Notes to Condensed Consolidated Financial Statements
Note 1. Accounting Policies
Basis of Presentation
The Condensed Consolidated Financial Statements of Wal-Mart Stores, Inc. and its subsidiaries ("Walmart" or the "Company") and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the 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 the accompanying notes, are prepared in accordance with generally accepted accounting principles 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, 2016
. Therefore, the interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report on Form
10-K
.
The Company's Condensed Consolidated Financial Statements are based on a fiscal year ending on
January 31
for the United States ("U.S.") and Canadian operations. The Company consolidates all other operations generally using a one-month lag and based on a calendar year. There were no significant intervening events during the month of
October 2016
related to the operations consolidated using a lag that materially affected the Condensed Consolidated Financial Statements.
The Company's business is seasonal to a certain extent due to calendar events and national and religious holidays, as well as weather patterns. Historically, the Company's highest sales volume and operating income have occurred in the fiscal quarter ending January 31.
Receivables
Receivables are stated at their carrying values, net of a reserve for doubtful accounts. Receivables consist primarily of amounts due from:
|
|
•
|
insurance companies resulting from pharmacy sales;
|
|
|
•
|
banks for customer credit and debit cards and electronic bank transfers that take in excess of seven days to process;
|
|
|
•
|
consumer financing programs in certain international operations;
|
|
|
•
|
suppliers for marketing or incentive programs; and
|
|
|
•
|
real estate transactions.
|
The Walmart International segment offers a limited number of consumer credit products, primarily through its financial institutions in Canada and Chile to customers in those markets. The receivable balance from consumer credit products was
$1.2 billion
, net of a reserve for doubtful accounts of
$77 million
at
October 31, 2016
, compared to a receivable balance of $
1.0 billion
, net of a reserve for doubtful accounts of
$70 million
at
January 31, 2016
. These balances are included in receivables, net, in the Company's Condensed Consolidated Balance Sheets.
Inventories
The Company values inventories at the lower of cost or market as determined primarily by the retail inventory method of accounting, using the last-in, first-out ("LIFO") method for substantially all of the Walmart U.S. segment's inventories. The inventory at the Walmart International segment is valued primarily by the retail inventory method of accounting, using the first-in, first-out ("FIFO") method. The retail inventory method of accounting results in inventory being valued at the lower of cost or market, since permanent markdowns are immediately recorded as a reduction of the retail value of inventory. The inventory at the Sam's Club segment is valued using the LIFO method. At
October 31, 2016
and
January 31, 2016
, the Company's inventories valued at LIFO approximated those inventories as if they were valued at FIFO.
Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606).
This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which deferred the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2017, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
,
which is
intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
,
which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; and ASU 2016-12,
Revenue from Contracts
with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
,
which contains certain practical expedients in response to identified implementation issues. The Company is planning to adopt ASU 2014-09 and related ASUs on February 1, 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt these ASUs. Management is currently evaluating these ASUs, including which transition approach to use, but does not expect these ASUs to materially impact the Company's consolidated net income, financial position or cash flows.
Leases
In February 2016, FASB issued ASU 2016-02,
Leases (Topic 842)
. FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and quantitative disclosures are required, as well as a retrospective recognition and measurement of impacted leases. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. Management is currently evaluating this ASU to determine its impact on the Company's consolidated net income, financial position, cash flows and disclosures.
Financial Instruments
In January 2016, FASB issued ASU 2016-01,
Financial Instruments–Overall
(
Topic 825
). ASU 2016-01 updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017. Management is currently evaluating this ASU to determine its impact on the Company's consolidated net income, financial position and disclosures.
In June 2016, FASB issued ASU 2016-13,
Financial Instruments–Credit Losses (Topic 326)
. ASU 2016-13 modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for fiscal years and interim periods within those years beginning after December 15, 2019. Management is currently evaluating this ASU to determine its impact on the Company's consolidated net income, financial position, cash flows and disclosures.
Stock Compensation
In March 2016, FASB issued ASU 2016-09,
Compensation–Stock Compensation (Topic 718)
. ASU 2016-09 includes new guidance on stock compensation, which is intended to simplify accounting for share-based payment transactions. The guidance will change several aspects of the accounting for share-based payment award transactions, including accounting for income taxes, forfeitures, and minimum statutory tax withholding requirements. Management has determined that the Company will adopt ASU 2016-09 in the first quarter of the year ended January 31, 2018 ("Fiscal 2018"). Management has evaluated this ASU and determined that, upon adoption, it will have an immaterial retrospective impact on the classification of cash flows between operating and financing activities.
Note 2. Net Income Per Common Share
Basic income per common share attributable to Walmart is based on the weighted-average common shares outstanding during the relevant period. Diluted income per common share attributable to Walmart is based on the weighted-average common shares outstanding during the relevant period adjusted for the dilutive effect of share-based awards. The Company did not have significant share-based awards outstanding that were antidilutive and not included in the calculation of diluted income per common share attributable to Walmart for the
three and nine months ended
October 31, 2016 and 2015
.
The following table provides a reconciliation of the numerators and denominators used to determine basic and diluted income per common share attributable to Walmart:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
(Amounts in millions, except per share data)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
$
|
3,202
|
|
|
$
|
3,414
|
|
|
$
|
10,307
|
|
|
$
|
10,332
|
|
Consolidated net income attributable to noncontrolling interest
|
|
(168
|
)
|
|
(110
|
)
|
|
(421
|
)
|
|
(212
|
)
|
Consolidated net income attributable to Walmart
|
|
$
|
3,034
|
|
|
$
|
3,304
|
|
|
$
|
9,886
|
|
|
$
|
10,120
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic
|
|
3,089
|
|
|
3,210
|
|
|
3,114
|
|
|
3,221
|
|
Dilutive impact of stock options and other share-based awards
|
|
11
|
|
|
9
|
|
|
10
|
|
|
10
|
|
Weighted-average common shares outstanding, diluted
|
|
3,100
|
|
|
3,219
|
|
|
3,124
|
|
|
3,231
|
|
|
|
|
|
|
|
|
|
|
Net income per common share attributable to Walmart
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.98
|
|
|
$
|
1.03
|
|
|
$
|
3.17
|
|
|
$
|
3.14
|
|
Diluted
|
|
0.98
|
|
|
1.03
|
|
|
3.16
|
|
|
3.13
|
|
Note 3. Accumulated Other Comprehensive Loss
The following table provides the changes in the composition of total accumulated other comprehensive loss for the
nine months ended
October 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions and net of income taxes)
|
|
Currency Translation
and Other
|
|
Net Investment Hedges
|
|
Cash Flow Hedges
|
|
Minimum
Pension Liability
|
|
Total
|
Balances as of February 1, 2016
|
|
$
|
(11,690
|
)
|
|
$
|
1,022
|
|
|
$
|
(336
|
)
|
|
$
|
(593
|
)
|
|
$
|
(11,597
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(994
|
)
|
|
468
|
|
|
(151
|
)
|
|
(83
|
)
|
|
(760
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
28
|
|
|
(6
|
)
|
|
22
|
|
Balances as of October 31, 2016
|
|
$
|
(12,684
|
)
|
|
$
|
1,490
|
|
|
$
|
(459
|
)
|
|
$
|
(682
|
)
|
|
$
|
(12,335
|
)
|
Amounts reclassified from accumulated other comprehensive loss for derivative instruments are recorded in interest, net, in the Company's Condensed Consolidated Statements of Income, and the amounts for the minimum pension liability are recorded in operating, selling, general and administrative expenses in the Company's Condensed Consolidated Statements of Income.
Note 4. Long-term Debt
The following table provides the changes in the Company's long-term debt for the
nine months ended
October 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
Long-term debt due within one year
|
|
Long-term debt
|
|
Total
|
Balances as of February 1, 2016
|
|
$
|
2,745
|
|
|
$
|
38,214
|
|
|
$
|
40,959
|
|
Proceeds from long-term debt
|
|
—
|
|
|
134
|
|
|
134
|
|
Repayments of long-term debt
|
|
(2,040
|
)
|
|
—
|
|
|
(2,040
|
)
|
Reclassifications of long-term debt
|
|
1,500
|
|
|
(1,500
|
)
|
|
—
|
|
Other
|
|
61
|
|
|
(670
|
)
|
|
(609
|
)
|
Balances as of October 31, 2016
|
|
$
|
2,266
|
|
|
$
|
36,178
|
|
|
$
|
38,444
|
|
Issuances
The Company did not have any material long-term debt issuances during the
nine months ended
October 31, 2016
, but received proceeds from a number of small, immaterial long-term debt issuances by several of its non-U.S. operations.
Maturities
During the
nine months ended
October 31, 2016
, the following long-term debt matured and was repaid:
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Principal Amount
|
|
Fixed vs. Floating
|
|
Interest Rate
|
|
Repayment
|
April 11, 2016
|
|
1,000 USD
|
|
Fixed
|
|
0.600%
|
|
$
|
1,000
|
|
April 15, 2016
|
|
1,000 USD
|
|
Fixed
|
|
2.800%
|
|
1,000
|
|
|
|
|
|
|
|
|
|
$
|
2,000
|
|
The Company also repaid other, smaller long-term debt as it matured in several of its non-U.S. operations.
Note 5. Fair Value Measurements
The Company records and discloses certain financial and non-financial assets and liabilities at 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. The fair value of a liability is 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 the fair value hierarchy, which prioritizes the inputs used in measuring fair value. The levels of the fair value hierarchy are:
|
|
•
|
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 for which little or no market data exists, therefore requiring the Company to develop its own assumptions.
|
Recurring Fair Value Measurements
The Company holds derivative instruments that are required to be measured at fair value on a recurring basis. The fair values are the estimated amounts the Company would receive or pay upon termination of the related derivative agreements as of the reporting dates. The fair values have been measured using the income approach and Level 2 inputs, which include the relevant interest rate and foreign currency forward curves. As of
October 31, 2016
and
January 31, 2016
, the notional amounts and fair values of these derivatives were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
January 31, 2016
|
(Amounts in millions)
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
Receive fixed-rate, pay variable-rate interest rate swaps designated as fair value hedges
|
$
|
5,000
|
|
|
$
|
172
|
|
|
$
|
5,000
|
|
|
$
|
173
|
|
Receive fixed-rate, pay fixed-rate cross-currency swaps designated as net investment hedges
|
1,250
|
|
|
532
|
|
|
1,250
|
|
|
319
|
|
Receive fixed-rate, pay fixed-rate cross-currency swaps designated as cash flow hedges
|
3,970
|
|
|
(837
|
)
|
|
4,132
|
|
|
(609
|
)
|
Total
|
$
|
10,220
|
|
|
$
|
(133
|
)
|
|
$
|
10,382
|
|
|
$
|
(117
|
)
|
Additionally, the Company has available-for-sale securities that are measured at fair value on recurring basis using Level 1 inputs. Changes in fair value are recorded in accumulated other comprehensive loss.
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company's assets and liabilities are also subject to nonrecurring fair value measurements. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. The Company did not record any significant impairment charges to assets measured at fair value on a nonrecurring basis during the
three and nine months ended
October 31, 2016
, or for the fiscal year ended
January 31, 2016
.
Other Fair Value Disclosures
The Company records cash and cash equivalents and short-term borrowings at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities.
The Company's long-term debt is also recorded at cost. The fair value is estimated using Level 2 inputs based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. The carrying value and fair value of the Company's long-term debt as of
October 31, 2016
and
January 31, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
January 31, 2016
|
(Amounts in millions)
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Long-term debt, including amounts due within one year
|
|
$
|
38,444
|
|
|
$
|
46,797
|
|
|
$
|
40,959
|
|
|
$
|
46,965
|
|
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 variable-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 when appropriate.
The Company only enters into derivative transactions with counterparties rated "A-" or better by nationally recognized credit rating agencies. Subsequent to entering into derivative transactions, the Company regularly monitors the credit ratings of its counterparties. In connection with various derivative agreements, including master netting arrangements, the Company held cash collateral from counterparties of
$266 million
and
$345 million
at
October 31, 2016
and
January 31, 2016
, respectively. The Company records cash collateral received as amounts due to the counterparties exclusive of any derivative asset. Furthermore, as part of the master netting arrangements with each of these counterparties, the Company is also required to post collateral with a counterparty if the Company's net derivative liability position exceeds
$150 million
with such counterparties. The Company did not have any cash collateral posted with counterparties at
October 31, 2016
, however, the Company did have an insignificant amount of cash collateral posted with counterparties at
January 31, 2016
. The Company records cash collateral it posts with counterparties as amounts receivable from those counterparties exclusive of any derivative liability.
The Company uses derivative financial instruments for the purpose of hedging its exposure to interest and currency exchange rate risks and, accordingly, 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 recorded using hedge accounting, depending on the nature of the hedge, changes in the fair value of the instrument will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or be recognized in accumulated other comprehensive loss until the hedged item is recognized in earnings. Any hedge ineffectiveness is immediately recognized in earnings. The Company's net investment and cash flow instruments are highly effective hedges and the ineffective portion has not been, and is not expected to be, significant. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are recorded 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 variable-rate interest rate swaps that the Company uses to hedge the fair value of fixed-rate debt. 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 variable-interest rate payments are designated as fair value hedges. As the specific terms and notional amounts of the derivative instruments match those of the fixed-rate debt being hedged, the derivative instruments are assumed to be perfectly effective hedges. Changes in the fair values of these derivative instruments are recorded in earnings, but are offset by corresponding changes in the fair values of the hedged items, also recorded in earnings, and, accordingly, do not impact the Company's Condensed Consolidated Statements of Income. These fair value instruments will mature on dates ranging from
October 2020
to
April 2024
.
Net Investment Instruments
The Company is a party to cross-currency interest rate swaps that the Company uses to hedge its net investments. The agreements are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. All changes in the fair value of these instruments are recorded in accumulated other comprehensive loss, offsetting the currency translation adjustment of the related investment that is also recorded in accumulated other comprehensive loss. These instruments will mature on dates ranging from
October 2023
to
February 2030
.
The Company has issued foreign-currency-denominated long-term debt as hedges of net investments of certain of its foreign operations. These foreign-currency-denominated long-term debt issuances are designated and qualify as nonderivative hedging instruments. Accordingly, the foreign currency translation of these debt instruments is recorded in accumulated other comprehensive loss, offsetting the foreign currency translation adjustment of the related net investments that is also recorded in accumulated other comprehensive loss. At
October 31, 2016
and
January 31, 2016
, the Company had
¥10 billion
of outstanding long-term debt designated as a hedge of its net investment in Japan, as well as outstanding long-term debt of
£2.5 billion
at
October 31, 2016
and
January 31, 2016
that was designated as a hedge of its net investment in the United Kingdom. These nonderivative net investment hedges will mature on dates ranging from
July 2020
to
January 2039
.
Cash Flow Instruments
The Company is 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 certain 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. The effective portion of changes in the fair value of derivatives designated as cash flow hedges of foreign exchange risk is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The hedged items are recognized foreign currency-denominated liabilities that are re-measured at spot exchange rates each period, and the assessment of effectiveness (and measurement of any ineffectiveness) is based on total changes in the related derivative's cash flows. As a result, the amount reclassified into earnings each period includes an amount that offsets the related transaction gain or loss arising from that re-measurement and the adjustment to earnings for the period's allocable portion of the initial spot-forward difference associated with the hedging instrument. These cash flow instruments will mature on dates ranging from
April 2022
to
March 2034
.
Financial Statement Presentation
Although subject to master netting arrangements, the Company does not offset derivative assets and derivative liabilities in its Condensed Consolidated Balance Sheets. Derivative instruments with an unrealized gain are recorded in the Company's Condensed Consolidated Balance Sheets as either current or non-current assets, based on maturity date, and those hedging instruments with an unrealized loss are recorded as either current or non-current liabilities, based on maturity date. Refer to Note 5 for the net presentation of the Company's derivative instruments.
The Company's derivative instruments, as well as its nonderivative debt instruments designated and qualifying as net investment hedges, were classified as follows in the Company's Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
January 31, 2016
|
(Amounts in millions)
|
Fair Value
Instruments
|
|
Net Investment
Instruments
|
|
Cash Flow
Instruments
|
|
Fair Value
Instruments
|
|
Net Investment
Instruments
|
|
Cash Flow
Instruments
|
Derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
Other assets and deferred charges
|
$
|
172
|
|
|
$
|
532
|
|
|
$
|
—
|
|
|
$
|
173
|
|
|
$
|
319
|
|
|
$
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes and other
|
—
|
|
|
—
|
|
|
837
|
|
|
—
|
|
|
—
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonderivative hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
—
|
|
|
3,142
|
|
|
—
|
|
|
—
|
|
|
3,644
|
|
|
—
|
|
Gains and losses related to the Company's derivatives primarily relate to interest rate hedges, which are recorded in interest, net, in the Company's Condensed Consolidated Statements of Income. Amounts related to the Company's derivatives expected to be reclassified from accumulated other comprehensive loss to net income during the next 12 months are not significant.
Note 7. Share Repurchases
From time to time, the Company repurchases shares of its common stock under share repurchase programs authorized by the Company's Board of Directors. The current
$20.0 billion
share repurchase program has no expiration date or other restrictions limiting the period over which the Company can make share repurchases. At
October 31, 2016
, authorization for
$11.3 billion
of share repurchases remained under the current share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status.
The Company considers several factors in determining when to execute share repurchases, including, among other things, current cash needs, capacity for leverage, cost of borrowings and the market price of its common stock. The following table provides, on a settlement date basis, the number of shares repurchased, average price paid per share and total amount paid for share repurchases for the
nine months ended
October 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
(Amounts in millions, except per share data)
|
|
2016
|
|
2015
|
Total number of shares repurchased
|
|
90.6
|
|
|
23.2
|
|
Average price paid per share
|
|
$
|
69.04
|
|
|
$
|
74.20
|
|
Total amount paid for share repurchases
|
|
$
|
6,254
|
|
|
$
|
1,720
|
|
Note 8. Common Stock Dividends
Dividends Declared
On
February 18, 2016
, the Board of Directors approved the fiscal
2017
annual dividend of
$2.00
per share, an increase over the fiscal
2016
annual dividend of
$1.96
per share. For fiscal
2017
, the annual dividend will be paid in four quarterly installments of
$0.50
per share, according to the following record and payable dates:
|
|
|
|
Record Date
|
|
Payable Date
|
March 11, 2016
|
|
April 4, 2016
|
May 13, 2016
|
|
June 6, 2016
|
August 12, 2016
|
|
September 6, 2016
|
December 9, 2016
|
|
January 3, 2017
|
The dividend installments payable on
April 4, 2016
,
June 6, 2016
and
September 6, 2016
were paid as scheduled.
Note 9. Contingencies
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, a liability is not probable or the amount cannot be reasonably estimated and therefore an accrual has not been made. However, where a liability is reasonably possible and may be 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 and its shareholders.
Unless stated otherwise, 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 a liability material to the Company's financial condition or results of operations.
ASDA Equal Value Claims:
ASDA Stores, Ltd. ("ASDA"), a wholly-owned subsidiary of the Company, is a defendant in over
8,000
"equal value" claims that are proceeding before an Employment Tribunal in Manchester (the "Employment Tribunal") in the United Kingdom ("UK") on behalf of current and former ASDA store employees, who allege that the work performed by female employees in ASDA's retail stores is of equal value in terms of, among other things, the demands of their jobs to that of male employees working in ASDA's warehouse and distribution facilities, and that the disparity in pay between these different job positions is not objectively justified. Claimants are requesting differential back pay based on higher wage rates in the warehouse and distribution facilities and those higher wage rates on a prospective basis as part of these equal value proceedings. ASDA believes that further claims may be asserted in the near future. On March 23, 2015, ASDA asked the Employment Tribunal to stay all proceedings and to "strike out" substantially all of the claims. On July 23, 2015, the Employment Tribunal denied ASDA's requests. Following additional proceedings, the Employment Appeal Tribunal agreed to review the "strike out" issue and the Court of Appeals agreed to review the stay issue. On May 26, 2016, the Court of Appeals denied ASDA's appeal of the stay issue. On October 14, 2016, following a preliminary hearing, the Employment Tribunal ruled that claimants could compare their positions in ASDA's retail stores with those of employees in ASDA's warehouse and distribution facilities. Claimants will now proceed to the next phase of their claims. That phase will determine whether the
work performed by the claimants is of equal value to the work performed by employees in ASDA's warehouse and distribution facilities. On November 23, 2016, ASDA filed a request with the Employment Appeal Tribunal to hear an appeal of the October 14, 2016 ruling. At present, the Company cannot predict the number of such claims that may be filed, and cannot reasonably estimate any loss or range of loss that may arise from these proceedings. The Company believes it has substantial factual and legal defenses to these claims, and intends to defend the claims vigorously.
FCPA Investigation and Related Matters
The Audit Committee (the "Audit Committee") of the Board of Directors of the Company, which is composed solely of independent directors, has been conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act ("FCPA") and other alleged crimes or misconduct in connection with foreign subsidiaries, including Wal-Mart de México, S.A.B. de C.V. ("Walmex"), and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters.
The Company has also been conducting a voluntary global review of its policies, practices and internal controls for anti-corruption compliance. The Company is engaged in strengthening its global anti-corruption compliance program through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the "DOJ") and the Securities and Exchange Commission (the "SEC"). Since the implementation of the global review and the enhanced anti-corruption compliance program, the Audit Committee and the Company have identified or been made aware of additional allegations regarding potential violations of the FCPA. When such allegations have been reported or identified, the Audit Committee and the Company, together with their third party advisors, have conducted inquiries and when warranted based on those inquiries, opened investigations. Inquiries or investigations regarding allegations of potential FCPA violations were commenced in a number of foreign markets where the Company operates, including, but not limited to, Brazil, China and India.
As previously disclosed, the Company is under investigation by the DOJ and the SEC regarding possible violations of the FCPA. The Company has been cooperating with the agencies and discussions have begun with them regarding the resolution of these matters. As these discussions are preliminary, the Company cannot currently predict the timing, the outcome or the impact of a possible resolution of these matters.
A number of federal and local government agencies in Mexico have also initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have been filed by several of the Company's shareholders against it, certain of its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex's current and former officers.
The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the on-going government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, debarment or other relief, criminal convictions and/or penalties and the shareholder lawsuits referenced above may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company expects that there will be on-going media and governmental interest, including additional news articles from media publications on these matters, which could impact the perception among certain audiences of the Company's role as a corporate citizen.
In addition, the Company has incurred and expects to continue to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting the review and investigations. These costs will be expensed as incurred. For the
three and nine months ended
October 31, 2016 and 2015
, the Company incurred the following third-party expenses in connection with the FCPA investigation and related matters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
(Amounts in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Ongoing inquiries and investigations
|
|
$
|
24
|
|
|
$
|
22
|
|
|
$
|
68
|
|
|
$
|
70
|
|
Global compliance program and organizational enhancements
|
|
5
|
|
|
8
|
|
|
14
|
|
|
23
|
|
Total
|
|
$
|
29
|
|
|
$
|
30
|
|
|
$
|
82
|
|
|
$
|
93
|
|
While the Company believes that it is probable that it will incur a loss from these matters, given the on-going nature and complexity of the review, inquiries and investigations, the Company cannot yet reasonably estimate a loss or range of loss that may arise from the conclusion of these matters. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.
Note 10. Acquisitions, Disposals and Related Items
In July
2015
, the Company completed the purchase of all of the remaining noncontrolling interest in Yihaodian, our e-commerce operations in China, for approximately
$760 million
, using existing cash to complete this transaction.
In June 2016, the Company sold certain assets relating to Yihaodian, including the Yihaodian brand, website and application, to JD.com, Inc. ("JD") in exchange for
Class A ordinary shares
of JD representing approximately
five percent
of JD's outstanding ordinary shares on a fully diluted basis. The
$1.5 billion
investment in JD is carried at cost and is included in other assets and deferred charges in the accompanying Condensed Consolidated Balance Sheets. The sale resulted in the recognition of a
$535 million
noncash gain in the Walmart International segment which is included in membership and other income in the accompanying Condensed Consolidated Statements of Income. During the quarter ended October 31, 2016, the Company purchased
$1.9 billion
of additional JD shares classified as available for sale securities, representing an additional ownership percentage of approximately
five percent
, for a total ownership of approximately
ten percent
of JD's outstanding ordinary shares.
On August 10, 2016, one of the Company's subsidiaries entered into a definitive agreement to sell Suburbia, the apparel retail division in Mexico for approximately
$1.0 billion
in total consideration, resulting in
$591 million
in current assets held for sale and
$163 million
in current liabilities held for sale as of October 31, 2016. The transaction is subject to regulatory approval and is expected to close in Fiscal 2018.
On September 19, 2016, the Company completed the acquisition of Jet.com, Inc., a U.S. based e-commerce company. The integration of Jet.com into Walmart U.S. e-commerce business will build upon the current e-commerce foundation, allowing for synergies from talent, logistical operations and access to a broader customer base. The total purchase price for the acquisition was
$2.4 billion
, net of cash acquired. The preliminary allocation of the purchase price includes
$1.7 billion
in goodwill and
$0.6 billion
in intangible assets. As part of the transaction, the Company will pay additional compensation in cash and equity of approximately
$0.8 billion
over a five year period. The Company began consolidating Jet.com's operations in the Walmart U.S. segment during the quarter ended October 31, 2016 and the acquisition is not significant to the Company's Consolidated Financial Statements.
Note 11. Segments
The Company is engaged in retail and wholesale operations located in the U.S., Argentina, Brazil, Canada, Chile, China, India, Japan, Mexico and the United Kingdom, as well as countries located in Africa and Central America. The Company's operations are conducted in three business segments: Walmart U.S., Walmart International and Sam's Club. The Company defines its segments as those operations whose 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 revenues for each of these individual products and services.
The Walmart U.S. segment includes the Company's mass merchant concept in the U.S. operating under the "Walmart" or "Wal-Mart" brands, as well as digital retail. The Walmart International segment consists of the Company's operations outside of the U.S., including various retail websites. The Sam's Club segment includes the warehouse membership clubs in the U.S., as well as samsclub.com. Corporate and support consists of corporate overhead and other items not allocated to any of the Company's segments.
The Company measures the results of its segments using, among other measures, each segment's net sales and 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 determined by the information regularly reviewed by its CODM. When the measurement of a segment changes, previous period amounts and balances are reclassified to be comparable to the current period's presentation.
Net sales by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
(Amounts in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net sales:
|
|
|
|
|
|
|
|
|
Walmart U.S.
|
|
$
|
74,550
|
|
|
$
|
72,712
|
|
|
$
|
224,086
|
|
|
$
|
216,916
|
|
Walmart International
|
|
28,390
|
|
|
29,811
|
|
|
85,094
|
|
|
90,726
|
|
Sam's Club
|
|
14,236
|
|
|
14,075
|
|
|
42,387
|
|
|
42,288
|
|
Net sales
|
|
$
|
117,176
|
|
|
$
|
116,598
|
|
|
$
|
351,567
|
|
|
$
|
349,930
|
|
Operating income by segment, as well as operating loss for corporate and support, and interest, net, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
(Amounts in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Walmart U.S.
|
|
$
|
3,999
|
|
|
$
|
4,506
|
|
|
$
|
12,750
|
|
|
$
|
13,964
|
|
Walmart International
|
|
1,354
|
|
|
1,338
|
|
|
4,245
|
|
|
3,685
|
|
Sam's Club
|
|
396
|
|
|
539
|
|
|
1,281
|
|
|
1,394
|
|
Corporate and support
|
|
(630
|
)
|
|
(669
|
)
|
|
(1,717
|
)
|
|
(1,580
|
)
|
Operating income
|
|
5,119
|
|
|
5,714
|
|
|
16,559
|
|
|
17,463
|
|
Interest, net
|
|
585
|
|
|
552
|
|
|
1,712
|
|
|
1,919
|
|
Income before income taxes
|
|
$
|
4,534
|
|
|
$
|
5,162
|
|
|
$
|
14,847
|
|
|
$
|
15,544
|
|