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1 Basis of Presentation
The Condensed Consolidated Balance Sheets of Wal-Mart Stores, Inc. and its subsidiaries (“Walmart,” the “Company” or “we”) as of October 31, 2009 and 2008, the related Condensed Consolidated Statements of Income for the three- and nine-month periods ended October 31, 2009 and 2008, and the related Condensed Consolidated Statements of Cash Flows for the nine-month periods ended October 31, 2009 and 2008, are unaudited. The Condensed Consolidated Balance Sheet as of January 31, 2009, is derived from the Company’s audited Consolidated Balance Sheet at that date.
The Company’s operations in Argentina, Brazil, Chile, China, Costa Rica, El Salvador, Guatemala, Honduras, India, Japan, Mexico, Nicaragua and the United Kingdom are consolidated using a December 31 fiscal year end, generally due to statutory reporting requirements. The Company’s operations in Canada and Puerto Rico are consolidated using a January 31 fiscal year end.
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. Interim results are not necessarily indicative of results for a full year.
The Condensed Consolidated Financial Statements and notes thereto are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and do not contain certain information included in the Company’s Annual Report to Shareholders for the fiscal year ended January 31, 2009. Therefore, the interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report to Shareholders.
In connection with the Company’s finance transformation project, we reviewed and adjusted the classification of certain revenue and expense items within our Condensed Consolidated Statements of Income for financial reporting purposes. The reclassifications did not impact operating income or consolidated net income attributable to Walmart. The changes were effective February 1, 2009 and have been reflected in all prior periods presented.
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3 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 Sam’s Club segment’s merchandise and merchandise in our distribution warehouses are valued based on the weighted-average cost using the LIFO method. Inventories of foreign operations are primarily valued by the retail method of accounting, using the first-in, first-out (“FIFO”) method. At October 31, 2009 and 2008, our inventories valued at LIFO approximate those inventories as if they were valued at FIFO.
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4 Long-Term Debt
On March 27, 2009, the Company issued and sold £1.0 billion of 5.625% Notes Due 2034 at an issue price equal to 98.981% of the notes’ aggregate principal amount. Interest started accruing on the notes on March 27, 2009. The Company will pay interest on the notes on March 27 and September 27 of each year, commencing on September 27, 2009. The notes will mature on March 27, 2034. The notes are senior, unsecured obligations of Walmart.
On May 21, 2009, the Company issued and sold $1.0 billion of 3.20% Notes Due 2014 at an issue price equal to 99.987% of the notes’ aggregate principal amount. Interest started accruing on the notes on May 21, 2009. The Company will pay interest on the notes on May 15 and November 15 of each year, commencing on November 15, 2009. The notes will mature on May 15, 2014. The notes are senior, unsecured obligations of Walmart.
On July 27, 2009, the Company issued and sold $500 million of 6.200% Notes Due 2038 at an issue price equal to 106.001% of the notes’ aggregate principal amount. Interest started accruing on the notes on April 15, 2009. The Company will pay interest on the notes on April 15 and October 15 of each year, commencing on October 15, 2009. The notes will mature on April 15, 2038. The notes are senior, unsecured obligations of Walmart.
On August 6, 2009, the Company issued and sold ¥83.1 billion of its Japanese Yen Bonds—Third Series (2009) (the “Fixed Rate Bonds”) and its ¥16.9 billion of its Japanese Yen Floating Rate Bonds—Second Series (2009) (the “Floating Rate Bonds”) at an issue price, in the case of each issue of bonds, equal to the face amount of the bonds and used the proceeds to reduce a portion of its outstanding Yen credit facility. The Fixed Rate Bonds bear interest at a rate of 1.49% per annum. The Floating Rate Bonds bear interest at a floating rate of interest equal to an applicable six-month Yen LIBOR for each interest period plus 0.60%, with an initial interest rate of 1.235%. Interest started accruing on the bonds on August 6, 2009. The Company will pay interest on the bonds on February 6 and August 6 of each year, commencing on February 6, 2010. The notes will mature on August 6, 2014. The notes are senior, unsecured obligations of Walmart.
On September 21, 2009, the Company issued and sold €1.0 billion of its 4.875% Notes Due 2029 at an issue price equal to 99.074% of the notes’ aggregate principal amount. Interest started accruing on the notes on September 21, 2009. The Company will pay interest on the notes on September 21 of each year, commencing on September 21, 2010. The notes will mature on September 21, 2029. The notes are senior, unsecured obligations of Walmart.
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5 Fair Value Measurements
The Company records and discloses certain financial and non-financial assets and liabilities at their fair value. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.
Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
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Level 1, defined as observable inputs such as quoted prices in active markets; |
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Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
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Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the Company to develop our own assumptions. |
The disclosure of fair value of certain financial assets and liabilities that are recorded at cost are as follows:
Cash and cash equivalents: The carrying amount approximates fair value due to the short maturity of these instruments.
Long-term debt: The fair value is based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements or, where applicable, quoted market prices. The cost and fair value of our debt as of October 31, 2009 is as follows:
(Amounts in millions) | Cost | Fair Value | ||||
Long-term debt |
$ | 38,563 | $ | 40,490 |
Additionally, as of October 31, 2009 and 2008, the Company held certain derivative asset and liability positions that are required to be measured at fair value on a recurring basis. The majority of the Company’s derivative instruments relate to interest rate swaps. The fair values of these interest rate swaps have been measured in accordance with Level 2 inputs of the fair value hierarchy. As of October 31, 2009 and 2008, the notional amounts and fair values of these interest rate swaps are as follows (asset/(liability)):
October 31, 2009 | October 31, 2008 | |||||||||||||
(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 |
$ | 4,445 | $ | 238 | $ | 5,195 | $ | 223 | ||||||
Receive fixed-rate, pay fixed-rate cross-currency interest rate swaps designated as net investment hedges |
1,250 | 177 | 1,250 | 240 | ||||||||||
Receive floating-rate, pay fixed-rate interest rate swaps designated as cash flow hedges |
462 | (15 | ) | 462 | (10 | ) | ||||||||
Receive fixed-rate, pay fixed-rate cross-currency interest rate swaps designated as cash flow hedges |
2,902 | 235 | — | — | ||||||||||
Total |
$ | 9,059 | $ | 635 | $ | 6,907 | $ | 453 | ||||||
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.
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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 foreign exchange rates, as well as to maintain an appropriate mix of fixed- and floating-rate debt. Use of derivative financial instruments in hedging programs subjects the Company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative instrument will change. In a hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the Company’s derivative financial instruments is used to measure interest to be paid or received and does not represent the Company’s exposure due to credit risk. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) from the counterparty when appropriate.
The Company’s transactions are with counterparties rated “A+” or better by nationally recognized credit rating agencies. In connection with various derivative agreements with counterparties, the Company is holding $208 million in cash collateral from these counterparties at October 31, 2009. It is our policy to record cash collateral exclusive of any derivative asset, and any collateral holdings are reflected in our accrued liabilities as amounts due to the counterparties. Furthermore, as part of the master netting arrangements with these counterparties, the Company is also required to post collateral if the derivative liability position exceeds $150 million. The Company has no outstanding collateral postings and in the event of providing cash collateral, the Company would record the posting as a receivable exclusive of any derivative liability.
When the Company uses derivative financial instruments for purposes of hedging its exposure to interest and foreign exchange rates, the contract terms of a hedge instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative instrument is a hedge, depending on the nature of the hedge, changes in the fair value of the instrument will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or be recognized in accumulated other comprehensive (loss) income until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of change.
Fair Value Instruments
The Company is party to receive fixed-rate, pay floating-rate interest rate swaps to hedge the fair value of fixed-rate debt. Under certain swap agreements, the Company pays floating-rate interest and receives fixed-rate interest payments periodically over the life of the instruments. The notional amounts are used to measure interest to be paid or received and do not represent the exposure due to credit loss. The Company’s interest rate swaps that receive fixed-interest rate payments and pay floating-interest rate payments are designated as fair value hedges. As the specific terms and notional amounts of the derivative instruments match those of the instruments being hedged, the derivative instruments were assumed to be perfectly effective hedges and all changes in fair value of the hedges were recorded on the balance sheet with no net impact on the income statement. These fair value instruments will mature on various dates ranging from February 15, 2011 to May 15, 2014.
Net Investment Instruments
At October 31, 2009 and 2008, the Company is party to cross-currency interest rate swaps that hedge its net investment in the United Kingdom. The agreements are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. All changes in the fair value of these instruments are recorded in accumulated other comprehensive (loss) income, offsetting the foreign currency translation adjustment that is also recorded in accumulated other comprehensive (loss) income.
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 October 31, 2009 and 2008. The Company also has outstanding approximately ¥437.4 billion and ¥457.1 billion of debt that is designated as a hedge of the Company’s net investment in Japan at October 31, 2009 and 2008, respectively. Any translation of foreign-denominated debt is recorded in accumulated other comprehensive (loss) income, offsetting the foreign currency translation adjustment that is also recorded in accumulated other comprehensive (loss) income.
Cash Flow Instruments
The Company is party to receive floating-rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain foreign-denominated debt. The swaps are designated as cash flow hedges of interest expense risk. Changes in the foreign benchmark interest rate result in reclassification of amounts from accumulated other comprehensive (loss) income to earnings to offset the floating-rate interest expense. These cash flow instruments will mature on August 5, 2013.
The Company is also party to receive fixed-rate, pay fixed-rate cross-currency interest rate swaps to hedge the currency exposure associated with the forecasted payments of principal and interest of foreign-denominated debt. The swaps are designated as cash flow hedges of the currency risk related to payments on the foreign-denominated debt. Changes in the currency exchange rate result in reclassification of amounts from accumulated other comprehensive (loss) income to earnings to offset the re-measurement (loss) gain on the foreign-denominated debt. These cash flow instruments will mature on March 27, 2034 and September 21, 2029.
Financial Statement Presentation
Hedging instruments with an unrealized gain are recorded on the Condensed Consolidated Balance Sheets in other assets and deferred charges, based on maturity date. Those instruments with an unrealized loss are recorded in accrued liabilities or deferred income taxes and other, based on maturity date.
As of October 31, 2009, our financial instruments were classified as follows in the Condensed Consolidated Balance Sheets:
October 31, 2009 | |||||||||
(Amounts in millions) | Fair Value Instruments |
Net Investment Hedge |
Cash Flow Instruments |
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Balance Sheet Classification: |
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Other assets and deferred charges |
$ | 238 | $ | 177 | $ | 278 | |||
Total assets |
$ | 238 | $ | 177 | $ | 278 | |||
Long-term debt |
238 | — | — | ||||||
Deferred income taxes and other |
— | — | 58 | ||||||
Total liabilities |
$ | 238 | $ | — | $ | 58 | |||
During the first nine months of fiscal 2010, we reclassified $215 million from accumulated other comprehensive (loss) income to earnings to offset currency translation losses on the re-measurement of foreign denominated debt.
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7 Segments
The Company is engaged in the operations of retail stores located in all 50 states of the United States, our wholly-owned subsidiaries in Argentina, Brazil, Canada, Japan, Puerto Rico and the United Kingdom, our majority-owned subsidiaries in Central America, Chile and Mexico and our joint ventures in China and India and our other controlled subsidiaries in China. The Company defines our segments as those business units whose operating results our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources.
The Walmart U.S. segment includes the Company’s mass merchant concept in the United States operating under the “Walmart” or “Wal-Mart” brand, as well as walmart.com. The Sam’s Club segment includes the warehouse membership clubs in the United States, as well as samsclub.com. The International segment consists of the Company’s operations outside of the 50 United States. The amounts under the caption “Other” in the table below relating to operating income are unallocated corporate overhead items.
The Company measures the results of its segments using each segment’s operating income which includes certain corporate overhead allocations. From time to time, we revise the measurement of each segment’s operating income, including any corporate overhead allocations, as dictated by the information regularly reviewed by our CODM. When we do so, the segment operating income for each segment affected by the revisions is restated for all periods presented to maintain comparability.
Net sales by operating segment were as follows:
Three Months Ended October 31, |
Nine Months Ended October 31, |
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(Amounts in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||
Net Sales: |
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Walmart U.S. |
$ | 61,807 | $ | 61,075 | $ | 187,260 | $ | 184,055 | ||||
International |
25,307 | 24,905 | 70,535 | 74,089 | ||||||||
Sam’s Club |
11,553 | 11,639 | 34,425 | 35,063 | ||||||||
Total Company |
$ | 98,667 | $ | 97,619 | $ | 292,220 | $ | 293,207 | ||||
Operating income by segment was as follows:
Three Months Ended October 31, |
Nine Months Ended October 31, |
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(Amounts in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Operating Income: |
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Walmart U.S. |
$ | 4,525 | $ | 4,232 | $ | 13,890 | $ | 13,219 | ||||||||
International |
1,119 | 1,182 | 3,142 | 3,450 | ||||||||||||
Sam’s Club |
395 | 374 | 1,207 | 1,208 | ||||||||||||
Other |
(446 | ) | (496 | ) | (1,547 | ) | (1,456 | ) | ||||||||
Operating income |
$ | 5,593 | $ | 5,292 | $ | 16,692 | $ | 16,421 | ||||||||
Interest expense, net |
(475 | ) | (456 | ) | (1,415 | ) | (1,408 | ) | ||||||||
Income from continuing operations before income taxes |
$ | 5,118 | $ | 4,836 | $ | 15,277 | $ | 15,013 | ||||||||
Goodwill is recorded on the Condensed Consolidated Balance Sheets for the operating segments as follows:
(Amounts in millions) | October 31, 2009 |
October 31, 2008 |
January 31, 2009 |
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International |
$ | 15,857 | $ | 15,111 | $ | 14,955 | |||
Sam’s Club |
305 | 305 | 305 | ||||||
Total goodwill |
$ | 16,162 | $ | 15,416 | $ | 15,260 | |||
The increase in the International segment’s goodwill since October 31, 2008, primarily resulted from currency exchange rate fluctuations and the acquisition of Distribución y Servicio D&S S.A. (“D&S”) in January 2009. The increase in the International segment’s goodwill since January 31, 2009 primarily resulted from currency exchange rate fluctuations.
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8 Equity and Comprehensive Income
The following is a summary of the changes in total equity:
2009 | 2008 | |||||||||||||||||||||||
Walmart shareholders’ equity |
Noncontrolling interest |
Total equity |
Walmart shareholders’ equity |
Noncontrolling interest |
Total equity |
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(Amounts in millions) | ||||||||||||||||||||||||
Balances—January 31, |
$ | 65,285 | $ | 1,794 | $ | 67,079 | $ | 64,608 | $ | 1,929 | $ | 66,537 | ||||||||||||
Net income |
9,703 | 320 | (1) | 10,023 | 9,608 | 365 | 9,973 | |||||||||||||||||
Components of other comprehensive income, net of tax |
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Foreign currency translation |
2,198 | 8 | 2,206 | (2,353 | ) | 22 | (2,331 | ) | ||||||||||||||||
Other unrealized losses |
(61 | ) | — | (61 | ) | — | — | — | ||||||||||||||||
Cash dividends |
(4,200 | ) | — | (4,200 | ) | (3,801 | ) | — | (3,801 | ) | ||||||||||||||
Purchase of Company stock |
(5,241 | ) | — | (5,241 | ) | (3,416 | ) | — | (3,416 | ) | ||||||||||||||
Purchase of redeemable noncontrolling interest |
(288 | ) | — | (288 | ) | — | — | — | ||||||||||||||||
Other equity transactions |
292 | (168 | ) | 124 | 893 | (282 | ) | 611 | ||||||||||||||||
Balances—October 31, |
$ | 67,688 | $ | 1,954 | $ | 69,642 | $ | 65,539 | $ | 2,034 | $ | 67,573 | ||||||||||||
(1) | Excludes $18 million for the first nine months of fiscal 2010 that is related to the redeemable noncontrolling interest. |
The components of comprehensive income (loss) for the three and nine months ended October 31, 2009 and 2008 were as follows:
Three Months Ended October 31, |
Nine Months Ended October 31, |
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(Amounts in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Consolidated net income |
$ | 3,353 | (1) | $ | 3,251 | $ | 10,041 | (1) | $ | 9,973 | ||||||
Other comprehensive income, net of tax |
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Foreign currency translation |
(336 | ) (2) | (3,302 | ) | 2,260 | (2) | (2,331 | ) | ||||||||
Other unrealized income (losses) |
56 | — | (61 | ) | — | |||||||||||
Comprehensive income (loss) |
$ | 3,073 | $ | (51 | ) | $ | 12,240 | $ | 7,642 | |||||||
Less comprehensive income attributable to the noncontrolling interest |
(67 | ) (3) | (224 | ) | (400 | ) (3) | (387 | ) | ||||||||
Comprehensive income (loss) attributable to Walmart |
$ | 3,006 | $ | (275 | ) | $ | 11,840 | $ | 7,255 | |||||||
(1) | Includes $10 million for the third quarter of fiscal 2010 and $18 million for the first nine months of fiscal 2010 that is related to the redeemable noncontrolling interest. |
(2) | Includes ($20) million for the third quarter of fiscal 2010 and $54 million for the first nine months of fiscal 2010 that is related to the redeemable noncontrolling interest. |
(3) | Includes $10 million for the third quarter of fiscal 2010 and ($72) million for the first nine months of fiscal 2010 that is related to the redeemable noncontrolling interest. |
Accumulated other comprehensive (loss) income is composed of the following:
(Amounts in millions) | October 31, 2009 |
October 31, 2008 |
January 31, 2009 |
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Foreign currency translation |
$ | (198 | ) | $ | 1,750 | $ | (2,396 | ) | ||||
Other unrealized losses |
(78 | ) | (10 | ) | (17 | ) | ||||||
Minimum pension liability |
(275 | ) | (229 | ) | (275 | ) | ||||||
Total accumulated comprehensive (loss) income |
$ | (551 | ) | $ | 1,511 | $ | (2,688 | ) | ||||
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9 Common Stock Dividends
On March 5, 2009, the Company’s Board of Directors approved an increase in the annual dividend for fiscal 2010 to $1.09 per share, an increase of 15% over the dividends paid in fiscal 2009. The annual dividend is payable in four quarterly installments on April 6, 2009, June 1, 2009, September 8, 2009, and January 4, 2010 to holders of record on March 13, May 15, August 14 and December 11, 2009, respectively. The dividend installments payable on April 6, 2009 and June 1, 2009 and September 8, 2009 were paid as scheduled.
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10 Income and Other Taxes
The Company’s effective tax rate was 34.3% for the three months ended October 31, 2009, compared to 34.9% for the three months ended October 31, 2008. The Company expects the fiscal 2010 annual effective tax rate to be approximately 34-35%. Significant factors that will impact the annual effective tax rate include completion of certain discrete tax matters, changes in management’s assessment of certain tax matters and the mix of domestic and international income.
In determining the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate based on forecasted annual income and permanent items, statutory tax rates and tax planning opportunities in the various jurisdictions in which the Company operates. The impact of significant discrete items is separately recognized in the quarter in which they occur.
In the normal course of its business, the Company provides for uncertain tax positions, and the related interest and penalties, and adjusts its unrecognized tax benefits, accrued interest and penalties accordingly. During the third quarter of fiscal 2010, unrecognized tax benefits related to continuing operations and accrued interest increased by $29 million and $15 million, respectively. For the first nine months of fiscal 2010, unrecognized tax benefits related to continuing operations decreased by $53 million and accrued interest and penalties increased by $34 million and $10 million, respectively. As of October 31, 2009 the Company’s unrecognized tax benefits relating to continuing operations were $964 million, of which $558 million would, if recognized, affect the Company’s effective tax rate.
During the next twelve months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits by $310 million to $430 million, either because our tax positions are sustained on audit or because the Company agrees to their disallowance. The Company does not expect any such audit resolutions to cause a significant change in its effective tax rate.
Additionally, at January 31, 2008 the Company had unrecognized tax benefits of up to $1.8 billion which, if recognized, would be recorded as discontinued operations. Of this, $63 million was recognized in discontinued operations during the second quarter of fiscal year 2009 following the resolution of a gain determination on a discontinued operation that was sold in fiscal year 2004. The balance of $1.7 billion at October 31, 2009 relates to a worthless stock deduction which the Company has claimed for the Company’s fiscal year 2007 disposition of its German operations. The Company believes it is reasonably possible this matter will be resolved within the next twelve months.
The Company classifies interest on uncertain tax benefits as interest expense and income tax penalties as operating, selling, general and administrative costs. At October 31, 2009, before any tax benefits, the Company had $306 million of accrued interest and penalties on unrecognized tax benefits.
The Company is subject to income tax examinations for its U.S. federal income taxes generally for the fiscal year 2009, with fiscal years 2004 through 2008 remaining open for a limited number of U.S. income tax issues. Non-U.S. income taxes are subject to income tax examination for the tax years 2002 through 2009, and state and local income taxes are open for the fiscal years 2004 through 2009 generally and for the fiscal years 1997 through 2003 for a limited number of issues.
Additionally, the Company is subject to tax examinations for payroll, value added, sales-based and other taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from the taxing authorities. Where appropriate, the
Company has made accruals for these matters which are reflected in the Company’s Condensed Consolidated Financial Statements. While these matters are individually immaterial, a group of related matters, if decided adversely to the Company, may result in liability material to the Company’s financial condition or results of operations.
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11 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 condensed consolidated financial statements. For some matters, as discussed below, 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 Actions: The Company is a defendant in various cases containing class-action allegations in which the plaintiffs are current and former hourly associates who allege that the Company committed wage-and-hour violations by failing to provide rest breaks, meal periods, or other benefits, or otherwise by failing to pay them correctly. The complaints generally seek unspecified monetary damages, injunctive relief, or both. The Company cannot reasonably estimate the possible loss or range of loss that may arise from these lawsuits, except where the lawsuit has been settled or otherwise as noted below and described elsewhere in this Form 10-Q.
In one of the wage-and-hour lawsuits, Braun/Hummel v. Wal-Mart Stores, Inc., a trial was commenced in September 2006, 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, the 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. 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.
Another of the wage-and-hour lawsuits, Salvas v. Wal-Mart Stores, Inc., is pending in the Superior Court of Middlesex County, Massachusetts. The plaintiffs allege that class members worked off the clock and were not provided meal and rest breaks in accordance with Massachusetts law, and seek compensatory damages, statutory treble damages, interest, costs of court, and attorneys’ fees. On October 19, 2009, the parties entered into a settlement agreement disposing of all claims asserted in the litigation, which is subject to approval by the trial court. If the proposed settlement is approved, the amount to be paid by Wal-Mart will be approximately $40 million.
Exempt Status Cases: The Company is currently a defendant in seven cases in which the plaintiffs seek class or collective certification of various groups of salaried managers, and challenge their exempt status under state and federal laws. In one of those cases (Sepulveda v. Wal-Mart Stores, Inc.), class certification was denied by the trial court on May 5, 2006. On April 25, 2008, a three-judge panel of the United States Court of Appeals for the Ninth Circuit affirmed the trial court’s ruling in part and reversed it in part, and remanded the case for further proceedings. On May 16, 2008, the Company filed a petition seeking review of that ruling by a larger panel of the court. On October 10, 2008, the court entered an Order staying all proceedings in the Sepulveda appeal pending the final disposition of the appeal in Dukes v. Wal-Mart Stores, Inc., discussed below. In another of the cases (Patel v. Wal-Mart Stores, Inc.), the plaintiffs’ Motion to Facilitate Class Notice was denied in orders dated June 19 and September 4, 2009, which constituted a denial of certification of the proposed collective action. Class certification has not been addressed in the other cases. The Company cannot reasonably estimate the possible loss or range of loss that may arise from these lawsuits.
Gender Discrimination Cases: The Company is a defendant in Dukes v. Wal-Mart Stores, Inc., a class-action lawsuit commenced in June 2001 in the United States District Court for the Northern District of California. The case was brought on behalf of all past and present female employees in all of the Company’s retail stores and warehouse clubs in the United States. The complaint alleges that the Company has engaged in a pattern and practice of discriminating against women in promotions, pay, training and job assignments. The complaint seeks, 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. The class, which was certified by the district court for purposes of liability, injunctive and declaratory relief, punitive damages and lost pay, subject to certain exceptions, includes all women employed at any Walmart domestic retail store at any time since December 26, 1998, who have been or may be subjected to the pay and management track promotions policies and practices challenged by the plaintiffs.
The Company believes that the district court’s ruling is incorrect. 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. The court heard oral argument on the Petition on March 24, 2009. If the Company is not successful in its appeal of class certification, or an appellate court issues a ruling that allows for the certification of a class or classes with a different size or scope, and if there is a subsequent adverse verdict on the merits from which there is no successful appeal, or in the event of a negotiated settlement of the litigation, the resulting liability could be material to the Company’s financial condition or results of operations. The plaintiffs also seek punitive damages which, if awarded, could result in the payment of additional amounts material to the Company’s financial condition or results of operations. However, because of the uncertainty of the outcome of the appeal from the district court’s certification decision, because of the uncertainty of the balance of the proceedings contemplated by the district court, and because the Company’s liability, if any, arising from the litigation, including the size of any damages award if plaintiffs are successful in the litigation or any negotiated settlement, could vary widely, the Company cannot reasonably estimate the possible loss or range of loss that may arise from the litigation.
The Company is a defendant in a lawsuit that was filed by the Equal Employment Opportunity Commission (“EEOC”) on August 24, 2001, in the United States District Court for the Eastern District of Kentucky on behalf of Janice Smith and all other females who made application or transfer requests at the London, Kentucky, distribution center from 1998 to the present, and who were not hired or transferred into the warehouse positions for which they applied. The complaint alleges that the Company based hiring decisions on gender in violation of Title VII of the 1964 Civil Rights Act as amended. The EEOC can maintain this action as a class without certification. The EEOC seeks back pay and front pay for those females not selected for hire or transfer during the relevant time period, plus compensatory and punitive damages and injunctive relief. The EEOC has asserted that the hiring practices in question resulted in a shortfall of 245 positions. The claims for compensatory and punitive damages are capped by statute at $300,000 per shortfall position. The amounts of back pay and front pay that are being sought have not been specified. The case has been set for trial on March 1, 2010.
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 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.
Additionally, the U.S. Attorney’s Office in the Northern District of California has initiated its own investigation regarding the Company’s handling of hazardous materials and hazardous waste and the Company has received administrative document requests from the California Department of Toxic Substances Control requesting documents and information with respect to two of the Company’s distribution facilities. Further, the Company also received a subpoena from the Los Angeles County District Attorney’s Office for documents and administrative interrogatories requesting information, among other things, regarding the Company’s handling of materials and hazardous waste. California state and local government authorities and the State of Nevada also initiated investigations into these matters. On November 3, 2009, the Company and the State of Nevada entered into a settlement agreement whereby the Company agreed to maintain enhanced hazardous waste management procedures and pay a $5,000 civil penalty. The Company is cooperating fully with the respective authorities. While management cannot predict the ultimate outcome in the California 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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12 Adoption of New Accounting Standards
The Company must, at times, adopt new accounting policies or adjust existing accounting policies to comply with new accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) or the SEC. The following subcaptions provide a discussion of the Company’s adoption of new accounting policies as required by new accounting standards that became effective February 1, 2009 or will become effective in future periods.
Accounting for Acquisitions
The Company accounts for all consolidated acquisitions and business combinations using the purchase method of accounting. As a result of new accounting standards effective February 1, 2009, the Company changed some of its accounting for business combinations on February 1, 2009. Therefore, certain policies differ when accounting for these acquisitions occurring before and after February 1, 2009, as discussed below.
Prior to February 1, 2009, the Company applied the following policies in accounting for business combinations:
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acquisition costs were included as part of the business combinations; |
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only the Company’s proportionate share in the fair value of assets and liabilities acquired in a partial acquisition (less than 100% control was acquired) was recorded as part of the purchase price; |
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goodwill was only recorded to the extent of the Company’s proportionate share in a less than 100% acquired entity; |
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contingent consideration, if any, is recorded as additional purchase price when settled; |
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any adjustments to income tax valuation allowances or uncertain tax positions are recognized as adjustments to the accounting for the business combination; and |
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contingent liabilities acquired are recorded at acquisition if probable and reasonably estimable. |
Subsequent to February 1, 2009, the Company will apply the following policies in accounting for business combinations, when applicable:
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costs related to an acquisition are expensed as incurred; |
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regardless of the level of ownership acquired, the Company records the full fair value of assets and liabilities acquired as part of the purchase price; |
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goodwill includes any noncontrolling interest portion and is recorded as the excess of the cost of the acquisition over the total fair value of the assets and liabilities acquired and any noncontrolling interest; |
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contingent consideration, if any, is recorded at fair value as part of initial purchase price; |
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any adjustments to income tax valuation allowances or uncertain tax positions after the acquisition date are generally recognized as income tax expense; and |
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contingent liabilities acquired are recorded at fair value. If fair value is not determinable, a reasonably estimable amount is recorded, provided the incurrence of the liability is probable. |
No acquisitions have occurred subsequent to February 1, 2009. However, if any adjustments to income tax valuation allowances and uncertain tax positions that relate to acquisitions prior to February 1, 2009 occur within a one year period from the acquisition date due to revised facts and circumstances at the acquisition date, then the adjustment will be recorded to goodwill. Adjustments outside the one year measurement period are typically recorded to the provision for income taxes.
Noncontrolling Interests
Effective February 1, 2009, the Company generally reports noncontrolling interests in subsidiaries in the equity section of the Company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. Consolidated net income is also reduced by the amount attributable to the noncontrolling interest to arrive at income “attributable to Walmart.” Accordingly, the changes have been retroactively applied in the Company’s condensed consolidated financial statements. Furthermore, when the Company acquires some or all of the noncontrolling interest, the transaction is accounted for as an equity transaction and any amount paid in excess of the noncontrolling interest’s cost basis acquired is recorded to additional paid in capital.
All noncontrolling interests where the Company may be required to repurchase a portion of the noncontrolling interest under a put option or other contractual redemption requirement are presented in the mezzanine section of the balance sheet between liabilities and equity, as redeemable noncontrolling interest.
In March 2009, the Company paid $436 million to acquire a portion of the redeemable noncontrolling interest in D&S through a second tender offer as required by the Chilean securities laws increasing its ownership stake in D&S to 74.6%. This transaction resulted in a $148 million acquisition of that portion of the redeemable noncontrolling interest and the remaining $288 million is reflected as a reduction of Walmart shareholders’ equity. Additionally, the former D&S controlling shareholders still hold a put option that is exercisable beginning in January 2011 through January 2016. During the exercise period, the put option allows each former controlling shareholder the right to require the Company to purchase up to all of their shares of D&S (approximately 25.1%) owned at fair market value at the time of an exercise, if any.
Future Accounting Policy Adoptions
A new accounting standard, effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period, changes the approach to determining the primary beneficiary of a variable interest entity (“VIE”) and requires companies to more frequently assess whether they must consolidate VIEs. The Company will adopt this new standard on February 1, 2010 and is currently assessing the potential impacts, if any, on its financial statements and disclosures.
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13 Discontinued Operations
During fiscal 2009, the Company disposed of Gazeley Limited (“Gazeley”), an ASDA commercial property development subsidiary in the United Kingdom. Consequently, the results of operations associated with Gazeley are presented as discontinued operations in our Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets for all periods presented. The cash flows related to this operation were insignificant for all periods presented. In the third quarter of fiscal 2009, the Company recognized approximately $212 million, after tax, in operating profits and gains from the sale of Gazeley. The transaction continues to remain subject to certain indemnification obligations. The Company’s operations in the United Kingdom are consolidated using a December 31 fiscal year-end. Since the sale of Gazeley closed in July 2008, the Company recorded the gain to discontinued operations in the third quarter of fiscal 2009.
During the third quarter of fiscal 2009, the Company initiated a restructuring program under which the Company’s Japanese subsidiary, The Seiyu Ltd., has closed or will close approximately 23 stores and dispose of certain excess properties. This restructuring involves incurring costs associated with lease termination obligations, asset impairment charges and employee separation benefits. The costs associated with this restructuring are presented as discontinued operations in our Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets for all periods presented. In the third quarter of fiscal 2009, the Company recognized approximately $107 million, after tax, in restructuring expenses and operating results as discontinued operations. The cash flows and accrued liabilities related to this restructuring were insignificant for all periods presented. The Company recognized approximately $7 million and $22 million, after tax, in operating losses as discontinued operations for the three and nine months ended October 31, 2009, respectively. Additional costs will be recorded in future periods for lease termination obligations and employee separation benefits and are not expected to be material.
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14 Subsequent Events
A subsequent event is a significant event or transaction occurring between the balance sheet date and the issue date of the financial statements that could make the financial statements misleading if not recognized or disclosed. Recognized subsequent events consist of those events that provide additional evidence with respect to conditions that existed at the date of the balance sheet and affect the estimates of amounts already recorded in financial statements. If required, the Company adjusts the financial statements for recognized subsequent events. Unrecognized subsequent events consist of those events that provide evidence with respect to conditions that did not exist at the balance sheet date being reported on, but arose subsequent to that date. These events should not result in an adjustment to the financial statements, but are disclosed if material. As of December 7, 2009, the date of issuance of the financial statements, we identified the following subsequent event for disclosure in the financial statements:
On December 6, 2009, the Company’s majority-owned subsidiary in Mexico, Wal-Mart de Mexico (“Walmex”), announced it has entered into an agreement to acquire 100 percent of the Company’s majority-owned subsidiary in Central America from the Company and the minority shareholders of that subsidiary. The effect of this transaction on the consolidated Company will be a purchase of the outstanding noncontrolling interest of our Central American business, with the Company’s ownership of Walmex declining slightly. Currently, the Company owns 68% of Walmex and 51% of the Central American business. The transaction is expected to close in the first quarter of fiscal 2010, subject to customary transaction closing conditions.
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