Table of Contents

 

o

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended November 28, 2009

 

OR

 

 

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: 1-9595

 

 

BEST BUY CO., INC.

(Exact name of registrant as specified in its charter)

 

Minnesota

 

41-0907483

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

7601 Penn Avenue South

 

 

Richfield, Minnesota

 

55423

(Address of principal executive offices)

 

(Zip Code)

 

(612) 291-1000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x 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 (§ 229.405 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 x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes o No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.10 Par Value — 418,032,000 shares outstanding as of November 28, 2009.

 

 

 



Table of Contents

 

BEST BUY CO., INC.

 

FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 28, 2009

 

INDEX

 

Part I — Financial Information

3

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

3

 

 

 

 

 

 

 

a)

Condensed consolidated balance sheets as of November 28, 2009; February 28, 2009; and November 29, 2008

3

 

 

 

 

 

 

 

b)

Consolidated statements of earnings for the three and nine months ended November 28, 2009, and November 29, 2008

5

 

 

 

 

 

 

 

c)

Consolidated statements of cash flows for the nine months ended November 28, 2009, and November 29, 2008

6

 

 

 

 

 

 

 

d)

Notes to condensed consolidated financial statements

7

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

37

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

50

 

 

 

 

 

Part II — Other Information

51

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

 

 

 

Item 6.

 

Exhibits

51

 

 

 

 

 

Signatures

52

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.               CONSOLIDATED FINANCIAL STATEMENTS

 

BEST BUY CO., INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

($ in millions, except per share amounts)

 

(Unaudited)

 

 

 

November 28,
2009

 

February 28,
2009

 

November 29,
2008

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

564

 

$

498

 

$

569

 

Short-term investments

 

93

 

11

 

25

 

Receivables

 

2,630

 

1,868

 

2,638

 

Merchandise inventories

 

8,978

 

4,753

 

8,207

 

Other current assets

 

1,002

 

1,062

 

879

 

Total current assets

 

13,267

 

8,192

 

12,318

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, NET

 

4,123

 

4,174

 

4,268

 

 

 

 

 

 

 

 

 

GOODWILL

 

2,421

 

2,203

 

2,414

 

 

 

 

 

 

 

 

 

TRADENAMES

 

163

 

173

 

182

 

 

 

 

 

 

 

 

 

CUSTOMER RELATIONSHIPS

 

292

 

322

 

420

 

 

 

 

 

 

 

 

 

EQUITY AND OTHER INVESTMENTS

 

332

 

395

 

435

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

502

 

367

 

610

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

21,100

 

$

15,826

 

$

20,647

 

 

NOTE:  The consolidated balance sheet as of February 28, 2009, has been condensed from the audited consolidated financial statements.

 

See Notes to Condensed Consolidated Financial Statements.

 

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BEST BUY CO., INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

($ in millions, except per share amounts)

 

(Unaudited)

 

 

 

November 28,
2009

 

February 28,
2009

 

November 29,
2008

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

9,083

 

$

4,997

 

$

8,219

 

Unredeemed gift card liabilities

 

425

 

479

 

468

 

Accrued compensation and related expenses

 

482

 

459

 

410

 

Accrued liabilities

 

1,856

 

1,382

 

1,749

 

Accrued income taxes

 

55

 

281

 

148

 

Short-term debt

 

741

 

783

 

2,153

 

Current portion of long-term debt

 

36

 

54

 

48

 

Total current liabilities

 

12,678

 

8,435

 

13,195

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

1,194

 

1,109

 

1,093

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT

 

1,104

 

1,126

 

1,125

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Best Buy Co., Inc. Shareholders’ Equity

 

 

 

 

 

 

 

Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none

 

 

 

 

Common stock, $.10 par value: Authorized — 1.0 billion shares; Issued and outstanding — 418,032,000, 413,684,000 and 413,429,000 shares, respectively

 

42

 

41

 

41

 

Additional paid-in capital

 

404

 

205

 

172

 

Retained earnings

 

5,076

 

4,714

 

4,202

 

Accumulated other comprehensive income (loss)

 

7

 

(317

)

145

 

Total Best Buy Co., Inc. shareholders’ equity

 

5,529

 

4,643

 

4,560

 

Noncontrolling interests

 

595

 

513

 

674

 

Total shareholders’ equity

 

6,124

 

5,156

 

5,234

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

21,100

 

$

15,826

 

$

20,647

 

 

NOTE:  The consolidated balance sheet as of February 28, 2009, has been condensed from the audited consolidated financial statements.

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

BEST BUY CO., INC.

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

($ in millions, except per share amounts)

 

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 28,
2009

 

November 29,
2008

 

November 28,
2009

 

November 29,
2008

 

Revenue

 

$

12,024

 

$

11,500

 

$

33,141

 

$

30,291

 

Cost of goods sold

 

9,082

 

8,639

 

24,958

 

22,916

 

Gross profit

 

2,942

 

2,861

 

8,183

 

7,375

 

Selling, general and administrative expenses

 

2,566

 

2,587

 

7,179

 

6,485

 

Restructuring charges

 

 

 

52

 

 

Operating income

 

376

 

274

 

952

 

890

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Investment income (expense) and other

 

11

 

(3

)

38

 

27

 

Investment impairment

 

 

(111

)

 

(111

)

Interest expense

 

(23

)

(35

)

(68

)

(69

)

Earnings before income tax expense and equity in earnings of affiliates

 

364

 

125

 

922

 

737

 

Income tax expense

 

93

 

68

 

338

 

296

 

Equity in earnings of affiliates

 

 

6

 

 

5

 

Net earnings including noncontrolling interests

 

271

 

63

 

584

 

446

 

Net earnings attributable to noncontrolling interests

 

(44

)

(11

)

(46

)

(13

)

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Best Buy Co., Inc.

 

$

227

 

$

52

 

$

538

 

$

433

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Best Buy Co., Inc.

 

 

 

 

 

 

 

 

 

Basic

 

$

0.54

 

$

0.13

 

$

1.29

 

$

1.05

 

Diluted

 

$

0.53

 

$

0.13

 

$

1.27

 

$

1.04

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.14

 

$

0.14

 

$

0.42

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (in millions)

 

 

 

 

 

 

 

 

 

Basic

 

417.1

 

412.9

 

416.3

 

412.1

 

Diluted

 

428.6

 

422.6

 

426.8

 

422.7

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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BEST BUY CO., INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

November 28,
2009

 

November 29,
2008

 

OPERATING ACTIVITIES

 

 

 

 

 

Net earnings including noncontrolling interests

 

$

584

 

$

446

 

Adjustments to reconcile net earnings including noncontrolling interests to total cash provided by (used in) operating activities

 

 

 

 

 

Depreciation

 

614

 

520

 

Amortization of definite-lived intangible assets

 

66

 

42

 

Investment impairment charge

 

 

111

 

Restructuring charges

 

52

 

 

Stock-based compensation

 

88

 

82

 

Deferred income taxes

 

(41

)

(66

)

Excess tax benefits from stock-based compensation

 

(3

)

(5

)

Other, net

 

(4

)

3

 

Changes in operating assets and liabilities, net of acquired assets and liabilities

 

 

 

 

 

Receivables

 

(691

)

(1,032

)

Merchandise inventories

 

(4,087

)

(3,210

)

Other assets

 

(5

)

(117

)

Accounts payable

 

3,936

 

3,285

 

Other liabilities

 

374

 

152

 

Income taxes

 

(204

)

(291

)

Total cash provided by (used in) operating activities

 

679

 

(80

)

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Additions to property and equipment, net of $160 non-cash capital expenditures in the nine months ended November 29, 2008

 

(469

)

(927

)

Purchases of investments

 

(10

)

(95

)

Sales of investments

 

46

 

255

 

Acquisition of businesses, net of cash acquired

 

 

(2,167

)

Change in restricted assets

 

19

 

(17

)

Settlement of net investment hedges

 

27

 

 

Other, net

 

(18

)

(18

)

Total cash used in investing activities

 

(405

)

(2,969

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Borrowings of debt

 

3,593

 

4,314

 

Repayments of debt

 

(3,703

)

(2,082

)

Dividends paid

 

(175

)

(165

)

Issuance of common stock under employee stock purchase plan and for the exercise of stock options

 

120

 

78

 

Acquisition of noncontrolling interests

 

(34

)

 

Excess tax benefits from stock-based compensation

 

3

 

5

 

Other, net

 

(12

)

(9

)

Total cash (used in) provided by financing activities

 

(208

)

2,141

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

39

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

66

 

(869

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

498

 

1,438

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

564

 

$

569

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

BEST BUY CO., INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

($ in millions, except per share amounts)

 

(Unaudited)

 

1.                         Basis of Presentation

 

Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” in these Notes to Condensed Consolidated Financial Statements refers to Best Buy Co., Inc. and its consolidated subsidiaries.

 

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States. All adjustments were comprised of normal recurring adjustments, except as noted in these Notes to Condensed Consolidated Financial Statements.

 

Historically, we have realized more of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Europe and Canada, than in any other fiscal quarter. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. The interim financial statements and the related notes in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2009.

 

We consolidate the financial results of our Europe, China and Mexico operations on a two-month lag. There were no intervening events that would have significantly affected our consolidated financial statements had they been recorded during the three months ended November 28, 2009, except for the settlement of a tax matter with a taxing authority within our Best Buy Europe business that favorably impacted our income tax expense and net earnings attributable to Best Buy Co., Inc. by $61 and $31, respectively.  Our policy is to record the effect of events occurring in the lag period that significantly affect our consolidated financial statements; as a result, the settlement is included in our fiscal third quarter results.

 

In preparing the accompanying unaudited condensed consolidated financial statements, we evaluated the period from November 29, 2009 through January 5, 2010, the date the financial statements herein were available to be issued, for material subsequent events requiring recognition or disclosure. No such events were identified for this period.

 

Reclassifications

 

To maintain consistency and comparability, we reclassified certain prior-year amounts to conform to the current-year presentation as described in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended February 28, 2009. To conform to the current-year presentation, which presents customer relationships separately on our consolidated balance sheets, we reclassified to customer relationships, $420 at November 29, 2008, which was previously reported in other assets on our condensed consolidated balance sheet.

 

In addition, as a result of the adoption of new guidance related to the treatment of noncontrolling interests in consolidated financial statements, as described below in New Accounting Standards, we:

 

·                  reclassified to noncontrolling interests, a component of shareholders’ equity, $513 and $674 at February 28, 2009, and November 29, 2008, respectively, which was previously reported as minority interests on our condensed consolidated balance sheets;

 

·                  reported as separate captions within our consolidated statements of earnings, net earnings including noncontrolling interests, net (earnings) loss attributable to noncontrolling interests, and net earnings attributable to Best Buy Co., Inc. of $63, $(11) and $52, respectively, for the three months ended November 29, 2008, and $446, $(13) and $433, respectively, for the nine months ended November 29, 2008; and

 

·                  utilized net earnings including noncontrolling interests of $446 for the nine months ended November 29, 2008, as the starting point on our consolidated statements of cash flows in order to reconcile net earnings to cash flows from operating activities, rather than beginning with net earnings, which was previously exclusive of noncontrolling interests.

 

These reclassifications had no effect on previously reported consolidated operating income, net earnings attributable to Best Buy Co., Inc., or net cash flows from operating activities.  Also, earnings per share continues to be based on net earnings attributable to Best Buy Co., Inc.

 

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Table of Contents

 

New Accounting Standards

 

Accounting Standards Codification  —  In June 2009, the Financial Accounting Standards Board (“FASB”) issued a standard that established the FASB Accounting Standards Codification (the “ASC”), which effectively amended the hierarchy of U.S. generally accepted accounting principles (“GAAP”) and established only two levels of GAAP, authoritative and nonauthoritative. All previously existing accounting standard documents were superseded, and the ASC became the single source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the ASC became nonauthoritative. The ASC was intended to provide access to the authoritative guidance related to a particular topic in one place. New guidance issued subsequent to June 30, 2009 will be communicated by the FASB through Accounting Standards Updates. The ASC was effective for financial statements for interim or annual reporting periods ending after September 15, 2009.  We adopted and applied the provisions of the ASC for our third fiscal quarter ended November 28, 2009, and have eliminated references to pre-ASC accounting standards throughout our consolidated financial statements. Our adoption of the ASC did not have a material impact on our consolidated financial statements.

 

Consolidation of Variable Interest Entities  —  In June 2009, the FASB issued new guidance on the consolidation of variable interest entities (“VIE”) in response to concerns about the application of certain key provisions of pre-existing guidance, including those regarding the transparency of the involvement with a VIE. Specifically, this new guidance requires a qualitative approach to identifying a controlling financial interest in a VIE and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. In addition, this new guidance requires additional disclosures about the involvement with a VIE and any significant changes in risk exposure due to that involvement. This new guidance is effective for fiscal years beginning after November 15, 2009. We plan to adopt the new guidance in fiscal 2011 and are evaluating the impact it will have on our consolidated financial statements.

 

Transfers of Financial Assets  —  In June 2009, the FASB issued new guidance on accounting for transfers of financial assets which eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. This new guidance is effective for fiscal years beginning after November 15, 2009. We plan to adopt the new guidance in fiscal 2011 and are evaluating the impact it will have on our consolidated financial statements.

 

Subsequent Events  —  In May 2009, the FASB issued new guidance on the treatment of subsequent events which is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This new guidance was effective for fiscal years and interim periods ended after June 15, 2009, and must be applied prospectively. We adopted and applied the provisions of the new guidance for our second fiscal quarter ended August 29, 2009, and have included the required disclosures in the Basis of Presentation section above. Our adoption of the new guidance did not have an impact on our consolidated financial position or results of operations.

 

Fair Value and Other-Than-Temporary Impairments  —  In April 2009, the FASB issued new guidance intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. New guidance related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly provides additional guidelines for estimating fair value in accordance with pre-existing guidance on fair value measurements. New guidance on recognition and presentation of other-than-temporary impairments provides additional guidance related to the disclosure of impairment losses on securities and the accounting for impairment losses on debt securities, but does not amend existing guidance related to other-than-temporary impairments of equity securities. Lastly, new guidance on interim disclosures about the fair value of financial instruments increases the frequency of fair value disclosures. The new guidance was effective for fiscal years and interim periods ended after June 15, 2009.  As such, we adopted the new guidance in the second quarter of fiscal 2010, and have included the additional required interim disclosures about the fair value of financial instruments and valuation techniques within Note 3, Investments, and Note 4, Fair Value Measurements. Our adoption of the new guidance did not have a material impact on our consolidated financial position or results of operations.

 

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Derivatives and Hedging Disclosures  —  In March 2008, the FASB issued new guidance on disclosures about derivative instruments and hedging activities. This new guidance is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effect these instruments and activities have on an entity’s financial position, financial performance and cash flows. Entities are required to provide enhanced disclosures about: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under existing GAAP; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This new guidance was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Our adoption of the guidance in the fourth quarter of fiscal 2009 had no impact on our consolidated financial statements. However, in the first quarter of fiscal 2010, we entered into significant derivative hedging contracts and, accordingly, we have included the disclosures required by the new guidance in Note 8, Derivative Instruments, which are provided on a prospective basis.

 

Business Combinations  —  In December 2007, the FASB issued new guidance on business combinations which significantly changed the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under this new guidance, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This new guidance was effective for fiscal years beginning after December 15, 2008. We adopted the new guidance on March 1, 2009, which changed our accounting treatment for business combinations on a prospective basis.

 

Noncontrolling Interests  —  In December 2007, the FASB issued new guidance on noncontrolling interests in consolidated financial statements. This new guidance changes the accounting and reporting for minority interests, which must be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. This new guidance was effective for fiscal years beginning after December 15, 2008. We adopted the new guidance on March 1, 2009, and applied its provisions prospectively, except for the presentation and disclosure requirements, which we applied retrospectively. Our adoption of the new guidance did not have a material impact on our consolidated financial statements other than the following reporting and disclosure changes which we applied retrospectively to all periods presented:

 

(i)             we recharacterized minority interests previously reported on our condensed consolidated balance sheets as noncontrolling interests and classified them as a component of shareholders’ equity;

 

(ii)          we adjusted certain captions previously utilized on our consolidated statements of earnings to specifically identify net earnings attributable to noncontrolling interests and net earnings attributable to Best Buy Co., Inc.; and

 

(iii)       in order to reconcile net earnings to the cash flows from operating activities, we changed the starting point on our consolidated statements of cash flows from net earnings to net earnings including noncontrolling interests, with net earnings or loss from the noncontrolling interests (previously, minority interests) no longer a reconciling item in arriving at net cash flows from operating activities in our consolidated statement of cash flows.

 

Additional disclosures required by this new guidance are included in Note 11, Supplemental Equity and Comprehensive Income Information.

 

2.                         Acquisitions

 

Five Star

 

We acquired a 75% interest in Jiangsu Five Star Appliance Co., Ltd. (“Five Star”) in June 2006, for $184, which included a working capital injection of $122. At the time of the acquisition, we also entered into an agreement with Five Star’s minority shareholders to acquire the remaining 25% interest in Five Star within four years, subject to Chinese government approval.

 

On February 6, 2009, we were granted a business license to acquire the remaining 25% interest in Five Star and our acquisition converted Five Star into a wholly-owned foreign enterprise. The $191 purchase price for the remaining 25% interest was primarily based on a previously agreed-upon pricing formula, consisting of a base purchase price and an earn-out for the remaining Five Star shareholders. The amount paid in excess of the fair value of the net assets acquired, as agreed to at the time of the initial purchase, furthers our international growth plans and accelerates the integration of Best Buy and Five Star in China.

 

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The acquisition of the remaining 25% interest in Five Star for $191 was accounted for using the purchase method. We recorded the net assets acquired at their estimated fair values. We included Five Star’s operating results, which are reported on a two-month lag, from the date of acquisition as part of our International segment. The purchase price allocation is preliminary and will be finalized no later than the fourth quarter of fiscal 2010. None of the goodwill is deductible for tax purposes.

 

The preliminary purchase price allocation was as follows:

 

Net assets of noncontrolling interests

 

$

48

 

Tradenames

 

8

 

Goodwill

 

137

 

Total assets

 

193

 

 

 

 

 

Long-term liabilities

 

(2

)

 

 

 

 

Purchase price allocated to assets and liabilities acquired

 

$

191

 

 

Napster

 

On October 25, 2008, we acquired Napster, Inc. (“Napster”) for $122 (or $101 net of cash acquired), pursuant to a cash tender offer whereby all issued and outstanding shares of Napster common stock, and all stock purchase rights associated with such shares, were acquired by us at a price of $2.65 per share. Of the $122 purchase price, $4 represented our previous ownership interest in Napster common shares. The effective acquisition date for accounting purposes was the close of business on October 31, 2008, the end of Napster’s fiscal October.

 

We entered into this transaction as we believe Napster has one of the most comprehensive and easy-to-use digital music offerings in the industry. The amount we paid in excess of the fair value of the net assets acquired was to obtain Napster’s capabilities and digital subscriber base to reach new customers with an enhanced experience for exploring and selecting music and other digital entertainment products over an increasing array of devices, such as bundling the sale of hardware with digital services. We believe the combined capabilities of our two companies allows us to build stronger relationships with customers and expand the number of subscribers.

 

We have consolidated Napster in our financial results as part of our Domestic segment from the date of acquisition. We recorded the net assets acquired at their estimated fair values and allocated the purchase price on a preliminary basis using information then available. The allocation of the purchase price to the acquired assets and liabilities was finalized in the third quarter of fiscal 2010, with no material adjustments made to the preliminary allocation. None of the goodwill is deductible for tax purposes.

 

The final purchase price allocation was as follows:

 

Cash and cash equivalents

 

$

21

 

Short-term investments

 

28

 

Receivables

 

2

 

Other current assets

 

3

 

Property and equipment

 

10

 

Goodwill

 

32

 

Tradenames

 

13

 

Customer relationships

 

3

 

Equity and other investments

 

3

 

Other assets (deferred tax assets)

 

48

 

Total assets

 

163

 

 

 

 

 

Accounts payable

 

(3

)

Other current liabilities

 

(38

)

Total liabilities

 

(41

)

 

 

 

 

Purchase price allocated to assets and liabilities acquired

 

$

122

 

 

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Table of Contents

 

Best Buy Europe

 

On May 7, 2008, we entered into a Sale and Purchase Agreement with The Carphone Warehouse Group PLC (“CPW”). All conditions to closing were satisfied, and the transaction was consummated on June 30, 2008. The effective acquisition date for accounting purposes was the close of business on June 28, 2008, the end of CPW’s fiscal first quarter. Pursuant to the transaction, CPW contributed certain assets and liabilities into a newly-formed company, Best Buy Europe Distributions Limited (“Best Buy Europe”), in exchange for all of the ordinary shares of Best Buy Europe, and our wholly-owned subsidiary, Best Buy Distributions Limited, purchased 50% of such ordinary shares of Best Buy Europe from CPW for an aggregate purchase price of $2,167. In addition to the purchase price paid to CPW, we incurred $29 of transaction costs for an aggregate purchase price of $2,196.

 

Pursuant to a shareholders’ agreement with CPW, our designees to the Best Buy Europe board of directors have ultimate approval rights over select Best Buy Europe senior management positions and the annual capital and operating budgets of Best Buy Europe.

 

The assets and liabilities contributed to Best Buy Europe by CPW included CPW’s retail and distribution business, consisting of retail stores and online offerings; mobile airtime reselling operations; device insurance operations; fixed line telecommunications businesses in Spain and Switzerland; facilities management business, under which it bills and manages the customers of network operators in the U.K.; dealer business, under which it acts as a wholesale distributor of handsets and airtime vouchers; and economic interests in pre-existing commercial arrangements with us (Best Buy Mobile in the U.S. and the Geek Squad joint venture in the U.K. and Spain).

 

The amount we paid at the time of acquisition in excess of the fair value of the net assets acquired was primarily for (i) the expected future cash flows derived from the existing business and infrastructure contributed to Best Buy Europe by CPW, which included over 2,400 retail stores, (ii) immediate access to the European market with a management team that is experienced in both retailing and wireless service technologies in this marketplace, and (iii) the expected synergies our management believes the venture will generate, which include benefits from joint purchasing, sourcing and merchandising. In addition, Best Buy Europe plans to introduce new product and service offerings in its retail stores and, beginning in fiscal 2011, launch large-format Best Buy-branded stores and Web sites in the European market.

 

We have consolidated Best Buy Europe in our financial results as part of our International segment from the date of acquisition. We consolidate the financial results of Best Buy Europe on a two-month lag to align with CPW’s quarterly reporting periods.

 

We recorded the net assets acquired at their estimated fair values and allocated the purchase price on a preliminary basis using information then available. The allocation of the purchase price to the acquired assets and liabilities was finalized in the second quarter of fiscal 2010, with no material adjustments made to the preliminary allocation. None of the goodwill is deductible for tax purposes.

 

The final purchase price allocation was as follows:

 

Cash and cash equivalents

 

$

124

 

Restricted cash

 

112

 

Receivables

 

1,190

 

Merchandise inventories

 

535

 

Other current assets

 

114

 

Property and equipment

 

500

 

Goodwill

 

1,546

 

Tradenames

 

93

 

Customer relationships

 

484

 

Other assets

 

184

 

Total assets

 

4,882

 

 

 

 

 

Accounts payable

 

(803

)

Other current liabilities

 

(695

)

Short-term debt

 

(299

)

Long-term liabilities

 

(246

)

Total liabilities

 

(2,043

)

 

 

 

 

Noncontrolling interests1

 

(643

)

 

 

 

 

Purchase price allocated to assets and liabilities acquired

 

$

2,196

 

 

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1                   We recorded the fair value adjustments only in respect of the 50% of net assets acquired, with the remaining 50% of the net assets of Best Buy Europe being consolidated and recorded at their historical cost basis. This also resulted in a $643 noncontrolling interest being reflected in our condensed consolidated balance sheet in respect of the 50% owned by CPW.

 

The valuation of the identifiable intangible assets acquired was based on management’s estimates, available information and reasonable and supportable assumptions. The valuation was generally based on the fair value of these assets using income and market approaches. The amortizable intangible assets are being amortized using a straight-line method over their respective estimated useful lives. The following table summarizes the identified intangible asset categories and their respective weighted average amortization periods:

 

 

 

Weighted Average

 

 

 

 

 

Amortization Period
(in years)

 

Fair Value
on Acquisition

 

Customer relationships

 

6.8

 

$

484

 

Tradenames

 

4.2

 

93

 

Total

 

6.4

 

$

577

 

 

We recorded an estimate for costs to terminate certain activities associated with Best Buy Europe operations. A restructuring accrual of $20 has been recorded and reflects the accrued restructuring costs incurred at the date of acquisition, primarily for store closure costs and agreement termination fees expected to be utilized in fiscal 2010 and fiscal 2011.

 

Our interest in Best Buy Europe is separate and distinct from our investment in the common stock of CPW, as discussed in Note 3, Investments.

 

Pro Forma Financial Results

 

Our pro forma condensed consolidated financial results of operations are presented in the following table as if the acquisitions described above had been completed at the beginning of each period presented:

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

November 29,
2008

 

November 29,
2008

 

Pro forma revenue

 

$

11,518

 

$

33,260

 

Pro forma net earnings

 

61

 

414

 

 

 

 

 

 

 

Pro forma earnings per common share

 

 

 

 

 

Basic

 

$

0.15

 

$

1.01

 

Diluted

 

0.15

 

0.99

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

412.9

 

412.1

 

Diluted

 

422.6

 

422.7

 

 

These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments, such as increased interest expense on acquisition debt, foregone interest income and amortization related to acquired customer relationships and tradenames. They have not been adjusted for the effect of costs or synergies that would have been expected to result from the integration of these acquisitions or for costs that are not expected to recur as a result of the acquisitions. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred at the beginning of each period presented, or of future results of the consolidated entities.

 

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3.                        Investments

 

Investments were comprised of the following:

 

 

 

November 28,
2009

 

February 28,
2009

 

November 29,
2008

 

Short-term investments

 

 

 

 

 

 

 

Money market fund

 

$

4

 

$

8

 

$

25

 

Debt securities (auction-rate securities)

 

89

 

 

 

Other investments

 

 

3

 

 

Total short-term investments

 

$

93

 

$

11

 

$

25

 

 

 

 

 

 

 

 

 

Equity and other investments

 

 

 

 

 

 

 

Debt securities (auction-rate securities)

 

$

195

 

$

314

 

$

339

 

Marketable equity securities

 

86

 

41

 

49

 

Other investments

 

51

 

40

 

47

 

Total equity and other investments

 

$

332

 

$

395

 

$

435

 

 

Debt Securities

 

Our debt securities are comprised of auction-rate securities (“ARS”). We classify our investments in ARS as available-for-sale and carry them at fair value. ARS were intended to behave like short-term debt instruments because their interest rates reset periodically through an auction process, most commonly at intervals of 7, 28 and 35 days. The auction process had historically provided a means by which we could rollover the investment or sell these securities at par in order to provide us with liquidity as needed.

 

In mid-February 2008, auctions began to fail due to insufficient buyers, as the amount of securities submitted for sale in auctions exceeded the aggregate amount of the bids. For each failed auction, the interest rate on the security moves to a maximum rate specified for each security, and generally resets at a level higher than specified short-term interest rate benchmarks. To date, we have collected all interest due on our ARS and expect to continue to do so in the future. We sold $36 of ARS at par during the first nine months of fiscal 2010. However, at November 28, 2009, our entire remaining ARS portfolio, consisting of 49 investments in ARS, was subject to failed auctions. Subsequent to November 28, 2009, and through January 5, 2010, we sold $1 (par value) of our ARS.

 

As a result of the persistent failed auctions, and the uncertainty of when these investments could be liquidated at par, we have classified all of our investments in ARS as non-current assets within equity and other investments in our consolidated balance sheet at November 28, 2009, except for $89, which was marketed and sold by UBS AG and its affiliates (collectively, “UBS”) and is classified within short-term investments. In October 2008, we accepted a settlement with UBS pursuant to which UBS issued to us Series C-2 Auction Rate Securities Rights (“ARS Rights”). The ARS Rights provide us the right to receive the full par value of our UBS-brokered ARS of $89 plus accrued but unpaid interest at any time between June 30, 2010, and July 2, 2012.  We plan to exercise our ARS Rights in the second quarter of fiscal 2011.

 

Our ARS portfolio consisted of the following at November 28, 2009, February 28, 2009, and November 29, 2008, at fair value:

 

Description

 

Nature of collateral or guarantee

 

November 28,
2009

 

February 28,
2009

 

November 29,
2008

 

Student loan bonds

 

Student loans guaranteed 95% to 100% by the U.S. government

 

$

264

 

$

276

 

$

296

 

Municipal revenue bonds

 

100% insured by AA/Aa-rated bond insurers at November 28, 2009

 

20

 

24

 

28

 

Auction preferred securities

 

Underlying investments of closed-end funds

 

 

14

 

15

 

Total fair value1

 

 

 

$

284

 

$

314

 

$

339

 

 

1                   The par value and weighted-average interest rates (taxable equivalent) of our ARS were $293, $329 and $339 and 0.95%, 2.04% and 3.61%, respectively, at November 28, 2009, February 28, 2009, and November 29, 2008, respectively.

 

At November 28, 2009, our ARS portfolio was 78% AAA/Aaa-rated, 10% AA/Aa-rated and 12% A/A-rated.

 

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The investment principal associated with failed auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process, the issuers establish a different form of financing to replace these securities, or final payments are due according to the contractual maturities of the debt issues, which range from seven to 38 years. We intend to hold our ARS until we can recover the full principal amount through one of the means described above, and have the ability to do so based on our other sources of liquidity.

 

We evaluated our entire ARS portfolio of $293 (par value) for impairment at November 28, 2009, based primarily on the methodology described in Note 4, Fair Value Measurements. As a result of this review, we determined that the fair value of our ARS portfolio at November 28, 2009, was $284. Accordingly, we recognized a $9 pre-tax unrealized loss in accumulated other comprehensive income. This unrealized loss reflects a temporary impairment on all of our investments in ARS, except for our investments in ARS with UBS, for which we have determined that fair value approximates par value. The estimated fair value of our ARS portfolio could change significantly based on future market conditions. We will continue to assess the fair value of our ARS portfolio for substantive changes in relevant market conditions, changes in our financial condition or other changes that may alter our estimates described above.

 

We may be required to record an additional unrealized holding loss or an impairment charge to earnings if we determine that our ARS portfolio has incurred a further decline in fair value that is temporary or other-than-temporary, respectively. Factors that we consider when assessing our ARS portfolio for other-than-temporary impairment include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the nature of the collateral or guarantees in place, as well as our intent and ability to hold an investment.

 

We had $(5), $(10) and $0 in unrealized (loss) gain, net of tax, recorded in accumulated other comprehensive income at November 28, 2009, February 28, 2009, and November 29, 2008, respectively, related to our investments in debt securities.

 

Marketable Equity Securities

 

We invest in marketable equity securities and classify them as available-for-sale. Investments in marketable equity securities are classified as non-current assets within equity and other investments in our condensed consolidated balance sheets, and are reported at fair value based on quoted market prices.

 

Our investments in marketable equity securities were as follows:

 

 

 

November 28,
2009

 

February 28,
2009

 

November 29,
2008

 

 

 

 

 

 

 

 

 

Common stock of CPW

 

$

83

 

$

40

 

$

47

 

Other

 

3

 

1

 

2

 

Total

 

$

86

 

$

41

 

$

49

 

 

We review all investments for other-than-temporary impairment at least quarterly or as indicators of impairment exist. Indicators of impairment include the duration and severity of the decline in fair value as well as the intent and ability to hold the investment to allow for a recovery in the market value of the investment. In addition, we consider qualitative factors that include, but are not limited to: (i) the financial condition and business plans of the investee including its future earnings potential, (ii) the investee’s credit rating, and (iii) the current and expected market and industry conditions in which the investee operates. If a decline in the fair value of an investment is deemed by management to be other-than-temporary, we write down the cost basis of the investment to fair value, and the amount of the write-down is included in net earnings. Such a determination is dependent on the facts and circumstances relating to each investment.

 

We purchased shares of CPW’s common stock in fiscal 2008 for $183 and in the third quarter of fiscal 2009, recorded a $111 other-than-temporary impairment charge.  Subsequent to November 29, 2008, the market price of CPW common stock increased and, accordingly, we recorded a $29 pre-tax unrealized gain in accumulated other comprehensive income related to this investment at November 28, 2009.

 

All unrealized holding gains or losses related to our investments in marketable equity securities are reflected net of tax in accumulated other comprehensive income in shareholders’ equity. Net unrealized gain (loss), net of tax, included in accumulated other comprehensive income was $26, $(4) and $1 at November 28, 2009, February 28, 2009, and November 29, 2008, respectively.

 

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Table of Contents

 

Other Investments

 

The aggregate carrying values of investments accounted for using either the cost method or the equity method at November 28, 2009, February 28, 2009, and November 29, 2008, were $51, $43 and $47, respectively.

 

4.                         Fair Value Measurements

 

We adopted new guidance related to fair value measurements on March 2, 2008. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use a three-tier valuation hierarchy based upon observable and non-observable inputs:

 

Level 1     Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

 

Level 2      Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly.

 

Level 3      Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

 

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

 

The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following tables set forth by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis at November 28, 2009, February 28, 2009, and November 29, 2008, according to the valuation techniques we used to determine their fair values.

 

 

 

 

 

Fair Value Measurements
Using Inputs Considered as

 

 

 

Fair Value at
November 28,
2009

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

Money market funds

 

$

28

 

$

28

 

$

 

$

 

Short-term investments

 

 

 

 

 

 

 

 

 

Money market fund

 

4

 

 

4

 

 

Auction-rate securities

 

89

 

 

 

89

 

Other current assets

 

 

 

 

 

 

 

 

 

U.S. Treasury bills (restricted cash)

 

55

 

55

 

 

 

Money market funds (restricted cash)

 

16

 

16

 

 

 

Derivative instruments

 

4

 

 

4

 

 

Equity and other investments

 

 

 

 

 

 

 

 

 

Auction-rate securities

 

195

 

 

 

195

 

Marketable equity securities

 

86

 

86

 

 

 

Other assets

 

 

 

 

 

 

 

 

 

Assets that fund deferred compensation

 

73

 

73

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

 

 

 

 

 

 

 

 

Derivative instruments

 

1

 

 

1

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

Deferred compensation

 

62

 

62

 

 

 

 

15



Table of Contents

 

 

 

 

 

Fair Value Measurements
Using Inputs Considered as

 

 

 

Fair Value at
February 28,
2009

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

ASSETS

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

Money market fund

 

$

8

 

$

 

$

8

 

$

 

Other current assets (restricted assets)

 

 

 

 

 

 

 

 

 

U.S. Treasury bills

 

125

 

125

 

 

 

Equity and other investments

 

 

 

 

 

 

 

 

 

Auction-rate securities

 

314

 

 

 

314

 

Marketable equity securities

 

41

 

41

 

 

 

Other assets

 

 

 

 

 

 

 

 

 

Assets that fund deferred compensation

 

64

 

64

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

Deferred compensation

 

55

 

55

 

 

 

 

 

 

 

 

Fair Value Measurements
Using Inputs Considered as

 

 

 

Fair Value at
November 29,
2008

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

ASSETS

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

Money market funds

 

$

25

 

$

 

$

25

 

$

 

Other current assets (restricted assets)

 

 

 

 

 

 

 

 

 

U.S. Treasury bills

 

60

 

60

 

 

 

Equity and other investments

 

 

 

 

 

 

 

 

 

Auction-rate securities

 

339

 

 

 

339

 

Marketable equity securities

 

49

 

49

 

 

 

Other assets

 

 

 

 

 

 

 

 

 

Assets that fund deferred compensation

 

67

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

Deferred compensation

 

59

 

59

 

 

 

 

The following tables provide a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the tables above that used significant unobservable inputs (Level 3) for the three and nine months ended November 28, 2009 and November 29, 2008.

 

 

 

Debt securities-
Auction-rate securities only

 

 

 

Student loan
bonds

 

Municipal
revenue bonds

 

Auction
preferred
securities

 

Total

 

Balances at August 29, 2009

 

$

278

 

$

20

 

$

 

$

298

 

Purchases, sales and settlements, net

 

(14

)

 

 

(14

)

Balances at November 28, 2009

 

$

264

 

$

20

 

$

 

$

284

 

 

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Table of Contents

 

 

 

Debt securities-
Auction-rate securities only

 

 

 

Student loan
 bonds

 

Municipal
revenue bonds

 

Auction
preferred
securities

 

Total

 

Balances at February 28, 2009

 

$

276

 

$

24

 

$

14

 

$

314

 

Changes in unrealized gains (losses)

 

5

 

 

1

 

6

 

Purchases, sales and settlements, net

 

(17

)

(4

)

(15

)

(36

)

Balances at November 28, 2009

 

$

264

 

$

20

 

$

 

$

284

 

 

 

 

Debt securities-
Auction-rate securities only

 

 

 

Student loan
 bonds

 

Municipal
 revenue bonds

 

Auction
preferred
securities

 

Total

 

Balances at August 30, 2008

 

$

295

 

$

44

 

$

15

 

$

354

 

Purchases, sales and settlements, net

 

(1

)

(16

)

 

(17

)

Interest accrued, net

 

2

 

 

 

2

 

Balances at November 29, 2008

 

$

296

 

$

28

 

$

15

 

$

339

 

 

 

 

Debt securities-
Auction-rate securities only

 

 

 

Student loan
 bonds

 

Municipal
 revenue bonds

 

Auction
preferred
securities

 

Total

 

Balances at March 1, 2008

 

$

297

 

$

97

 

$

23

 

$

417

 

Purchases, sales and settlements, net

 

(2

)

(69

)

(8

)

(79

)

Interest accrued, net

 

1

 

 

 

1

 

Balances at November 29, 2008

 

$

296

 

$

28

 

$

15

 

$

339

 

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

 

Money Market Funds.  Our money market fund investments were classified as Level 1 or 2. If a fund is not trading on a regular basis, and we have been unable to obtain pricing information on an ongoing basis, we classify the fund as Level 2.

 

U.S. Treasury Bills.  Our U.S. Treasury notes were classified as Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.

 

Derivative Instruments.  Comprised primarily of foreign currency forward contracts and foreign currency swaps, our derivative instruments were measured at fair value using readily observable market inputs, such as quotations on forward foreign exchange points and foreign interest rates. Our derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not actively traded.

 

Auction-Rate Securities.  Our investments in auction-rate securities were classified as Level 3 as quoted prices were unavailable due to events described in Note 3, Investments. Due to limited market information, we utilized a discounted cash flow (“DCF”) model to derive an estimate of fair value at November 28, 2009. The assumptions used in preparing the DCF model included estimates with respect to the amount and timing of future interest and principal payments, forward projections of the interest rate benchmarks, the probability of full repayment of the principal considering the credit quality and guarantees in place, and the rate of return required by investors to own such securities given the current liquidity risk associated with auction-rate securities.

 

Marketable Equity Securities.  Our marketable equity securities were measured at fair value using quoted market prices. They were classified as Level 1 as they trade in an active market for which closing stock prices are readily available.

 

Deferred Compensation.  Our deferred compensation liabilities and the assets that fund our deferred compensation consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.

 

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Table of Contents

 

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

 

Disclosures for nonfinancial assets and liabilities that are measured at fair value, but are recognized and disclosed at fair value on a nonrecurring basis, were required prospectively beginning March 1, 2009. During the nine months ended November 28, 2009, we had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

 

Fair Value of Financial Instruments

 

Our financial instruments, other than those presented in the disclosures above, include cash, receivables, other investments, accounts payable, accrued liabilities and short- and long-term debt. The fair values of cash, receivables, accounts payable, accrued liabilities and short-term debt approximated carrying values because of the short-term nature of these instruments. Fair values for other investments held at cost are not readily available, but are estimated to approximate fair value. See Note 7, Debt, for information about the fair value of our long-term debt.

 

5.                         Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill and indefinite-lived tradenames by segment were as follows in the nine months ended November 28, 2009 and November 29, 2008:

 

 

 

Goodwill

 

Tradenames

 

 

 

Domestic

 

International

 

Total

 

Domestic

 

International

 

Total

 

Balances at February 28, 2009

 

$

434

 

$

1,769

 

$

2,203

 

$

32

 

$

72

 

$

104

 

Adjustments to purchase price allocation

 

 

43

 

43

 

 

 

 

Changes in foreign currency exchange rates

 

 

175

 

175

 

 

8

 

8

 

Balances at November 28, 2009

 

$

434

 

$

1,987

 

$

2,421

 

$

32

 

$

80

 

$

112

 

 

 

 

Goodwill

 

Tradenames

 

 

 

Domestic

 

International

 

Total

 

Domestic

 

International

 

Total

 

Balances at March 1, 2008

 

$

450

 

$

638

 

$

1,088

 

$

23

 

$

74

 

$

97

 

Acquisitions

 

43

 

1,501

 

1,544

 

13

 

 

13

 

Amortization

 

 

 

 

 

 

 

Changes resulting from tax adjustment 1

 

 

19

 

19

 

 

 

 

Changes in foreign currency exchange rates

 

 

(237

)

(237

)

 

(9

)

(9

)

Balances at November 29, 2008

 

$

493

 

$

1,921

 

$

2,414

 

$

36

 

$

65

 

$

101

 

 

1                   Adjustment related to the resolution of certain tax matters associated with our acquisition of Jiangsu Five Star Appliance Co., Ltd. in fiscal 2007.

 

The following table provides the gross carrying amount and related accumulated amortization of definite-lived intangible assets:

 

 

 

November 28, 2009

 

February 28, 2009

 

November 29, 2008

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Tradenames

 

$

74

 

$

(23

)

$

79

 

$

(10

)

$

87

 

$

(6

)

Customer relationships

 

395

 

(103

)

367

 

(45

)

457

 

(37

)

Total

 

$

469

 

$

(126

)

$

446

 

$

(55

)

$

544

 

$

(43

)

 

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Table of Contents

 

Total amortization expense for the three months ended November 28, 2009 and November 29, 2008 was $24 and $41, respectively, and was $66 and $42 for the nine months then ended, respectively.  The estimated future amortization expense for identifiable intangible assets during the remainder of fiscal 2010 and for the next four years is as follows:

 

Fiscal Year

 

 

 

Remainder of fiscal 2010

 

$

21

 

2011

 

86

 

2012

 

65

 

2013

 

45

 

2014

 

40

 

Thereafter

 

86

 

 

6.                         Restructuring Charges

 

In the fourth quarter of fiscal 2009, we implemented a restructuring plan for our domestic and international businesses to support our fiscal 2010 strategy and long-term growth plans. We believe these changes have provided an operating structure that supports a more effective and efficient use of our resources and provides a platform from which key strategic initiatives can progress despite changing economic conditions. In the fourth quarter of fiscal 2009, we recorded charges of $78, related primarily to voluntary and involuntary separation plans at our corporate headquarters.

 

In April 2009, we notified our U.S. Best Buy store employees of our intention to update our store operating model, which included eliminating certain positions. In addition, we incurred restructuring charges related to employee termination benefits and business reorganization costs at Best Buy Europe within our International segment.  As a result of our restructuring efforts, we recorded charges of $52 in the first quarter of fiscal 2010.  No restructuring charges were recorded in the second or third quarters of fiscal 2010, and we believe we are substantially complete with our announced restructuring activities.

 

All charges related to our restructuring plans were presented as restructuring charges in our consolidated statements of earnings. The composition of our restructuring charges incurred in the nine months ended November 28, 2009, as well as the cumulative amount incurred through November 28, 2009, for both the Domestic and International segments, were as follows:

 

 

 

Domestic

 

International

 

Total

 

 

 

Nine Months
Ended
November 28,
2009

 

Cumulative
Amount through
November 28,
2009

 

Nine Months
Ended
November 28,
2009

 

Cumulative
Amount
through
November 28,
2009

 

Nine Months
Ended
November 28,
2009

 

Cumulative
Amount
through
November 28,
2009

 

Termination benefits

 

$

25

 

$

94

 

$

26

 

$

32

 

$

51

 

$

126

 

Facility closure costs

 

 

1

 

1

 

1

 

1

 

2

 

Property and equipment write-downs

 

 

2

 

 

 

 

2

 

Total

 

$

25

 

$

97

 

$

27

 

$

33

 

$

52

 

$

130

 

 

The following table summarizes our restructuring accrual activity in the nine months ended November 28, 2009, related to termination benefits and facility closure costs:

 

 

 

Termination
Benefits

 

Facility
Closure Costs

 

Total

 

Balances at February 28, 2009

 

$

73

 

$

1

 

$

74

 

Charges

 

51

 

1

 

52

 

Cash payments

 

(116

)

(1

)

(117

)

Effects of foreign exchange rates

 

3

 

 

3

 

Balances at November 28, 2009

 

$

11

 

$

1

 

$

12

 

 

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7.                         Debt

 

Short-Term Debt

 

Short-term debt consisted of the following:

 

 

 

November 28,
2009

 

February 28,
2009

 

November 29,
2008

 

 

 

 

 

 

 

 

 

JPMorgan credit facility

 

$

350

 

$

162

 

$

1,733

 

ARS revolving credit line

 

 

 

19

 

Europe receivables financing facility

 

326

 

 

 

Europe revolving credit facility

 

30

 

584

 

358

 

Canada revolving demand facility

 

 

2

 

 

China revolving demand facilities

 

35

 

35

 

43

 

Total short-term debt

 

$

741

 

$

783

 

$

2,153

 

 

Europe Receivables Financing Facility

 

In the second quarter of fiscal 2010, a subsidiary of Best Buy Europe (the “Subsidiary”) entered into a £350 (or $573) receivables financing agreement (the “Agreement”) with Barclays Bank PLC, as administrative agent, and a syndication of banks to finance the working capital needs of Best Buy Europe. The Agreement is secured by certain network carrier receivables of the Subsidiary. Availability on the facility is based on a percentage of the available acceptable receivables, as defined in the Agreement, and was £206 (or $326) at November 28, 2009.  The full amount available was drawn at November 28, 2009. The Agreement expires on July 3, 2012.

 

Interest rates under the Agreement are variable, based on the three-month London Interbank Offered Rate (LIBOR) plus a margin of 3.00%, with a commitment fee of 1.5% on unused available capacity.  The Agreement also required an initial commitment fee of 2.75%.

 

The Agreement is not guaranteed by Best Buy Co., Inc., or any subsidiary, nor does it provide for any recourse to Best Buy Co., Inc. The Agreement contains customary affirmative and negative covenants. Among other things, these covenants restrict or prohibit the Subsidiary’s ability to incur certain types or amounts of indebtedness, incur additional encumbrances on its receivables, make material changes in the nature of its business, dispose of material assets, make guarantees, or engage in a change in control transaction. The Agreement also contains covenants that require the Subsidiary to comply with a maximum annual leverage ratio, a minimum annual interest coverage ratio and a minimum fixed charges coverage ratio.

 

Europe Revolving Credit Facility

 

In connection with a £475 (or $754) revolving credit facility available to Best Buy Europe with CPW as lender, Best Buy Co., Inc. is named as guarantor, up to 50% of the amount outstanding. Concurrent with entering into the Agreement described above, we amended the revolving credit facility to decrease the amount available under the revolving credit facility by the amount available under the Agreement. The related guarantee by Best Buy Co., Inc. was similarly reduced. At November 28, 2009, the amount available under the revolving credit facility was £269 (or $428), of which $30 was outstanding and the related guarantee by Best Buy Co., Inc. was $15. The revolving credit facility expires in March 2013.

 

Long-Term Debt

 

Long-term debt consisted of the following:

 

 

 

November 28,
2009

 

February 28,
2009

 

November 29,
2008

 

6.75% notes

 

$

500

 

$

500

 

$

500

 

Convertible debentures

 

402

 

402

 

402

 

Financing lease obligations

 

191

 

200

 

204

 

Capital lease obligations

 

44

 

65

 

54

 

Other debt

 

3

 

13

 

13

 

Total long-term debt

 

1,140

 

1,180

 

1,173

 

Less: current portion

 

(36

)

(54

)

(48

)

Total long-term debt, less current portion

 

$

1,104

 

$

1,126

 

$

1,125

 

 

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The fair value of long-term debt approximated $1,221, $1,122 and $1,071 at November 28, 2009, February 28, 2009, and November 29, 2008, respectively, based primarily on the ask prices quoted from external sources, compared with carrying values of $1,140, $1,180 and $1,173, respectively.

 

Other than as referred to above, see Note 6, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2009, for additional information regarding the terms of our debt facilities and obligations.

 

8.        Derivative Instruments

 

We manage our economic and transaction exposure to certain market-based risks through the use of derivative instruments. Under this strategy, foreign currency exchange contracts are utilized to manage foreign currency exposure to certain forecasted inventory purchases, revenue streams and net investments in certain foreign operations. Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows as well as net asset values associated with changes in foreign currency exchange rates. We do not hold or issue derivative financial instruments for trading or speculative purposes.

 

We record all derivatives on our condensed consolidated balance sheets at fair value and evaluate hedge effectiveness prospectively and retrospectively when electing to apply hedge accounting treatment. We formally document all hedging relationships at inception for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions. Our strategy employs both cash flow and net investment hedges. We classify the cash flows from derivatives treated as hedges in our consolidated statement of cash flows in the same category as the item being hedged. In addition, we have derivatives which are not designated as hedging instruments. We have no derivatives that have credit-risk-related contingent features, and we mitigate our credit risk by engaging with major financial institutions as our counterparties.

 

Cash Flow Hedges

 

We enter into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on certain revenue streams denominated in non-functional currencies. The contracts have terms of up to three years. We report the effective portion of the gain or loss on a cash flow hedge as a component of other comprehensive income and it is subsequently reclassified into net earnings in the period in which the hedged transaction affects net earnings or the forecasted transaction is no longer probable of occurring.  We report the ineffective portion, if any, of the gain or loss in net earnings.

 

Net Investment Hedges

 

We also enter into foreign exchange swap contracts to hedge against the effect of euro and swiss franc exchange rate fluctuations on net investments of certain foreign operations. For a net investment hedge, we recognize changes in the fair value of the derivative as a component of foreign currency translation within other comprehensive income to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or liquidated.  We limit recognition in net earnings of amounts previously recorded in cumulative translation of other comprehensive income to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation.  We report the ineffective portion, if any, of the gain or loss in net earnings.

 

Derivatives Not Designated as Hedging Instruments

 

Derivatives not designated as hedging instruments include forward currency exchange contracts used to manage the impact of fluctuations in foreign currency exchange rates relative to recognized receivable and payable balances denominated in non-functional currencies and on certain forecasted inventory purchases and revenue streams denominated in non-functional currencies.  The contracts have terms of up to twelve months. These derivative instruments are not designated in hedging relationships; therefore, we record gains and losses on these contracts directly in net earnings.  In the third quarter of fiscal 2010, we did not dedesignate any derivative instruments that were formerly designated in cash flow hedging relationships.

 

Summary of Derivative Balances

 

The following table presents the gross fair values for derivative instruments and the corresponding classification in our condensed consolidated balance sheet at November 28, 2009:

 

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Table of Contents

 

 

 

Assets

 

Liabilities

 

Contract Type

 

Balance Sheet
Classification

 

Fair Value

 

Balance Sheet
Classification

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Other current assets

 

$

1

 

Accrued liabilities

 

$

 

 

 

 

 

 

 

 

 

 

 

Net investment hedges

 

 

 

 

 

 

 

 

 

Foreign exchange swap contracts

 

Other current assets

 

 

Accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives designated as hedging instruments

 

 

 

$

1

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Other current assets

 

3

 

Accrued liabilities

 

(1

)

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

4

 

 

 

$

(1

)

 

The following table presents the effects of derivative instruments on other comprehensive income (“OCI”) and on our consolidated statements of earnings for the three and nine months ended November 28, 2009:

 

 

 

Pre-tax
Gain (Loss)
Recognized
in OCI
1

 

Gain (Loss) Recognized
in Income on Derivative

(Ineffective Portion) 2

 

Gain (Loss) Reclassified
from Accumulated
OCI to Net Earnings

(Effective Portion)

 

Contract Type

 

At
November 28,
2009

 

Three months
ended
November 28,
2009

 

Nine months
ended
November 28,
2009

 

Three months
ended
November 28,
2009

 

Nine months
ended
November 28,
2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts 3

 

$

1

 

$

 

$

 

$

1

 

$

4

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment hedges

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange swap contracts

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

29

 

$

 

$

 

$

1

 

$

4

 

 

1       Reflects the amount recognized in OCI prior to the reclassification of less than $1 and $14 to noncontrolling interests for the cash flow and net investment hedges, respectively.

 

2       There are no amounts excluded from the assessment of hedge effectiveness.

 

3       Gains reclassified from OCI are included within selling, general and administrative expenses in our consolidated statements of earnings.

 

The following table presents the effects of derivatives not designated as hedging instruments on our consolidated statements of earnings for the three and nine months ended November 28, 2009:

 

 

 

Gain (Loss) Recognized in Income 1

 

Contract Type

 

Three months ended
November 28, 2009

 

Nine months ended
November 28, 2009

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

(3

)

$

(4

)

 

1      Included within selling, general and administrative expenses in our consolidated statements of earnings.

 

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Table of Contents

 

The following table presents the notional amounts of our foreign currency exchange contracts at November 28, 2009:

 

 

 

Notional
Amount

 

Derivatives designated as cash flow hedging instruments

 

$

134

 

Derivatives designated as net investment hedging instruments

 

685

 

Derivatives not designated as hedging instruments

 

163

 

Total

 

$

982

 

 

9.        Income Taxes

 

Our effective tax rates were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 28,
2009

 

November 29,
2008

 

November 28,
2009

 

November 29,
2008

 

Effective tax rate

 

25.6

%

54.6

%

36.7

%

40.2

%

 

The decreases in our effective tax rates (“ETR”) in the three and nine months ended November 28, 2009, as compared to the prior year periods, were primarily due to the net impact of certain foreign tax matters in the fiscal third quarter of 2010, which included the settlement discussed in Note 1, Basis of Presentation, and the prior year period tax impact of the $111 other-than-temporary impairment charge discussed in Note 3, Investments, related to our investment in CPW common stock.  In addition, the ETR in the first nine months of fiscal 2010 was impacted by unbenefitted losses in certain foreign jurisdictions that increased our ETR.

 

10.      Earnings per Share

 

Our basic earnings per share calculation is computed based on the weighted-average number of common shares outstanding. Our diluted earnings per share calculation is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include stock options, nonvested share awards and shares issuable under our employee stock purchase plan, as well as common shares that would have resulted from the assumed conversion of our convertible debentures. Since the potentially dilutive shares related to the convertible debentures are included in the calculation, the related interest expense, net of tax, is added back to net earnings, as the interest would not have been paid if the convertible debentures had been converted to common stock. Nonvested market-based awards and nonvested performance-based awards are included in the average diluted shares outstanding each period if established market or performance criteria have been met at the end of the respective periods.

 

The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share attributable to Best Buy Co., Inc. (shares in millions):

 

<

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 28,
2009

 

November 29,
2008

 

November 28,
2009

 

November 29,
2008

 

Numerator