Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended July 31, 2018.
or
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o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to .
Commission File Number 001-6991
WALMART INC.
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 71-0415188 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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702 S.W. 8th Street Bentonville, Arkansas | | 72716 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: (479) 273-4000
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | | ý | | Accelerated Filer | | o |
Non-Accelerated Filer | | o | | Smaller Reporting Company | | o |
| | | | Emerging Growth Company | | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The registrant had 2,928,734,576 shares of common stock outstanding as of September 4, 2018.
Walmart Inc.
Form 10-Q
For the Quarterly Period Ended July 31, 2018
Table of Contents
PART I. FINANCIAL INFORMATION
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Item 1. | Financial Statements |
Walmart Inc.
Condensed Consolidated Statements of Income
(Unaudited)
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| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(Amounts in millions, except per share data) | | 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | | | | | | | |
Net sales | | $ | 127,059 |
| | $ | 121,949 |
| | $ | 248,689 |
| | $ | 238,475 |
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Membership and other income | | 969 |
| | 1,406 |
| | 2,029 |
| | 2,422 |
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Total revenues | | 128,028 |
| | 123,355 |
| | 250,718 |
| | 240,897 |
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Costs and expenses: | | | | | | | | |
Cost of sales | | 95,571 |
| | 91,521 |
| | 187,278 |
| | 179,209 |
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Operating, selling, general and administrative expenses | | 26,707 |
| | 25,865 |
| | 52,536 |
| | 50,482 |
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Operating income | | 5,750 |
| | 5,969 |
| | 10,904 |
| | 11,206 |
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Interest: | | | | | | | | |
Debt | | 460 |
| | 522 |
| | 897 |
| | 1,028 |
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Capital lease and financing obligations | | 94 |
| | 91 |
| | 187 |
| | 183 |
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Interest income | | (51 | ) | | (38 | ) | | (94 | ) | | (73 | ) |
Interest, net | | 503 |
| | 575 |
| | 990 |
| | 1,138 |
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Loss on extinguishment of debt | | — |
| | 788 |
| | — |
| | 788 |
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Other (gains) and losses | | 4,849 |
| | — |
| | 6,694 |
| | — |
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Income before income taxes | | 398 |
| | 4,606 |
| | 3,220 |
| | 9,280 |
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Provision for income taxes | | 1,125 |
| | 1,502 |
| | 1,671 |
| | 3,024 |
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Consolidated net income (loss) | | (727 | ) | | 3,104 |
| | 1,549 |
| | 6,256 |
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Consolidated net income attributable to noncontrolling interest | | (134 | ) | | (205 | ) | | (276 | ) | | (318 | ) |
Consolidated net income (loss) attributable to Walmart | | $ | (861 | ) | | $ | 2,899 |
| | $ | 1,273 |
| | $ | 5,938 |
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| | | | | | | | |
Net income (loss) per common share: | | | | | | | | |
Basic net income (loss) per common share attributable to Walmart | | $ | (0.29 | ) | | $ | 0.96 |
| | $ | 0.43 |
| | $ | 1.97 |
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Diluted net income (loss) per common share attributable to Walmart | | (0.29 | ) | | 0.96 |
| | 0.43 |
| | 1.96 |
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| | | | | | | | |
Weighted-average common shares outstanding: | | | | | | | | |
Basic | | 2,946 |
| | 3,008 |
| | 2,948 |
| | 3,021 |
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Diluted | | 2,946 |
| | 3,021 |
| | 2,963 |
| | 3,034 |
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| | | | | | | | |
Dividends declared per common share | | $ | — |
| | $ | — |
| | $ | 2.08 |
| | $ | 2.04 |
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See accompanying notes.
Walmart Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
(Amounts in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Consolidated net income (loss) | $ | (727 | ) | | $ | 3,104 |
| | $ | 1,549 |
| | $ | 6,256 |
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Consolidated net income attributable to noncontrolling interest | (134 | ) | | (205 | ) | | (276 | ) | | (318 | ) |
Consolidated net income (loss) attributable to Walmart | (861 | ) | | 2,899 |
| | 1,273 |
| | 5,938 |
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| | | | | | | |
Other comprehensive income (loss), net of income taxes | | | | | | | |
Currency translation and other | (2,685 | ) | | 1,026 |
| | (1,220 | ) | | 2,185 |
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Net investment hedges | 193 |
| | (36 | ) | | 261 |
| | (149 | ) |
Cash flow hedges | (155 | ) | | 115 |
| | (232 | ) | | 143 |
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Minimum pension liability | 9 |
| | 27 |
| | 52 |
| | 32 |
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Unrealized gain on available-for-sale securities | — |
| | 727 |
| | — |
| | 1,208 |
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Other comprehensive income (loss), net of income taxes | (2,638 | ) | | 1,859 |
| | (1,139 | ) | | 3,419 |
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Other comprehensive (income) loss attributable to noncontrolling interest | 290 |
| | (5 | ) | | 127 |
| | (287 | ) |
Other comprehensive income (loss) attributable to Walmart | (2,348 | ) | | 1,854 |
| | (1,012 | ) | | 3,132 |
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Comprehensive income (loss), net of income taxes | (3,365 | ) | | 4,963 |
| | 410 |
| | 9,675 |
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Comprehensive (income) loss attributable to noncontrolling interest | 156 |
| | (210 | ) | | (149 | ) | | (605 | ) |
Comprehensive income (loss) attributable to Walmart | $ | (3,209 | ) | | $ | 4,753 |
| | $ | 261 |
| | $ | 9,070 |
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See accompanying notes.
Walmart Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
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| | | | | | | | | | | | |
| | July 31, | | January 31, | | July 31, |
(Amounts in millions) | | 2018 | | 2018 | | 2017 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 15,840 |
| | $ | 6,756 |
| | $ | 6,469 |
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Receivables, net | | 5,002 |
| | 5,614 |
| | 5,395 |
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Inventories | | 41,985 |
| | 43,783 |
| | 43,442 |
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Prepaid expenses and other | | 3,543 |
| | 3,511 |
| | 1,457 |
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Total current assets | | 66,370 |
| | 59,664 |
| | 56,763 |
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Property and equipment: | | | | | | |
Property and equipment | | 182,524 |
| | 185,154 |
| | 183,545 |
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Less accumulated depreciation | | (78,505 | ) | | (77,479 | ) | | (75,375 | ) |
Property and equipment, net | | 104,019 |
| | 107,675 |
| | 108,170 |
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Property under capital lease and financing obligations: | | | | | | |
Property under capital lease and financing obligations | | 12,545 |
| | 12,703 |
| | 12,581 |
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Less accumulated amortization | | (5,547 | ) | | (5,560 | ) | | (5,398 | ) |
Property under capital lease and financing obligations, net | | 6,998 |
| | 7,143 |
| | 7,183 |
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| | | | | | |
Goodwill | | 17,840 |
| | 18,242 |
| | 18,037 |
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Other long-term assets
| | 10,835 |
| | 11,798 |
| | 11,413 |
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Total assets | | $ | 206,062 |
| | $ | 204,522 |
| | $ | 201,566 |
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| | | | | | |
LIABILITIES AND EQUITY | | | | | | |
Current liabilities: | | | | | | |
Short-term borrowings | | $ | 444 |
| | $ | 5,257 |
| | $ | 3,262 |
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Accounts payable | | 43,128 |
| | 46,092 |
| | 42,389 |
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Dividends payable | | 3,057 |
| | — |
| | 3,057 |
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Accrued liabilities | | 22,846 |
| | 22,122 |
| | 19,686 |
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Accrued income taxes | | 424 |
| | 645 |
| | 505 |
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Long-term debt due within one year | | 1,090 |
| | 3,738 |
| | 3,254 |
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Capital lease and financing obligations due within one year | | 694 |
| | 667 |
| | 658 |
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Total current liabilities | | 71,683 |
| | 78,521 |
| | 72,811 |
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| | | | | | |
Long-term debt | | 44,958 |
| | 30,045 |
| | 33,706 |
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Long-term capital lease and financing obligations | | 6,610 |
| | 6,780 |
| | 6,763 |
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Deferred income taxes and other | | 8,999 |
| | 8,354 |
| | 9,240 |
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| | | | | | |
Commitments and contingencies | |
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| |
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Equity: | | | | | | |
Common stock | | 294 |
| | 295 |
| | 299 |
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Capital in excess of par value | | 2,710 |
| | 2,648 |
| | 2,352 |
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Retained earnings | | 80,810 |
| | 85,107 |
| | 84,838 |
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Accumulated other comprehensive loss | | (12,629 | ) | | (10,181 | ) | | (11,100 | ) |
Total Walmart shareholders' equity | | 71,185 |
| | 77,869 |
| | 76,389 |
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Noncontrolling interest | | 2,627 |
| | 2,953 |
| | 2,657 |
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Total equity | | 73,812 |
| | 80,822 |
| | 79,046 |
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Total liabilities and equity | | $ | 206,062 |
| | $ | 204,522 |
| | $ | 201,566 |
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See accompanying notes.
Walmart Inc.
Condensed Consolidated Statement of Shareholders' Equity
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated | | Total | | | | |
| | | | | Capital in | | | | Other | | Walmart | | | | |
(Amounts in millions) | Common Stock | | Excess of | | Retained | | Comprehensive | | Shareholders' | | Noncontrolling | | Total |
Shares | | Amount | | Par Value | | Earnings | | Loss | | Equity | | Interest | | Equity |
Balances as of February 1, 2018 | 2,952 |
| | $ | 295 |
| | $ | 2,648 |
| | $ | 85,107 |
| | $ | (10,181 | ) | | $ | 77,869 |
| | $ | 2,953 |
| | $ | 80,822 |
|
Adoption of new accounting standards on February 1, 2018, net of income taxes | — |
| | — |
| | — |
| | 2,361 |
| | (1,436 | ) | | 925 |
| | (1 | ) | | 924 |
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Consolidated net income | — |
| | — |
| | — |
| | 1,273 |
| | — |
| | 1,273 |
| | 276 |
| | 1,549 |
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Other comprehensive income (loss), net of income taxes | — |
| | — |
| | — |
| | — |
| | (1,012 | ) | | (1,012 | ) | | (127 | ) | | (1,139 | ) |
Cash dividends declared ($2.08 per share) | — |
| | — |
| | — |
| | (6,121 | ) | | — |
| | (6,121 | ) | | — |
| | (6,121 | ) |
Purchase of Company stock | (21 | ) | | (2 | ) | | (56 | ) | | (1,816 | ) | | — |
| | (1,874 | ) | | — |
| | (1,874 | ) |
Cash dividend declared to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (480 | ) | | (480 | ) |
Other | 4 |
| | 1 |
| | 118 |
| | 6 |
| | — |
| | 125 |
| | 6 |
| | 131 |
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Balances as of July 31, 2018 | 2,935 |
| | $ | 294 |
| | $ | 2,710 |
| | $ | 80,810 |
| | $ | (12,629 | ) | | $ | 71,185 |
| | $ | 2,627 |
| | $ | 73,812 |
|
See accompanying notes.
Walmart Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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| | | | | | | | |
| | Six Months Ended July 31, |
(Amounts in millions) | | 2018 | | 2017 |
Cash flows from operating activities: | | | | |
Consolidated net income | | $ | 1,549 |
| | $ | 6,256 |
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 5,332 |
| | 5,169 |
|
Unrealized (gains) and losses | | 1,939 |
| | — |
|
(Gains) and losses for disposal of business operations | | 4,755 |
| | — |
|
Deferred income taxes | | (117 | ) | | 94 |
|
Loss on extinguishment of debt | | — |
| | 788 |
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Other operating activities | | 469 |
| | (16 | ) |
Changes in certain assets and liabilities, net of effects of acquisitions: | | | | |
Receivables, net | | 257 |
| | 585 |
|
Inventories | | 441 |
| | 233 |
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Accounts payable | | (1,588 | ) | | 535 |
|
Accrued liabilities | | (1,702 | ) | | (1,720 | ) |
Accrued income taxes | | (240 | ) | | (564 | ) |
Net cash provided by operating activities | | 11,095 |
| | 11,360 |
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| | | | |
Cash flows from investing activities: | | | | |
Payments for property and equipment | | (4,282 | ) | | (4,423 | ) |
Proceeds from the disposal of property and equipment | | 205 |
| | 212 |
|
Proceeds from the disposal of certain operations | | — |
| | 1,012 |
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Payments for business acquisitions, net of cash acquired | | — |
| | (363 | ) |
Other investing activities | | (351 | ) | | 20 |
|
Net cash used in investing activities | | (4,428 | ) | | (3,542 | ) |
| | | | |
Cash flows from financing activities: | | | | |
Net change in short-term borrowings | | (4,761 | ) | | 2,144 |
|
Proceeds from issuance of long-term debt | | 15,851 |
| | 1,503 |
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Repayments of long-term debt | | (3,050 | ) | | (3,400 | ) |
Premiums paid to extinguish debt | | — |
| | (777 | ) |
Dividends paid | | (3,067 | ) | | (3,088 | ) |
Purchase of Company stock | | (1,844 | ) | | (4,447 | ) |
Dividends paid to noncontrolling interest | | (171 | ) | | (473 | ) |
Purchase of noncontrolling interest | | — |
| | (8 | ) |
Other financing activities | | (478 | ) | | (85 | ) |
Net cash provided by (used in) financing activities | | 2,480 |
| | (8,631 | ) |
| | | | |
Effect of exchange rates on cash, cash equivalents and restricted cash | | (299 | ) | | 432 |
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| | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 8,848 |
| | (381 | ) |
Cash, cash equivalents and restricted cash at beginning of year | | 7,014 |
| | 7,144 |
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Cash, cash equivalents and restricted cash at end of period | | $ | 15,862 |
| | $ | 6,763 |
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See accompanying notes.
Walmart Inc.
Notes to Condensed Consolidated Financial Statements
Note 1. Accounting Policies
Basis of Presentation
The Condensed Consolidated Financial Statements of Walmart 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, 2018 ("fiscal 2018"). 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 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 intervening events during the month of July 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.
Reclassifications
Certain reclassifications have been made to previous fiscal year amounts and balances to conform to the presentation in the current fiscal year. These reclassifications did not impact consolidated operating income or net income.
Inventories
At July 31, 2018 and January 31, 2018, the Company's inventories valued at LIFO approximated those inventories as if they were valued at FIFO.
Fair Value Measurement
In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-01, Financial Instruments–Overall (Topic 825), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments ("ASU 2016-01"). The Company adopted this ASU on February 1, 2018, which primarily impacted the Company's accounting for its investment in JD.com ("JD") and resulted in a positive adjustment to retained earnings of approximately $2.6 billion, net of tax, based on the market value of the Company's investment in JD at January 31, 2018. The adoption requires changes in fair value of the Company's investment in JD to be recorded in the Condensed Consolidated Statement of Income.
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 orderly 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. Refer to Note 5 for additional fair value disclosures. Revenue Recognition
In May 2014, the FASB issued 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. The Company adopted the ASU on February 1, 2018, using the modified retrospective approach and applied the ASU only to contracts not completed as of February 1, 2018. Updated accounting policies and other disclosures are below. Note 11 provides the related disaggregated revenue disclosures. The impact of adopting the ASU was not material to the Condensed Consolidated Financial Statements. Sales
The Company recognizes sales revenue, net of sales taxes and estimated sales returns, at the time it sells merchandise to the customer. eCommerce sales include shipping revenue and are recorded upon delivery to the customer. Additionally, estimated sales returns are calculated based on expected returns.
Membership Fee Revenue
The Company recognizes membership fee revenue both in the U.S. and internationally over the term of the membership, which is typically 12 months. Membership fee revenue is included in membership and other income in the Company's Condensed Consolidated Statements of Income. The deferred membership fee is included in accrued liabilities in the Company's Condensed Consolidated Balance Sheets.
Gift Cards
Customer purchases of gift cards, to be utilized at the Company's stores or eCommerce websites, are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card. Gift cards in the U.S. and some countries do not carry an expiration date; therefore, customers and members can redeem their gift cards for merchandise indefinitely. Gift cards in some countries where the Company does business have expiration dates. While gift cards are generally redeemed within 12 months, a certain number of gift cards, both with and without expiration dates, will not be fully redeemed. Management estimates unredeemed balances and recognizes revenue for these amounts in membership and other income in the Company's Condensed Consolidated Statements of Income over the expected redemption period. Management periodically reviews and updates its estimates.
Financial and Other Services
The Company recognizes revenue from service transactions at the time the service is performed. Generally, revenue from services is classified as a component of net sales in the Company's Condensed Consolidated Statements of Income.
Contract Balances
Contract balances as a result of transactions with customers primarily consist of receivables included in receivables, net, and deferred gift card revenue included in accrued liabilities in the Company's Condensed Consolidated Balance Sheets. The following table provides the Company's receivables and deferred gift card revenue from transactions with customers:
|
| | | | |
(Amounts in millions) | | As of July 31, 2018 |
Assets: | | |
Receivables from transactions with customers, net | | $ | 1,554 |
|
| | |
Liabilities: | | |
Deferred gift card revenue | | $ | 1,853 |
|
The deferred gift card revenue liability was $2.0 billion at January 31, 2018.
Income Taxes
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), in response to the Tax Cuts and Jobs Act of 2017 ("Tax Act"). The Company recorded a provisional benefit, as allowed by SAB 118, of $207 million during fiscal 2018 and an additional provisional expense of $123 million and benefit of $19 million during the three and six months ended July 31, 2018, respectively. The adjustments to the provisional amounts are related to refinements of the transition tax for changes in assumptions.
The Tax Act created a new requirement that certain income (i.e., global intangible low-taxed income or "GILTI") earned by controlled foreign corporations ("CFCs") must be included currently in the gross income of the CFCs’ U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is not yet able to reasonably estimate the long-term effects of this provision. Therefore, the Company has not yet recorded any potential deferred tax effects related to GILTI in the Condensed Consolidated Financial Statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method. The Company has, however, included an estimate of the current GILTI impact in the annual effective tax rate for fiscal 2019.
The Company has previously asserted all its unremitted earnings offshore were permanently reinvested. In the second quarter of fiscal 2019, the Company changed its repatriation assertion for certain historical and fiscal 2019 earnings. The Company now plans to repatriate approximately $5 billion of cash at a cost of approximately $80 million. The tax cost of repatriating historical earnings was recorded as a discrete tax charge in the current quarter, while the tax cost of repatriating current year earnings was included in the annualized effective tax rate. The Company is continuing its analysis and awaits anticipated technical guidance surrounding any potential repatriation plans beyond fiscal 2019. Final determination and disclosure will be made as more information is received, including guidance from the IRS and Treasury.
In addition to the GILTI and repatriation evaluations, management is also still evaluating the Tax Act with respect to the deferred tax remeasurement, transition tax and certain policy elections. The ultimate impacts of the Tax Act may differ from provisional amounts due to gathering additional information to more precisely compute the amount of tax, changes in
interpretations and assumptions, and additional regulatory guidance that may be issued. The Company expects to continue to revise the provisional amounts during the allowable measurement period of one year from the enactment as the Company refines its analysis of the new rules and as new guidance is issued.
In February 2018, the FASB issued Accounting Standards Update ASU 2018-02, Income Statement–Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). The ASU provides that the stranded tax effects from the Tax Act in accumulated other comprehensive loss may be reclassified to retained earnings. The Company adopted this ASU on February 1, 2018, which resulted in an immaterial adjustment to retained earnings.
The Company's U.S. statutory tax rate is 21%. The Company's effective income tax rate was 283% and 52% for the three and six months ended July 31, 2018, respectively. The loss related to the sale of a majority stake in the Company's retail operations in Brazil ("Walmart Brazil") increased the effective tax rate 227% and 28% for the three and six months ended July 31, 2018, respectively, as it provided minimal realizable tax benefit. Additionally, for the three months ended July 31, 2018, the adjustment in the provisional amount recorded related to the Tax Act increased the effective tax rate by 31%.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows–Restricted Cash (Topic 230), which requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the statement of cash flows. The Company adopted this ASU on February 1, 2018. Restricted cash held outside of cash and cash equivalents is primarily recorded in other-long term assets in the Condensed Consolidated Balance Sheets and was $22 million as of July 31, 2018 and was approximately $0.3 billion as of January 31, 2018 and July 31, 2017.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lease assets and liabilities to be recorded on the balance sheet. Certain qualitative and quantitative disclosures are also required. The Company will adopt this ASU and related amendments on February 1, 2019 and expects to elect certain practical expedients permitted under the transition guidance. Additionally, the Company will elect the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods. Management is implementing new lease systems in connection with the adoption of this ASU; however, these systems are still being developed to comply with the new ASU.
Although management continues to evaluate the effect to the Company's Condensed Consolidated Financial Statements and disclosures, management currently estimates total assets and liabilities will increase approximately $14 billion to $18 billion upon adoption, before considering deferred taxes. This estimate could change as the Company continues to progress with implementation and will also fluctuate based on the lease portfolio and discount rates as of the adoption date. Management does not expect a material impact to the Company’s Condensed Consolidated Statements of Income or Cash Flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326), which modifies the measurement of expected credit losses of certain financial instruments. The Company will adopt this ASU on February 1, 2020. Management is currently evaluating this ASU to determine its impact to the Company's Condensed Consolidated Financial Statements and disclosures.
Note 2. Net Income or Loss Per Common Share
Basic net income or loss per common share attributable to Walmart is based on the weighted-average common shares outstanding during the relevant period. Diluted net income or loss 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 anti-dilutive and not included in the calculation of diluted net income per common share attributable to Walmart for the three and six months ended July 31, 2018 and 2017. Further, the calculation of diluted net loss per common share attributable to Walmart for the three months ended July 31, 2018 does not include the effect of stock options and other share-based awards as their inclusion would be anti-dilutive, as it would reduce the net loss per common share. The following table provides a reconciliation of the numerators and denominators used to determine basic and diluted net income per common share attributable to Walmart:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(Amounts in millions, except per share data) | | 2018 | | 2017 | | 2018 | | 2017 |
Numerator | | | | | | | | |
Consolidated net income (loss) | | $ | (727 | ) | | $ | 3,104 |
| | $ | 1,549 |
| | $ | 6,256 |
|
Consolidated net income attributable to noncontrolling interest | | (134 | ) | | (205 | ) | | (276 | ) | | (318 | ) |
Consolidated net income (loss) attributable to Walmart | | $ | (861 | ) | | $ | 2,899 |
| | $ | 1,273 |
| | $ | 5,938 |
|
| | | | | | | | |
Denominator | | | | | | | | |
Weighted-average common shares outstanding, basic | | 2,946 |
| | 3,008 |
| | 2,948 |
| | 3,021 |
|
Dilutive impact of stock options and other share-based awards | | — |
| | 13 |
| | 15 |
| | 13 |
|
Weighted-average common shares outstanding, diluted | | 2,946 |
| | 3,021 |
| | 2,963 |
| | 3,034 |
|
| | | | | | | | |
Net income (loss) per common share attributable to Walmart | | | | | | | | |
Basic | | $ | (0.29 | ) | | $ | 0.96 |
| | $ | 0.43 |
| | $ | 1.97 |
|
Diluted | | (0.29 | ) | | 0.96 |
| | 0.43 |
| | 1.96 |
|
Note 3. Accumulated Other Comprehensive Loss
The following table provides the changes in the composition of total accumulated other comprehensive loss for the six months ended July 31, 2018: |
| | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in millions and net of income taxes) | | Currency Translation and Other | | Unrealized Gain on Available-for-Sale Securities | | Net Investment Hedges | | Cash Flow Hedges | | Minimum Pension Liability | | Total |
Balances as of February 1, 2018 | | $ | (12,136 | ) | | $ | 1,646 |
| | $ | 1,030 |
| | $ | 122 |
| | $ | (843 | ) | | $ | (10,181 | ) |
Adoption of new accounting standards on February 1, 2018(1) (2) | | 89 |
| | (1,646 | ) | | 93 |
| | 28 |
| | — |
| | (1,436 | ) |
Other comprehensive income (loss) before reclassifications, net(1) | | (1,093 | ) | | — |
| | 261 |
| | (257 | ) | | 29 |
| | (1,060 | ) |
Reclassifications to income, net(1) | | — |
| | — |
| | — |
| | 25 |
| | 23 |
| | 48 |
|
Balances as of July 31, 2018 | | $ | (13,140 | ) | | $ | — |
| | $ | 1,384 |
| | $ | (82 | ) | | $ | (791 | ) | | $ | (12,629 | ) |
(1) Income tax impact is immaterial
(2) Primarily relates to the adoption of ASU 2016-01 and ASU 2018-02
Amounts reclassified from accumulated other comprehensive loss to net income for derivative instruments are recorded in interest, net, in the Company's Condensed Consolidated Statements of Income, and amounts reclassified for the minimum pension liability are recorded in other gains and losses in the Company's Condensed Consolidated Statements of Income.
Note 4. Short-term Borrowings and Long-term Debt
The Company has various committed lines of credit in the U.S., committed with 22 financial institutions, used to support its commercial paper program. In May 2018, the Company renewed and extended its existing five year credit facility of $5.0 billion and renewed and extended its 364-day revolving credit facility and increased it to $10.0 billion from $7.5 billion. In total, the Company has committed lines of credit in the U.S. of $15.0 billion at July 31, 2018 and $12.5 billion at January 31, 2018, all undrawn.
The following table provides the changes in the Company's long-term debt for the six months ended July 31, 2018: |
| | | | | | | | | | | | |
(Amounts in millions) | | Long-term debt due within one year | | Long-term debt | | Total |
Balances as of February 1, 2018 | | $ | 3,738 |
|
| $ | 30,045 |
|
| $ | 33,783 |
|
Proceeds from issuance of long-term debt | | — |
|
| 15,851 |
|
| 15,851 |
|
Repayments of long-term debt | | (3,029 | ) |
| (21 | ) |
| (3,050 | ) |
Reclassifications of long-term debt | | 364 |
|
| (364 | ) |
| — |
|
Other | | 17 |
|
| (553 | ) |
| (536 | ) |
Balances as of July 31, 2018 | | $ | 1,090 |
|
| $ | 44,958 |
|
| $ | 46,048 |
|
Debt Issuances
Information on long-term debt issued during the six months ended July 31, 2018, to fund a portion of the purchase price for the Flipkart acquisition discussed in Note 10 and for general corporate purposes, is as follows: |
| | | | | | | | | | | | |
(Amounts in millions) | | | | | | | | | | |
Issue Date | | Principal Amount | | Maturity Date | | Fixed vs. Floating | | Interest Rate | | Net Proceeds |
June 27, 2018 | | 750 USD | | June 23, 2020 | | Floating | | Floating | | $ | 748 |
|
June 27, 2018 | | 1,250 USD | | June 23, 2020 | | Fixed | | 2.850% | | 1,247 |
|
June 27, 2018 | | 750 USD | | June 23, 2021 | | Floating | | Floating | | 748 |
|
June 27, 2018 | | 1,750 USD | | June 23, 2021 | | Fixed | | 3.125% | | 1,745 |
|
June 27, 2018 | | 2,750 USD | | June 26, 2023 | | Fixed | | 3.400% | | 2,740 |
|
June 27, 2018 | | 1,500 USD | | June 26, 2025 | | Fixed | | 3.550% | | 1,490 |
|
June 27, 2018 | | 2,750 USD | | June 26, 2028 | | Fixed | | 3.700% | | 2,725 |
|
June 27, 2018 | | 1,500 USD | | June 28, 2038 | | Fixed | | 3.950% | | 1,473 |
|
June 27, 2018 | | 3,000 USD | | June 29, 2048 | | Fixed | | 4.050% | | 2,935 |
|
Total | | | | | | | | | | $ | 15,851 |
|
These issuances are senior, unsecured notes which rank equally with all other senior, unsecured debt obligations of the Company, and are not convertible or exchangeable. These issuances do not contain any financial covenants and do not restrict the Company's ability to pay dividends or repurchase company stock.
Maturities
The following table provides details of debt repayments during the six months ended July 31, 2018: |
| | | | | | | | | | |
(Amounts in millions) | | | | | | | | |
Maturity Date | | Principal Amount | | Fixed vs. Floating | | Interest Rate | | Repayment |
February 15, 2018 | | 1,250 USD | | Fixed | | 5.800% | | $ | 1,250 |
|
April 11, 2018 | | 1,250 USD | | Fixed | | 1.125% | | 1,250 |
|
June 1, 2018 | | 500 USD | | Floating | | 5.498% | | 500 |
|
Various | | 50 USD | | Various | | Various | | 50 |
|
Total repayment of matured debt | | | | | | | | $ | 3,050 |
|
Annual maturities of long-term debt for the remainder of fiscal 2019, the next five years and thereafter are as follows:
|
| | | | |
(Amounts in millions) | | |
Fiscal year | | Maturities |
Remainder of 2019 | | $ | 699 |
|
2020 | | 1,875 |
|
2021 | | 5,326 |
|
2022 | | 3,086 |
|
2023 | | 2,851 |
|
Thereafter | | 32,211 |
|
Total | | $ | 46,048 |
|
Note 5. Fair Value Measurements
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. |
The Company has equity investments, primarily its investment in JD, measured at fair value on a recurring basis included in other long-term assets in the accompanying Condensed Consolidated Balance Sheet. Beginning in fiscal 2019 due to the adoption of the new financial instrument standard, changes in fair value are recorded in other gains and losses on the Condensed Consolidated Statements of Income. Additional detail about the Company's two portions of the investment in JD are as follows:
| |
• | The purchased portion of the investment in JD measured using Level 1 inputs, which prior to fiscal 2019 was classified as available-for-sale with changes in fair value recognized through other comprehensive income; and |
| |
• | The portion of the investment in JD received in exchange for selling certain assets related to Yihaodian, the Company's former eCommerce operations in China, measured using Level 2 inputs. Fair value is determined primarily using quoted prices in active markets for similar assets. Prior to fiscal 2019, the investment was carried at cost. |
Information for the cost basis, carrying value and fair value of the Company's investment in JD is as follows:
|
| | | | | | | | | | | | | | | | | | |
(Amounts in millions) | | Cost Basis | | Carrying Value as of January 31, 2018 | | Fair Value as of February 1, 2018 | | | Fair Value as of July 31, 2018 | |
Investment in JD measured using Level 1 inputs | | $ | 1,901 |
| | $ | 3,547 |
| | $ | 3,547 |
| (1) | | $ | 2,584 |
| |
Investment in JD measured using Level 2 inputs | | 1,490 |
| | 1,490 |
| | 3,559 |
| (2) | | 2,590 |
| |
Total | | $ | 3,391 |
| | $ | 5,037 |
| | $ | 7,106 |
| | | $ | 5,174 |
| (3) |
(1) Fair value was already recognized on the balance sheet. Upon adoption of the new financial instrument standard on February 1, 2018, the excess of fair value over cost was reclassified from accumulated other comprehensive loss to retained earnings.
(2) Upon adoption of the new financial instrument standard on February 1, 2018, the excess of fair value over cost was recognized by increasing the carrying value of the asset and retained earnings.
(3) The decreases in fair value for the three and six months ended July 31, 2018 of $0.1 billion and $1.9 billion, respectively, were recognized in net income and included in other gains and losses in the Company's Condensed Consolidated Statements of Income.
The Company also holds derivative instruments. Derivative 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 July 31, 2018 and January 31, 2018, the notional amounts and fair values of these derivatives were as follows:
|
| | | | | | | | | | | | | | | |
| July 31, 2018 | | January 31, 2018 |
(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 | $ | 4,000 |
| | $ | (145 | ) | | $ | 4,000 |
| | $ | (91 | ) |
Receive fixed-rate, pay fixed-rate cross-currency swaps designated as net investment hedges | 2,250 |
| | 318 |
| | 2,250 |
| | 208 |
|
Receive fixed-rate, pay fixed-rate cross-currency swaps designated as cash flow hedges | 4,236 |
| | (102 | ) | | 4,523 |
| | 205 |
|
Total | $ | 10,486 |
| | $ | 71 |
| | $ | 10,773 |
| | $ | 322 |
|
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.
As discussed in Note 10, the Company met the criteria to recognize Walmart Brazil as held for sale in the second quarter of fiscal 2019. Prior to meeting the held for sale criteria, the carrying values of the long-lived assets were concluded to be recoverable based upon cash flows expected to be generated over the assets' useful lives. When the sale of Walmart Brazil became probable, the Company reclassified the related assets and liabilities to held for sale and measured the disposal group at fair value, less costs to sell. The assets of the disposal group totaled $3.3 billion and were comprised of $1.0 billion in current assets, $1.6 billion in property and equipment and property under capital lease and financing obligations, net, and $0.7 billion of other long-term assets. These assets were fully impaired during the second quarter of fiscal 2019 as the carrying value of the disposal group exceeded the fair value, less costs to sell. This impairment charge was included in the $4.8 billion loss recorde
d in other gains and losses in the Company's Condensed Consolidated Statements of Income as part of the Walmart International segment for the three and six months ended July 31, 2018.
For the fiscal year ended January 31, 2018, the Company recorded impairment charges related to assets measured at fair value on a non-recurring basis of approximately $1.4 billion primarily related to the following:
| |
• | in the Sam's Club segment, $0.6 billion for restructuring charges for the Sam's Club closures for underperforming stores; the impaired assets consisted primarily of buildings and related store fixtures, and leased assets of its retail operations; |
| |
• | in the Walmart International segment, $0.2 billion for restructuring charges for the wind-down of the Brazil first-party eCommerce business; the impaired assets consisted primarily of fixtures and equipment; and |
| |
• | immaterial discontinued real estate projects in the Walmart U.S. and Sam's Club segments and decisions to exit certain international properties in the Walmart International segment. |
Other Fair Value Disclosures
The Company records cash and cash equivalents, restricted cash, 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 July 31, 2018 and January 31, 2018, are as follows:
|
| | | | | | | | | | | | | | | | |
| | July 31, 2018 | | January 31, 2018 |
(Amounts in millions) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Long-term debt, including amounts due within one year | | $ | 46,048 |
| | $ | 49,817 |
| | $ | 33,783 |
| | $ | 38,766 |
|
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 $224 million and $279 million at July 31, 2018 and January 31, 2018, 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 July 31, 2018 or January 31, 2018. The Company records cash collateral it posts with counterparties as amounts receivable from those counterparties exclusive of any derivative liability.
The contractual terms of the Company's hedged instruments closely mirror those of the hedged items, 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 July 2020 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 July 31, 2018 and January 31, 2018, the Company had ¥180 billion of outstanding long-term debt designated as a hedge of its net investment in Japan, as well as outstanding long-term debt of £1.7 billion at July 31, 2018 and January 31, 2018, 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: |
| | | | | | | | | | | | | | | | | | | | | | | |
| July 31, 2018 | | January 31, 2018 |
(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 long-term assets | $ | — |
| | $ | 318 |
| | $ | 121 |
| | $ | — |
| | $ | 208 |
| | $ | 300 |
|
| | | | | | | | | | | |
Derivative liabilities: | | | | | | | | | | | |
Deferred income taxes and other | 145 |
| | — |
| | 223 |
| | 91 |
| | — |
| | 95 |
|
| | | | | | | | | | | |
Nonderivative hedging instruments | | | | | | | | | | | |
Long-term debt | — |
| | 3,836 |
| | — |
| | — |
| | 4,041 |
| | — |
|
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. All repurchases made during the three and six months ended July 31, 2018, were made under the plan in effect at the beginning of the fiscal year. The current $20 billion share repurchase program approved in October 2017 has no expiration date or other restrictions limiting the period over which the Company can make share repurchases. As of July 31, 2018, authorization for $16.9 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 six months ended July 31, 2018 and 2017: |
| | | | | | | | |
| | Six Months Ended July 31, |
(Amounts in millions, except per share data) | | 2018 | | 2017 |
Total number of shares repurchased | | 20.8 |
| | 60.6 |
|
Average price paid per share | | $ | 88.81 |
| | $ | 73.38 |
|
Total amount paid for share repurchases | | $ | 1,844 |
| | $ | 4,447 |
|
Note 8. Common Stock Dividends
Dividends Declared
On February 20, 2018, the Board of Directors approved the fiscal 2019 annual dividend of $2.08 per share, an increase over the fiscal 2018 annual dividend of $2.04 per share. For fiscal 2019, the annual dividend will be paid in four quarterly installments of $0.52 per share, according to the following record and payable dates:
|
| | |
Record Date | | Payable Date |
March 9, 2018 | | April 2, 2018 |
May 11, 2018 | | June 4, 2018 |
August 10, 2018 | | September 4, 2018 |
December 7, 2018 | | January 2, 2019 |
The dividend installments payable on April 2, 2018, June 4, 2018, and September 4, 2018 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 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 26,000 equal value ("Equal Value") claims that began in 2008 and 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, and further claims may be asserted in the future. The claimants 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 compared 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. As a result, claimants are requesting differential back pay based on higher wage rates in the warehouse and distribution facilities and higher wage rates on a prospective basis.
On March 23, 2015, Asda asked the Employment Tribunal to stay all proceedings and to "strike out" substantially all of the claims because the claimants had not adhered to the Tribunal's procedural rule for including multiple claimants on the same claim form. On July 23, 2015, the Employment Tribunal denied Asda's requests. Following additional proceedings, on June 20, 2017, the Employment Appeal Tribunal ruled in favor of Asda on the "strike out" issue and remitted the matter to the Employment Tribunal to determine whether the improperly filed claims should be struck out. On July 12, 2017, claimants sought permission from the Court of Appeals to appeal this ruling, which was granted on October 3, 2017. A hearing before the Court of Appeals is scheduled for October 23, 2018.
As to the initial phase of the Equal Value claims, 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. On August 31, 2017, the Employment Appeal Tribunal affirmed the Employment Tribunal's ruling. The Employment Appeal Tribunal also granted permission for Asda to appeal substantially all of its findings on August 31, 2017. Asda sought permission to appeal the remainder of the Employment Appeal Tribunal's findings to the Court of Appeals on September 21, 2017. A hearing before the Court of Appeals is scheduled for October 10, 2018.
Claimants are now proceeding in 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.
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.
National Prescription Opiate Litigation and Related Matters
In December 2017, the United States Judicial Panel on Multidistrict Litigation ordered numerous lawsuits filed against a wide array of defendants by various plaintiffs be consolidated, including counties, cities, healthcare providers, Native American tribes, and third-party payors, asserting claims generally concerning the impacts of widespread opioid abuse. The consolidated multidistrict litigation is entitled In re National Prescription Opiate Litigation (MDL No. 2804), and is pending in the U.S. District Court for the Northern District of Ohio. The Company is named as a defendant in some of the cases included in this multidistrict litigation. Similar cases that name the Company have been filed in state courts by various counties and municipalities; by health care providers; and by various Native American Tribes. The relief sought by various plaintiffs is compensatory and punitive damages, as well as injunctive relief including abatement. 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 such claims. The Company believes it has substantial factual and legal defenses to these claims, and intends to defend the claims vigorously. The Company has also been responding to subpoenas, information requests and investigations from governmental entities related to nationwide controlled substance dispensing practices involving the sale of opioids. The Company can provide no assurance as to the scope and outcome of these matters and no assurance as to whether its business, financial position, results of operations or cash flows will not be materially adversely affected.
FCPA Investigation and Related Matters
The Audit Committee (the "Audit Committee") of the Board of Directors of the Company 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 or has operated, 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 been ongoing regarding the resolution of these matters. These discussions have progressed to a point that, in fiscal 2018, the Company reasonably estimated a probable loss and has recorded an aggregate accrual of $283 million with respect to these matters (the "Accrual"). As the discussions are continuing, there can be no assurance as to the timing or the terms of the final 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, and certain of its former directors, certain of its former officers and certain of Walmex's 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 six months ended July 31, 2018 and 2017, the Company incurred the following third-party expenses in connection with the FCPA investigation and related matters:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(Amounts in millions) | | 2018 | | 2017 | | 2018 | | 2017 |
Ongoing inquiries and investigations | | $ | 5 |
| | $ | 7 |
| | $ | 8 |
| | $ | 20 |
|
Global compliance program and organizational enhancements | | 3 |
| | 5 |
| | 7 |
| | 8 |
|
Total | | $ | 8 |
| | $ | 12 |
| | $ | 15 |
| | $ | 28 |
|
The Company does not presently believe that these matters, including the Accrual (and the payment of the Accrual at some point-in-time in the future), will have a material adverse effect on its business, financial position, results of operations or cash flows, although given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business, financial position, results of operations or cash flows in the future.
Note 10. Acquisitions, Disposals and Subsequent Events
The following significant transactions impact, or are expected to impact, the operations of the Company's Walmart International segment. Other immaterial transactions have also occurred or been announced.
Walmart Brazil
In June 2018, the Company agreed to sell an 80 percent stake of Walmart Brazil to Advent International ("Advent"). Under the terms, the Company may receive up to $250 million in contingent consideration, Advent will contribute additional capital to the business over a three-year period, and Walmart agreed to indemnify Advent for a fixed amount of certain pre-closing tax and legal contingencies and other matters ("the Indemnity"). As a result, the disposal group was classified as held for sale in the second quarter of fiscal 2019 and consisted of the following:
| |
• | Assets of $3.3 billion, which were fully impaired as discussed in Note 5 upon meeting the held for sale criteria; |
| |
• | Liabilities of $1.3 billion, consisting of $0.7 billion in accounts payable and accrued liabilities, $0.1 billion of capital lease and financing obligations, and $0.5 billion of deferred taxes and other long-term liabilities, which were reclassified to accrued liabilities upon meeting the held for sale criteria; and |
| |
• | Cumulative foreign currency translation loss of $2 billion, which will be reclassified from accumulated other comprehensive income in the third quarter of fiscal 2019 upon closure of the sale. |
The carrying value of the disposal group exceeded the fair value less costs to sell, and as a result, the Company recorded a pre-tax net loss of approximately $4.8 billion in other gains and losses in the Company's Condensed Consolidated Statement of Income in the second quarter of fiscal 2019. In calculating the loss, the fair value of the disposal group was reduced by approximately $800 million related to the estimated value of the Indemnity.
The sale was completed in August 2018. As a result, beginning in the third quarter of fiscal 2019, the Company will deconsolidate the financial statements of Walmart Brazil and account for its remaining 20 percent ownership interest, determined to have no initial value, using the equity method of accounting.
Flipkart
In August 2018, the Company acquired approximately 77 percent of the outstanding shares of Flipkart Group ("Flipkart"), an Indian-based eCommerce marketplace, for approximately $16 billion of cash, which includes $2 billion of new equity funding. The acquisition increases the Company's investment in India, a large, growing economy. To finance the acquisition, the Company used a combination of cash provided by long-term debt as discussed in Note 4 and cash on hand. Beginning in the third quarter of fiscal 2019, the Company will consolidate the financial statements of Flipkart, using a one-month lag, with the Company's Condensed Consolidated Financial Statements. Given the recent closure of the transaction, the Company is in the initial stages of the process to allocate the purchase price of Flipkart and does not yet have an initial allocation available. The Company currently expects the majority of the purchase price to be allocated to trade names and goodwill. Asda
In April 2018, the Company entered into a definitive agreement and announced the proposed combination of J Sainsbury plc and Asda Group Limited ("Asda Group"), the Company's wholly owned UK retail subsidiary. Under the terms of the combination, the Company would receive approximately 42 percent of the share capital of the combined company. In addition, the Company would receive approximately £3 billion in cash, subject to customary closing adjustments, and retain obligations under the Asda Group defined benefit pension plan. Due to a complex regulatory review process, the outcome of which is uncertain and may take some time to complete, the held for sale classification criteria for the disposal group has not been met as of July 31, 2018. Upon the transaction closing, the Company would deconsolidate the financial statements of Asda Group and account for the ongoing investment in the combined company using the equity method of accounting.
Suburbia
In April 2017, the Company sold Suburbia, the apparel retail division in Mexico, for $1.0 billion. As part of the sales agreement, the Company is also leasing certain real estate to the purchaser. The sale resulted in a pre-tax gain of $0.7 billion, of which $0.4 billion was recognized in the second quarter of fiscal 2018 in membership and other income, and the remainder was deferred and is being recognized over the lease terms of approximately 20 years.
Note 11. Segments and Disaggregated Revenue
Segments
The Company is engaged in the operation of retail, wholesale and other units, as well as eCommerce websites, located throughout the U.S., Africa, Argentina, Brazil, Canada, Central America, Chile, China, India, Japan, Mexico and the United Kingdom. The Company's operations are conducted in three reportable segments: Walmart U.S., Walmart International and Sam's Club. The Company defines its segments as those operations whose results the 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 entity-wide.
The Walmart U.S. segment includes the Company's mass merchant concept in the U.S., as well as eCommerce. The Walmart International segment consists of the Company's operations outside of the U.S., as well as eCommerce. The Sam's Club segment includes the warehouse membership clubs in the U.S., as well as eCommerce. 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. In fiscal 2019, the Company revised certain of its corporate overhead allocations to the operating segments and, accordingly, revised prior period amounts for comparability.
Net sales by segment are as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(Amounts in millions) | | 2018 |
| 2017 | | 2018 |
| 2017 |
Net sales: | | | | | | | | |
Walmart U.S. | | $ | 82,815 |
| | $ | 78,738 |
| | $ | 160,563 |
| | $ | 154,174 |
|
Walmart International | | 29,454 |
| | 28,331 |
| | 59,714 |
| | 55,428 |
|
Sam's Club | | 14,790 |
| | 14,880 |
| | 28,412 |
| | 28,873 |
|
Net sales | | $ | 127,059 |
| | $ | 121,949 |
| | $ | 248,689 |
| | $ | 238,475 |
|
Operating income by segment, as well as operating loss for corporate and support, interest, net, loss on extinguishment of debt and other gains and losses are as follows: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(Amounts in millions) | | 2018 |
| 2017 | | 2018 | | 2017 |
Operating income (loss): | | | | | | | | |
Walmart U.S. | | $ | 4,479 |
| | $ | 4,417 |
| | $ | 8,406 |
| | $ | 8,469 |
|
Walmart International | | 1,269 |
| | 1,568 |
| | 2,534 |
| | 2,707 |
|
Sam's Club | | 402 |
| | 391 |
| | 727 |
| | 790 |
|
Corporate and support | | (400 | ) | | (407 | ) | | (763 | ) | | (760 | ) |
Operating income | | 5,750 |
| | 5,969 |
| | 10,904 |
| | 11,206 |
|
Interest, net | | 503 |
| | 575 |
| | 990 |
| | 1,138 |
|
Loss on extinguishment of debt | | — |
| | 788 |
| | — |
| | 788 |
|
Other (gains) and losses | | 4,849 |
| | — |
| | 6,694 |
| | — |
|
Income before income taxes | | $ | 398 |
| | $ | 4,606 |
| | $ | 3,220 |
| | $ | 9,280 |
|
Disaggregated Revenues
In the following tables, segment net sales are disaggregated by either merchandise category or market. In addition, net sales related to eCommerce are provided for each segment, which include omni-channel sales, where a customer initiates an order online and the order is fulfilled through a store or club.
|
| | | | | | | | |
(Amounts in millions) | | Three Months Ended July 31, 2018 | | Six Months Ended July 31, 2018 |
Walmart U.S. net sales by merchandise category | | |
Grocery | | $ | 45,991 |
| | $ | 89,851 |
|
General merchandise | | 27,305 |
| | 51,479 |
|
Health and wellness | | 8,837 |
| | 17,965 |
|
Other categories | | 682 |
| | 1,268 |
|
Total | | $ | 82,815 |
| | $ | 160,563 |
|
Of Walmart U.S.'s total net sales, approximately $3.5 billion and $6.6 billion related to eCommerce for the three and six months ended July 31, 2018, respectively.
|
| | | | | | | | |
(Amounts in millions) | | Three Months Ended July 31, 2018 | | Six Months Ended July 31, 2018 |
Walmart International net sales by market | | |
Mexico and Central America | | $ | 7,510 |
| | $ | 15,194 |
|
United Kingdom | | 7,650 |
| | 15,165 |
|
Canada | | 4,703 |
| | 8,957 |
|
China | | 2,480 |
| | 5,685 |
|
Other | | 7,111 |
| | 14,713 |
|
Total | | $ | 29,454 |
| | $ | 59,714 |
|
Of International's total net sales, approximately $1.0 billion and $1.9 billion related to eCommerce for the three and six months ended July 31, 2018, respectively.
|
| | | | | | | | |
(Amounts in millions) | | Three Months Ended July 31, 2018 |
| Six Months Ended July 31, 2018 |
Sam’s Club net sales by merchandise category | |
|
Grocery and consumables | | $ | 8,585 |
| | $ | 16,597 |
|
Fuel, tobacco and other categories | | 3,261 |
| | 6,180 |
|
Home and apparel | | 1,398 |
| | 2,600 |
|
Health and wellness | | 789 |
| | 1,590 |
|
Technology, office and entertainment | | 757 |
| | 1,445 |
|
Total | | $ | 14,790 |
| | $ | 28,412 |
|
Of Sam's Club's total net sales, approximately $0.7 billion and $1.2 billion related to eCommerce for the three and six months ended July 31, 2018, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Walmart Inc. ("Walmart," the "Company," "our," or "we") is engaged in retail and wholesale operations in various formats around the world. Through our operations, we help people around the world save money and live better – anytime and anywhere – in retail stores and through eCommerce. Through innovation, we are striving to create a customer-centric experience that seamlessly integrates digital and physical shopping into an omni-channel offering that saves time for our customers. Physical retail encompasses our brick and mortar presence in each of the markets in which we operate. Digital retail, or eCommerce, is comprised of our eCommerce websites, mobile commerce applications and transactions involving both an eCommerce platform and a physical format, which we refer to as omni-channel. As of July 31, 2018 and prior to the sale of a majority stake of our retail operations in Brazil ("Walmart Brazil") discussed below, each week we served nearly 270 million customers who visit our more than 11,700 stores and numerous eCommerce websites under 65 banners in 28 countries. Our strategy is to lead on price, invest to differentiate on access, be competitive on assortment and deliver a great experience. By leading on price we earn the trust of our customers every day by providing a broad assortment of quality merchandise and services at everyday low prices ("EDLP"). EDLP is our pricing philosophy under which we price items at a low price every day so our customers trust that our prices will not change under frequent promotional activity. Price leadership is core to who we are. Everyday low cost ("EDLC") is our commitment to control expenses so our cost savings can be passed along to our customers. Our physical and digital presence, in which we are investing to integrate into a seamless omni-channel, provides customers convenient access to our broad assortment anytime and anywhere. We strive to give our customers and members a great shopping experience through whichever shopping method they prefer.
Our operations consist of three reportable segments: Walmart U.S., Walmart International and Sam's Club.
| |
• | Walmart U.S. is our largest segment with three primary store formats and eCommerce, as well as an omni-channel offering. Of our three reportable segments, Walmart U.S. has historically had the highest gross profit as a percentage of net sales ("gross profit rate"). In addition, it has historically contributed the greatest amount to the Company's net sales and operating income. |
| |
• | Walmart International consists of our operations outside of the U.S. and includes retail, wholesale and other businesses. These categories, including eCommerce, consist of many formats, including: supercenters, supermarkets, hypermarkets, warehouse clubs (including Sam's Clubs) and cash & carry. Overall gross profit rate for Walmart International is lower than that of Walmart U.S. primarily because of its merchandise mix. Walmart International is our second largest segment and has grown in recent years by adding retail, wholesale and other units, and expanding eCommerce. |
| |
• | Sam's Club consists of membership-only warehouse clubs as well as eCommerce through samsclub.com. As a membership-only warehouse club, membership income is a significant component of the segment's operating income. Sam's Club operates with a lower gross profit rate and lower operating expenses as a percentage of net sales than our other segments. |
Each of our segments contributes to the Company's operating results differently. Each, however, has generally maintained a consistent contribution rate to the Company's net sales and operating income in recent years other than minor changes to the contribution rate for the Walmart International segment due to fluctuations in currency exchange rates. Recently, we took some strategic actions to further position our portfolio for long-term growth, including:
| |
• | Acquisition of approximately 77 percent of the outstanding shares of Flipkart Group ("Flipkart"), an Indian-based eCommerce marketplace, in August 2018 for approximately $16 billion in cash (the "Flipkart Acquisition"). Beginning in the third quarter of fiscal 2018, we will consolidate the financial statements of Flipkart using a one-month lag. Given the recent closure of the transaction, we are in the initial stages of the process to allocate the purchase price of Flipkart and do not yet have an initial allocation available. We currently expect the majority of the purchase price to be allocated to trade names and goodwill. We also expect the ongoing operations of Flipkart to negatively impact fiscal 2019 and 2020 net income, including additional interest expense due to the long-term debt issuance in the second quarter of of fiscal 2019. |
| |
• | Proposed combination of J Sainsbury plc and Asda Group Limited ("Asda"), our wholly owned United Kingdom retail subsidiary. Under the terms, we would receive approximately 42 percent of the share capital of the combined company and approximately £3.0 billion in cash, subject to customary closing adjustments, while retaining obligations under the Asda defined benefit pension plan. Due to a complex regulatory review process, the outcome of which is uncertain and may take some time to complete, the held for sale classification criteria for the disposal group has not been met as of July 31, 2018. Upon meeting the held for sale classification criteria for the disposal group, we expect to recognize a loss, the amount of which may fluctuate based on the changes in the value of share capital received and foreign exchange rates. |
| |
• | Divestiture of 80 percent of Walmart Brazil to Advent International (“Advent”) in August 2018. We may receive up to $250 million in contingent consideration, Advent will contribute additional capital to the business over a three-year period, and we agreed to indemnify Advent for a fixed amount of certain pre-closing tax and legal contingencies and other matters. When the sale became probable, we recorded a pre-tax net loss of approximately $4.8 billion in the second quarter of fiscal 2019. |
| |
• | Proposed divestitures of the banking operations in Walmart Canada and Walmart Chile, both classified as held for sale as of July 31, 2018, and subject to closing procedures, consistent with our focus on core retail capabilities. |
Our fiscal year ends on January 31 for our U.S. and Canadian operations. We consolidate all other operations generally using a one-month lag and on a calendar year basis. Our business is seasonal to a certain extent due to calendar events and national and religious holidays, as well as weather patterns. Historically, our highest sales volume and operating income have occurred in the fiscal quarter ending January 31.
This discussion, which presents our results for periods occurring in the fiscal year ending January 31, 2019 ("fiscal 2019") and the fiscal year ended January 31, 2018 ("fiscal 2018"), should be read in conjunction with our Condensed Consolidated Financial Statements as of and for the three and six months ended July 31, 2018, and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Consolidated Financial Statements as of and for the year ended January 31, 2018, the accompanying notes and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report of Form 10-K for the year ended January 31, 2018 incorporated by reference. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes. We also discuss certain performance metrics that management uses to assess the Company's performance. Additionally, the discussion provides information about the financial results of each of the three segments of our business to provide a better understanding of how each of those segments and its results of operations affect the financial condition and results of operations of the Company as a whole.
Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations, we discuss segment operating income, comparable store and club sales and other measures. Management measures the results of the Company's segments using each segment's operating income, including certain corporate overhead allocations, as well as other measures. From time to time, we revise the measurement of each segment's operating income and other measures as determined by the information regularly reviewed by our chief operating decision maker. In fiscal 2019, the Company revised certain of its corporate overhead allocations to the operating segments and, accordingly, revised prior period amounts for comparability.
Comparable store and club sales, or comparable sales, is a metric that indicates the performance of our existing stores and clubs by measuring the change in sales for such stores and clubs, including eCommerce sales, for a particular period from the corresponding period in the previous year. Walmart's definition of comparable sales includes sales from stores and clubs open for the previous 12 months, including remodels, relocations, expansions and conversions, as well as eCommerce sales. We measure the eCommerce sales impact by including all sales initiated online or though mobile applications, including omni-channel transactions which are fulfilled through our stores and clubs. Sales at a store that has changed in format are excluded from comparable sales when the conversion of that store is accompanied by a relocation or expansion that results in a change in the store's retail square feet of more than five percent. Additionally, sales related to eCommerce acquisitions are excluded until such acquisitions have been owned for 12 months. Comparable sales are also referred to as "same-store" sales by others within the retail industry. The method of calculating comparable sales varies across the retail industry. As a result, our calculation of comparable sales is not necessarily comparable to similarly titled measures reported by other companies.
In discussing our operating results, we use the term "currency exchange rates" to refer to the currency exchange rates we use to convert the operating results for all countries where the functional currency is not the U.S. dollar into U.S. dollars for financial reporting purposes. We calculate the effect of changes in currency exchange rates from the prior period to the current period as the difference between current period activity translated using the current period's currency exchange rates, and current period activity translated using the comparable prior year period's currency exchange rates. Throughout our discussion, we refer to the results of this calculation as the impact of currency exchange rate fluctuations. Volatility in currency exchange rates may impact the results, including net sales and operating income, of the Company and the Walmart International segment in the future.
The Retail Industry
We operate in the highly competitive retail industry in all of the markets we serve. We face strong sales competition from other discount, department, drug, dollar, variety and specialty stores, warehouse clubs and supermarkets, as well as eCommerce businesses. Many of these competitors are national, regional or international chains or have a national or international online presence. We compete with a number of companies for prime retail site locations, as well as in attracting and retaining quality employees ("associates"). We, along with other retail companies, are influenced by a number of factors including, but not limited to: catastrophic events, weather, competitive pressures, consumer disposable income, consumer debt levels and buying patterns, consumer credit availability, cost of goods, currency exchange rate fluctuations, customer preferences, deflation, inflation, fuel and energy prices, general economic conditions, insurance costs, interest rates, labor costs, tax rates, cybersecurity attacks and unemployment.
Company Performance Metrics
We are committed to helping customers save money and live better through everyday low prices, supported by everyday low costs. At times, we adjust our business strategies to maintain and strengthen our competitive positions in the countries in which we operate. We define our financial framework as:
| |
• | strong, efficient growth; |
| |
• | operating discipline; and |
| |
• | strategic capital allocation. |
As we execute on this financial framework, we believe our returns on capital will improve over time.
Strong, Efficient Growth
Our objective of prioritizing strong, efficient growth means we will focus on increasing comparable store and club sales and accelerating eCommerce sales growth while slowing the rate of growth of new stores and clubs. At times, we make strategic investments which are focused on the long-term growth of the Company.
Comparable sales is a metric that indicates the performance of our existing stores and clubs by measuring the change in sales for such stores and clubs, including eCommerce sales, for a particular period over the corresponding period in the previous year. The retail industry generally reports comparable sales using the retail calendar (also known as the 4-5-4 calendar). To be consistent with the retail industry, we provide comparable sales using the retail calendar in our quarterly earnings releases. However, when we discuss our comparable sales below, we are referring to our calendar comparable sales calculated using our fiscal calendar. As our fiscal calendar differs from the retail calendar, our fiscal calendar comparable sales also differ from the retail calendar comparable sales provided in our quarterly earnings releases. Calendar comparable sales, as well as the impact of fuel, for the three and six months ended July 31, 2018, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| | With Fuel | | Fuel Impact | | With Fuel | | Fuel Impact |
Walmart U.S. | | 4.7 | % | | 1.7 | % | | 0.2 | % | | 0.1 | % | | 3.5 | % | | 1.4 | % | | 0.1 | % | | 0.1 | % |
Sam's Club | | 7.6 | % | | 1.5 | % | | 2.6 | % | | 0.2 | % | | 6.5 | % | | 1.8 | % | | 2.1 | % | | 0.8 | % |
Total U.S. | | 5.1 | % | | 1.6 | % | | 0.5 | % | | 0.0 | % | | 4.0 | % | | 1.4 | % | | 0.5 | % | | 0.1 | % |
Comparable sales in the U.S., including fuel, increased 5.1% and 4.0% for the three and six months ended July 31, 2018, respectively, when compared to the same period in the previous fiscal year. Total U.S. comparable sales were driven by strong comparable sales growth at both the Walmart U.S. and Sam's Club segments. The Walmart U.S. segment had growth of 4.7% and 3.5% for the three and six months ended July 31, 2018, respectively, driven by ticket and traffic growth, and aided by warmer weather in the second quarter. For the three and six months ended July 31, 2018, the Walmart U.S. segment's eCommerce sales positively impacted comparable sales by approximately 1.1% and 0.9%, respectively. Comparable sales at the Sam's Club segment were 7.6% and 6.5% for the three and six months ended July 31, 2018, respectively, driven by strong traffic, which is partially due to transfers of sales from our closed clubs to our existing clubs. The increase in comparable sales at the Sam's Club segment was partially offset by reduced tobacco sales. The Sam's Club segment's eCommerce sales positively impacted comparable sales by approximately 0.9% for both the three and six months ended July 31, 2018.
Operating Discipline
We operate with discipline by managing expenses and optimizing the efficiency of how we work. We measure operating discipline through expense leverage, which we define as net sales growing at a faster rate than operating, selling, general and administrative ("operating") expenses.
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| | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
(Amounts in millions, except unit counts) | | 2018 | | 2017 | | 2018 | | 2017 |
Net sales | | $ | 127,059 |
| | $ | 121,949 |
| | $ | 248,689 |
| | $ | 238,475 |
|
Percentage change from comparable period | | 4.2 | % | | 2.1 | % | | 4.3 | % | | 1.7 | % |
Operating, selling, general and administrative expenses | | $ | 26,707 |
| | $ | 25,865 |
| | $ | 52,536 |
| | $ | 50,482 |
|
Percentage change from comparable period | | 3.3 | % | | 2.6 | % | | 4.1 | % | | 2.4 | % |
Operating, selling, general and administrative expenses as a percentage of net sales | | 21.0 | % | | 21.2 | % | | 21.1 | % | | 21.2 | % |
For the three and six months ended July 31, 2018, we leveraged operating expenses, which decreased 19 and 4 basis points as a percentage of net sales when compared to the same periods in the previous fiscal year. The primary driver of the expense leverage was Walmart U.S. strong sales performance in conjunction with productivity improvements that more than offset investments in eCommerce and technology.
Strategic Capital Allocation
We are allocating more capital to store remodels, eCommerce, technology and supply chain and less to new store and club openings, when compared to prior years. This allocation aligns with our initiatives of improving our customer proposition in stores and clubs and integrating digital and physical shopping. The following table provides additional detail:
|
| | | | | | | | |
(Amounts in millions) | | Six Months Ended July 31, |
Allocation of Capital Expenditures | | 2018 | | 2017 |
Remodels | | $ | 1,117 |
| | $ | 1,124 |
|
eCommerce, technology, supply chain and other | | 1,972 |
| | 1,776 |
|
New stores and clubs, including expansions and relocations | | 182 |
| | 520 |
|
Total U.S. | | 3,271 |
| | 3,420 |
|
Walmart International | | 1,011 |
| | 1,003 |
|
Total capital expenditures | | $ | 4,282 |
| | $ | 4,423 |
|
Although capital expenditures remained relatively flat in total, how we expended capital varied consistent with our shift in capital allocation strategy.
Returns
As we execute our financial framework, we believe our return on capital will improve over time. We measure return on capital with our return on investment and free cash flow metrics. In addition, we provide returns in the form of share repurchases and dividends, which are discussed in the Liquidity and Capital Resources section. Return on Assets and Return on Investment
We include Return on Assets ("ROA"), the most directly comparable measure based on our financial statements presented in accordance with generally accepted accounting principles in the U.S. ("GAAP"), and Return on Investment ("ROI") as metrics to assess returns on assets. While ROI is considered a non-GAAP financial measure, management believes ROI is a meaningful metric to share with investors because it helps investors assess how effectively Walmart is deploying its assets. Trends in ROI can fluctuate over time as management balances long-term strategic initiatives with possible short-term impacts. ROA was 2.9% and 6.7% for the trailing twelve months ended July 31, 2018 and 2017, respectively. The decline in ROA was primarily due to the decrease in consolidated net income over the trailing twelve months which was the result of the $4.5 billion net loss related to the sale of a majority stake in Walmart Brazil, losses on extinguishment of debt in the third and fourth quarters of fiscal 2018, losses on our JD.com investment, and restructuring and impairment charges in the fourth quarter of fiscal 2018. ROI was 13.8% and 15.0% for the trailing twelve months ended July 31, 2018 and 2017, respectively. The decline in ROI was due to the decrease in operating income over the trailing twelve months, which was primarily driven by the restructuring and impairment charges in the fourth quarter of fiscal 2018. Additionally, an increase in average total assets also contributed to the decline of ROI, primarily driven by our higher cash balance at July 31, 2018 as a result of our recent $15.9 billion net proceeds from issuance of long-term debt and changes in the value of our JD.com investment.
We define ROI as adjusted operating income (operating income plus interest income, depreciation and amortization, and rent expense) for the trailing 12 months divided by average invested capital during that period. We consider average invested capital to be the average of our beginning and ending total assets, plus average accumulated depreciation and average amortization, less average accounts payable and average accrued liabilities for that period, plus a rent factor equal to the rent for the fiscal year or trailing 12 months multiplied by a factor of 8. When we have discontinued operations, we exclude the impact of the discontinued operations.
Our calculation of ROI is considered a non-GAAP financial measure because we calculate ROI using financial measures that exclude and include amounts that are included and excluded in the most directly comparable GAAP financial measure. For example, we exclude the impact of depreciation and amortization from our reported operating income in calculating the numerator of our calculation of ROI. In addition, we include a factor of 8 for rent expense that estimates the hypothetical capitalization of our operating leases. As mentioned above, we consider return on assets to be the financial measure computed in accordance with generally accepted accounting principles most directly comparable to our calculation of ROI. ROI differs from ROA (which is consolidated net income for the period divided by average total assets for the period) because ROI: adjusts operating income to exclude certain expense items and adds interest income; adjusts total assets for the impact of accumulated depreciation and amortization, accounts payable and accrued liabilities; and incorporates a factor of rent to arrive at total invested capital. Because of the adjustments mentioned above, we believe ROI more accurately measures how we are deploying our key assets and is more meaningful to investors than ROA.
Although ROI is a standard financial measure, numerous methods exist for calculating a company's ROI. As a result, the method used by management to calculate our ROI may differ from the methods used by other companies to calculate their ROI.
The calculation of ROA and ROI, along with a reconciliation of ROI to the calculation of ROA, the most comparable GAAP financial measure, is as follows: |
| | | | | | | | |
| | For the Trailing Twelve Months Ending July 31, |
(Amounts in millions) | | 2018 | | 2017 |
CALCULATION OF RETURN ON ASSETS |
Numerator | | | | |
Consolidated net income | | $ | 5,816 |
| | $ | 13,444 |
|
Denominator | | | | |
Average total assets(1) | | $ | 203,814 |
| | $ | 199,726 |
|
Return on assets (ROA) | | 2.9 | % | | 6.7 | % |
| | | | |
CALCULATION OF RETURN ON INVESTMENT |
Numerator | | | | |
Operating income | | $ | 20,135 |
| | $ | 22,530 |
|
+ Interest income | | 173 |
| | 127 |
|
+ Depreciation and amortization | | 10,692 |
| | 10,344 |
|
+ Rent | | 3,064 |
| | 2,608 |
|
= Adjusted operating income | | $ | 34,064 |
| | $ | 35,609 |
|
| | | | |
Denominator | | | | |
Average total assets(1) | | $ | 203,814 |
| | $ | 199,726 |
|
+ Average accumulated depreciation and amortization(1) | | 82,413 |
| | 77,752 |
|
- Average accounts payable(1) | | 42,759 |
| | 41,146 |
|
- Average accrued liabilities(1) | | 21,266 |
| | 19,669 |
|
+ Rent x 8 | | 24,512 |
| | 20,864 |
|
= Average invested capital | | $ | 246,714 |
| | $ | 237,527 |
|
Return on investment (ROI) | | 13.8 | % | | 15.0 | % |
|
| | | | | | | | | | | | |
| | As of July 31, |
| | 2018 | | 2017 | | 2016 |
Certain Balance Sheet Data | | | | | | |
Total assets | | $ | 206,062 |
| | $ | 201,566 |
| | $ | 197,886 |
|
Accumulated depreciation and amortization | | 84,052 |
| | 80,773 |
| | 74,730 |
|
Accounts payable | | 43,128 |
| | 42,389 |
| | 39,902 |
|
Accrued liabilities | | 22,846 |
| | 19,686 |
| | 19,651 |
|
(1) The average is based on the addition of the account balance at the end of the current period to the account balance at the end of the prior period and dividing by 2.
Free Cash Flow
Free cash flow is considered a non-GAAP financial measure. Management believes, however, that free cash flow, which measures our ability to generate additional cash from our business operations, is an important financial measure for use in evaluating the Company's financial performance. Free cash flow should be considered in addition to, rather than as a substitute for, consolidated net income as a measure of our performance and net cash provided by operating activities as a measure of our liquidity. See Liquidity and Capital Resources for discussions of GAAP metrics including net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities. We define free cash flow as net cash provided by operating activities in a period minus payments for property and equipment made in the same period. We had net cash provided by operating activities of $11.1 billion and $11.4 billion for the six months ended July 31, 2018 and 2017, respectively. The decrease in net cash provided by operating activities was primarily due to the timing of vendor payments, partially offset by a decrease in tax payments primarily as a result of the Tax Reform and Jobs Act of 2017 ("Tax Reform"). We generated free cash flow of $6.8 billion for the six months ended July 31, 2018, which was relatively flat compared to $6.9 billion for the six months ended July 31, 2017.
Walmart's definition of free cash flow is limited in that it does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Condensed Consolidated Statements of Cash Flows.
Although other companies report their free cash flow, numerous methods may exist for calculating a company's free cash flow. As a result, the method used by Walmart's management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow.
The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow, as well as information regarding net cash used in investing activities and net cash used in financing activities.