Presentation Transcript

1. Module 2 - REFORMULATIONJunichi Hara
2. Agenda Net Enterprise Assets (NEA) Enterprise Profits After Taxes (EPAT) Unanswered questions
3. Net Enterprise Assets (NEA)
4. Enterprise Assets (EA)
5. Cash
6. Cash Operating cash = 2% of revenue 2013 sales: $469,162 million Calculated cash: $9,383 Problem: Actual cash: $7,781
7. Components/Uses of cash Credit card, debit card, electronic benefits transfers in process (7 days)/due from banks. $1.3 billion Can’t change with capital structure Operating
8. Components/Uses of cash Restricted cash related to collateral holdings required by derivative and trust agreements $715 million “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.” Operating
9. Components/Uses of cash Cash held for liquidity needs in foreign operations $5.2 billion Operating
10. Components/Uses of cash Permanently reinvested cash outside of US $876 million We do not believe it will be necessary to repatriate cash and cash equivalents held outside of the U.S. and anticipate our domestic liquidity needs will be met through other funding sources Operating? Financing?
11. Final decision Is it being used for operations of foreign countries? Maybe/ambiguous Was it a result of capital structure? Probably not Guess: All cash is operating
12. Final decision Fits with Walmart’s focus on working capital efficiency “We generally operate with a working capital deficit due to our efficient use of cash in funding operations and in providing returns to our shareholders in the form of stock repurchases and payments of dividends.”
13. Other assets
14. Straightforward Receivables Inventories Property Goodwill All are used in operations Wouldn’t change with financing decisions
15. Ambiguous Prepaid expense and other Other assets and deferred charges Any financial investments? Did I miss a footnote? Amounts are probably immaterial
16. Enterprise Liabilities (EL)
17. Enterprise Liabilities Straightforward: Accounts payable Accrued liabilities Accrued income taxes Deferred income taxes and other All part of operations
18. Short-term borrowings?
19. Short-term borrowings? “We utilize the liquidity under our short-term borrowing programs to fund our operations, dividend payments, share repurchases, capital expenditures and for other cash requirements and corporate purposes, as needed. “ Does it matter if it’s used for operations? Could have raised equity instead of debt Financing
20. NEA calculation
21. Net Financial Liabilities (NFL)
22. Net Financial Liabilities (NFL)
23. Net Financial Liabilities (NFL) Straightforward: Short-term borrowing Long-term debt Capital lease obligation Could have issued equity or used retained earnings
24. Non-controlling interest
25. Non-controlling interest Redeemable vs. non-redeemable? “… Redeemable noncontrolling interest shareholders exercised put options that would require the Company to purchase a portion of their shares in Walmart Chile at the mutually agreed upon redemption value to be determined after exercise of the put options.” Redeemable interest closer to debt
26. Non-controlling interest Doesn’t matter (for now) Both represent interests outside of Walmart stockholders
27. Net Financial Liabilities
28. Check
29. Enterprise Profit After Tax
30. Enterprise Profit After Tax (EPAT)
31. Straightforward
32. Ambiguous
33. Interest and tax shield Assumed that all cash is operating Therefore, interest income operating? Interest income is not result of capital structure, i.e. inevitable Guess: Yes
34. Interest and tax shield Tax shield only based on interest expense Assumed 37% tax rate Better estimate? Interest expense x tax rate = Tax shield $2,251 x 37% = $832.87 Add back to tax on enterprise profit
35. Comprehensive income items
36. Comprehensive income items Currency translation Derivative instruments Minimum pension liability All part of operations Would incur regardless of capital structure
37. Enterprise Profit After Tax
38. Financing Expense After Tax (FEAT)
39. Check
40. Unanswered Questions
41. Unanswered questions Is it fair to classify all cash as operating? Permanently reinvested earnings Long term trend of operating cash as a proportion of sales? Comparison to competitors (e.g. Target)? Items overlooked in 10-K?
42. Unanswered questions Off-balance sheet items? Capitalization of operating lease Tax rate. 37%? Or effective tax rate? 31-33%
43. Questions