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Best Buy 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic

 

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 27, 2006

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   x  No   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 — 484,014,000 shares outstanding as of May 27, 2006.

 




 

BEST BUY CO., INC.

FORM 10-Q FOR THE QUARTER ENDED MAY 27, 2006

INDEX

Part I —

 

Financial Information

 

3

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements (unaudited):

 

3

 

 

 

 

 

 

 

 

 

 

 

a)

 

Consolidated condensed balance sheets as of May 27, 2006; February 25, 2006; and May 28, 2005

 

3

 

 

 

 

 

 

 

 

 

 

 

b)

 

Consolidated statements of earnings for the three months ended May 27, 2006, and May 28, 2005

 

5

 

 

 

 

 

 

 

 

 

 

 

c)

 

Consolidated statement of changes in shareholders’ equity for the three months ended May 27, 2006

 

6

 

 

 

 

 

 

 

 

 

 

 

d)

 

Consolidated statements of cash flows for the three months ended May 27, 2006, and May 28, 2005

 

7

 

 

 

 

 

 

 

 

 

 

 

e)

 

Notes to consolidated condensed financial statements

 

8

 

 

 

 

 

 

 

 

 

 

 

Item 2.

 

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

 

22

 

 

 

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

31

 

 

 

 

 

 

 

 

 

Part II —

 

Other Information

 

31

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

31

 

 

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

 

 

 

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

32

 

 

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

32

 

 

 

 

 

 

 

 

 

Signatures

 

 

 

 

 

33

 

 

2




 

PART I —             FINANCIAL INFORMATION

ITEM 1.                                                     CONSOLIDATED FINANCIAL STATEMENTS

BEST BUY CO., INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

ASSETS

($ in millions, except per share amounts)

(Unaudited)

 

 

May 27,
2006

 

February 25,
2006

 

May 28,
2005

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

772

 

$

748

 

$

458

 

Short-term investments

 

1,554

 

3,051

 

2,148

 

Receivables

 

409

 

439

 

350

 

Merchandise inventories

 

3,737

 

3,338

 

3,266

 

Other current assets

 

406

 

409

 

383

 

Total current assets

 

6,878

 

7,985

 

6,605

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

 

 

Property and equipment

 

4,957

 

4,836

 

4,281

 

Less accumulated depreciation

 

2,245

 

2,124

 

1,825

 

Net property and equipment

 

2,712

 

2,712

 

2,456

 

 

 

 

 

 

 

 

 

GOODWILL

 

955

 

557

 

507

 

 

 

 

 

 

 

 

 

OTHER INTANGIBLE ASSETS

 

63

 

44

 

40

 

 

 

 

 

 

 

 

 

LONG-TERM INVESTMENTS

 

302

 

218

 

113

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

359

 

348

 

178

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

11,269

 

$

11,864

 

$

9,899

 


NOTE:  The consolidated balance sheet as of February 25, 2006, has been condensed from the audited financial statements.

See Notes to Consolidated Condensed Financial Statements.

3




 

BEST BUY CO., INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

($ in millions, except per share amounts)

(Unaudited)

 

 

May 27,
2006

 

February 25,
2006

 

May 28,
2005

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

3,055

 

$

3,234

 

$

3,047

 

Unredeemed gift card liabilities

 

415

 

469

 

374

 

Accrued compensation and related expenses

 

278

 

354

 

189

 

Accrued liabilities

 

840

 

878

 

741

 

Accrued income taxes

 

291

 

703

 

200

 

Current portion of long-term debt

 

418

 

418

 

14

 

Total current liabilities

 

5,297

 

6,056

 

4,565

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

383

 

373

 

373

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT

 

180

 

178

 

530

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

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

 

 

 

 

Common stock, $.10 par value: Authorized — 1.5 billion shares; Issued and outstanding — 484,014,000, 485,098,000 and 487,716,000 shares, respectively

 

48

 

49

 

49

 

Additional paid-in capital

 

546

 

643

 

797

 

Retained earnings

 

4,500

 

4,304

 

3,449

 

Accumulated other comprehensive income

 

315

 

261

 

136

 

Total shareholders’ equity

 

5,409

 

5,257

 

4,431

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

11,269

 

$

11,864

 

$

9,899

 


NOTE:  The consolidated balance sheet as of February 25, 2006, has been condensed from the audited financial statements.

See Notes to Consolidated Condensed Financial Statements.

4




 

BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF EARNINGS

($ in millions, except per share amounts)

(Unaudited)

 

 

Three Months Ended

 

 

 

May 27,
2006

 

May 28,
2005

 

Revenue

 

$

6,959

 

$

6,118

 

Cost of goods sold

 

5,194

 

4,560

 

Gross profit

 

1,765

 

1,558

 

Selling, general and administrative expenses

 

1,428

 

1,319

 

Operating income

 

337

 

239

 

Net interest income

 

23

 

13

 

Earnings before income tax expense

 

360

 

252

 

Income tax expense

 

126

 

82

 

Net earnings

 

$

234

 

$

170

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.48

 

$

0.35

 

Diluted earnings per share

 

$

0.47

 

$

0.34

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.08

 

$

0.07

 

 

 

 

 

 

 

Basic weighted average common shares outstanding (in millions)

 

484.6

 

491.2

 

 

 

 

 

 

 

Diluted weighted average common shares outstanding (in millions)

 

500.8

 

505.3

 

 

See Notes to Consolidated Condensed Financial Statements.

5




 

BEST BUY CO., INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MAY 27, 2006

($ and shares in millions)

(Unaudited)

 

 

Common
Shares

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Total

 

Balances at February 25, 2006

 

485

 

$

49

 

$

643

 

$

4,304

 

$

261

 

$

5,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings, three months ended May 27, 2006

 

 

 

 

234

 

 

234

 

Other comprehensive income,
net
 of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

56

 

56

 

Other

 

 

 

 

 

(2

)

(2

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

3

 

 

68

 

 

 

68

 

Stock-based compensation

 

 

 

28

 

 

 

28

 

Tax benefits from stock options exercised and employee stock purchase plan

 

 

 

23

 

 

 

23

 

Issuance of common stock under employee stock purchase plan

 

 

 

21

 

 

 

21

 

Repurchase of common stock

 

(4

)

(1

)

(237

)

 

 

(238

)

Common stock dividend, $0.08 per share

 

 

 

 

(38

)

 

(38

)

Balances at May 27, 2006

 

484

 

$

48

 

$

546

 

$

4,500

 

$

315

 

$

5,409

 

 

See Notes to Consolidated Condensed Financial Statements.

6




 

BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)

 

 

Three Months Ended

 

 

 

May 27,
2006

 

May 28,
2005

 

OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

234

 

$

170

 

Adjustments to reconcile net earnings to total cash used in operating activities:

 

 

 

 

 

Depreciation

 

121

 

109

 

Asset impairment charges

 

12

 

 

Stock-based compensation

 

28

 

31

 

Deferred income taxes

 

(16

)

(7

)

Excess tax benefits from stock-based compensation

 

(20

)

(2

)

Other

 

8

 

4

 

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

 

 

 

 

 

Receivables

 

34

 

25

 

Merchandise inventories

 

(343

)

(420

)

Other assets

 

(10

)

3

 

Accounts payable

 

(201

)

228

 

Other liabilities

 

(179

)

(189

)

Accrued income taxes

 

(391

)

(371

)

Total cash used in operating activities

 

(723

)

(419

)

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Additions to property and equipment, net of $36 non-cash capital expenditures in the three months ended May 27, 2006

 

(154

)

(105

)

Acquisition of business, net of cash acquired

 

(408

)

 

Purchases of available-for-sale securities

 

(497

)

(325

)

Sales of available-for-sale securities

 

1,908

 

1,205

 

Changes in restricted assets

 

6

 

3

 

Other, net

 

9

 

4

 

Total cash provided by investing activities

 

864

 

782

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Repurchase of common stock

 

(238

)

(207

)

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

 

89

 

31

 

Dividends paid

 

(38

)

(36

)

Long-term debt payments

 

(2

)

(62

)

Proceeds from issuance of long-term debt

 

17

 

3

 

Excess tax benefits from stock-based compensation

 

20

 

2

 

Other, net

 

15

 

15

 

Total cash used in financing activities

 

(137

)

(254

)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

20

 

(5

)

 

 

 

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

 

24

 

104

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

748

 

354

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

772

 

$

458

 

 

See Notes to Consolidated Condensed Financial Statements.

7




 

BEST BUY CO., INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.                         Basis of Presentation:

In the opinion of management, the accompanying financial statements contain all adjustments necessary for a fair presentation. All adjustments were comprised of normal recurring adjustments, except as noted in the Notes to Consolidated Condensed Financial Statements. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season. These interim financial statements and the related notes should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended February 25, 2006.

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 25, 2006. In addition, we reclassified selected balances related to debit cards from receivables to cash and cash equivalents in our February 25, 2006, consolidated condensed balance sheet. These reclassifications had no effect on previously reported operating income, net earnings, shareholders’ equity or cash used in operations.

On June 23, 2005, our Board of Directors approved a three-for-two stock split. Shareholders of record as of July 13, 2005 received one additional share for every two shares owned. The additional shares were distributed on August 3, 2005. All share and per share information herein reflects the stock split.

The following table illustrates the primary costs classified in each major expense category:

Cost of Goods Sold

 

Selling, General & Administrative Expenses (SG&A)

·     Total cost of products sold including:

—   Freight expenses associated with moving merchandise inventories from our vendors to our distribution centers;

—   Vendor allowances that are not a reimbursement of specific, incremental and identifiable costs to promote a vendor’s products;

—   Cash discounts on payments to vendors;

·     Cost of services provided including:

—   Payroll and benefits costs for services employees;

—   Cost of replacement parts and related freight expenses;

·     Physical inventory losses;

·     Markdowns;

·     Customer shipping and handling expenses;

·     Costs associated with operating our distribution network, including payroll and benefit costs, occupancy costs, and depreciation; and

·     Freight expenses associated with moving merchandise inventories from our distribution centers to our retail stores.

 

·      Payroll and benefit costs for retail and corporate employees;

·      Occupancy costs of retail, services and corporate facilities;

·      Depreciation related to retail, services and corporate assets;

·      Advertising;

·      Vendor allowances that are a reimbursement of specific, incremental and identifiable costs to promote a vendor’s products;

·      Charitable contributions;

·      Outside service fees;

·      Long-lived asset impairment charges; and

·      Other administrative costs, such as credit card service fees, supplies, and travel and lodging.

 

Vendor allowances included in revenue for reimbursement of vendor-provided sales incentives were $6 million and $17 million, for the three months ended May 27, 2006, and May 28, 2005, respectively. Vendor allowances included in SG&A were $29 million and $20 million for the three months ended May 27, 2006, and May 28, 2005, respectively.

2.                         Acquisition:

Effective March 7, 2006, we acquired all of the common stock of Pacific Sales Kitchen and Bath Centers, Inc. (Pacific Sales) for $411 million, or $408 million, net of cash acquired, including transaction costs. We acquired Pacific Sales, a high-end home-improvement and appliance retailer, to enhance our ability to grow with an attractive customer base and premium brands using a proven and successful showroom format. Utilizing the existing store format, we expect to expand the number of stores in order to capitalize on the rapidly growing high-end segment of the U.S. appliance market. The

8




 

acquisition was accounted for using the purchase method in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. Accordingly, we recorded the net assets at their estimated fair values, and included operating results in our financial statements from the date of acquisition. We allocated the purchase price on a preliminary basis using information currently available. The allocation of the purchase price to the assets and liabilities acquired will be finalized no later than the first quarter of fiscal 2008, as we obtain more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of purchase. All goodwill is deductible for tax purposes.

The preliminary purchase price allocation was as follows ($ in millions):

Merchandise inventories

 

$

41

 

Property and equipment

 

2

 

Other assets1

 

14

 

Tradename

 

17

 

Goodwill

 

377

 

Current liabilities

 

(43

)

 

 

$

408

 


1 Includes $7 million related to the acquired customer backlog.

3.                         Gift Cards:

We sell gift cards to our customers in our retail stores and through our Web sites. Our gift cards do not have an expiration date. We recognize income from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and we determine that we do not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. We determine our gift card breakage rate based upon historical redemption patterns. Based on our historical information, the likelihood of a gift card remaining unredeemed can be determined 24 months after the gift card is issued. At that time, we recognize breakage income for those cards for which the likelihood of redemption is deemed to be remote if we do not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdictions. Gift card breakage income is included in revenue in our consolidated statements of earnings.

Gift card breakage income recognized for the three months ended May 27, 2006 was not significant. There was no gift card breakage income recognized for the three months ended May 28, 2005.

4.                         Net Interest Income:

Net interest income was comprised of the following ($ in millions):

 

Three Months Ended

 

 

 

May 27,
2006

 

May 28,
2005

 

Interest income

 

$

31

 

$

21

 

Interest expense

 

(8

)

(8

)

Net interest income

 

$

23

 

$

13

 

 

5.                         Earnings per Share:

Basic earnings per share is computed based on the weighted-average number of common shares outstanding. Diluted earnings per share 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 non-qualified stock options, nonvested share awards and shares issuable under our employee stock purchase plan (ESPP), 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 were converted to common stock.

9




 

The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share ($ and shares in millions, except per share amounts):

 

Three Months Ended

 

 

 

May 27, 2006

 

May 28, 2005

 

Numerator:

 

 

 

 

 

Net earnings, basic

 

$

234

 

$

170

 

Adjustment for assumed dilution:

 

 

 

 

 

Interest on convertible debentures, net of tax

 

2

 

2

 

Net earnings, diluted

 

$

236

 

$

172

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted-average common shares outstanding

 

484.6

 

491.2

 

Effect of potentially dilutive securities:

 

 

 

 

 

Shares from assumed conversion of convertible debentures

 

8.8

 

8.8

 

Non-qualified stock options and other

 

7.4

 

5.3

 

Weighted-average common shares outstanding, assuming dilution

 

500.8

 

505.3

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.48

 

$

0.35

 

Diluted earnings per share

 

$

0.47

 

$

0.34

 

 

The computation of average dilutive shares outstanding excluded options to purchase 0.1 million and 9.6 million shares of common stock for the three months ended May 27, 2006, and May 28, 2005, 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).

6.                         Stock-Based Compensation:

Stock-based compensation expense was $28 million and $31 million for the three months ended May 27, 2006, and May 28, 2005, respectively. The decline was due to an increase in our participant forfeiture rate resulting from recent workforce reductions. Stock-based compensation expense for the three months ended May 27, 2006, may not be indicative of the expense for the entire fiscal year.

7.                         Comprehensive Income:

Comprehensive income is computed as net earnings plus certain other items that are recorded directly to shareholders’ equity. The significant components of comprehensive income include foreign currency translation adjustments and unrealized gains/losses net of tax on available-for-sale marketable equity securities. Foreign currency translation adjustments do not include a provision for income tax expense because earnings from foreign operations are considered to be indefinitely reinvested outside the United States. Comprehensive income was $288 million and $157 million for the three months ended May 27, 2006, and May 28, 2005, respectively.

8.                         Segments:

We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all U.S. store and online operations, including Best Buy, Geek Squad, Pacific Sales and Magnolia Audio Video. The International segment is comprised of all Canadian store and online operations, including Future Shop, Best Buy and Geek Squad. Our segments are evaluated on an operating income basis, and a stand-alone tax provision is not calculated for each segment. The other accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 25, 2006.

10




 

Revenue by reportable segment was as follows ($ in millions):

 

Three Months Ended

 

 

 

May 27,
2006

 

May 28,
2005

 

Domestic

 

$

6,162

 

$

5,492

 

International

 

797

 

626

 

Total revenue

 

$

6,959

 

$

6,118

 

 

Operating income (loss) by reportable segment and the reconciliation to earnings before income tax expense were as follows ($ in millions):

 

Three Months Ended

 

 

 

May 27,
2006

 

May 28,
2005

 

Domestic

 

$

333

 

$

242

 

International

 

4

 

(3

)

Total operating income

 

337

 

239

 

Net interest income

 

23

 

13

 

Earnings before income tax expense

 

$

360

 

$

252

 

 

Assets by reportable operating segment were as follows ($ in millions):

 

May 27,
2006

 

February 25,
2006

 

May 28,
2005

 

Domestic

 

$

9,053

 

$

9,722

 

$

8,186

 

International

 

2,216

 

2,142

 

1,713

 

Total assets

 

$

11,269

 

$

11,864

 

$

9,899

 

 

Goodwill by reportable operating segment was as follows ($ in millions):

 

May 27,
2006

 

February 25,
2006

 

May 28,
2005

 

Domestic

 

$

383

 

$

6

 

$

3

 

International

 

572

 

551

 

504

 

Total goodwill

 

$

955

 

$

557

 

$

507

 

 

The change in the Domestic goodwill balance since February 25, 2006 was the result of the acquisition of Pacific Sales. The changes in the International goodwill balance since February 25, 2006, and May 28, 2005, were mainly the result of fluctuations in foreign currency exchange rates.

Other intangible assets included in our balance sheets were comprised primarily of indefinite-lived intangible tradename assets related to Future Shop, which is included in the International segment, and Pacific Sales, which is included in the Domestic segment.

 

May 27,
2006

 

February 25,
2006

 

May 28,
2005

 

Domestic

 

$

17

 

$

 

$

 

International

 

46

 

44

 

40

 

Total other intangible assets

 

$

63

 

$

44

 

$

40

 

 

9.                         Investments:

Debt Securities

Short-term and long-term investments are comprised of municipal and United States government debt securities, as well as auction-preferred and asset-backed securities. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and based on our

11




 

ability to market and sell these instruments, we classify auction-rate debt securities, variable-rate demand notes and other investments in debt securities as available-for-sale and carry them at amortized cost, which approximates fair value. Auction-rate debt securities and variable-rate demand notes are bonds that are similar to short-term instruments because their interest rates are reset periodically. Investments in these securities can be sold for cash on the auction date. We classify auction-rate debt securities and variable-rate demand notes as short-term or long-term investments based on the reset dates.

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. We seek to preserve principal and minimize exposure to interest-rate fluctuations by limiting default risk, market risk and reinvestment risk.

During the third quarter of fiscal 2006, we reclassified variable-rate demand notes from cash and cash equivalents to short-term investments for all periods presented. The amortized cost of the securities reclassified was $146 million at May 28, 2005.

We also revised the presentation in the consolidated statement of cash flows for the three months ended May 28, 2005, to reflect the gross purchases and sales of variable-rate demand notes as investing activities rather than as a component of cash and cash equivalents, which is consistent with the presentation for the three months ended May 27, 2006. The amount reclassified from cash and cash equivalents to investing activities was $146 million for the three months ended May 28, 2005.

The carrying amount of our investments in debt securities approximated fair value at May 27, 2006; February 25, 2006; and May 28, 2005, due to the rapid turnover of our portfolio and the highly liquid nature of these investments. Therefore, there were no significant unrealized holding gains or losses.

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

 

May 27, 2006

 

February 25, 2006

 

May 28, 2005

 

 

 

Amortized
Principal
Amount

 

Weighted-
Average
Interest
Rate

 

Amortized
Principal
Amount

 

Weighted-
Average
Interest
Rate

 

Amortized
Principal
Amount

 

Weighted-
Average
Interest
Rate

 

Short-term investments (less than one year)

 

$

1,554

 

5.61

%

$

3,051

 

4.76

%

$

2,148

 

4.60

%

Long-term investments (one to three years)

 

302

 

5.80

%

218

 

4.95

%

113

 

3.81

%

Total

 

$

1,856

 

 

 

$

3,269

 

 

 

$

2,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal debt securities

 

$

1,780

 

 

 

$

3,153

 

 

 

$

2,149

 

 

 

Auction-preferred and
asset-backed securities

 

76

 

 

 

109

 

 

 

105

 

 

 

Debt securities issued by U.S. Treasury and other U.S. government entities

 

 

 

 

7

 

 

 

7

 

 

 

Total

 

$

1,856

 

 

 

$

3,269

 

 

 

$

2,261

 

 

 

 

Marketable Equity Securities

We also hold investments in marketable equity securities. We classify all marketable equity securities as available-for-sale. Investments in marketable equity securities are included in other assets in our consolidated balance sheets and reported at fair value, based on quoted market prices. All unrealized holding gains or losses are reflected net of tax in accumulated other comprehensive income in shareholders’ equity.

The carrying value of our investments in marketable equity securities at May 27, 2006; February 25, 2006; and May 28, 2005, was $25 million, $28 million and $5 million, respectively. Net unrealized gains/(losses), net of tax, included in accumulated other comprehensive income were $10 million, $12 million and less than $(1) million at May 27, 2006; February 25, 2006; and May 28, 2005, respectively.

Prior to the second quarter of fiscal 2006, our investments in marketable equity securities included redeemable convertible preferred stock of Golf Galaxy, Inc. (Golf Galaxy), with a $5 million carrying value. In August 2005, Golf Galaxy completed an initial public offering (IPO) of its common stock. The convertible preferred stock was

12




 

simultaneously converted into 1,492,000 shares of common stock. In August 2005, we sold 216,000 shares of common stock in the IPO. The carrying value of our investment in Golf Galaxy was $21 million and $24 million at May 27, 2006, and February 25, 2006, respectively.

10.                   Restricted Assets:

Restricted cash and investments in debt securities, which are included in other current assets, totaled $172 million, $178 million and $155 million as of May 27, 2006; February 25, 2006; and May 28, 2005, respectively. Such balances are pledged as collateral or restricted to use for general liability insurance, workers’ compensation insurance and warranty programs.

11.                   Commitments and Contingencies:

On December 8, 2005, a purported class action lawsuit captioned, “Jasmen Holloway, et. al. v. Best Buy Co., Inc.,” was filed against us in the U.S. District Court for the Northern District of California. This federal court action alleges that we discriminate against women and minority individuals on the basis of gender, race, color and/or national origin in our stores with respect to recruitment, hiring, job assignments, transfers, promotions, compensation, allocation of weekly hours and other terms and conditions of employment. The plaintiffs seek an end to discriminatory policies and practices, an award of back and front pay, punitive damages and injunctive relief, including rightful place relief for all class members. We believe the allegations are without merit and intend to defend this action vigorously.

We are involved in various other legal proceedings arising in the normal course of conducting business. We believe the amounts provided in our consolidated financial statements, as prescribed by accounting principles generally accepted in the United States, are adequate in light of the probable and estimable liabilities. The resolution of those proceedings is not expected to have a material effect on our results of operations or financial condition.

12.                   Common Stock Repurchases:

Our Board of Directors (Board) authorized a $1.5 billion share repurchase program in April 2005. The program, which was announced on April 27, 2005, terminated and replaced a $500 million share repurchase program authorized by our Board in June 2004. There was no expiration date governing the period over which we could make our share repurchases under the April 2005 $1.5 billion share repurchase program.

For the three months ended May 27, 2006, we purchased and retired 4.4 million shares, at a cost of $238 million under our April 2005 $1.5 billion share repurchase program.

For the three months ended May 28, 2005, we purchased and retired 4.3 million shares, at a cost of $146 million under our April 2005 $1.5 billion share repurchase program. We also purchased and retired 1.8 million shares at a cost of $61 million under our June 2004 $500 million share repurchase program during the quarter.

Our Board authorized a new $1.5 billion share repurchase program in June 2006. The program, which was announced on June 21, 2006, and has no stated expiration date, terminated and replaced our current $1.5 billion share repurchase program.

13.                   New Accounting Pronouncements

In October 2005, the Financial Accounting Standards Board (FASB) issued Staff Position (FSP) No. FAS 13-1, Accounting for Rental Costs Incurred During a Construction Period. FSP No. FAS 13-1 requires companies to expense rent payments for building or ground leases incurred during the construction period. FSP No. FAS 13-1 is effective for all interim and annual reporting periods beginning after December 15, 2005. Retrospective application is permitted, but not required. We adopted FSP No. FAS 13-1 on a prospective basis in the first quarter of fiscal 2007. The adoption of FSP No. FAS 13-1 did not have a significant effect on our operating income or net earnings.

14.                   Subsequent Event

On June 8, 2006, we acquired a 75% interest in Jiangsu Five Star Appliance Co., Ltd. (Five Star) for $180 million, including a working capital injection of $122 million. Five Star is China’s fourth-largest appliance and consumer electronics retailer with 136 stores located in eight of China’s 34 provinces. We made the investment in Five Star to further our international growth plans and obtain an immediate presence in China. The acquisition will be accounted for in the second quarter of fiscal 2007 using the purchase method in accordance with SFAS No. 141, Business Combinations.

13




 

Accordingly, the net assets will be recorded at their estimated fair values, and operating results will be included in the international segment of our financial statements from the date of acquisition. The purchase price will be allocated on a preliminary basis using information currently available. The allocation of the purchase price to the assets and liabilities acquired will be finalized no later than the second quarter of fiscal 2008, as we obtain more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of purchase.

15.                   Condensed Consolidating Financial Information:

Our convertible debentures, due in 2022, are guaranteed by our wholly owned indirect subsidiary Best Buy Stores, L.P. Investments in subsidiaries of Best Buy Stores, L.P., which have not guaranteed the convertible debentures, are accounted for under the equity method. Certain prior-year amounts were reclassified as described in Note 1, Basis of Presentation, in this Quarterly Report on Form 10-Q. The aggregate principal balance and carrying amount of our convertible debentures is $402 million.

The debentures may be converted into shares of our common stock if certain criteria are met as described in Note 4, Debt, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended February 25, 2006. During a portion of the three months ended May 27, 2006, our closing stock price exceeded the specified stock price for more than 20 trading days in a 30-trading-day period, therefore, debenture holders had the option to convert their debentures into shares of our common stock. However, no debentures were so converted. Due to changes in the price of our common stock, the debentures were no longer convertible as of May 26, 2006 and through July 6, 2006.

We file a consolidated U.S. federal income tax return. Income taxes are allocated in accordance with our tax allocation agreement. U.S. affiliates receive no tax benefit for taxable losses, but are allocated taxes at the required effective income tax rate if they have taxable income.

The following tables present condensed consolidating balance sheets as of May 27, 2006; February 25, 2006; and May 28, 2005; condensed consolidating statements of earnings for the three months ended May 27, 2006, and May 28, 2005; and condensed consolidating statements of cash flows for the three months ended May 27, 2006, and May 28, 2005:

14




 

Condensed Consolidating Balance Sheets
As of May 27, 2006

(Unaudited)
$ in millions

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25

 

$

64

 

$

683

 

$

 

$

772

 

Short-term investments

 

1,376

 

 

178

 

 

1,554

 

Receivables

 

19

 

298

 

92

 

 

409

 

Merchandise inventories

 

 

3,308

 

725

 

(296

)

3,737

 

Other current assets

 

18

 

143

 

279

 

(34

)

406

 

Intercompany receivable

 

 

 

3,399

 

(3,399

)

 

Intercompany note receivable

 

500

 

 

 

(500

)

 

Total current assets

 

1,938

 

3,813

 

5,356

 

(4,229

)

6,878

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Property and Equipment

 

243

 

1,738

 

734

 

(3

)

2,712

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

6

 

949

 

 

955

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Intangible Assets

 

 

 

63

 

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Investments

 

302

 

 

 

 

302

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

118

 

262

 

133

 

(154

)

359

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in Subsidiaries

 

5,178

 

12

 

1,314

 

(6,504

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

7,779

 

$

5,831

 

$

8,549

 

$

(10,890

)

$

11,269

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

3,055

 

$

 

$

3,055

 

Unredeemed gift card liabilities

 

 

381

 

34

 

 

415

 

Accrued compensation and related expenses

 

7

 

157

 

114

 

 

278

 

Accrued liabilities

 

8

 

443

 

421

 

(32

)

840

 

Accrued income taxes

 

289

 

2

 

 

 

291

 

Current portion of long-term debt

 

404

 

9

 

5

 

 

418

 

Intercompany payable

 

1,088

 

2,149

 

 

(3,237

)

 

Intercompany note payable

 

 

500

 

 

(500

)

 

Total current liabilities

 

1,796

 

3,641

 

3,629

 

(3,769

)

5,297

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities

 

260

 

760

 

30

 

(667

)

383

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

6

 

116

 

58

 

 

180

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

5,717

 

1,314

 

4,832

 

(6,454

)

5,409

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

7,779

 

$

5,831

 

$

8,549

 

$

(10,890

)

$

11,269

 

 

15




 

Condensed Consolidating Balance Sheets
As of February 25, 2006
(Unaudited)
$ in millions

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10

 

$

79

 

$

659

 

$

 

$

748

 

Short-term investments

 

2,884

 

 

167

 

 

3,051

 

Receivables

 

27

 

319

 

93

 

 

439

 

Merchandise inventories

 

 

3,173

 

636

 

(471

)

3,338

 

Other current assets

 

20

 

211

 

265

 

(87

)

409

 

Intercompany receivable

 

 

 

3,757

 

(3,757

)

 

Intercompany note receivable

 

500

 

 

 

(500

)

 

Total current assets

 

3,441

 

3,782

 

5,577

 

(4,815

)

7,985

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Property and Equipment

 

244

 

1,733

 

737

 

(2

)

2,712

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

6

 

551

 

 

557

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Intangible Assets

 

 

 

44

 

 

44

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Investments

 

218

 

 

 

 

218

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

108

 

266

 

131

 

(157

)

348

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in Subsidiaries

 

4,813

 

 

1,124

 

(5,937

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

8,824

 

$

5,787

 

$

8,164

 

$

(10,911

)

$

11,864

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

3,234

 

$

 

$

3,234

 

Unredeemed gift card liabilities

 

 

430

 

39

 

 

469

 

Accrued compensation and related expenses

 

3

 

225

 

126

 

 

354

 

Accrued liabilities

 

7

 

518

 

392

 

(39

)

878

 

Accrued income taxes

 

670

 

 

76

 

(43

)

703

 

Current portion of long-term debt

 

404

 

9

 

5

 

 

418

 

Intercompany payable

 

1,717

 

2,134

 

 

(3,851

)

 

Intercompany note payable

 

 

500

 

 

(500

)

 

Total current liabilities

 

2,801

 

3,816

 

3,872

 

(4,433

)

6,056