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 May 30, 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  o  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 — 416,359,000 shares outstanding as of May 30, 2009.

 

 

 



 

BEST BUY CO., INC.

 

FORM 10-Q FOR THE QUARTER ENDED MAY 30, 2009

 

INDEX

 

Part I — Financial Information

 

3

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

 

a)

Condensed consolidated balance sheets as of May 30, 2009; February 28, 2009; and May 31, 2008

 

3

 

 

 

 

 

 

 

 

b)

Consolidated statements of earnings for the three months ended May 30, 2009, and May 31, 2008

 

5

 

 

 

 

 

 

 

 

c)

Consolidated statements of cash flows for the three months ended May 30, 2009, and May 31, 2008

 

6

 

 

 

 

 

 

 

 

d)

Notes to condensed consolidated financial statements

 

7

 

 

 

 

 

 

 

Item 2.

 

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

 

33

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

45

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

46

 

 

 

 

 

 

Part II — Other Information

 

46

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

47

 

 

 

 

 

 

Signatures

 

 

 

48

 

2



 

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)

 

 

 

May 30,
2009

 

February 28,
2009

 

May 31,
2008

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

535

 

$

498

 

$

1,475

 

Short-term investments

 

8

 

11

 

68

 

Receivables

 

1,427

 

1,868

 

533

 

Merchandise inventories

 

5,486

 

4,753

 

5,005

 

Other current assets

 

954

 

1,062

 

652

 

Total current assets

 

8,410

 

8,192

 

7,733

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, NET

 

4,184

 

4,174

 

3,456

 

 

 

 

 

 

 

 

 

GOODWILL

 

2,296

 

2,203

 

1,085

 

 

 

 

 

 

 

 

 

TRADENAMES

 

167

 

173

 

98

 

 

 

 

 

 

 

 

 

CUSTOMER RELATIONSHIPS

 

305

 

322

 

4

 

 

 

 

 

 

 

 

 

EQUITY AND OTHER INVESTMENTS

 

421

 

395

 

529

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

431

 

367

 

326

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

16,214

 

$

15,826

 

$

13,231

 

 

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.

 

3



 

BEST BUY CO., INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

($ in millions, except per share amounts)

 

(Unaudited)

 

 

 

May 30,
2009

 

February 28,
2009

 

May 31,
2008

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

4,996

 

$

4,997

 

$

4,697

 

Unredeemed gift card liabilities

 

428

 

479

 

481

 

Accrued compensation and related expenses

 

404

 

459

 

284

 

Accrued liabilities

 

1,365

 

1,382

 

1,016

 

Accrued income taxes

 

92

 

281

 

40

 

Short-term debt

 

1,017

 

783

 

469

 

Current portion of long-term debt

 

54

 

54

 

40

 

Total current liabilities

 

8,356

 

8,435

 

7,027

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

1,236

 

1,109

 

880

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT

 

1,121

 

1,126

 

650

 

 

 

 

 

 

 

 

 

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 — 416,359,000, 413,684,000 and 411,930,000 shares, respectively

 

42

 

41

 

41

 

Additional paid-in capital

 

294

 

205

 

72

 

Retained earnings

 

4,808

 

4,714

 

4,058

 

Accumulated other comprehensive (loss) income

 

(154

)

(317

)

463

 

Total Best Buy Co., Inc. shareholders’ equity

 

4,990

 

4,643

 

4,634

 

Noncontrolling interests

 

511

 

513

 

40

 

Total shareholders’ equity

 

5,501

 

5,156

 

4,674

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

16,214

 

$

15,826

 

$

13,231

 

 

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.

 

4



 

BEST BUY CO., INC.

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

($ in millions, except per share amounts)

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

May 30,
2009

 

May 31,
2008

 

Revenue

 

$

10,095

 

$

8,990

 

Cost of goods sold

 

7,538

 

6,857

 

Gross profit

 

2,557

 

2,133

 

Selling, general and administrative expenses

 

2,209

 

1,856

 

Restructuring charges

 

52

 

 

Operating income

 

296

 

277

 

Other income (expense)

 

 

 

 

 

Investment income and other

 

9

 

21

 

Interest expense

 

(23

)

(13

)

 

 

 

 

 

 

Earnings before income tax expense and equity in loss of affiliates

 

282

 

285

 

Income tax expense

 

126

 

106

 

Equity in loss of affiliates

 

 

(1

)

Net earnings including noncontrolling interests

 

156

 

178

 

Net (earnings) loss attributable to noncontrolling interests

 

(3

)

1

 

 

 

 

 

 

 

Net earnings attributable to Best Buy Co., Inc.

 

$

153

 

$

179

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

$

0.37

 

$

0.44

 

Diluted

 

$

0.36

 

$

0.43

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.14

 

$

0.13

 

 

 

 

 

 

 

Weighted average common shares outstanding (in millions)

 

 

 

 

 

Basic

 

415.2

 

411.4

 

Diluted

 

425.7

 

423.4

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



 

BEST BUY CO., INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

May 30,
2009

 

May 31,
2008

 

OPERATING ACTIVITIES

 

 

 

 

 

Net earnings including noncontrolling interests

 

$

156

 

$

178

 

Adjustments to reconcile net earnings including noncontrolling interests to total cash used in operating activities

 

 

 

 

 

Depreciation

 

196

 

153

 

Amortization of definite-lived intangible assets

 

21

 

 

Restructuring charges

 

52

 

 

Stock-based compensation

 

27

 

25

 

Deferred income taxes

 

24

 

(20

)

Excess tax benefits from stock-based compensation

 

(2

)

(4

)

Other, net

 

1

 

1

 

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

 

 

 

 

 

Receivables

 

421

 

27

 

Merchandise inventories

 

(668

)

(295

)

Other assets

 

99

 

(33

)

Accounts payable

 

(33

)

344

 

Other liabilities

 

(163

)

(87

)

Income taxes

 

(184

)

(350

)

Total cash used in operating activities

 

(53

)

(61

)

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Additions to property and equipment, net of $100 non-cash capital expenditures in the three months ended May 31, 2008

 

(186

)

(220

)

Purchases of investments

 

(3

)

(58

)

Sales of investments

 

22

 

91

 

Change in restricted assets

 

11

 

(24

)

Other, net

 

(15

)

 

Total cash used in investing activities

 

(171

)

(211

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Borrowings of debt

 

1,806

 

627

 

Repayments of debt

 

(1,558

)

(313

)

Dividends paid

 

(58

)

(54

)

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

 

71

 

35

 

Excess tax benefits from stock-based compensation

 

2

 

4

 

Other, net

 

(2

)

12

 

Total cash provided by financing activities

 

261

 

311

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

(2

)

 

 

 

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

 

37

 

37

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

498

 

1,438

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

535

 

$

1,475

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6



 

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 significant intervening events that would have materially affected our consolidated financial statements had they been recorded during the three months ended May 30, 2009.

 

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, we reclassified to customer relationships, $4 at May 31, 2008, which was previously reported in other assets on our consolidated balance sheet.

 

In addition, as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, as described below in New Accounting Standards, we:

 

·                  reclassified to noncontrolling interests, a component of shareholders’ equity, $513 and $40 at February 28, 2009, and May 31, 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 $178, $1 and $179, respectively, for the three months ended May 31, 2008; and

 

·                  utilized net earnings including noncontrolling interests of $178 for the three months ended May 31, 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.

 

7



 

New Accounting Standards

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles. This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) will become the 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 nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009.  We will begin to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2010.  As the Codification was not intended to change or alter existing GAAP, it will not have any impact on our consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140. The new standard 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. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009.  We will adopt SFAS No. 166 in fiscal 2011 and are evaluating the impact it will have to our consolidated financial statements.

 

In May 2009, the FASB issued SFAS No. 165, Subsequent Events. This standard 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 standard 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.  SFAS No. 165 is effective for fiscal years and interim periods ended after June 15, 2009 and will be applied prospectively. We will adopt SFAS No. 165 in the second quarter of fiscal 2010 and do not expect that it will have a material impact on our consolidated financial statements.

 

In April 2009, the FASB issued three FASB Staff Positions (“FSP”) intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. FSP No. 157-4, 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 SFAS No. 157, Fair Value Measurements. FSP No. 115-2, 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. FSP No. 115-2 does not amend existing guidance related to other-than-temporary impairments of equity securities. FSP No. 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, increases the frequency of fair value disclosures. These FSPs are effective for fiscal years and interim periods ended after June 15, 2009 and will be effective for us beginning in the second quarter of fiscal 2010. We are evaluating the impact these FSPs will have on our financial statements and related disclosures, but do not expect that they will have a material impact on our consolidated financial position or results of operations.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133. SFAS No. 161 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 SFAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Our adoption of SFAS No. 161 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 SFAS No. 161 in Note 7, Derivative Instruments, which are provided on a prospective basis.

 

8



 

In December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations (“141R”). SFAS No. 141R significantly changes 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 SFAS No. 141R, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008. We adopted SFAS No. 141R on March 1, 2009, which changed our accounting treatment for business combinations on a prospective basis.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. SFAS No. 160 changes the accounting and reporting for minority interests, which will 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. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We adopted SFAS No. 160 on March 1, 2009, and applied the provisions of the standard prospectively, except for the presentation and disclosure requirements, which we applied retrospectively. Our adoption of SFAS No. 160 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 interest (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 standard are included in Note 9, 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.

 

The acquisition of the remaining 25% interest in Five Star for $191 was accounted for using the purchase method in accordance with SFAS No. 141, Business Combinations. 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.

 

9



 

The preliminary purchase price allocation was as follows:

 

Net assets of noncontrolling interests

 

$

48

 

Tradename

 

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 $121 (or $100 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 $121 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 accounted for the acquisition pursuant to SFAS No. 141, using the purchase method. Accordingly, 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 will be finalized no later than the third quarter of fiscal 2010, as we obtain more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of acquisition. None of the goodwill is deductible for tax purposes.

 

The preliminary purchase price allocation was as follows:

 

Cash and cash equivalents

 

$

21

 

Short term investments

 

28

 

Receivables

 

3

 

Other current assets

 

2

 

Property and equipment

 

10

 

Goodwill

 

32

 

Tradenames

 

13

 

Customer relationships

 

3

 

Equity and other investments

 

3

 

Other assets (deferred tax assets)

 

47

 

Total assets

 

162

 

 

 

 

 

Accounts payable

 

(3

)

Other current liabilities

 

(38

)

Total liabilities

 

(41

)

 

 

 

 

Purchase price allocated to assets and liabilities acquired

 

$

121

 

 

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,

 

10



 

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 transactions costs for an aggregate purchase price of $2,196.

 

Pursuant to the shareholder’s 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 accounted for the acquisition pursuant to SFAS No. 141, using the purchase method. Accordingly, 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 will be finalized no later than the second quarter of fiscal 2010, as we obtain more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of purchase. None of the goodwill is deductible for tax purposes.

 

The preliminary purchase price allocation was as follows:

 

Cash and cash equivalents

 

$

124

 

Restricted cash

 

112

 

Receivables

 

1,186

 

Merchandise inventories

 

535

 

Other current assets

 

110

 

Property and equipment

 

500

 

Goodwill

 

1,515

 

Tradenames

 

93

 

Customer relationships

 

484

 

Other assets

 

203

 

Total assets

 

4,862

 

 

 

 

 

Accounts payable

 

(803

)

Other current liabilities

 

(705

)

Short-term debt

 

(299

)

Long-term liabilities

 

(215

)

Total liabilities

 

(2,022

)

 

 

 

 

Noncontrolling interests1

 

(644

)

 

 

 

 

Purchase price allocated to assets and liabilities acquired

 

$

2,196

 

 

11



 

1                      We acquired a 50% interest in the net assets of Best Buy Europe and are consolidating the financial results of Best Buy Europe as part of our International segment from the date of acquisition. 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 an initial $644 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, then available information and reasonable and supportable assumptions. The allocation 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

 

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 in accordance with Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. 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, which we expect to be utilized primarily in fiscal 2010. The restructuring accrual was not utilized in fiscal 2009 or the first quarter of fiscal  2010.

 

Our interest in Best Buy Europe is separate 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 ended

 

 

 

May 30,

 

May 31,

 

 

 

2009

 

2008

 

Pro forma revenue

 

$

10,095

 

$

10,509

 

Pro forma net earnings

 

153

 

166

 

 

 

 

 

 

 

Pro forma earnings per common share

 

 

 

 

 

Basic

 

$

0.37

 

$

0.40

 

Diluted

 

0.36

 

0.40

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

415.2

 

411.4

 

Diluted

 

425.7

 

423.4

 

 

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.

 

12



 

3.                       Investments

 

Investments were comprised of the following:

 

 

 

May 30,
2009

 

February 28,
2009

 

May 31,
2008

 

Short-term investments

 

 

 

 

 

 

 

Money market fund

 

$

8

 

$

8

 

$

 

Debt securities

 

 

 

68

 

Other investments

 

 

3

 

 

Total short-term investments

 

$

8

 

$

11

 

$

68

 

 

 

 

 

 

 

 

 

Equity and other investments

 

 

 

 

 

 

 

Debt securities

 

$

298

 

$

314

 

$

380

 

Marketable equity securities

 

79

 

41

 

131

 

Other investments

 

44

 

40

 

18

 

Total equity and other investments

 

$

421

 

$

395

 

$

529

 

 

Money Market Fund

 

We have $9 par value invested in one money market fund, The Reserve International Liquidity Fund, Ltd. (“RILF”). On September 15, 2008, we issued a redemption request for the entire $25 then outstanding and received $16 in January 2009. At May 30, 2009, the RILF has not yet honored our redemption request in full and, accordingly, we have presented the $8 fair value of the investment ($9 par value net of a $1 realized loss on investment) within short-term investments on our condensed consolidated balance sheet.

 

Debt Securities

 

The following table presents the fair values, related weighted-average interest rates (taxable equivalent), maturities and major security types for our investments in debt securities:

 

 

 

May 30, 2009

 

February 28, 2009

 

May 31, 2008

 

 

 

Fair
Value

 

Weighted-
Average
Interest
Rate

 

Fair
Value

 

Weighted-
Average
Interest
Rate

 

Fair
Value

 

Weighted-
Average
Interest
Rate

 

Short-term investments

 

$

 

N/A

 

$

 

N/A

 

$

68

 

3.73

%

Long-term investments

 

298

 

1.59

%

314

 

2.04

%

380

 

6.47

%

Total

 

$

298

 

 

 

$

314

 

 

 

$

448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction-rate securities1

 

$

298

 

 

 

$

314

 

 

 

$

380

 

 

 

Commercial paper

 

 

 

 

 

 

 

68

 

 

 

Total

 

$

298

 

 

 

$

314

 

 

 

$

448

 

 

 

 

1          The par value of our auction-rate securities was $312, $329 and $380 at May 30, 2009, February 28, 2009, and May 31, 2008, respectively.

 

In accordance with our investment policy, we place our investments in debt securities with issuers who have high-quality credit and limit the amount of investment exposure to any one issuer. The primary objectives of our investment activities are to preserve principal, maintain a desired level of liquidity to meet working capital needs and minimize exposure to interest rate fluctuations.

 

Short-term and long-term investments are comprised of auction-rate securities (“ARS”) and commercial paper. We classify investments in ARS and other investments in debt securities 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 has historically provided a

 

13



 

means by which we may rollover the investment or sell these securities at par in order to provide us with liquidity as needed.

 

Our ARS portfolio consisted of the following at May 30, 2009, February 28, 2009, and May 31, 2008:

 

Description

 

Nature of collateral or guarantee

 

May 30,
2009

 

February 28,
2009

 

May 31, 2008

 

Student loan bonds

 

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

 

$

274

 

$

276

 

$

298

 

Municipal revenue bonds

 

94% insured by AA/Aa-rated bond insurers at May 30, 2009

 

24

 

24

 

59

 

Auction preferred securities

 

Underlying investments of closed-end funds

 

 

14

 

23

 

Total fair value

 

 

 

$

298

 

$

314

 

$

380

 

 

At May 30, 2009, our ARS portfolio was 74% AAA/Aaa-rated, 8% AA/Aa-rated and 18% A/A-rated.

 

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. We sold $17 in ARS at par during the first quarter of fiscal 2010. However, at May 30, 2009, our entire remaining ARS portfolio, consisting of 52 investments in ARS, was subject to failed auctions. Subsequent to May 30, 2009, and through July 7, 2009, we sold $3 (par value) of our ARS. To date, we have collected all interest due on our ARS and expect to continue to do so in the future.

 

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 May 30, 2009. 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 come due according to the contractual maturities of the debt issues, which range from eight to 40 years. We believe that issuers and financial markets are exploring alternatives that may improve liquidity, although it is not yet clear when or if such efforts will be successful. 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.

 

Of our ARS portfolio, $89 was marketed and sold by UBS AG and its affiliates (collectively, “UBS”). 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 par value of our UBS-brokered ARS plus accrued but unpaid interest at any time between June 30, 2010, and July 2, 2012.

 

We evaluated our entire ARS portfolio of $312 (par value) for impairment at May 30, 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 May 30, 2009, was $298. Accordingly, we recognized a $14 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.

 

We had $(9), $(10) and $0 in unrealized (loss) gain, net of tax, recorded in accumulated other comprehensive income at May 30, 2009, February 28, 2009, and May 31, 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.

 

14



 

Our investments in marketable equity securities were as follows:

 

 

 

May 30,
2009

 

February 28,
2009

 

May 31,
2008

 

 

 

 

 

 

 

 

 

Common stock of CPW

 

$

70

 

$

40

 

$

124

 

Other

 

9

 

1

 

7

 

Total

 

$

79

 

$

41

 

$

131

 

 

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.  The decrease in value of our investment in CPW common stock since May 31, 2008, is due primarily to a $111 other-than-temporary impairment charge we recorded in the third quarter of fiscal 2009.  Subsequent to February 28, 2009, the market price of CPW common stock increased and, accordingly, we recorded a $23 pre-tax unrealized gain in accumulated other comprehensive income related to this investment.

 

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 $20, $(4) and $(58) at May 30, 2009, February 28, 2009, and May 31, 2008, respectively.

 

Other Investments

 

The aggregate carrying values of investments accounted for using either the cost method or the equity method, at May 30, 2009, February 28, 2009, and May 31, 2008, were $44, $43 and $18, respectively.

 

4.                        Fair Value Measurements

 

We adopted SFAS No. 157, Fair Value Measurements, on March 2, 2008. This standard defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157 defines fair value as 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. SFAS No. 157 also establishes a three-tier valuation hierarchy based upon observable and non-observable inputs.

 

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 May 30, 2009, February 28, 2009, and May 31, 2008, according to the valuation techniques we used to determine their fair values. See Note 4, Fair Value Measurements, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2009, for a description of the valuation techniques applied.

 

15



 

 

 

 

 

Fair Value Measurements
Using Inputs Considered as

 

 

 

Fair Value at
May 30,
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

 

 

 

 

 

 

 

 

 

U.S. Treasury bills (restricted cash)

 

85

 

85

 

 

 

Money market funds (restricted cash)

 

60

 

60

 

 

 

Derivative instruments

 

3

 

 

3

 

 

Equity and other investments

 

 

 

 

 

 

 

 

 

Auction rate securities

 

298

 

 

 

298

 

Marketable equity securities

 

79

 

79

 

 

 

Other assets

 

 

 

 

 

 

 

 

 

Assets that fund deferred compensation

 

67

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

 

 

 

 

 

 

 

 

Derivative instruments

 

6

 

 

6

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

Deferred compensation

 

56

 

56

 

 

 

 

 

 

 

 

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
May 31,
2008

 

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

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

1,136

 

$

647

 

$

489

 

$

 

Short-term investments

 

 

 

 

 

 

 

 

 

Debt securities

 

68

 

 

68

 

 

Other current assets (restricted assets)

 

 

 

 

 

 

 

 

 

Cash equivalents

 

114

 

114

 

 

 

Equity and other investments

 

 

 

 

 

 

 

 

 

Auction rate securities

 

380

 

 

 

380

 

Marketable equity securities

 

131

 

131

 

 

 

Other assets

 

 

 

 

 

 

 

 

 

Assets that fund deferred compensation

 

84

 

84

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

Deferred compensation

 

77

 

77

 

 

 

 

16



 

The following tables provide a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3).

 

 

 

 

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

 

Unrealized gain included in other comprehensive income

 

 

 

1

 

1

 

Purchases, sales and settlements, net

 

(2

)

 

(15

)

(17

)

Balances at May 30, 2009

 

$

274

 

$

24

 

$

 

$

298

 

 

 

 

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

 

(1

)

(38

)

 

(39

)

Interest accrued

 

2

 

 

 

2

 

Balances at May 31, 2008

 

$

298

 

$

59

 

$

23

 

$

380

 

 

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 May 30, 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.

 

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 three months ended May 30, 2009, we had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

 

17



 

5.                        Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill and indefinite-lived tradenames by segment were as follows in the three months ended May 30, 2009 and May 31, 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

 

 

10

 

10

 

 

 

 

Changes in foreign currency exchange rates

 

 

83

 

83

 

 

7

 

7

 

Balances at May 30, 2009

 

$

434

 

$

1,862

 

$

2,296

 

$

32

 

$

79

 

$

111

 

 

 

 

Goodwill

 

Tradenames

 

 

 

Domestic

 

International

 

Total

 

Domestic

 

International

 

Total

 

Balances at March 1, 2008

 

$

450

 

$

638

 

$

1,088

 

$

23

 

$

74

 

$

97

 

Changes in foreign currency exchange rates

 

 

(3

)

(3

)

 

1

 

1

 

Balances at May 31, 2008

 

$

450

 

$

635

 

$

1,085

 

$

23

 

$

75

 

$

98

 

 

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

 

 

 

May 30, 2009

 

February 28, 2009

 

May 31, 2008

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Tradenames

 

$

69

 

$

(13

)

$

79

 

$

(10

)

$

 

$

 

Customer relationships

 

369

 

(64

)

367

 

(45

)

6

 

(2

)

Total

 

$

438

 

$

(77

)

$

446

 

$

(55

)

$

6

 

$

(2

)

 

Total amortization expense for the three months ended May 30, 2009 and May 31, 2008 was $21 and less than $1, 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

 

$

61

 

2011

 

81

 

2012

 

61

 

2013

 

42

 

2014

 

37

 

Thereafter

 

79

 

 

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 will provide an operating structure that will support a more effective and efficient use of our resources and provide 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.

 

18



 

We expect to be substantially complete with our announced restructuring activities in fiscal 2010. We will continue to evaluate our operating structure and cannot project whether any further restructuring charges will be necessary.

 

All charges related to our restructuring plan were presented as restructuring charges in our consolidated statements of earnings. The composition of our restructuring charges incurred in the three months ended May 30, 2009, as well as the cumulative amount incurred through May 30, 2009, for both the Domestic and International segments, were as follows:

 

 

 

Domestic

 

International

 

Total

 

 

 

Three Months
Ended
May 30, 2009

 

Cumulative
Amount
to Date

 

Three Months
Ended
May 30, 2009

 

Cumulative
Amount
to Date

 

Three Months
Ended
May 30, 2009

 

Cumulative
Amount
to Date

 

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 activity in the three months ended May 30, 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

 

(67

)

 

(67

)

Balances at May 30, 2009

 

$

57

 

$

2

 

$

59

 

 

7.                        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 hedge 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 consolidated balance sheets at fair value and evaluate hedge effectiveness prospectively and retrospectively. 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. 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 currency exchange contracts to hedge against the effect of exchange rate fluctuations on certain forecasted inventory purchases and 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 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. We report the ineffective portion, if any, of the gain or loss in net earnings.

 

Net Investment Hedges

 

We also enter into foreign currency 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

 

19



 

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.  The contracts have terms of up to three months. These derivative instruments are not designated in hedging relationships; therefore, we record gains and losses on these contracts directly in net earnings.  There were no dedesignated derivative instruments formerly designated in cash flow hedging relationships at May 30, 2009.

 

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 May 30, 2009:

 

 

 

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

 

$

3

 

Accrued liabilities

 

$

(1

)

 

 

 

 

 

 

 

 

 

 

Net investment hedges

 

 

 

 

 

 

 

 

 

Foreign exchange swap contracts

 

Other current assets

 

 

Accrued liabilities

 

(3

)

 

 

 

 

 

 

 

 

 

 

Total derivatives designated as hedging instruments

 

 

 

$

3

 

 

 

$

(4

)

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Other current assets

 

 

Accrued liabilities

 

(2

)

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

3

 

 

 

$

(6

)

 

20



 

The following table presents the effects of derivative instruments on other comprehensive income (“OCI”) and on our consolidated statement of earnings for the three months ended May 30, 2009:

 

 

 

 

 

Gain (Loss) Recognized
in Income on Derivative

(Ineffective Portion) 2

 

Gain (Loss) Reclassified
from Accumulated
OCI to Net Earnings

(Effective Portion)

 

Contract Type

 

Gain (Loss)
Recognized
in OCI
1

 

Line Item in Consolidated Statement of Earnings

 

Amount

 

Line Item in Consolidated
Statement of Earnings

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

(2

)

Selling, general and administrative expenses (“SG&A”)

 

$

 

SG&A

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment hedges

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange swap contracts

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

16

 

 

 

$

 

 

 

$

 

 

1                   Reflects amount recognized in OCI prior to reclassification of $(1) and $9 to noncontrolling interests for the cash flow and net investment hedges, respectively.

 

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

 

The following table presents the effects of derivatives not designated as hedging instruments on our consolidated statement of earnings for the three months ended May 30, 2009:

 

 

 

Line Item in Consolidated
Statement of Earnings

 

Gain (Loss)
Recognized in
Income

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

SG&A

 

$

(4

)

 

The following table presents the notional amounts of our foreign currency exchange contracts at May 30, 2009:

 

 

 

 

Notional
Amount

 

Derivatives designated as cash flow hedging instruments

 

$

213

 

Derivatives designated as net investment hedging instruments

 

638

 

Derivatives not designated as hedging instruments

 

31

 

Total

 

$

882

 

 

8.                        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

 

21



 

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

 

 

 

May 30,
2009

 

May 31,
2008

 

Numerator

 

 

 

 

 

Net earnings attributable to Best Buy Co., Inc., basic

 

$

153

 

$

179

 

Adjustment for assumed dilution:

 

 

 

 

 

Interest on convertible debentures, net of tax

 

1

 

2

 

Net earnings attributable to Best Buy Co., Inc., diluted

 

$

154

 

$

181

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

Weighted-average common shares outstanding

 

415.2

 

411.4

 

Effect of potentially dilutive securities:

 

 

 

 

 

Shares from assumed conversion of convertible debentures

 

8.8

 

8.8

 

Stock options and other

 

1.7

 

3.2

 

Weighted-average common shares outstanding, assuming dilution

 

425.7

 

423.4

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

$

0.37

 

$

0.44

 

Diluted

 

$

0.36

 

$

0.43

 

 

The computation of average dilutive shares outstanding excluded options to purchase 20.7 million and 13.0 million shares of our common stock for the three months ended May 30, 2009, and May 31, 2008, respectively. These amounts were excluded as the options’ exercise prices were greater than the average market price of our common stock for the periods presented and, therefore, the effect would be antidilutive (i.e., including such options would result in higher earnings per share).

 

9.                       Supplemental Equity and Comprehensive Income Information

 

The following tables present our consolidated statements of changes in shareholders’ equity for the three months ended May 30, 2009 and May 31, 2008, respectively (shares in millions):

 

 

 

Best Buy Co., Inc.

 

 

 

 

 

 

 

Common
Shares

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Total
Best Buy

Co., Inc.

 

Non
controlling Interests

 

Total

 

Balances at February 28, 2009

 

414

 

$

41

 

$

205

 

$

4,714

 

$

(317

)

$

4,643

 

$

513

 

$

5,156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings, three months ended May 30, 2009

 

 

 

 

153

 

 

153

 

3

 

156

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

139

 

139

 

18

 

157

 

Unrealized gains on available-for-sale investments

 

 

 

 

 

25

 

25

 

 

25

 

Cash flow hedging instruments — unrealized losses

 

 

 

 

 

(1

)

(1

)

(1

)

(2

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

316

 

20

 

336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of business (adjustments to purchase price allocation)

 

 

 

 

 

 

 

(22

)

(22

)

Stock-based compensation

 

 

 

27

 

 

 

27

 

 

27

 

Issuance of common stock under employee stock purchase plan

 

1

 

 

19

 

 

 

19

 

 

19

 

Stock options exercised

 

1

 

1

 

51

 

 

 

52

 

 

52

 

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

 

 

 

(8

)

 

 

(8

)

 

(8

)

Common stock dividends, $0.14 per share

 

 

 

 

(59

)

 

(59

)

 

(59

)

Balances at May 30, 2009

 

416

 

$

42

 

$

294

 

$

4,808

 

$

(154

)

$

4,990

 

$

511

 

$

5,501

 

 

22



 

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Best Buy Co., Inc.