10-Q
Table of Contents

 
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 October 31, 2015 

OR 
¨
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨
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 ¨
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The registrant had 342,719,728 shares of common stock outstanding as of December 1, 2015.



Table of Contents

BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED OCTOBER 31, 2015 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I — FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
Condensed Consolidated Balance Sheets 
($ in millions) (unaudited)
 
October 31, 2015
 
January 31, 2015
 
November 1, 2014
Assets
 

 
 

 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
1,697

 
$
2,432

 
$
1,929

Short-term investments
1,650

 
1,456

 
1,209

Receivables, net
1,061

 
1,280

 
1,066

Merchandise inventories
6,651

 
5,174

 
6,900

Other current assets
676

 
703

 
959

Current assets held for sale

 
684

 

Total current assets
11,735

 
11,729

 
12,063

Property and equipment, net
2,329

 
2,295

 
2,524

Goodwill
425

 
425

 
425

Intangibles, net
18

 
57

 
99

Other assets
636

 
583

 
651

Non-current assets held for sale
32

 
167

 

Total assets
$
15,175

 
$
15,256

 
$
15,762

 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
Current liabilities
 

 
 

 
 

Accounts payable
$
6,184

 
$
5,030

 
$
6,626

Unredeemed gift card liabilities
379

 
411

 
381

Deferred revenue
330

 
326

 
449

Accrued compensation and related expenses
306

 
372

 
305

Accrued liabilities
790

 
782

 
788

Accrued income taxes
23

 
230

 
33

Current portion of long-term debt
383

 
41

 
44

Current liabilities held for sale

 
585

 

Total current liabilities
8,395

 
7,777

 
8,626

Long-term liabilities
874

 
881

 
972

Long-term debt
1,256

 
1,580

 
1,591

Long-term liabilities held for sale

 
18

 

Equity
 

 
 

 
 

Best Buy Co., Inc. shareholders’ equity
 

 
 

 
 

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

 

 

Common stock, $0.10 par value: Authorized — 1.0 billion shares; Issued and outstanding — 344,863,000, 351,468,000 and 350,407,000 shares, respectively
34

 
35

 
35

Additional paid-in capital
185

 
437

 
377

Retained earnings
4,135

 
4,141

 
3,689

Accumulated other comprehensive income
296

 
382

 
468

Total Best Buy Co., Inc. shareholders’ equity
4,650

 
4,995

 
4,569

Noncontrolling interests

 
5

 
4

Total equity
4,650

 
5,000

 
4,573

Total liabilities and equity
$
15,175

 
$
15,256

 
$
15,762

 
NOTE:  The Consolidated Balance Sheet as of January 31, 2015, has been condensed from the audited consolidated financial statements.
 
See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

Consolidated Statements of Earnings
($ in millions, except per share amounts) (unaudited)
 
Three Months Ended
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Revenue
$
8,819

 
$
9,032

 
$
25,905

 
$
26,130

Cost of goods sold
6,708

 
6,956

 
19,661

 
20,109

Restructuring charges – cost of goods sold
(1
)
 

 
4

 

Gross profit
2,112

 
2,076

 
6,240

 
6,021

Selling, general and administrative expenses
1,874

 
1,866

 
5,451

 
5,369

Restructuring charges
8

 
5

 
185

 
12

Operating income
230

 
205

 
604

 
640

Other income (expense)
 

 
 

 
 
 
 
Gain on sale of investments

 
5

 
2

 
7

Investment income and other
3

 

 
14

 
10

Interest expense
(20
)
 
(22
)
 
(60
)
 
(68
)
Earnings from continuing operations before income tax (benefit) expense
213

 
188

 
560

 
589

Income tax (benefit) expense
84

 
72

 
230

 
(133
)
Net earnings from continuing operations
129

 
116

 
330

 
722

Gain (loss) from discontinued operations (Note 2), net of tax benefit (expense) of $-, $3, $3 and $(1)
(4
)
 
(9
)
 
88

 
(7
)
Net earnings including noncontrolling interests
125

 
107

 
418

 
715

Net earnings from discontinued operations attributable to noncontrolling interests

 

 

 
(1
)
Net earnings attributable to Best Buy Co., Inc. shareholders
$
125

 
$
107

 
$
418

 
$
714

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Best Buy Co., Inc. shareholders
 

 
 

 
 
 
 
Continuing operations
$
0.37

 
$
0.33

 
$
0.95

 
$
2.07

Discontinued operations
(0.01
)
 
(0.03
)
 
0.25

 
(0.02
)
Basic earnings per share
$
0.36

 
$
0.30

 
$
1.20

 
$
2.05

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to Best Buy Co., Inc. shareholders
 
 
 
 
 
 
 
Continuing operations
$
0.37

 
$
0.33

 
$
0.93

 
$
2.04

Discontinued operations
(0.01
)
 
(0.03
)
 
0.25

 
(0.02
)
Diluted earnings per share
$
0.36

 
$
0.30

 
$
1.18

 
$
2.02

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.23

 
$
0.19

 
$
1.20

 
$
0.53

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (in millions)
 

 
 

 
 
 
 
Basic
344.7

 
350.1

 
348.9

 
349.0

Diluted
349.0

 
354.0

 
353.6

 
352.5

 
See Notes to Condensed Consolidated Financial Statements. 

4

Table of Contents

Consolidated Statements of Comprehensive Income 
($ in millions) (unaudited)
 
Three Months Ended
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Net earnings including noncontrolling interests
$
125

 
$
107

 
$
418

 
$
715

Foreign currency translation adjustments
(2
)
 
(25
)
 
(19
)
 
(22
)
Unrealized loss on available-for-sale investments

 
(1
)
 

 
(2
)
Reclassification of foreign currency translation adjustments into earnings due to sale of business

 

 
(67
)
 

Comprehensive income including noncontrolling interests
123

 
81

 
332

 
691

Comprehensive income attributable to noncontrolling interests

 

 

 
(1
)
Comprehensive income attributable to Best Buy Co., Inc. shareholders
$
123

 
$
81

 
$
332

 
$
690


See Notes to Condensed Consolidated Financial Statements. 


5

Table of Contents

Consolidated Statements of Change in Shareholders' Equity 
($ and shares in millions) (unaudited)
 
Best Buy Co., Inc.
 
 
 
 
 
Common
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total 
Best Buy
Co., Inc.
 
Non-
controlling
Interests
 
Total
Balances at January 31, 2015
352

 
$
35

 
$
437

 
$
4,141

 
$
382

 
$
4,995

 
$
5

 
$
5,000

Net earnings, nine months ended October 31, 2015

 

 

 
418

 

 
418

 

 
418

Foreign currency translation adjustments

 

 

 

 
(19
)
 
(19
)
 

 
(19
)
Reclassification of foreign currency translation adjustments into earnings

 

 

 

 
(67
)
 
(67
)
 

 
(67
)
Sale of noncontrolling interest

 

 

 

 

 

 
(5
)
 
(5
)
Stock-based compensation

 

 
80

 

 

 
80

 

 
80

Restricted stock vested and stock options exercised
4

 

 
36

 

 

 
36

 

 
36

Issuance of common stock under employee stock purchase plan

 

 
7

 

 

 
7

 

 
7

Tax benefit from stock options exercised, restricted stock vesting and employee stock purchase plan

 

 
9

 

 

 
9

 

 
9

Common stock dividends, $1.20 per share

 

 
3

 
(424
)
 

 
(421
)
 

 
(421
)
Repurchase of common stock
(11
)
 
(1
)
 
(387
)
 

 

 
(388
)
 

 
(388
)
Balances at October 31, 2015
345

 
$
34

 
$
185

 
$
4,135

 
$
296

 
$
4,650

 
$

 
$
4,650

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at February 1, 2014
347

 
$
35

 
$
300

 
$
3,159

 
$
492

 
$
3,986

 
$
3

 
$
3,989

Net earnings, nine months ended November 1, 2014

 

 

 
714

 

 
714

 
1

 
715

Foreign currency translation adjustments

 

 

 

 
(22
)
 
(22
)
 

 
(22
)
Unrealized losses on available-for-sale investments

 

 

 

 
(2
)
 
(2
)
 

 
(2
)
Stock-based compensation

 

 
64

 

 

 
64

 

 
64

Restricted stock vested and stock options exercised
3

 

 
19

 

 

 
19

 

 
19

Issuance of common stock under employee stock purchase plan

 

 
8

 

 

 
8

 

 
8

Tax deficit from stock options exercised, restricted stock vesting and employee stock purchase plan

 

 
(14
)
 

 

 
(14
)
 

 
(14
)
Common stock dividends, $0.53 per share

 

 

 
(184
)
 

 
(184
)
 

 
(184
)
Balances at November 1, 2014
350

 
$
35

 
$
377

 
$
3,689

 
$
468

 
$
4,569

 
$
4

 
$
4,573


See Notes to Condensed Consolidated Financial Statements.

6

Table of Contents

Consolidated Statements of Cash Flows
($ in millions) (unaudited)
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
Operating activities
 
 
 
Net earnings including noncontrolling interests
$
418

 
$
715

Adjustments to reconcile net earnings to total cash provided by (used in) operating activities:
 
 
 
Depreciation
494

 
484

Restructuring charges
189

 
17

Gain on sale of business, net
(99
)
 
(1
)
Stock-based compensation
80

 
63

Deferred income taxes
(43
)
 
(381
)
Other, net
3

 
4

Changes in operating assets and liabilities:
 
 
 
Receivables
229

 
237

Merchandise inventories
(1,494
)
 
(1,541
)
Other assets
20

 
14

Accounts payable
1,152

 
1,526

Other liabilities
(271
)
 
(263
)
Income taxes
(215
)
 
(100
)
Total cash provided by operating activities
463

 
774

 
 
 
 
Investing activities
 

 
 

Additions to property and equipment
(493
)
 
(425
)
Purchases of investments
(2,012
)
 
(2,067
)
Sales of investments
1,816

 
1,084

Proceeds from sale of business, net of cash transferred upon sale
102

 
38

Change in restricted assets
(45
)
 
25

Settlement of net investment hedges
14

 

Other, net

 
3

Total cash used in investing activities
(618
)
 
(1,342
)
 
 
 
 
Financing activities
 

 
 

Repurchase of common stock
(385
)
 

Repayments of debt
(18
)
 
(19
)
Dividends paid
(421
)
 
(185
)
Issuance of common stock
44

 
27

Other, net
19

 
2

Total cash used in financing activities
(761
)
 
(175
)
Effect of exchange rate changes on cash
(13
)
 
(6
)
Decrease in cash and cash equivalents
(929
)
 
(749
)
Cash and cash equivalents at beginning of period, excluding held for sale
2,432

 
2,678

Cash and cash equivalents held for sale at beginning of period
194

 

Cash and cash equivalents at end of period
$
1,697

 
$
1,929


See Notes to Condensed Consolidated Financial Statements.

7

Table of Contents

Notes to Condensed Consolidated Financial Statements
(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 (“GAAP”). All adjustments were comprised of normal recurring adjustments, except as noted in these Notes to Condensed Consolidated Financial Statements.

Historically, we have generated a higher proportion of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico. 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 January 31, 2015. The first nine months of fiscal 2016 and fiscal 2015 included 39 weeks.

In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations on a one-month lag. Our policy is to accelerate recording the effect of events occurring in the lag period that significantly affect our consolidated financial statements. No such events were identified for this period.

In preparing the accompanying condensed consolidated financial statements, we evaluated the period from November 1, 2015, through the date the financial statements were issued, for material subsequent events requiring recognition or disclosure. No such events were identified for this period.

2.
Discontinued Operations

Discontinued operations are primarily comprised of Jiangsu Five Star Appliance Co., Limited ("Five Star") within our International segment. Following the sale of Five Star in February 2015, we continue to hold one retail property in Shanghai, China, which remains held for sale at October 31, 2015, as we continue to actively market the property. The presentation of discontinued operations has been retrospectively applied to all prior periods presented.

The composition of assets and liabilities disposed of as a result of the sale of Five Star was as follows ($ in millions):
 
February 13, 2015
Cash and cash equivalents
$
125

Receivables
113

Merchandise inventories
252

All other assets
461

Total assets
$
951

 
 
Accounts payable
$
478

All other liabilities
128

Total liabilities
$
606



8

Table of Contents

The aggregate financial results of discontinued operations were as follows ($ in millions):

 
Three Months Ended
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Revenue
$

 
$
347

 
$
217

 
$
1,181

 
 
 
 
 
 
 
 
Restructuring charges

 
4

 

 
5

 
 
 
 
 
 
 
 
Loss from discontinued operations before income tax benefit (expense)
(4
)
 
(12
)
 
(14
)
 
(8
)
Income tax benefit (expense)

 
3

 
3

 
(1
)
Gain on sale of discontinued operations

 

 
99

 
2

Net gain (loss) from discontinued operations, including noncontrolling interests
(4
)
 
(9
)
 
88

 
(7
)
Net earnings from discontinued operations attributable to noncontrolling interests

 

 

 
(1
)
Net gain (loss) from discontinued operations attributable to Best Buy Co., Inc. shareholders
$
(4
)
 
$
(9
)
 
$
88

 
$
(8
)

3.    Fair Value Measurements
 
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. To measure fair value, 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, including:
 
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets in non-active markets;
Inputs other than quoted prices that are observable for the asset or liability; and
Inputs that are derived principally from or corroborated by other observable market data.
 
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 Measured at Fair Value on a Recurring Basis
 
The fair value hierarchy requires the use of observable market data when available. In instances where 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.


9

Table of Contents

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 October 31, 2015, January 31, 2015, and November 1, 2014, according to the valuation techniques we used to determine their fair values ($ in millions).
 
 
 
Fair Value Measurements
Using Inputs Considered as
 
Fair Value at
October 31, 2015
 
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
$
2

 
$
2

 
$

 
$

Commercial paper
108

 

 
108

 

Time deposits
222

 

 
222

 

Short-term investments
 

 
 

 
 

 
 

Corporate bonds
333

 

 
333

 

Commercial paper
288

 

 
288

 

Time deposits
1,029

 

 
1,029

 

Other current assets
 
 
 
 
 
 
 
Foreign currency derivative instruments
14

 

 
14

 

Time deposits
79

 

 
79

 

Other assets
 

 
 

 
 

 
 

Interest rate swap derivative instruments
10

 

 
10

 

Auction rate securities
2

 

 

 
2

Marketable securities that fund deferred compensation
96

 
96

 

 


10

Table of Contents

 
 
 
Fair Value Measurements
Using Inputs Considered as
 
Fair Value at
January 31, 2015
 
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
$
265

 
$
265

 
$

 
$

Corporate bonds
13

 

 
13

 

Commercial paper
165

 

 
165

 

Time deposits
100

 

 
100

 

Short-term investments
 

 
 

 
 

 
 

Corporate bonds
276

 

 
276

 

Commercial paper
306

 

 
306

 

Time deposits
874

 

 
874

 

Other current assets
 

 
 

 
 

 
 

Foreign currency derivative instruments
30

 

 
30

 

Time deposits
83

 

 
83

 

Other assets
 

 
 

 
 

 
 

Interest rate swap derivative instruments
1

 

 
1

 

Auction rate securities
2

 

 

 
2

Marketable securities that fund deferred compensation
97

 
97

 

 

 
 
 
 
 
 
 
 
ASSETS HELD FOR SALE
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
16

 
16

 

 

Time deposits
124

 

 
124

 

 
 
 
 
Fair Value Measurements
Using Inputs Considered as
 
Fair Value at
November 1, 2014
 
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
$
74

 
$
74

 
$

 
$

Corporate bonds
31

 

 
31

 

Commercial paper
91

 

 
91

 

Time deposits
66

 

 
66

 

Short-term investments
 

 
 

 
 

 
 

Corporate bonds
97

 

 
97

 

Commercial paper
381

 

 
381

 

Time deposits
731

 

 
731

 

Other current assets
 

 
 

 
 

 
 

Foreign currency derivative instruments
4

 

 
4

 

Time deposits
181

 

 
181

 

Other assets
 

 
 

 
 

 
 

Auction rate securities
9

 

 

 
9

Marketable equity securities
9

 
9

 

 

Marketable securities that fund deferred compensation
97

 
97

 

 


11

Table of Contents


There was no change in 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 October 31, 2015.

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 measured at fair value as they trade in an active market using quoted market prices and therefore, were classified as Level 1.

Corporate Bonds. Our corporate bond investments were measured at fair value using quoted market prices. They were classified as Level 2 as they trade in a non-active market for which bond prices are readily available.
 
Commercial Paper. Our investments in commercial paper were measured using inputs based upon quoted prices for similar instruments in active markets and, therefore, were classified as Level 2.

Time Deposits. Our time deposits are balances held with banking institutions that cannot be withdrawn for specified terms without a penalty. Time deposits are held at face value plus accrued interest, which approximates fair value, and are classified as Level 2.
 
Foreign Currency Derivative Instruments. Comprised primarily of foreign currency forward contracts and foreign currency swap contracts, our foreign currency 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 foreign currency derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

Interest Rate Swap Derivative Instruments. Our interest rate swap contracts were measured at fair value using readily observable inputs, such as the LIBOR interest rate. Our interest rate swap derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
 
Auction Rate Securities. Our investments in auction rate securities ("ARS") were classified as Level 3 as quoted prices were unavailable. Due to limited market information, we utilized a discounted cash flow ("DCF") model to derive an estimate of fair value. The assumptions we 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 ARS.
 
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.
 
Marketable Securities that Fund Deferred Compensation. 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.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
 
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible fixed assets, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value on our Condensed Consolidated Balance Sheets. For these assets, we do not periodically adjust carrying value to fair value, except in the event of impairment. When we determine that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded within operating income in our Consolidated Statements of Earnings.

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The following table summarizes the fair value remeasurements for non-restructuring property and equipment impairments and restructuring impairments recorded during the nine months ended October 31, 2015, and November 1, 2014 ($ in millions):
 
Nine Months Ended
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
Impairments
 
Remaining Net Carrying Value(1)
 
Impairments
 
Remaining Net Carrying Value(1)
Continuing operations
 
 
 
 
 
 
 
Property and equipment (non-restructuring)
$
34

 
$
10

 
$
27

 
$
17

Restructuring activities(2)
 
 
 
 
 
 
 
Tradename
40

 

 

 

Property and equipment
30

 

 

 

Total continuing operations
$
104

 
$
10

 
$
27

 
$
17

Discontinued operations
 
 
 
 
 
 
 
Property and equipment
$

 
$

 
$
1

 
$

Total discontinued operations
$

 
$

 
$
1

 
$

(1)
Remaining net carrying value approximates fair value.
(2)
See Note 5, Restructuring Charges, for additional information.

All of the fair value remeasurements included in the table above were based on significant unobservable inputs (Level 3). Fixed asset fair values were derived using a DCF model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate. For the tradename, fair value was derived using the relief from royalty method. In the case of assets for which the impairment was the result of restructuring activities, no future cash flows have been assumed as the assets will cease to be used and expected sale values are nominal.

Fair Value of Financial Instruments

Our financial instruments, other than those presented in the disclosures above, include cash, receivables, other investments, accounts payable, other payables, and long-term debt. The fair values of cash, receivables, accounts payable and other payables 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 we estimate that the carrying values for these investments approximate fair value. See Note 6, Debt, for information about the fair value of our long-term debt.

4.    Goodwill and Intangible Assets
 
The changes in the carrying values of goodwill and indefinite-lived tradenames by segment were as follows in the nine months ended October 31, 2015, and November 1, 2014 ($ in millions):
 
Goodwill
 
Indefinite-lived Tradenames
 
Domestic
 
Domestic
 
International
 
Total
Balances at January 31, 2015
$
425

 
$
18

 
$
39

 
$
57

Changes in foreign currency exchange rates

 

 
1

 
1

Canada brand restructuring(1)

 

 
(40
)
 
(40
)
Balances at October 31, 2015
$
425

 
$
18

 
$

 
$
18

 
(1)
Represents the Future Shop tradename impaired as a result of the Canadian brand consolidation in the first quarter of fiscal 2016. See Note 5, Restructuring Charges, for further discussion of the Canadian brand consolidation.
 
Goodwill
 
Indefinite-lived Tradenames
 
Domestic
 
Domestic
 
International
 
Total
Balances at February 1, 2014
$
425

 
$
19

 
$
82

 
$
101

Changes in foreign currency exchange rates

 

 
(2
)
 
(2
)
Balances at November 1, 2014
$
425

 
$
19

 
$
80

 
$
99



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The following table provides the gross carrying amount of goodwill and cumulative goodwill impairment ($ in millions):
 
October 31, 2015
 
January 31, 2015
 
November 1, 2014
 
Gross
Carrying
Amount
 
Cumulative
Impairment
 
Gross
Carrying
Amount(1)
 
Cumulative
Impairment(1)
 
Gross
Carrying
Amount
 
Cumulative
Impairment
Goodwill
$
1,100

 
$
(675
)
 
$
1,100

 
$
(675
)
 
$
1,308

 
$
(883
)
(1)
Excludes the gross carrying amount and cumulative impairment related to Five Star, which was held for sale at January 31, 2015. The sale was completed on February 13, 2015.


5.    Restructuring Charges

Charges incurred in the nine months ended October 31, 2015, and November 1, 2014, for our restructuring activities were as follows ($ in millions):
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
Continuing operations
 
 
 
Canadian brand consolidation
$
189

 
$

Renew Blue
(2
)
 
18

Other restructuring activities(1)
2

 
(6
)
Total continuing operations
189

 
12

Discontinued operations
 
 
 
Renew Blue

 
5

Total restructuring charges
$
189

 
$
17

(1)
Represents activity related to our remaining vacant space liability for U.S. large-format store closures in fiscal 2013. We may continue to incur immaterial adjustments to the liability for changes in sublease assumptions or potential lease buyouts. In addition, lease payments for vacated stores will continue until leases expire or are terminated. The remaining vacant space liability was $18 million at October 31, 2015.

Canadian Brand Consolidation

In the first quarter of fiscal 2016, we consolidated the Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in the permanent closure of 66 Future Shop stores and the conversion of the remaining 65 Future Shop stores to the Best Buy brand. In the first nine months of fiscal 2016, we incurred $189 million of restructuring charges related to implementing these changes, which primarily consisted of lease exit costs, a tradename impairment, property and equipment impairments, employee termination benefits and inventory write-downs. In addition, in the first nine months of fiscal 2016, we incurred $9 million of non-restructuring charges related to the changes. We expect to incur total pre-tax charges in the range of $210 million to $250 million related to this action, which includes restructuring charges and other non-restructuring charges. While we expect the majority of these costs to be borne in fiscal 2016, we expect to continue transformation of our Canadian operations throughout fiscal 2017 and fiscal 2018. The total expected charges include approximately $140 million to $180 million of cash charges.

The inventory write-downs related to our Canadian brand consolidation are presented in restructuring charges – cost of goods sold in our Consolidated Statements of Earnings, and the remainder of the restructuring charges are presented in restructuring charges in our Consolidated Statements of Earnings. The composition of total restructuring charges we incurred for the Canadian brand consolidation in the first nine months of fiscal 2016 was as follows ($ in millions):
 
International
Continuing operations
 
Inventory write-downs
$
4

Property and equipment impairments
30

Tradename impairment
40

Termination benefits
26

Facility closure and other costs
89

Total continuing operations
$
189


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The following tables summarize our restructuring accrual activity during the nine months ended October 31, 2015, related to termination benefits and facility closure and other costs associated with Canadian brand consolidation ($ in millions):
 
Termination
Benefits
 
Facility
Closure and
Other Costs
 
Total
Balances at January 31, 2015
$

 
$

 
$

Charges
28

 
113

 
141

Cash payments
(22
)
 
(28
)
 
(50
)
Adjustments(1)
(2
)
 
(9
)
 
(11
)
Changes in foreign currency exchange rates

 
(3
)
 
(3
)
Balances at October 31, 2015
$
4

 
$
73

 
$
77


(1) The adjustments related to termination benefits relate to higher-than-expected employee retention. Adjustments to facility closure and other costs represent changes in sublease assumptions.

Renew Blue

In the fourth quarter of fiscal 2013, we launched the Renew Blue strategy, which included initiatives intended to reduce costs and improve operating performance. These initiatives included focusing on core business activities, reducing headcount, updating our store operating model and optimizing our real estate portfolio. These cost reduction initiatives represented one of the key Renew Blue priorities. We recognized a $2 million benefit and incurred $18 million of restructuring charges related to Renew Blue in the first nine months of fiscal 2016 and 2015, respectively. The charges in the first nine months of fiscal 2015 were primarily comprised of employee termination benefits. We expect to continue to implement cost reduction initiatives throughout the remainder of fiscal 2016 and into fiscal 2017, as we further analyze our operations and strategies.

For continuing operations, the inventory write-downs related to our Renew Blue restructuring activities are presented in restructuring charges - cost of goods sold in our Consolidated Statements of Earnings and the remainder of the restructuring charges are presented in restructuring charges. The restructuring charges from discontinued operations related to this plan are presented in discontinued operations, net of tax.

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The composition of the restructuring charges we incurred for this program in the nine months ended October 31, 2015, and November 1, 2014, as well as the cumulative amount incurred from fiscal 2013 through October 31, 2015, was as follows ($ in millions):
 
Domestic
 
International
 
Total
 
Nine Months Ended
 
Cumulative
Amount
 
Nine Months Ended
 
Cumulative
Amount
 
Nine Months Ended
 
Cumulative
Amount
 
October 31, 2015
 
November 1, 2014
 
 
October 31, 2015
 
November 1, 2014
 
 
October 31, 2015
 
November 1, 2014
 
Continuing operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Inventory write-downs
$

 
$

 
$
1

 
$

 
$

 
$

 
$

 
$

 
$
1

Property and equipment impairments

 

 
14

 

 
1

 
25

 

 
1

 
39

Termination benefits
(2
)
 
11

 
159

 

 
3

 
38

 
(2
)
 
14

 
197

Investment impairments

 

 
43

 

 

 

 

 

 
43

Facility closure and other costs
1

 
1

 
5

 
(1
)
 
2

 
50

 

 
3

 
55

Total continuing operations
(1
)
 
12

 
222

 
(1
)
 
6

 
113

 
(2
)
 
18

 
335

Discontinued operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment impairments

 

 

 

 

 
1

 

 

 
1

Termination benefits

 

 

 

 
2

 
16

 

 
2

 
16

Facility closure and other costs

 

 

 

 
3

 
11

 

 
3

 
11

Total Discontinued Operations

 

 

 

 
5

 
28

 

 
5

 
28

Total
$
(1
)
 
$
12

 
$
222

 
$
(1
)
 
$
11

 
$
141

 
$
(2
)
 
$
23

 
$
363


The following tables summarize our restructuring accrual activity during the nine months ended October 31, 2015, and November 1, 2014, related to termination benefits and facility closure and other costs associated with this program ($ in millions):
 
Termination
Benefits
 
Facility
Closure and
Other Costs
 
Total
Balances at January 31, 2015
$
16

 
$
23

 
$
39

Charges

 

 

Cash payments
(7
)
 
(8
)
 
(15
)
Adjustments(1)
(8
)
 
(5
)
 
(13
)
Changes in foreign currency exchange rates

 

 

Balances at October 31, 2015
$
1

 
$
10

 
$
11

(1)
Adjustments to termination benefits were due to higher-than-expected employee retention. In addition, adjustments include the remaining liabilities eliminated as a result of the sale of Five Star, as described in Note 2, Discontinued Operations.

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Termination
Benefits
 
Facility
Closure and
Other Costs
 
Total
Balances at February 1, 2014
$
111

 
$
51

 
$
162

Charges
35

 
12

 
47

Cash payments
(117
)
 
(16
)
 
(133
)
Adjustments(1)
(19
)
 
(5
)
 
(24
)
Changes in foreign currency exchange rates

 
(6
)
 
(6
)
Balances at November 1, 2014
$
10

 
$
36

 
$
46

(1)
Adjustments to termination benefits were due to higher-than-expected employee retention. Adjustments to facility closure and other costs represent changes in sublease assumptions.

6.    Debt

Long-term debt consisted of the following ($ in millions):
 
October 31, 2015
 
January 31, 2015
 
November 1, 2014
2016 Notes
$
350

 
$
349

 
$
350

2018 Notes
500

 
500

 
500

2021 Notes
649

 
649

 
649

Interest rate swap valuation adjustments
10

 
1

 

Financing lease obligations
88

 
69

 
77

Capital lease obligations
42

 
52

 
59

Other debt

 
1

 

   Total long-term debt
1,639

 
1,621

 
1,635

Less: current portion(1)
(383
)
 
(41
)
 
(44
)
   Total long-term debt, less current portion
$
1,256

 
$
1,580

 
$
1,591

 
(1)
Our 2016 Notes due March 15, 2016, are classified in the current portion of long-term debt as of October 31, 2015.

The fair value of total long-term debt approximated $1,718 million, $1,677 million, and $1,672 million at October 31, 2015, January 31, 2015, and November 1, 2014, respectively, based primarily on the market prices quoted from external sources, compared with carrying values of $1,639 million, $1,621 million, and $1,635 million, respectively. If long-term debt was measured at fair value in the financial statements, it would be classified primarily as Level 2 in the fair value hierarchy.

See Note 5, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, for additional information regarding the terms of our debt facilities, debt instruments and other obligations.

7.    Derivative Instruments

We manage our economic and transaction exposure to certain risks through the use of foreign currency derivative instruments. Our objective in holding these derivatives is to reduce the volatility of net earnings and cash flows, as well as net asset value associated with changes in foreign currency exchange rates. We do not hold derivative instruments for trading or speculative purposes. 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.

We record all foreign currency derivative instruments on our Condensed Consolidated Balance Sheets at fair value and evaluate hedge effectiveness prospectively and retrospectively when electing to apply hedge accounting. We formally document all hedging relations at inception for derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transaction. In addition, we have derivatives which are not designated as hedging instruments.

Net Investment Hedges

We use foreign exchange forward contracts to hedge against the effect of Canadian dollar exchange rate fluctuations on a portion of our net investment in our Canadian operations. The contracts have terms up to 12 months. For a net investment

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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 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 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 of the gain or loss, if any, in net earnings.

Interest Rate Swaps

We use "receive fixed-rate, pay variable-rate" interest rate swaps to partially mitigate the effect of interest rate fluctuations on our 2018 Notes and 2021 Notes. Our interest rate swap contracts are considered perfect hedges because the critical terms and notional amounts match those of our fixed-rate debt being hedged and are therefore accounted as a fair value hedge using the shortcut method. Under the shortcut method, we recognize the change in the fair value of the derivatives with an offsetting change to the carrying value of the debt. Accordingly, there is no impact on our Consolidated Statements of Earnings from the fair value of the derivatives.

Derivatives Not Designated as Hedging Instruments

We use foreign currency forward contracts 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 forecast inventory purchases denominated in non-functional currencies. The contracts generally have terms of up to 12 months. These derivative instruments are not designated in hedging relationships, and, therefore, we record gains and losses on these contracts directly to net earnings.

Summary of Derivative Balances

The following table presents the gross fair values for outstanding derivative instruments and the corresponding classification at October 31, 2015, January 31, 2015 and November 1, 2014 ($ in millions):
 
October 31, 2015
 
January 31, 2015
 
November 1, 2014
Contract Type
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as net investment hedges(1)
$
12

 
$

 
$
19

 
$

 
$
1

 
$

Derivatives designated as interest rate swaps(2)
10

 

 
1

 

 

 

No hedge designation (foreign exchange forward contracts)(1)
2

 

 
11

 

 
3

 

Total
$
24

 
$

 
$
31

 
$

 
$
4

 
$

(1)
The fair value is recorded in other current assets or accrued liabilities.
(2)
The fair value is recorded in other assets or long-term liabilities.
    
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 October 31, 2015, and November 1, 2014, respectively ($ in millions):
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Contract Type
Pre-tax Gain(Loss) Recognized in OCI
 
Gain(Loss) Reclassified from Accumulated OCI to Earnings (Effective Portion)
 
Pre-tax Gain(Loss) Recognized in OCI
 
Gain(Loss) Reclassified from Accumulated OCI to Earnings (Effective Portion)
 
Pre-tax Gain(Loss) Recognized in OCI
 
Gain(Loss) Reclassified from Accumulated OCI to Earnings (Effective Portion)
 
Pre-tax Gain(Loss) Recognized in OCI
 
Gain(Loss) Reclassified from Accumulated OCI to Earnings (Effective Portion)
Derivatives designated as net investment hedges
$

 
$

 
$
1

 
$

 
$
6

 
$

 
$
1

 
$



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Table of Contents

The following tables present the effects of derivative instruments on our Consolidated Statements of Earnings for the three and nine months ended October 31, 2015, and November 1, 2014, respectively ($ in millions):
 
Gain (Loss) Recognized within SG&A
 
Gain (Loss) Recognized within SG&A
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
Contract Type
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
No hedge designation (foreign exchange forward contracts)
$
1

 
$
4

 
$
(3
)
 
$


 
Gain (Loss) Recognized within Interest Expense
 
Gain (Loss) Recognized within Interest Expense
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
Contract Type
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Interest rate swap gain (loss)
$
(3
)
 
$

 
$
9

 
$

Adjustments to carrying value of long-term debt
3

 

 
(9
)
 

Net impact on Consolidated Statements of Earnings
$