Walmart 2005 Annual Report Download - page 32

Management’s Discussion and Analysis of
Results of Operations and Financial Condition
W A L -M A R T
30 WAL-MART 2005 ANNUAL REPORT
At January 31, 2005 and 2004, the ratio of our debt to our total
capitalization was 39% and 38%, respectively. Our objective is
to maintain a debt to total capitalization ratio averaging approxi-
mately 40%.
Management believes that cash flows from operations and proceeds
from the sale of commercial paper will be sufficient to finance any
seasonal buildups in merchandise inventories and meet other cash
requirements. If our operating cash flows are not sufficient to pay
dividends and to fund our capital expenditures, we anticipate fund-
ing any shortfall in these expenditures with a combination of com-
mercial paper and long-term debt. We plan to refinance existing
long-term debt as it matures and may desire to obtain additional
long-term financing for other corporate purposes. We anticipate no
difficulty in obtaining long-term financing in view of our credit rat-
ing and favorable experiences in the debt market in the recent past.
At January 31, 2005, S&P, Moody’s Investors Services, Inc. and
Fitch Ratings rated our commercial paper A-1+, P-1 and F1+ and
our long-term debt AA, Aa2 and AA, respectively.
Future Expansion
Capital expenditures for fiscal 2006 are expected to be approxi-
mately $14 billion, including additions of capital leases. These
fiscal 2006 expenditures will include the construction of 40 to 45
new Discount Stores, 240 to 250 new Supercenters (with reloca-
tions or expansions accounting for approximately 160 of those
Supercenters), 25 to 30 new Neighborhood Markets, 30 to 40 new
SAM’S CLUBs and 155 to 165 new units in our International seg-
ment (with relocations or expansions accounting for approximately
30 of these units). We plan to finance this expansion primarily out
of cash flows from operations and with the issuance of commercial
paper and long-term debt.
Market Risk
In addition to the risks inherent in our operations, we are exposed
to certain market risks, including changes in interest rates and
changes in foreign exchange rates. In prior years, we presented our
market risk information in tabular format. We have changed the
presentation of this information to disclose a sensitivity analysis,
because we believe it provides a more meaningful representation of
our market risks.
The analysis presented for each of our market risk sensitive instru-
ments is based on a 10% change in interest or foreign currency
exchange rates. These changes are hypothetical scenarios used to
calibrate potential risk and do not represent our view of future
market changes. As the hypothetical figures indicate, changes in
fair value based on the assumed change in rates generally cannot be
extrapolated because the relationship of the change in assumption
to the change in fair value may not be linear. The effect of a variation
in a particular assumption is calculated without changing any other
assumption. In reality, changes in one factor may result in changes
in another, which may magnify or counteract the sensitivities.
At January 31, 2005 and 2004, we had $23.8 billion and
$20.0 billion, respectively, of long-term debt outstanding.
Our weighted average effective interest rate on long-term debt,
after considering the effect of interest rate swaps, was 4.08% and
3.97% at January 31, 2005 and 2004, respectively. A hypotheti-
cal 10% increase in interest rates in effect at January 31, 2005
and 2004, would have increased annual interest expense on
borrowings outstanding at those dates by $25 million and
$10 million, respectively.
We enter into interest rate swaps to minimize the risks and costs
associated with financing activities, as well as to maintain an appro-
priate mix of fixed- and floating-rate debt. Our preference is to
maintain approximately 50% of our debt portfolio, including interest
rate swaps, in floating-rate debt. The swap agreements are contracts
to exchange fixed- or variable-rates for variable- or fixed-interest rate
payments periodically over the life of the instruments. The aggre-
gate fair value of these swaps was a gain of approximately $471 mil-
lion and $681 million at January 31, 2005 and 2004, respectively. A
hypothetical increase (or decrease) of 10% in interest rates from the
level in effect at January 31, 2005, would result in a (loss) or gain in
value of the swaps of ($123 million) or $126 million, respectively. A
hypothetical increase (or decrease) of 10% in interest rates from the
level in effect at January 31, 2004, would result in a (loss) or gain in
value of the swaps of ($75 million) or $81 million, respectively.
We hold currency swaps to hedge the foreign currency exchange
component of our net investments in the United Kingdom and
Japan. In addition, we hold a cross-currency swap which hedges
the foreign currency risk of debt denominated in currencies other
than the local currency. The aggregate fair value of these swaps
at January 31, 2005 and 2004, was a loss of $169 million and
$71 million, respectively. A hypothetical 10% increase (or decrease)
in the foreign currency exchange rates underlying these swaps from
the market rate would result in a (loss) or gain in the value of the
swaps of ($90 million) and $71 million at January 31, 2005, and
($83 million) and $65 million at January 31, 2004. A hypothetical
10% change in interest rates underlying these swaps from the
market rates in effect at January 31, 2005 and 2004, would have
an insignificant impact on the value of the swaps.
We have designated debt of approximately £2.0 billion and £1.0 bil-
lion as of January 31, 2005 and 2004, respectively, as a hedge of
our net investment in the United Kingdom. At January 31, 2005,
a hypothetical 10% increase (or decrease) in value of the U.S. Dollar
relative to the British Pound would result in a gain (or loss) in the
value of the debt of $380 million. At January 31, 2004, a hypotheti-
cal 10% increase (or decrease) in value of the U.S. Dollar relative to
the British Pound would result in a gain (or loss) in the value of the
debt of $183 million.
Summary of Critical Accounting Policies
Management strives to report the financial results of the company
in a clear and understandable manner, even though in some cases
accounting and disclosure rules are complex and require us to use
technical terminology. In preparing our consolidated financial state-
ments, we follow accounting principles generally accepted in the
United States. These principles require us to make certain estimates
and apply judgments that affect our financial position and results of
operations as reflected in our financial statements. These judgments