June 3, 2010 and announced on June 4, 2010. On June 2, 2011, the Company’s Board of Directors replaced that share repurchase program, which had approximately $2.1 billion of remaining authorization for share repurchase as of that date, with a new $15.0 billion share repurchase program, announced on June 3, 2011. As a result, the Company terminated and will make no further share repurchases under the program announced on June 4, 2010. As was the case with the replaced share repurchase program, the new program has no expiration date or other restriction limiting the period over which the Company can make share repurchases and will expire only when and if the Company has repurchased $15.0 billion of its shares under the newly authorized program or when it earlier terminates or replaces the newly authorized program. Any repurchased shares are constructively retired and returned to an unissued status.

The Company considers several factors in determining when to execute the share repurchases, including, among other things, its current cash needs, its capacity for leverage, its cost of borrowings and the market price of its common stock. The Company’s share repurchases during the six months ended July 31, 2011 and 2010 were as follows:

 

Share Repurchases

(millions, except per share data)

   Total Number of
Shares  Repurchased
   Average Price
Paid per  Share
   Total Investment

Six months ended July 31, 2011

       65.4        $ 54.11        $ 3,540  

Six months ended July 31, 2010

       135.6        $ 52.47        $ 7,112  

Capital Resources

Management believes 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.

 

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Our access to the commercial paper and long-term debt markets has historically provided us with substantial sources of liquidity. We anticipate no difficulty in obtaining financing from those markets in the future in view of our favorable experiences in the debt markets in the recent past. Our ability to continue to access the commercial paper and long-term debt markets on favorable interest rates and other terms will depend, to a significant degree, on the ratings assigned by the credit rating agencies to our indebtedness continuing to be at or above the level of our current ratings. At July 31, 2011, the ratings assigned to our commercial paper and rated series of our outstanding long-term debt were as follows:

 

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

In the event that the ratings of our commercial paper or any rated series of our outstanding long-term debt issues were lowered or withdrawn for any reason or if the ratings assigned to any new issue of the Company’s long-term debt securities were lower than those noted above, our ability to access the debt markets would be adversely affected. In addition, in such a case, our cost of funds for new issues of commercial paper and long-term debt (i.e., the rate of interest on any such indebtedness) would be higher than our cost of funds had the ratings of those new issues been at or above the level of the ratings noted above. 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. Moreover, each credit rating is specific to the security to which it applies.

To monitor our credit rating and our capacity for long-term financing, we consider various qualitative and quantitative factors. 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. We monitor the ratio of our debt to our total capitalization as support for our long-term financing decisions. At July 31, 2011 and 2010, the ratio of our debt-to-total capitalization was 45.7% and 43.2%, respectively. Our ratio of debt to our total capitalization increased during the six months ended July 31, 2011 as a result of an increase in our long-term debt coupled with a decline in shareholders’ equity, primarily as a result of the amounts expended for cash dividends and share repurchases over the trailing twelve months ended July 31, 2011.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risks relating to our operations result primarily from changes in interest rates and changes in currency exchange rates. Our market risks at July 31, 2011 are similar to those disclosed in our Form 10-K for the fiscal year ended January 31, 2011.

The information concerning market risk under the sub-caption “Market Risk” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 17 of the Annual Report to Shareholders for the fiscal year ended January 31, 2011 that is Exhibit 13 to our Annual Report on Form 10-K for the fiscal year ended January 31, 2011, is hereby incorporated by reference into this Quarterly Report on Form 10-Q.

 

Item 4. Controls and Procedures

We maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. In designing and evaluating such controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management is required to use judgment in evaluating controls and procedures. Also, we may have investments in certain unconsolidated entities. Since we do not control or manage those entities, our controls and procedures with respect to those entities are substantially more limited than those we maintain with respect to our consolidated subsidiaries.

In the ordinary course of business, we review our system of internal control over financial reporting and make changes to our systems and processes to improve such controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems and automating manual processes. We have been implementing a new financial system in stages and to date, have completed implementations in the United States and Puerto Rico, the United Kingdom, Canada, Japan and Mexico. During the second quarter of fiscal 2012, we began the implementation in Argentina. The new financial system is a significant component of our internal control over financial reporting. We will continue to implement our new financial system in stages, and each implementation may become a significant component of our internal control over financial reporting.

 

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An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive and Chief Financial Officers. Based upon that evaluation, our Chief Executive and Chief Financial Officers concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Except for the new system implementation noted above, there has been no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended July 31, 2011, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

I. SUPPLEMENTAL INFORMATION: We discuss certain legal proceedings in Part I of this Quarterly Report on Form 10-Q under the caption “Item 1. Financial Statements,” in Note 10 to our condensed consolidated financial statements, which is captioned “Legal Proceedings,” and refer you to that discussion for important information concerning those legal proceedings, including the basis for such actions and, where known, the relief sought. We provide the following additional information concerning those legal proceedings, including the name of the lawsuit, the court in which the lawsuit is pending, and the date on which the petition commencing the lawsuit was filed. In each lawsuit’s name, the letters “WM” refer to Wal-Mart Stores, Inc.

Wage-and-Hour Class Action: Braun/Hummel v. WM, Ct. of Common Pleas, Philadelphia County, PA, 3/20/02 & 8/30/04; Superior Ct. of PA, Eastern Dist., Philadelphia, PA, 12/07/07.

Gender Discrimination Class Action: Dukes v. WM, USDC, Northern Dist. of CA, San Francisco Div., 6/19/01; 9th Circuit Ct. of Appeals, San Francisco, CA, 8/26/04; US Supreme Court, Washington DC, 8/25/10.

II. ENVIRONMENTAL MATTERS: Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters. The following matters are disclosed in accordance with that requirement:

On November 8, 2005, the Company received a grand jury subpoena from the United States Attorney’s Office for the Central District of California, seeking documents and information relating to the Company’s receipt, transportation, handling, identification, recycling, treatment, storage and disposal of certain merchandise that constitutes hazardous materials or hazardous waste. The Company has been informed by the U.S. Attorney’s Office for the Central District of California that it is a target of a criminal investigation into potential violations of the Resource Conservation and Recovery Act (the “RCRA”), the Clean Water Act and the Hazardous Materials Transportation Statute. This U.S. Attorney’s Office contends, among other things, that the use of Company trucks to transport certain returned merchandise from the Company’s stores to its return centers is prohibited by RCRA because those materials may be considered hazardous waste. The government alleges that, to comply with RCRA, the Company must ship from the store certain materials as “hazardous waste” directly to a certified disposal facility using a certified hazardous waste carrier. The U.S. Attorney’s Office in the Northern District of California subsequently joined in this investigation. The Company contends that the practice of transporting returned merchandise to its return centers for subsequent disposition, including disposal by certified facilities, is compliant with applicable laws and regulations. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.

The U.S. Environmental Protection Agency (the “EPA”) approached a grocery industry group to resolve issues relating to refrigerant-handling practices and to reduce the use of ozone-depleting refrigerants in refrigeration equipment. The Company then approached the EPA independently to address these issues, and proposed a plan for removing ozone-depleting refrigerants from certain types of refrigeration equipment. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.

In January 2007, Wal-Mart Puerto Rico, Inc. became aware that the U.S. Army Corps of Engineers (the “USACE”) was concerned about alleged violations of a permit issued by that agency in 2003, for the fill of 0.23 acres of a creek and its contiguous wetlands during the construction of the Wal-Mart store in Caguas, Puerto Rico. On January 19, 2007, Wal-Mart Puerto Rico responded to these issues in writing. On January 25, 2007, the USACE issued a formal Notice of Non-Compliance to Wal-Mart Puerto Rico regarding this matter. Wal-Mart Puerto Rico filed a formal response, implemented mitigation measures, and continues to monitor and provide the required maintenance to the mitigation area. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.

On March 28, 2008, the Company received a Notice of Violation from the Missouri Department of Natural Resources (the “Department”) alleging various violations of Missouri hazardous waste laws and regulations in connection with the activities of a third-party contractor with whom the Company had contracted for recycling services. The Department alleges that the Company provided certain items to the contractor for recycling that should have been managed as hazardous waste. The EPA has inspected the contractor’s facilities, and both the EPA and the U.S. Attorney’s Office for the Western District of Missouri are conducting investigations. The Company has submitted a response to the Notice of Violation and is cooperating with these authorities. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.

 

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In March 2011, the Office of the District Attorney for Riverside County, California, notified the Company that it had initiated an investigation of whether third party contractors hired by the Company had violated California laws regarding the disposal of construction materials at a local landfill. The Company is cooperating with the District Attorney’s Office. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.

In January 2011, the Environmental Department of Porto Alegre Municipality formally notified WMS Supermercados do Brasil Ltda, a subsidiary of the Company, of soil inspection reports indicating soil contamination due to leakage of oil from power generating equipment at nine store locations in Brazil. WMS Supermercados do Brasil Ltda is cooperating with the agency as well as the District Attorney’s Office for the State of Rio Grande do Sul and has filed a mitigation plan to address the situation. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.

In July 2011, the Environmental Patrol and the Environmental Department for Bento Goncalves Municipality, Brazil, notified WMS Supermercados do Brasil Ltda that they are investigating alleged soil contamination involving a leaking subsoil oil duct at a store site. The same agency is also investigating alleged soil contamination from wastewater at the same store. WMS Supermercados do Brasil Ltda is cooperating with the agencies. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.

 

Item 1A. Risk Factors

The risks described in Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended January 31, 2011, could materially and adversely affect our business, financial condition and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. No material change in the risk factors discussed in that Form 10-K has occurred.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share repurchase activity under our share repurchase program, outlined in Note 9 of the condensed consolidated financial statements, hereby incorporated by reference, was as follows during the three months ended July 31, 2011:

 

Fiscal Period

   Total
Number of
Shares
Purchased
       Average
Price Paid
per Share
       Total
Number of

Shares
Purchased

as Part of
Publicly

Announced
Plans or

Programs
       Approximate
Dollar Value of
Shares that

May Yet Be
Purchased
Under the

Plans or
Programs

(billions)
 

May 1-31, 2011

     8,243,088         $ 55.21           8,243,088         $ 2.2   

June 1-30, 2011

     9,390,376           53.49           9,390,376           14.5   

July 1-31, 2011

     8,445,393           53.69           8,445,393           14.1   
  

 

 

           

 

 

      

Total

     26,078,857                26,078,857        
  

 

 

           

 

 

      

 

Item 5. Other Information

Forward-looking Statements

This Quarterly Report on Form 10-Q contains statements that Walmart believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements include: (1) a statement in Note 6 to Walmart’s condensed consolidated financial statements as of and for the quarter ended July 31, 2011 regarding the expected immateriality of any ineffectiveness of certain cash flow instruments to which Walmart is a party; a statement in Note 9 to those condensed consolidated financial statements (which also appears under the caption “Liquidity and Capital Resources-Cash Flows from Financing Activities-Company Share Repurchase Program” in Management’s Discussion and Analysis of Financial Condition and Results of Operations) regarding management’s expectations as to factors to be considered in repurchasing shares under a share repurchase program; statements in Note 10 to those condensed consolidated financial statements regarding the possible outcome of certain litigation and other proceedings to which Walmart is a party; statements in Note 11 to those condensed consolidated financial statements as to the expected time of completion of the in-store conversion of the Netto stores acquired by the Company, as well as concerning final regulatory approval of and consummation of a transaction relating to

 

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BCL; a statement in Note 13 to those condensed consolidated financial statements regarding the payment of dividends in the remainder of fiscal year 2012; (2) in Part I., Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations: under the caption “Company Performance Metrics-Growth” a statement (that also appears under the caption “Results of Operations-Consolidated”) relating to the possible continuing impact of volatility in currency exchange rates on Walmart’s net sales; statements under the caption “Results of Operations-Consolidated” regarding the forecasted full year effective tax rate for Walmart’s fiscal year 2012 and the factors that may impact that effective tax rate; statements under the caption “Results of Operations-Walmart International Segment” relating to the possible continuing impact of volatility in currency exchange rates on Walmart; statements under the caption “Results of Operations-Sam’s Club Segment” relating to the possible continuing impact of volatility in fuel prices on the Sam’s Club segment; a statement under the caption “Liquidity and Capital Resources-Cash Flows from Investing Activities” regarding management’s expectations as to the aggregate amount of capital expenditures Walmart will make in fiscal year 2012; a statement under the caption “Liquidity and Capital Resources-Cash Flows from Financing Activities-Dividends Paid” regarding the payment of dividends in the remainder of fiscal 2012; and statements under the caption “Liquidity and Capital Resources-Capital Resources” regarding management’s expectations regarding the sufficiency of cash flows from operations and the proceeds from the issuance of short-term borrowings to finance seasonal inventory buildups and to meet other cash requirements, management’s expectations regarding funding certain cash flow shortfalls with a combination of short-term borrowings and long-term debt securities, management’s plans to refinance existing long-term debt as it matures, management’s expectations as to obtaining additional long-term financing for other corporate purposes and Walmart’s ability to do so, and management’s expectation that Walmart’s ability to access the commercial paper and long-term debt markets on favorable terms will depend on Walmart’s credit ratings and the effect that lower ratings would have on that access and Walmart’s cost of funds; (3) a statement in Part I., Item 4. “Controls and Procedures” regarding management’s expectations that each implementation of Walmart’s new financial system may become a significant component of Walmart’s internal control over financial reporting; and (4) statements in Part II., Item 1. Legal Proceedings regarding the outcome of certain legal proceedings to which Walmart is a party, as well as other statements about Walmart’s future performance, occurrences, plans and objectives. These statements are identified by the use of the words “anticipate,” “believe,” “consider,” “could be,” “could result,” “expect,” “expected,” “may become,” “may continue,” “may desire,” “may impact,” “may result,” “plan,” “will be,” “will be paid,” “will continue,” “will depend,” “would be” or a variation of one of those words or phrases in those statements or by the use of words or phrases of similar import. These forward-looking statements are subject to risks, uncertainties and other factors, domestically and internationally, including general economic conditions, including the current economic circumstances and disruption in the financial markets, unemployment levels, consumer credit availability, levels of consumer disposable income, consumer spending patterns and debt levels, inflation, deflation, the cost of the goods that Walmart sells, labor costs, transportation costs, the cost of diesel fuel, gasoline, natural gas and electricity, the cost of healthcare benefits, accident costs, Walmart’s 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 Walmart’s stores and distribution centers, weather- and natural disaster-related closing of stores, availability and transport of goods from domestic and international 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 Walmart’s business, costs of compliance with laws and regulations, the outcome of legal proceedings to which Walmart is a party, interest rate fluctuations, changes in employment legislation and other capital market, pandemics and other public health emergencies, economic and geo-political conditions and events, including civil unrest, civil disturbances and terrorist attacks, and other risks. Walmart discusses certain of these matters more fully, as well as certain risk factors that may affect its business operations, financial condition and results of operations, in other of Walmart’s filings with the SEC, including its Annual Report on Form 10-K for the year ended January 31, 2011. This Quarterly Report on Form 10-Q should be read in conjunction with that Annual Report on Form 10-K and all of Walmart’s other filings, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, made with the SEC through the date of this report. Walmart urges you to consider all of these risks, uncertainties and other factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. As a result of these and other matters, including changes in facts, assumptions not being realized or other factors, the actual results relating to the subject matter of any forward-looking statement in this Quarterly Report on Form 10-Q may differ materially from the anticipated results expressed or implied in that forward-looking statement. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and Walmart undertakes no obligation to update any of these forward-looking statements to reflect subsequent events or circumstances.

 

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Table of Contents
Item 6. Exhibits

The following documents are filed as an exhibit to this Quarterly Report on Form 10-Q:

 

Exhibit 3(i)   Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3(a) to the Annual Report on Form 10-K of the Company for the year ended January 31, 1989 (which document may be found and reviewed in the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549, in the files therein relating to the Company, whose SEC file number is No. 1-6991), the Certificate of Amendment to the Restated Certificate of Incorporation is incorporated herein by reference to Registration Statement on Form S-8 (File Number 33-43315) and the Certificate of Amendment to the Restated Certificate of Incorporation is incorporated herein by reference to the Current Report on Form 8-K of the Company, dated August 11, 1999 (which document may be found and reviewed in the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549, in the files therein relating to the Company, whose SEC file number is No. 1-6991).
Exhibit 3(ii)   Amended and Restated Bylaws of the Company are incorporated herein by reference to Exhibit 3(ii) to the Quarterly Report on Form 10-Q of the Company, filed with the SEC on June 3, 2011.
Exhibit 12.1*   Ratio of Earnings to Fixed Charges
Exhibit 31.1*   Chief Executive Officer Section 302 Certification
Exhibit 31.2*   Chief Financial Officer Section 302 Certification
Exhibit 32.1**   Chief Executive Officer Section 906 Certification
Exhibit 32.2**   Chief Financial Officer Section 906 Certification
Exhibit 99   The information incorporated by reference in Part I, Item 3 of this Quarterly Report on Form 10-Q is incorporated by reference to the material set forth under the sub-caption “Market Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is contained in Exhibit 13 to the Company’s Annual Report on Form 10-K for the year ended January 31, 2011, as filed with the Securities and Exchange Commission.
Exhibit 101.INS**+   XBRL Instance Document
Exhibit 101.SCH**+   XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL**+   XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF**+   XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB**+   XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE**+   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith as an Exhibit.
** Furnished herewith as an Exhibit.
+ Submitted electronically with this Quarterly Report.

 

28


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

        WAL-MART STORES, INC.
Date: September 1, 2011     By:  

/S/    MICHAEL T. DUKE        

     

Michael T. Duke

President and Chief Executive Officer

(Principal Executive Officer)

Date: September 1, 2011     By:  

/S/    CHARLES M. HOLLEY, JR.        

     

Charles M. Holley, Jr.

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: September 1, 2011     By:  

/S/    STEVEN P. WHALEY        

     

Steven P. Whaley

Senior Vice President and Controller

(Principal Accounting Officer)

 

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Table of Contents

Index to Exhibits

The following documents are filed as an exhibit to this Quarterly Report on Form 10-Q:

 

Exhibit 3(i)   Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3(a) to the Annual Report on Form 10-K of the Company for the year ended January 31, 1989 (which document may be found and reviewed in the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549, in the files therein relating to the Company, whose SEC file number is No. 1-6991), the Certificate of Amendment to the Restated Certificate of Incorporation is incorporated herein by reference to Registration Statement on Form S-8 (File Number 33-43315) and the Certificate of Amendment to the Restated Certificate of Incorporation is incorporated hereby by reference to the Current Report on Form 8-K of the Company, dated August 11, 1999 (which document may be found and reviewed in the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549, in the files therein relating to the Company, whose SEC file number is No. 1-6991).
Exhibit 3(ii)   Amended and Restated Bylaws of the Company are incorporated herein by reference to Exhibit 3(ii) to the Quarterly Report on Form 10-Q of the Company, filed with the SEC on June 3, 2011.
Exhibit 12.1*   Ratio of Earnings to Fixed Charges
Exhibit 31.1*   Chief Executive Officer Section 302 Certification
Exhibit 31.2*   Chief Financial Officer Section 302 Certification
Exhibit 32.1**   Chief Executive Officer Section 906 Certification
Exhibit 32.2**   Chief Financial Officer Section 906 Certification
Exhibit 99   The information incorporated by reference in Part I, Item 3 of this Quarterly Report on Form 10-Q is incorporated by reference to the material set forth under the sub-caption “Market Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is contained in Exhibit 13 to the Company’s Annual Report on Form 10-K for the year ended January 31, 2011, as filed with the Securities and Exchange Commission.
Exhibit 101.INS**+   XBRL Instance Document
Exhibit 101.SCH**+   XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL**+   XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF**+   XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB**+   XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE**+   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith as an Exhibit.
** Furnished herewith as an Exhibit.
+ Submitted electronically with this Quarterly Report.

 

30

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