Walmart 2006 Annual Report Download - page 29

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In connection with the development of our grocery distribution
network in the United States, we have agreements with third par-
ties which would require us to purchase or assume the leases on
certain unique equipment in the event the agreements are termi-
nated. These agreements, which can be terminated by either party
at will, cover up to a fi ve-year period and obligate the Company to
pay up to approximately $233 million upon termination of some
or all of these agreements.
There are no recourse provisions which would enable us to
recover from third parties any amounts paid under the above
guarantees. No liability for these guarantees has been recorded
in our fi nancial statements.
The Company has entered into lease commitments for land and
buildings for 60 future locations. These lease commitments with real
estate developers provide for minimum rentals ranging from fi ve to
35 years, which, if consummated based on current cost estimates,
will approximate $95 million annually over the lease terms.
Capital Resources
During fi scal 2006, we issued $7.7 billion of long-term debt. The
net proceeds from the issuance of such long-term debt were used
to repay outstanding commercial paper indebtedness and for other
general corporate purposes.
At January 31, 2006 and 2005, the ratio of our debt to our total
capitalization was 42% and 39%, respectively. The fi scal 2006 con-
solidation of Seiyu and purchase of Sonae increased our debt to
total capitalization at January 31, 2006, by 2.5 percentage points.
Our objective is to maintain a debt to total capitalization ratio
averaging approximately 40%.
Management believes that cash fl ows from operations and pro-
ceeds from the sale of commercial paper will be suffi cient to
fi nance any seasonal buildups in merchandise inventories and
meet other cash requirements. If our operating cash fl ows are not
suffi cient to pay dividends and to fund our capital expenditures,
we anticipate funding any shortfall in these expenditures with a
combination of commercial paper and long-term debt. We plan
to refi nance existing long-term debt as it matures and may desire
to obtain additional long-term fi nancing for other corporate pur-
poses. We anticipate no diffi culty in obtaining long-term fi nancing
in view of our credit rating and favorable experiences in the debt
market in the recent past. The following table details the ratings of
the credit rating agencies that rated our outstanding indebtedness
at January 31, 2006.
Rating agency Commercial paper Long-term debt
Standard and Poor’s A-1+ AA
Moody’s Investors Service P-1 Aa2
Fitch Ratings F1+ AA
Dominion Bond Rating Service R-1(middle) AA
In February 2006, we entered into a £150 million revolving credit
facility in the United Kingdom. Interest on borrowings under the
credit facility accrues at LIBOR plus 25 basis points.
Future Expansion
Capital expenditures for fi scal 2007 are expected to be approxi-
mately $17.5 billion, including additions of capital leases. These
fi scal 2007 expenditures will include the construction of 20 to 30
new discount stores, 270 to 280 new supercenters (with reloca-
tions or expansions accounting for approximately 160 of those
supercenters), 15 to 20 new Neighborhood Markets, 30 to 40 new
SAM’S CLUBs (with relocations or expansions accounting for 20 of
those SAM’S CLUBs) and 220 to 230 new units in our International
segment (with relocations or expansions accounting for approxi-
mately 35 of those units). We plan to fi nance this expansion, and
any acquisitions of other operations that we may make during fi scal
2007, primarily out of cash fl ows from operations.
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 currency exchange rates.
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 mar-
ket changes. As the hypothetical fi gures 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, 2006 and 2005, we had $31.0 billion and
$23.8 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 4.79% and
4.08% at January 31, 2006 and 2005, respectively. A hypotheti-
cal 10% increase in interest rates in effect at January 31, 2006
and 2005, would have increased annual interest expense on bor-
rowings outstanding at those dates by $48 million and $25 mil-
lion, respectively.
At January 31, 2006 and 2005, we had $3.8 billion of outstand-
ing commercial paper obligations. The rate, including fees, on
these obligations at January 31, 2006 and 2005, was 3.9% and
2.9%, respectively. A hypothetical 10% increase in commercial
paper rates in effect at January 31, 2006 and 2005, would have
increased annual interest expense on the outstanding balances on
those dates by $14 million and $11 million, respectively.