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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2002 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.)

 

 

 

7075 Flying Cloud Drive
Eden Prairie, Minnesota

 

55344

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(952) 947-2000

(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   ý   No   o

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEEDING 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, $0.10 Par Value — 321,725,000 shares as of November 30, 2002

 

 



 

BEST BUY CO., INC.

 

FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 2002

 

INDEX

 

Part I.

Financial Information

 

 

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements:

 

 

 

 

 

 

 

a)

 

Condensed consolidated balance sheets as of November 30, 2002; March 2, 2002; and December 1, 2001

 

 

 

 

 

 

 

b)

 

Consolidated statements of earnings for the three and nine months ended November 30, 2002, and December 1, 2001

 

 

 

 

 

 

 

c)

 

Consolidated statement of changes in shareholders’ equity for the nine months ended November 30, 2002

 

 

 

 

 

 

 

d)

 

Consolidated statements of cash flows for the nine months ended November 30, 2002, and December 1, 2001

 

 

 

 

 

 

 

e)

 

Notes to consolidated financial statements

 

 

 

 

 

 

 

Item 2.

 

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

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

 

Item 6.

 

Exhibits and Reports on Form 8-K

 

 

 

 

 

 

Signatures

 

 

 

 

 

2



 

PART 1.                                   FINANCIAL INFORMATION

 

ITEM 1.                                     CONSOLIDATED FINANCIAL STATEMENTS

 

BEST BUY CO., INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

($ in millions, except per share amounts)

 

 

 

Nov. 30,
2002

 

March 2,
2002

 

Dec. 1,
2001

 

 

 

(Unaudited)

 

 

 

(Unaudited)

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,156

 

$

1,855

 

$

843

 

Receivables

 

579

 

230

 

370

 

Recoverable costs from developed properties

 

35

 

79

 

83

 

Merchandise inventories

 

4,090

 

2,258

 

3,459

 

Other current assets

 

193

 

172

 

132

 

Total current assets

 

6,053

 

4,594

 

4,887

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

 

 

Property and equipment

 

3,333

 

2,720

 

2,606

 

Less accumulated depreciation and amortization

 

1,065

 

823

 

853

 

Net property and equipment

 

2,268

 

1,897

 

1,753

 

 

 

 

 

 

 

 

 

GOODWILL, NET

 

407

 

773

 

750

 

 

 

 

 

 

 

 

 

INTANGIBLE ASSET

 

32

 

 

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

101

 

87

 

80

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

8,861

 

$

7,351

 

$

7,470

 

 

NOTE:  The consolidated balance sheet at March 2, 2002, has been condensed from the audited financial statements.

 

See Notes to Consolidated Financial Statements.

 

3



 

BEST BUY CO., INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

($ in millions, except per share amounts)

 

 

 

Nov. 30,
2002

 

March 2,
2002

 

Dec. 1,
2001

 

 

 

(Unaudited)

 

 

 

(Unaudited)

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

4,094

 

$

2,479

 

$

3,645

 

Accrued compensation and related expenses

 

192

 

205

 

189

 

Accrued liabilities

 

819

 

718

 

713

 

Accrued income taxes

 

173

 

291

 

79

 

Current portion of long-term debt

 

7

 

7

 

14

 

Total current liabilities

 

5,285

 

3,700

 

4,640

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

284

 

317

 

323

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT

 

822

 

813

 

364

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

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

 

 

 

 

Common stock, $0.10 par value:
Authorized — 1 billion shares;
Issued and outstanding — 321,725,000, 319,128,000 and 317,505,000 shares, respectively

 

32

 

31

 

31

 

Additional paid-in capital

 

774

 

702

 

668

 

Retained earnings

 

1,663

 

1,794

 

1,444

 

Accumulated other comprehensive income (loss)

 

1

 

(6

)

 

Total shareholders’ equity

 

2,470

 

2,521

 

2,143

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

8,861

 

$

7,351

 

$

7,470

 

 

NOTE:  The consolidated balance sheet at March 2, 2002, has been condensed from the audited financial statements.

 

See Notes to Consolidated Financial Statements.

 

4



 

BEST BUY CO., INC.

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

($ in millions, except per share amounts)

 

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Revenues

 

$

5,505

 

$

4,756

 

$

15,099

 

$

12,617

 

Cost of goods sold

 

4,318

 

3,728

 

11,718

 

9,795

 

Gross profit

 

1,187

 

1,028

 

3,381

 

2,822

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,048

 

899

 

3,024

 

2,455

 

Operating income

 

139

 

129

 

357

 

367

 

Net interest expense (income)

 

1

 

(3

)

4

 

6

 

 

 

 

 

 

 

 

 

 

 

Earnings before income tax expense

 

138

 

132

 

353

 

361

 

Income tax expense

 

53

 

52

 

136

 

141

 

 

 

 

 

 

 

 

 

 

 

Earnings before cumulative effect of change in accounting principle

 

85

 

80

 

217

 

220

 

Cumulative effect of change in accounting principle, net of $24 tax

 

 

 

(348

)

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

85

 

$

80

 

$

(131

)

$

220

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Before accounting change

 

$

0.26

 

$

0.25

 

$

0.67

 

$

0.70

 

Cumulative effect of accounting change

 

 

 

(1.08

)

 

Basic earnings (loss) per share

 

$

0.26

 

$

0.25

 

$

(0.41

)

$

0.70

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Before accounting change

 

$

0.26

 

$

0.25

 

$

0.67

 

$

0.68

 

Cumulative effect of accounting change

 

 

 

(1.07

)

 

Diluted earnings (loss) per share

 

$

0.26

 

$

0.25

 

$

(0.40

)

$

0.68

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding (in millions)

 

321.5

 

316.6

 

320.9

 

315.2

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares outstanding (in millions)

 

324.1

 

322.2

 

324.9

 

321.7

 

 

See Notes to Consolidated Financial Statements.

 

5



 

BEST BUY CO., INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

 

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2002

 

($ and shares in millions)

 

(Unaudited)

 

 

 

Common
Shares

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total

 

Balances at March 2, 2002

 

319

 

$

31

 

$

702

 

$

1,794

 

$

(6

)

$

2,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

2

 

1

 

41

 

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit from stock options exercised

 

 

 

31

 

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments and other

 

 

 

 

 

7

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss, nine months ended November 30, 2002

 

 

 

 

(131

)

 

(131

)

Balances at November 30, 2002

 

321

 

$

32

 

$

774

 

$

1,663

 

$

1

 

$

2,470

 

 

See Notes to Consolidated Financial Statements.

 

6



 

BEST BUY CO., INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

Nov. 30,
2002

 

Dec. 1,
2001

 

OPERATING ACTIVITIES

 

 

 

 

 

Net (loss) earnings

 

$

(131

)

$

220

 

Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities:

 

 

 

 

 

Cumulative effect of change in accounting principle, net of tax

 

348

 

 

Depreciation

 

265

 

211

 

Deferred income taxes

 

(27

)

52

 

Amortization of goodwill

 

 

15

 

Other

 

14

 

33

 

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

 

 

 

 

 

Receivables

 

(348

)

(155

)

Merchandise inventories

 

(1,829

)

(1,517

)

Other assets

 

(36

)

(16

)

Accounts payable

 

1,612

 

1,683

 

Other liabilities

 

91

 

280

 

Accrued income taxes

 

(92

)

(28

)

Total cash (used in) provided by operating activities

 

(133

)

778

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Additions to property and equipment

 

(649

)

(431

)

Acquisition of businesses, net of cash acquired

 

(3

)

(360

)

Decrease in recoverable costs from developed properties

 

44

 

26

 

Total cash used in investing activities

 

(608

)

(765

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Issuance of common stock

 

39

 

36

 

Long-term debt payments

 

(12

)

(283

)

Net proceeds from long-term debt

 

15

 

330

 

Total cash provided by financing activities

 

42

 

83

 

 

 

 

 

 

 

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(699

)

96

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

1,855

 

747

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

1,156

 

$

843

 

 

See Notes to Consolidated Financial Statements.

 

7



 

BEST BUY CO., INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                       Basis of Presentation:

 

The accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation. All adjustments were normal recurring adjustments, except as noted in the Notes to Consolidated Financial Statements. Our business is seasonal in nature, and interim results are not necessarily indicative of results for a full year. These interim financial statements and the related notes should be read in conjunction with the financial statements and notes included in our Annual Report to Shareholders for the fiscal year ended March 2, 2002. The Annual Report to Shareholders is incorporated by reference into our Annual Report on Form 10-K for the fiscal year ended March 2, 2002. On May 10, 2002, we effected a three-for-two stock split in the form of a 50% stock dividend. All share and per share information in this filing reflects this stock split. Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on net earnings or total shareholders’ equity.

 

2.                                       Net Interest Expense (Income):

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Interest expense

 

$

7

 

$

3

 

$

22

 

$

16

 

Loss on early retirement of debt

 

 

 

 

8

 

Capitalized interest

 

(1

)

 

(3

)

 

Interest income

 

(5

)

(6

)

(15

)

(18

)

Net interest expense (income)

 

$

1

 

$

(3

)

$

4

 

$

6

 

 

3.                                       Income Taxes:

 

Income taxes are provided on an interim basis based upon our estimate of the annual effective tax rate. Our estimated effective income tax rate declined to 38.7% in fiscal 2003, compared with 39.1% in fiscal 2002. The decrease was mainly due to the discontinuation of goodwill amortization as a result of our adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, on March 3, 2002 (See Notes 8 and 9 of the Notes to Consolidated Financial Statements). In fiscal 2002, a substantial amount of our goodwill amortization was non-deductible for tax purposes.

 

8



 

4.                                       Earnings (Loss) Per Share:

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Numerator:

 

 

 

 

 

 

 

 

 

Earnings before cumulative effect of change in accounting principle

 

$

85

 

$

80

 

$

217

 

$

220

 

Cumulative effect of change in accounting principle, net of $24 tax

 

 

 

(348

)

 

Net earnings (loss)

 

$

85

 

$

80

 

$

(131

)

$

220

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

321.5

 

316.6

 

320.9

 

315.2

 

Dilutive effect of employee stock options

 

2.6

 

5.6

 

4.0

 

6.5

 

Weighted average common shares outstanding assuming dilution

 

324.1

 

322.2

 

324.9

 

321.7

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Before accounting change

 

$

0.26

 

$

0.25

 

$

0.67

 

$

0.70

 

Cumulative effect of accounting change

 

 

 

(1.08

)

 

Basic earnings (loss) per share

 

$

0.26

 

$

0.25

 

$

(0.41

)

$

0.70

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Before accounting change

 

$

0.26

 

$

0.25

 

$

0.67

 

$

0.68

 

Cumulative effect of accounting change

 

 

 

(1.07

)

 

Diluted earnings (loss) per share

 

$

0.26

 

$

0.25

 

$

(0.40

)

$

0.68

 

 

Potentially dilutive shares of common stock include stock options, convertible debentures (assuming certain criteria are met) and other stock-based awards granted under stock-based compensation plans. The shares related to the convertible debentures were not included in our diluted earnings per share computation, as the criteria for conversion of the debentures were not met.

 

5.                                       Comprehensive Income (Loss):

 

Comprehensive income (loss) is net earnings (loss) plus certain other items that are recorded directly to shareholders’ equity. The only significant item currently applicable to us is foreign currency translation adjustments. Comprehensive income (loss) was $86 million and $80 million for the three months ended November 30, 2002, and December 1, 2001, respectively, and $(124) million and $220 million for the nine months ended November 30, 2002, and December 1, 2001, respectively.

 

6.                                       Acquisitions:

 

Effective November 4, 2001, we acquired all of the common stock of Future Shop Ltd. (Future Shop) for $377 million, or $368 million net of cash acquired, including transaction costs. We acquired Future Shop to further our expansion plans and to increase shareholder value. The acquisition was accounted for using the purchase method in accordance with SFAS No. 141, Business Combinations, issued in June 2001. 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 then available. The allocation of the purchase price to the assets and liabilities acquired was finalized in the third quarter of fiscal 2003. The primary adjustments to the preliminary allocation were to assign value to the “Future Shop” trade name as a result of our decision to

 

9



 

operate stores under both the Best Buy and Future Shop trade names in Canada, and to refine extended warranty plan reserves assumed at the date of acquisition based on actual warranty expenses incurred through the third quarter of fiscal 2003. The final purchase price allocation is shown below and resulted in a $5 million decrease to goodwill from our preliminary allocation. All goodwill is nondeductible for tax purposes. Under SFAS No.142, goodwill is not amortized.

 

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

 

Merchandise inventories

 

$

169

 

Property and equipment

 

103

 

Goodwill

 

401

 

Intangible asset

 

32

 

Other assets

 

43

 

Current liabilities

 

(341

)

Debt, including current portion

 

(13

)

Other liabilities

 

(26

)

Total

 

$

368

 

 

The following unaudited pro forma data sets forth the consolidated results of operations of Best Buy Co., Inc. as though Future Shop had been acquired as of the beginning of fiscal 2002 ($ in millions, except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

As Reported

 

Pro Forma

 

As Reported

 

Pro Forma

 

 

 

Dec. 1,
2001

 

Dec. 1,
2001

 

Dec. 1,
2001

 

Dec. 1,
2001

 

Revenues

 

$

4,756

 

$

4,986

 

$

12,617

 

$

13,412

 

Net earnings

 

$

80

 

$

79

 

$

220

 

$

219

 

Basic earnings per share

 

$

0.25

 

$

0.25

 

$

0.70

 

$

0.70

 

Diluted earnings per share

 

$

0.25

 

$

0.25

 

$

0.68

 

$

0.68

 

 

The pro forma results include adjustments, principally the loss of interest income on cash used to finance the acquisition. The pro forma results exclude costs expected to be incurred in the integration and transformation of Future Shop’s business. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been completed at the beginning of fiscal 2002, nor are they necessarily indicative of future consolidated results.

 

Effective October 14, 2002, we acquired all of the common stock of Geek Squad, Inc. (Geek Squad) for approximately $3 million, net of cash acquired, including transaction costs. Geek Squad provides residential consumer computer support. We acquired Geek Squad to further our plans of providing technology support services to customers. The acquisition was accounted for using the purchase method in accordance with SFAS No. 141. Accordingly, we recorded the net assets at their estimated fair values and included operating results in our financial statements from the date of acquisition. Substantially all of the purchase price was allocated to goodwill, which is nondeductible for tax purposes. Under SFAS No.142, goodwill is not amortized. The pro forma results of operations for this acquisition have not been presented, as the impact on reported results is not significant.

 

7.                                       Segments:

 

We have two reportable segments, Domestic and International. The Domestic segment aggregates all operations exclusive of International operations, including U.S. Best Buy stores, Musicland and Magnolia Hi-Fi operations. The International segment is currently comprised of Future Shop and Canadian Best Buy stores. The primary reasons for the combining of our domestic operations into one reportable segment were the significant similarities of their respective products and markets, the leveraging of our buying and distribution functions, and the merging of many of our operational

 

10



 

functions into a shared services model in the first quarter of fiscal 2003.  Prior period financial data has been restated to reflect this change.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Domestic

 

$

5,081

 

$

4,632

 

$

14,034

 

$

12,493

 

International

 

424

 

124

 

1,065

 

124

 

Total revenues

 

$

5,505

 

$

4,756

 

$

15,099

 

$

12,617

 

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Domestic

 

$

143

 

$

127

 

$

367

 

$

365

 

International

 

(4

)

2

 

(10

)

2

 

Total operating income

 

139

 

129

 

357

 

367

 

Net interest expense (income)

 

1

 

(3

)

4

 

6

 

Earnings before income tax expense

 

$

138

 

$

132

 

$

353

 

$

361

 

 

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

 

 

 

Nov. 30,
2002

 

March 2,
2002

 

Dec. 1,
2001

 

Domestic

 

$

7,926

 

$

6,665

 

$

6,700

 

International

 

935

 

686

 

770

 

Total assets

 

$

8,861

 

$

7,351

 

$

7,470

 

 

8.                                       Goodwill and Intangible Asset:

 

In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, which eliminated the systematic amortization of goodwill. The Statement also required that goodwill be reviewed for impairment at adoption and at least annually thereafter. Effective March 3, 2002, we adopted SFAS No. 142. A reconciliation of reported net income adjusted to reflect the adoption of SFAS No. 142 is provided below ($ in millions, except per share amounts):

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Reported net earnings (loss)

 

$

85

 

$

80

 

$

(131

)

$

220

 

Add-back goodwill amortization, net of tax

 

 

5

 

 

14

 

Adjusted net earnings (loss)

 

$

85

 

$

85

 

$

(131

)

$

234

 

 

 

 

 

 

 

 

 

 

 

Reported basic earnings (loss) per share

 

$

0.26

 

$

0.25

 

$

(0.41

)

$

0.70

 

Add-back goodwill amortization

 

 

0.01

 

 

0.04

 

Adjusted basic earnings (loss) per share

 

$

0.26

 

$

0.26

 

$

(0.41

)

$

0.74

 

 

 

 

 

 

 

 

 

 

 

Reported diluted earnings (loss) per share

 

$

0.26

 

$

0.25

 

$

(0.40

)

$

0.68

 

Add-back goodwill amortization

 

 

0.01

 

 

0.04

 

Adjusted diluted earnings (loss) per share

 

$

0.26

 

$

0.26

 

$

(0.40

)

$

0.72

 

 

11



 

During the second quarter of fiscal 2003, we completed the transitional requirements for goodwill impairment testing. As a result of the transitional goodwill impairment testing, we determined that the book value of the assets of our Musicland and Magnolia Hi-Fi businesses, which were acquired in the fourth quarter of fiscal 2001, exceeded their current fair value. Fair values were determined utilizing widely accepted valuation techniques, including discounted cash flow and market multiple analyses.  Musicland’s current fair value was based on present expectations for the business in light of the current retail environment and the uncertainty associated with future trends in prerecorded music products.  Magnolia Hi-Fi’s current fair value was based on present expectations for the business in light of recent sales trends and the current business environment, including an economic slowdown in the Pacific Northwest. The resulting after-tax, non-cash, impairment charge was $348 million, of which $308 million was associated with Musicland and $40 million was associated with Magnolia Hi-Fi. The charge represented a complete write-off of the goodwill associated with these businesses. This impairment charge is considered a change in accounting principle, and the cumulative effect of adopting SFAS No. 142 on our first quarter’s results is provided below ($ in millions, except per share amounts):

 

 

 

Net Earnings

 

Basic Earnings
(Loss) per Share

 

Diluted Earnings
(Loss) per Share

 

As reported for the three months ended June 1, 2002

 

$

70

 

$

0.22

 

$

0.22

 

Less:  cumulative effect of change in accounting principle, net of  $24 tax

 

348

 

1.09

 

1.07

 

Adjusted to include the impairment charge

 

$

(278

)

$

(0.87

)

$

(0.85

)

 

We expect to complete our annual goodwill impairment testing for Future Shop in the fourth quarter of fiscal 2003. The impact, if any, resulting from Future Shop goodwill impairment testing is not known at this time.

 

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

 

 

 

Nov. 30,
2002

 

March 2,
2002

 

Dec. 1,
2001

 

Domestic

 

$

3

 

$

372

 

$

371

 

International

 

404

 

401

 

379

 

Goodwill, net

 

$

407

 

$

773

 

$

750

 

 

The change in the Domestic segment from December 1, 2001 through March 2, 2002 was due to the finalization of the purchase accounting for Musicland and Magnolia Hi-Fi, substantially offset by goodwill amortization. The change in the Domestic segment from March 2, 2002 through November 30, 2002 was primarily due to the impairment charge described above. Adjustment to our preliminary purchase price allocation and fluctuation in the foreign currency exchange rates caused the change in the International segment from December 1, 2001 through March 2, 2002. The finalization of the purchase accounting for Future Shop and fluctuation in the foreign currency exchange rates caused the change in the International segment from March 2, 2002 to November 30, 2002.

 

Our intangible asset was comprised of a $32 million indefinite-lived intangible trade name related to Future Shop. The intangible asset is recorded in the International segment and is not being amortized in accordance with SFAS No. 142.

 

9.                                       New Accounting Standards:

 

We adopted SFAS No. 142, Goodwill and Other Intangible Assets, on March 3, 2002. Under this Statement, goodwill is no longer amortized over its useful life. Rather, goodwill is subject to an annual impairment test based on its fair value. Separable intangible assets that are determined to have a finite

 

12



 

life will continue to be amortized over their useful lives. The effects of adopting SFAS No. 142 are disclosed above.

 

We also adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, on March 3, 2002. This Statement develops one accounting model (based on the model in SFAS No. 121) for long-lived assets to be disposed of, expands the scope of discontinued operations and modifies the accounting for discontinued operations. The adoption of this Statement did not have a significant impact on our net earnings or financial position.

 

We will adopt SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, on January 1, 2003. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan. The principal impact of this Statement is expected to come from the timing of when costs for exit or disposal activities are recognized.

 

In November 2002, the Emerging Issues Task Force (EITF) reached consensus on Issue No. 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration given by a Vendor to a Customer (including a Reseller of the Vendor's Products).  Cash consideration received by a customer from a vendor is to be considered a reduction of the prices of the vendor's products or services, and characterized as a reduction of cost of sales unless certain conditions are met. Rebates or refunds that are payable to a customer only upon the occurrence of certain events are to be recognized as a reduction of cost of sales on a systematic and rational basis. EITF Issue No. 02-16 is effective for us beginning with the first quarter of fiscal 2004.  We have not completed our evaluation of the impact of this EITF.

 

10.                                 Condensed Consolidating Financial Information:

 

Our convertible debentures are guaranteed by Best Buy Stores, L.P., a wholly-owned indirect subsidiary.  At November 30, 2002, convertible debentures totaling approximately $748 million were outstanding. The debentures are described in the notes included in our Annual Report to Shareholders for the fiscal year ended March 2, 2002. The following tables present condensed consolidating balance sheets as of November 30, 2002; March 2, 2002; and December 1, 2001; condensed consolidating statements of earnings for the three and nine months ended November 30, 2002, and December 1, 2001; and condensed consolidating statements of cash flows for the nine months ended November 30, 2002 and December 1, 2001:

 

13



 

Condensed Consolidating Balance Sheets

As of November 30, 2002

(Unaudited)

$ in millions

 

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,051

 

$

94

 

$

11

 

$

 

$

1,156

 

Receivables

 

512

 

23

 

44

 

 

579

 

Recoverable costs from developed properties

 

35

 

 

 

 

35

 

Merchandise inventories

 

 

3,191

 

907

 

(8

)

4,090

 

Intercompany receivable

 

2,477

 

 

 

(2,477

)

 

Intercompany note receivable

 

500

 

 

 

(500

)

 

Other current assets

 

738

 

6

 

68

 

(619

)

193

 

Total current assets

 

5,313

 

3,314

 

1,030

 

(3,604

)

6,053

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Property and Equipment

 

848

 

1,011

 

409

 

 

2,268

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill, Net

 

 

3

 

404

 

 

407

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible Asset

 

 

 

32

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

72

 

23

 

94

 

(88

)

101

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in Subsidiaries

 

925

 

 

 

(925

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

7,158

 

$

4,351

 

$

1,969

 

$

(4,617

)

$

8,861

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,329

 

$

 

$

765

 

$

 

$

4,094

 

Accrued compensation and related expenses

 

82

 

74

 

36

 

 

192

 

Accrued liabilities

 

221

 

428

 

170

 

 

819

 

Accrued income taxes

 

 

505

 

288

 

(620

)

173

 

Current portion of long-term debt

 

1

 

 

6

 

 

7

 

Intercompany payable

 

 

1,893

 

584

 

(2,477

)

 

Intercompany note payable

 

 

500

 

 

(500

)

 

Total current liabilities

 

3,633

 

3,400

 

1,849

 

(3,597

)

5,285

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities

 

223

 

84

 

51

 

(74

)

284

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

811

 

 

11

 

 

822

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

2,491

 

867

 

58

 

(946

)

2,470

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

7,158

 

$

4,351

 

$

1,969

 

$

(4,617

)

$

8,861

 

 

14



 

Condensed Consolidating Balance Sheets

As of March 2, 2002

(Unaudited)

$ in millions

 

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,823

 

$

29

 

$

3

 

$

 

$

1,855

 

Receivables

 

207

 

 

25

 

(2

)

230

 

Recoverable costs from developed properties

 

79

 

 

 

 

79

 

Merchandise inventories

 

 

1,711

 

549

 

(2

)

2,258

 

Intercompany receivable

 

1,071

 

 

 

(1,071

)

 

Intercompany note receivable

 

500

 

 

 

(500

)

 

Other current assets

 

488

 

 

65

 

(381

)

172

 

Total current assets

 

4,168

 

1,740

 

642

 

(1,956

)

4,594

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Property and Equipment

 

577

 

934

 

386

 

 

1,897

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill, Net

 

 

 

773

 

 

773

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

69

 

11

 

7

 

 

87

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in Subsidiaries

 

1,045

 

 

 

(1,045

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

5,859

 

$

2,685

 

$

1,808

 

$

(3,001

)

$

7,351

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,037

 

$

 

$

446

 

$

(4

)

$

2,479

 

Accrued compensation and related expenses

 

81

 

71

 

53

 

 

205

 

Accrued liabilities

 

157

 

384

 

177

 

 

718

 

Accrued income taxes

 

 

445

 

227

 

(381

)

291

 

Current portion of long-term debt

 

2

 

 

5

 

 

7

 

Intercompany payable

 

 

280

 

791

 

(1,071

)

 

Intercompany note payable

 

 

500

 

 

(500

)

 

Total current liabilities

 

2,277

 

1,680

 

1,699

 

(1,956

)

3,700

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities

 

261

 

44

 

12

 

 

317

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

800

 

 

13

 

 

813

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

2,521

 

961

 

84

 

(1,045

)

2,521

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

5,859

 

$

2,685

 

$

1,808

 

$

(3,001

)

$

7,351

 

 

15



 

Condensed Consolidating Balance Sheets

As of December 1, 2001

(Unaudited)

$ in millions

 

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

792

 

$

38

 

$

13

 

$

 

$

843

 

Receivables

 

329

 

 

41

 

 

370

 

Recoverable costs from developed properties

 

77

 

 

6

 

 

83

 

Merchandise inventories

 

 

2,619

 

842

 

(2

)

3,459

 

Intercompany receivable

 

2,318

 

 

 

(2,318

)

 

Intercompany note receivable

 

500

 

 

 

(500

)

 

Other current assets

 

393

 

2

 

71

 

(334

)

132

 

Total current assets

 

4,409

 

2,659

 

973

 

(3,154

)

4,887

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Property and Equipment

 

453

 

922

 

378

 

 

1,753

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill, Net

 

 

 

750

 

 

750

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

57

 

11

 

22

 

(10

)

80

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in Subsidiaries

 

1,067

 

 

 

(1,067

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

5,986

 

$

3,592

 

$

2,123

 

$

(4,231

)

$

7,470

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,888

 

$

 

$

757

 

$

 

$

3,645

 

Accrued compensation and related expenses

 

84

 

61

 

44

 

 

189

 

Accrued liabilities

 

280

 

341

 

92

 

 

713

 

Accrued income taxes

 

 

251

 

162

 

(334

)

79

 

Current portion of long-term debt

 

2

 

 

12

 

 

14

 

Intercompany payable

 

 

1,614

 

702

 

(2,316

)

 

Intercompany note payable

 

 

500

 

 

(500

)

 

Total current liabilities

 

3,254

 

2,767

 

1,769

 

(3,150

)

4,640

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities

 

228

 

78

 

28

 

(11

)

323

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

358

 

 

6

 

 

364

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

2,146

 

747

 

320

 

(1,070

)

2,143

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

5,986

 

$

3,592

 

$

2,123

 

$

(4,231

)

$

7,470

 

 

16



 

Condensed Consolidating Statements of Earnings

For the Three Months Ended November 30, 2002

(Unaudited)

$ in millions

 

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenues

 

$

1

 

$

4,832

 

$

986

 

$

(314

)

$

5,505

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

3,866

 

668

 

(216

)

4,318

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

1

 

966

 

318

 

(98

)

1,187

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

6

 

864

 

276

 

(98

)

1,048

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

(5

)

102

 

42

 

 

139

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest (income) expense

 

(5

)

5

 

1

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

84

 

 

 

(84

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income tax expense

 

84

 

97

 

41

 

(84

)

138

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(1

)

38

 

16

 

 

53

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

85

 

$

59

 

$

25

 

$

(84

)

$

85

 

 

17



 

Condensed Consolidating Statements of Earnings

For the Three Months Ended December 1, 2001

(Unaudited)

$ in millions

 

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenues

 

$

 

$

4,244

 

$

696

 

$

(184

)

$

4,756

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

3,398

 

427

 

(97

)

3,728

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

846

 

269

 

(87

)

1,028

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

8

 

750

 

228

 

(87

)

899

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

(8

)

96

 

41

 

 

129

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest (income) expense

 

(9

)

5

 

1

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

79

 

 

 

(79

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income tax expense

 

80

 

91

 

40

 

(79

)

132

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

 

36

 

16

 

 

52

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

80

 

$

55

 

$

24

 

$

(79

)

$

80

 

 

18



 

Condensed Consolidating Statements of Earnings

For the Nine Months Ended November 30, 2002

(Unaudited)

$ in millions

 

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenues

 

$

2

 

$

13,240

 

$

2,725

 

$

(868

)

$

15,099

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

10,510

 

1,816

 

(608

)

11,718

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

2

 

2,730

 

909

 

(260

)

3,381

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

(1

)

2,494

 

791

 

(260

)

3,024

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

3

 

236

 

118

 

 

357

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest (income) expense

 

(14

)

14

 

4

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (loss) of subsidiaries

 

(142

)

 

 

142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings before income tax expense

 

(125

)

222

 

114

 

142

 

353

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

6

 

86

 

44

 

 

136

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings before cumulative effect of change in accounting principle

 

(131

)

136

 

70

 

142

 

217

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in accounting principle, net of $24 tax

 

 

 

(348

)

 

(348

)

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

$

(131

)

$

136

 

$

(278

)

$

142

 

$

(131

)

 

19



 

Condensed Consolidating Statements of Earnings

For the Nine Months Ended December 1, 2001

(Unaudited)

$ in millions

 

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenues

 

$

1

 

$

11,343

 

$

1,727

 

$

(454

)

$

12,617

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

9,006

 

1,009

 

(220

)

9,795

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

1

 

2,337

 

718

 

(234

)

2,822

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

4

 

2,075

 

610

 

(234

)

2,455

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

(3

)

262

 

108

 

 

367

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest (income) expense

 

(34

)

23

 

17

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

202

 

 

 

(202

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income tax expense

 

233

 

239

 

91

 

(202

)

361

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

13

 

93

 

35

 

 

141

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

220

 

$

146

 

$

56

 

$

(202

)

$

220

 

 

20



 

Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended November 30, 2002

(Unaudited)

$ in millions

 

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Total cash provided by (used in) operating activities

 

$

 871

 

$

 (859

)

$

 (145

)

$

 —

 

$

 (133

)

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

(324

)

(220

)

(105

)

 

(649

)

Acquisitions of business, net of cash acquired

 

 

(3

)

 

 

(3

)

Decrease in recoverable costs from developed properties

 

44

 

 

 

 

44

 

Total cash used in investing activities

 

(280

)

(223

)

(105

)

 

(608

)

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

39

 

 

 

 

39

 

Long-term debt payments

 

(11

)

 

(1

)

 

(12

)

Net proceeds from long-term debt

 

15

 

 

 

 

15

 

Change in intercompany receivable/payable

 

(1,406

)

1,147

 

259

 

 

 

Total cash (used in) provided by financing activities

 

(1,363

)

1,147

 

258

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(772

)

65

 

8

 

 

(699

)

Cash and cash equivalents at beginning of period

 

1,823

 

29

 

3

 

 

1,855

 

Cash and cash equivalents at end of period

 

$

 1,051

 

$

 94

 

$

 11

 

$

 —

 

$

 1,156

 

 

21



 

Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended December 1, 2001
(Unaudited)
$ in millions

 

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Total cash provided by (used in) operating activities

 

$

1,644

 

$

(658

)

$

(208

)

$

 

$

778

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

(198

)

(196

)

(37

)

 

(431

)

Acquisitions of business, net of cash acquired

 

 

 

(360

)

 

(360

)

Decrease in recoverable costs from developed properties

 

26

 

 

 

 

26

 

Total cash used in investing activities

 

(172

)

(196

)

(397

)

 

(765

)

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

36

 

 

 

 

36

 

Long-term debt payments

 

(6

)

 

(277

)

 

(283

)

Net proceeds from long-term debt

 

330

 

 

 

 

330

 

Change in intercompany receivable/payable

 

(1,756

)

865

 

891

 

 

 

Total cash (used in) provided by financing activities

 

(1,396

)

865

 

614

 

 

83

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

76

 

11

 

9

 

 

96

 

Cash and cash equivalents at beginning of period

 

716

 

27

 

4

 

 

747

 

Cash and cash equivalents at end of period

 

$

792

 

$

38

 

$

13

 

$

 

$

843

 

 

22



 

BEST BUY CO., INC.

 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

Overview

Best Buy Co., Inc. is a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. In November of fiscal 2002, we acquired Future Shop Ltd. (Future Shop), Canada’s largest specialty retailer of name-brand consumer electronics, home office equipment, entertainment software and appliances. Future Shop’s net assets and results of operations were included in our consolidated financial statements from the date of acquisition. We currently operate two reportable segments: Domestic and International. The Domestic segment aggregates all operations exclusive of International operations, including U.S. Best Buy stores, Musicland (Sam Goody, Suncoast, On Cue and Media Play) and Magnolia Hi-Fi operations. The International segment consists of Future Shop and Canadian Best Buy stores. For additional information regarding acquisitions and segments, refer to notes 6 and 7 of the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

 

Goodwill Impairment Charge

In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, we completed the transitional requirements for goodwill impairment testing in the second quarter of fiscal 2003. As a result of the testing, we determined that the book value of the assets of our Musicland and Magnolia Hi-Fi businesses, which were acquired in the fourth quarter of fiscal 2001, exceeded their current fair value. Fair values were determined utilizing widely accepted valuation techniques including discounted cash flow and market multiple analyses. Musicland’s current fair value was based on present expectations for the business in light of the current retail environment and the uncertainty associated with future trends in prerecorded music products. Magnolia Hi-Fi’s current fair value was based on present expectations for the business in light of recent sales trends and the current business environment, including an economic slowdown in the Pacific Northwest. The resulting after-tax, non-cash, impairment charge was $348 million ($1.07 per diluted share), of which $308 million was associated with Musicland and $40 million was associated with Magnolia Hi-Fi. The charge represented a complete write-off of the goodwill associated with these businesses. Our discussion of operating results in this filing excludes the impact of the goodwill impairment charge. For additional discussion regarding the impairment charge, refer to note 8 in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

 

Results of Operations

 

Third-Quarter Summary

 

                  Revenues increased 16% over last year’s third fiscal quarter to $5.51 billion, driven by the opening of 68 U.S. Best Buy stores in the past 12 months and the inclusion of a full quarter of sales from International operations. Comparable store sales declined 0.4%.

                  Our gross profit percentage remained even with the comparable period of last year. The inclusion of a full quarter of the higher-margin International operations and a more profitable sales mix at U.S. Best Buy stores were offset by a less profitable sales mix at Musicland. A more promotional environment put pressure on the gross profit percentage in the third quarter.

                  Our selling, general and administrative expenses (SG&A) percentage increased by 0.1% of revenues compared with the third quarter of fiscal 2002. The inclusion of International operations and the deleveraging impact of a modest comparable store sales decline offset expense reductions in our Domestic segment.

                  Net earnings were $85 million, or $0.26 per diluted share, compared with $80 million, or $0.25 per diluted share, in the third quarter of fiscal 2002.

 

23



 

                  On January 9, 2003, we announced that we revised our fiscal 2003 fourth-quarter earnings expectations from our previously communicated range of $1.00 to $1.10 per diluted share, to $1.05 to $1.10 per diluted share. The revision was based on slightly higher than expected December sales at U.S. Best Buy stores and the expectation that results for the remainder of the fourth quarter will be in line with our projections.  As announced on December 17, 2002, we had reduced our fourth quarter earnings estimate to $1.00 to $1.10 per diluted share from our September 17, 2002 estimate of $1.05 to $1.15 per diluted share.  The $0.05 per diluted share reduction was primarily due to the unexpected weakness in comparable store sales at our Musicland stores.  Fiscal 2003 earnings per diluted share are projected at $1.72 to $1.77 per share (before cumulative effect of a change in accounting principle) as compared with $1.77 per share in fiscal 2002.

 

Consolidated

 

The following table presents selected unaudited consolidated financial data ($ in millions, except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

As Reported

 

Pro forma(1)

 

As Reported

 

Pro forma(1)

 

 

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Dec. 1,
2001

 

Nov. 30,
2002

 

Dec. 1,
2001

 

Dec. 1,
2001

 

Revenues

 

$

5,505

 

$

4,756

 

$

4,986

 

$

15,099

 

$

12,617

 

$

13,412

 

Revenues % change

 

16

%

27

%

N/A

 

20

%

28

%

N/A

 

Comparable store sales change(2)

 

(0.4

)%

1.6

%

N/A

 

2.2

%

0.6

%

N/A

 

Gross profit percentage

 

21.6

%

21.6

%

21.6

%

22.4

%

22.4

%

22.5

%

SG&A percentage

 

19.0

%

18.9

%

19.0

%

20.0

%

19.5

%

19.7

%

Operating income

 

$

139

 

$

129

 

$

130

 

$

357

 

$

367

 

$

373

 

Operating income percentage

 

2.5

%

2.7

%

2.6

%

2.4

%

2.9

%

2.8

%

Earnings before cumulative effect of change in accounting principle

 

$

85

 

$

80

 

$

79

 

$

217

 

$

220

 

$

219

 

Net earnings (loss)

 

$

85

 

$

80

 

$

79

 

$

(131

)

$

220

 

$

219

 

Diluted earnings per share before accounting change(3)

 

$

0.26

 

$

0.25

 

$

0.25

 

$

0.67

 

$

0.68

 

$

0.68

 

Diluted earnings (loss) per share(3)

 

$

0.26

 

$

0.25

 

$

0.25

 

$

(0.40

)

$

0.68

 

$

0.68

 

 


(1) Pro forma financial data presents our results of operations as if Future Shop had been acquired at the beginning of fiscal 2002.

(2) Includes sales at stores and Internet sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of acquisition. Future Shop sales will be included in our comparable store sales calculation beginning in the fourth quarter of fiscal 2003.

(3) The diluted earnings (loss) per share amounts above have been restated to reflect a three-for-two stock split effected May 10, 2002.

 

Our third–quarter fiscal 2003 net earnings were $85 million, or $0.26 per diluted share, compared with $80 million, or $0.25 per diluted share, in the third quarter of fiscal 2002. For the first nine months of fiscal 2003, earnings before the cumulative effect of a change in accounting principle were $217 million, or $0.67 per diluted share, compared with net earnings of $220 million, or $0.68 per diluted share, for the same period one year ago. For the quarter, the increase in net earnings resulted primarily from an increase in revenues driven by the opening of 68 new U.S. Best Buy stores in the past 12 months. For the nine-month period, the decrease in earnings (before the cumulative effect of a change in accounting principle) was primarily due to an increase in the SG&A percentage, which more than offset increased gross margin dollars resulting from the 20% revenue increase.

 

24



 

Revenues were $5.51 billion in the third quarter of fiscal 2003, a 16% increase compared with the same period in the prior fiscal year. For the first nine months of fiscal 2003, revenues increased 20% to $15.10 billion compared with the same period in fiscal 2002. For the quarter, new U.S. Best Buy stores generated approximately three-fifths of the increase in revenues. The remainder of the increase in third-quarter revenues was due to the inclusion of a full quarter of International operations. For the nine-month period, new U.S. Best Buy stores generated approximately half of the increase in revenues. The remainder of the increase for the nine-month period resulted from the inclusion of International operations and the 2.2% comparable store sales gain.

 

Our third-quarter and year-to-date gross profit percentages for fiscal 2003 were 21.6% and 22.4%, respectively, consistent with the comparable periods of the prior fiscal year. For both the quarter and nine-month periods, a more profitable sales mix at U.S. Best Buy stores and the inclusion of higher-margin International results were offset by a less profitable sales mix at Musicland. The inclusion of International operations increased the gross profit percentage by 0.2% of revenues and 0.1% of revenues for the third quarter and nine months ended November 30, 2002, respectively.

 

Our SG&A percentage increased by 0.1% of revenues for the third quarter and by 0.5% of revenues for the first nine months of fiscal 2003. Third-quarter Domestic SG&A expense reductions were offset by the deleveraging effect of a modest comparable store sales decline (i.e., the effect of expenses that grew at a faster rate than comparable store sales) and the inclusion of a full quarter of International operations, compared with the same period one year ago. The inclusion of International operations increased our SG&A percentage by 0.3% of revenues in both the third quarter and first nine months of fiscal 2003. The increase in the SG&A percentage for the nine months ended November 30, 2002, compared with the same period last fiscal year was primarily due to the inclusion of International operations and the deleveraging effect of a modest comparable store sales increase. Increased expenses to support strategic initiatives and business growth were also contributing factors in the SG&A percentage increase. These factors were partially offset by expense reductions initiated in the third quarter. In addition, the SG&A percentage benefited from the discontinuation of goodwill amortization at the beginning of fiscal 2003 resulting from our adoption of SFAS No. 142. Goodwill amortization expense totaled approximately $5 million and $15 million for the third quarter and first nine months of fiscal 2002, respectively.

 

Segment Performance

 

Domestic

 

The following table presents unaudited selected financial data for the Domestic segment ($ in millions):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Nov. 30, 2002

 

Dec. 1,  2001

 

Nov. 30, 2002

 

Dec. 1,  2001

 

Revenues

 

$

5,081

 

$

4,632

 

$

14,034

 

$

12,493

 

Revenues as a % of total Company revenues

 

92.3

%

97.4

%

92.9

%

99.0

%

Comparable store sales change(1)

 

(0.4

)%

1.6

%

2.2

%

0.6

%

Gross profit percentage

 

21.4

%

21.6

%

22.3

%

22.4

%

SG&A percentage

 

18.6

%

18.8

%

19.6

%

19.4

%

Operating income

 

$

143

 

$

127

 

$

367

 

$

365

 

Operating income percentage

 

2.8

%

2.8

%

2.6

%

2.9

%

 


(1)  Includes sales at stores and Internet sites operating at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of acquisition.

 

25



 

The following table presents the Domestic comparable store sales percentage change for the periods presented:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Nov. 30, 2002

 

Dec. 1, 2001

 

Nov. 30, 2002

 

Dec. 1, 2001

 

U.S. Best Buy stores

 

0.7

%

1.6

%

3.1

%

0.6

%

Musicland

 

(11.5

)%

0.3

%

(5.5

)%

(2.1

)%

Magnolia Hi-Fi

 

2.9

%

(16.3

)%

(3.6

)%

(12.7

)%

Total

 

(0.4

)%

1.6

%

2.2

%

0.6

%

 

The following table reconciles Domestic stores open at the beginning and end of the third quarter of fiscal 2003:

 

 

 

Total Stores
End of
Second
Quarter
Fiscal 2003

 

Stores
Opened

 

Stores
Closed

 

Total Stores
End of
Third
Quarter
Fiscal 2003

 

U.S. Best Buy stores

 

515

 

31

 

 

546

 

Musicland

 

1,306

 

23

 

11

 

1,318

 

Magnolia Hi-Fi

 

16

 

3

 

 

19

 

Total

 

1,837

 

57

 

11

 

1,883

 

 


Note: In the third quarter of fiscal 2003, Best Buy relocated two stores and remodeled one location. Musicland and Magnolia Hi-Fi did not relocate, remodel or expand any locations.

 

The following table reconciles Domestic stores open at the beginning and end of the third quarter of fiscal 2002:

 

 

 

Total Stores
End of
Second
Quarter
Fiscal 2002

 

Stores
Opened

 

Stores
Closed

 

Total Stores
End of
Third
Quarter
Fiscal 2002

 

U.S. Best Buy stores

 

439

 

39

 

 

478

 

Musicland

 

1,304

 

26

 

3

 

1,327

 

Magnolia Hi-Fi

 

13

 

 

 

13

 

Total

 

1,756

 

65

 

3

 

1,818

 

 


Note: In the third quarter of fiscal 2002, Best Buy relocated two stores and remodeled or expanded four locations. Musicland relocated six stores and remodeled or expanded 24 locations. Magnolia Hi-Fi did not relocate, remodel or expand any locations.

 

In the third quarter of fiscal 2003, Domestic operating income increased to $143 million, compared with $127 million in the third quarter of the prior fiscal year. For the first nine months of fiscal 2003, Domestic operating income was $367 million, $2 million higher than the same period one year ago. The increase in operating income for the quarter resulted primarily from revenues generated by 68 U.S. Best Buy stores opened in the last 12 months, as the slight decline in the gross profit percentage was offset by the lower SG&A percentage. Comparable store sales gains at Best Buy and Magnolia Hi-Fi were more than offset by the decline at Musicland. For the first nine months of fiscal 2003, a slightly lower gross profit percentage and a higher SG&A percentage offset revenues generated by new stores. Comparable store sales gains at Best Buy were partially offset by declines at Musicland and Magnolia Hi-Fi.

 

Domestic revenues were $5.08 billion in the third quarter of fiscal 2003, a 10% increase compared with the third quarter of fiscal 2002. For the first nine months of fiscal 2003, Domestic revenues increased 12% to $14.03 billion. For the quarter, substantially all of the revenue gain resulted from opening 68 new U.S. Best Buy stores

 

26



 

over the past 12 months. The increased revenue from new stores was partially offset by the 11.5% comparable store sales decline at Musicland. The timing of the Thanksgiving holiday this fiscal year placed one less week of holiday sales in the third quarter and negatively impacted the overall comparable store sales change. New U.S. Best Buy stores generated approximately four-fifths of the revenue gain for the first nine months of fiscal 2003 compared with the same period last year. The remainder of the increase was primarily due to the 2.2% comparable store sales increase.

 

The third quarter Domestic gross profit percentage was 21.4% of revenues, down from 21.6% of revenues for the same period in fiscal 2002. For the first nine months, the Domestic gross profit percentage declined slightly to 22.3% of revenues compared with 22.4% one year ago. Nearly all of the third-quarter gross profit percentage decline was the result of a change in the sales mix at Musicland stores. Musicland’s gross profit percentage continued to decline due to increased sales of lower-margin DVD movies and video gaming hardware and software, and decreased sales of higher-margin prerecorded music. The gross profit percentage at U.S. Best Buy stores improved due to a more profitable sales mix; however, a more promotional environment limited the improvement. Both the third-quarter and nine-month period Domestic gross profit percentages benefited from increased sales of higher-margin digital products and accessories.

 

The Domestic SG&A percentage was 18.6% and 19.6% of revenues for the third quarter and first nine months of fiscal 2003, respectively, down by 0.2% of revenues in the third quarter, but up by 0.2% of revenues for the first nine months, when compared to the same periods one year ago. For the third quarter, the Domestic SG&A percentage decline was primarily due to year-over-year expense reductions.  The reduction in the SG&A percentage resulting from the expense reductions was partially offset by the deleveraging effect of a modest comparable store sales decline. For the nine-month period, the increase compared with the first nine months of fiscal 2002 was primarily due to the deleveraging effect of a modest comparable store sales increase. Increased depreciation related to technology investments, investments in personnel and outside consultants to support strategic initiatives and business growth were also contributing factors to the increase in the SG&A percentage. These factors were partially offset by expense reductions begun in the third quarter. In addition, the third-quarter and nine-month period Domestic SG&A percentage benefited from the discontinuation of goodwill amortization resulting from the adoption of SFAS No. 142 at the beginning of fiscal 2003. Goodwill amortization expense totaled approximately $5 million and $15 million for the third quarter and first nine months of fiscal 2002, respectively.

 

International

 

The following table presents unaudited selected financial data for the International segment ($ in millions):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Nov. 30,  2002

 

Pro forma(1)
Dec. 1,  2001

 

Nov. 30,  2002

 

Pro forma(1)
Dec. 1,  2001

 

Revenues

 

$

424

 

$

354

 

$

1,065

 

$

919

 

Revenues as a % of total Company revenues

 

7.7

%

7.1

%

7.1

%

6.8

%

Comparable store sales change(2)

 

3.8

%

11.2

%

6.4

%

10.9

%

Gross profit percentage

 

23.2

%

22.2

%

24.1

%

23.7

%

SG&A percentage

 

24.0

%

21.5

%

25.0

%

22.9

%

Operating (loss) income

 

$

(4

)

$

3

 

$

(10

)

$

8

 

Operating (loss) income percentage

 

(0.8

)%

0.7

%

(0.9

)%

0.8

%

 


(1) Pro forma financial data presents results of operations as though Future Shop had been acquired at the beginning of fiscal 2002.

(2) Includes sales at stores and Internet sites operating at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. The comparable store sales calculation excludes the impact of foreign currency exchange rate fluctuations.

 

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The following table reconciles International stores open at the beginning and end of the third quarter of fiscal 2003:

 

 

 

Total Stores
End of
Second
Quarter
Fiscal 2003

 

Stores
Opened

 

Stores
Closed

 

Total Stores
End of
Third
Quarter
Fiscal 2003

 

Future Shop

 

100

 

4

 

 

104

 

Canadian Best Buy Stores

 

1

 

7

 

 

8

 

Total

 

101

 

11

 

 

112

 

 


Note: Future Shop relocated four stores in the third quarter of fiscal 2003.

 

Our International segment recorded a third-quarter operating loss of $4 million compared with operating income of $3 million, on a pro forma basis, in the third quarter of the prior fiscal year. For the first nine months of fiscal 2003, our International segment had an operating loss of $10 million, compared with operating income of $8 million, on a pro forma basis, for the same period one year ago. For the third quarter and nine-month periods, revenue gains and an increased gross profit percentage were offset by an increase in the SG&A percentage. Foreign exchange rate fluctuations did not have a significant effect on results of operations in fiscal 2003.

 

International revenues increased 20% to $424 million in the third quarter compared with the same period in the prior fiscal year, on a pro forma basis. Approximately one-fifth of the revenue increase was due to a 3.8% comparable store sales increase, driven by strong sales of digital products and video gaming. The remainder of the third-quarter revenue increase was the result of opening nine Future Shop stores and eight Canadian Best Buy stores in the past 12 months. For the first nine months of fiscal 2003, International revenues increased 16% to $1.07 billion compared with the same period last fiscal year, on a pro forma basis. A 6.4% comparable store sales increase, resulting from the same factors driving the third quarter increase, generated approximately two-fifths of the revenue increase. The remainder of the increase for the nine-month period was primarily due to new store openings.

 

In the third quarter, the International gross profit percentage was 23.2% of revenues, up from 22.2% of revenues in the third quarter of the prior fiscal year, on a pro forma basis. For the nine-month period, the International gross profit percentage increased modestly to 24.1% compared with 23.7% for the same period in the prior fiscal year, on a pro forma basis. The gross profit percentage improvement for the quarter and nine-month period was mainly due to a higher-margin sales mix, including increased sales of higher-margin digital products and accessories, compared with the prior fiscal year.

 

In the third quarter, the International SG&A percentage increased by 2.5% of revenues to 24.0% of revenues compared to the third quarter of last fiscal year, on a pro forma basis. For the first nine months of the current fiscal year, the International SG&A percentage was 25.0%, up from 22.9% for the same period last fiscal year, on a pro forma basis. The SG&A percentage increase for the three-and nine-month periods was primarily due to continued investments to support strategic initiatives intended to improve the future efficiency and profitability of our International operations, as well as expenses associated with launching Best Buy stores in Canada.

 

Consolidated

 

Net Interest Expense (Income)

Net interest expense was $1 million for the third quarter and $4 million the first nine-months of fiscal 2003, compared with $3 million of net interest income and $6 million of net interest expense in the comparable periods of the prior fiscal year, respectively. For the third quarter, the increase in net interest expense resulted from the combination of lower yields on cash investments and interest expense associated with convertible debentures issued during fiscal 2002. These factors were partially offset by interest earned on higher average cash balances. Although the same factors affected the nine-month comparison, net interest expense decreased due to a reduction in

 

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interest resulting from the repayment of debt and the capitalization of interest related to the construction of our new corporate facility. Finally, included in the first nine months of fiscal 2002 was an $8 million second-quarter charge for the early retirement of debt acquired as part of the Musicland acquisition. See note 2 of the Notes to Consolidated Financial Statements that discusses the components of net interest expense (income).

 

Effective Income Tax Rate

Our estimated effective income tax rate decreased to 38.7% in fiscal 2003 compared with 39.1% in fiscal 2002. The decrease was mainly due to the discontinuation of goodwill amortization as a result of our adoption of SFAS No. 142, on March 3, 2002.  In fiscal 2002, a substantial amount of our goodwill amortization was non-deductible for tax purposes.

 

Liquidity and Capital Resources

 

Summary

We believe our financial condition, at the end of the third quarter, remained strong. Cash and cash equivalents totaled $1.2 billion, compared with $1.9 billion at the end of fiscal 2002 and $843 million at the end of last year’s third fiscal quarter. Our current ratio, current assets divided by current liabilities, was 1.15 compared with 1.24 at the end of fiscal 2002 and 1.05 at the end of last year’s third fiscal quarter. Our long-term debt-to-capitalization ratio was 25%, up slightly compared with 24% at the end of fiscal 2002 and up from 15% at the end of the third quarter of fiscal 2002. The increase compared with the third quarter of the prior fiscal year was primarily due to the issuance of convertible debentures in the fourth quarter of fiscal 2002.

 

Cash Flows

$133 million was used in operating activities during the first nine months of fiscal 2003, compared with $778 million provided by operating activities for the same period in the prior fiscal year. Earnings before the cumulative effect of a change in accounting principle were essentially even with the prior year. Substantially all of the change in cash used in operating activities was driven by changes in the components of working capital. The change in inventories was primarily due to the addition of new stores in the last 12 months. In addition, we are carrying higher levels of inventory that are contributing to our sales growth, primarily digital products. The change in receivables was mainly due to the timing of cash settlements related to Thanksgiving weekend credit card sales. Credit card processors typically complete their cash settlements in one to four days subsequent to the date of sale. This year, the Thanksgiving holiday fell in the last week (fourth week) of fiscal November, compared with the third week of fiscal November one year ago. The change in accounts payable was due mainly to the timing of payments. The change in accrued income taxes resulted from higher tax payments due to increased earnings in fiscal 2002 compared with fiscal 2001. The change in other liabilities was primarily related to changes in advances received under vendor alliances and the payment of higher performance-based compensation resulting from increased earnings in fiscal 2002 compared with fiscal 2001.

 

For the nine-month period, cash used in investing activities was $608 million, compared with $765 million one year ago. The prior year includes $360 million for the acquisition of Future Shop. Capital spending increased $218 million to $649 million in the first nine months of fiscal 2003. Approximately $96 million of the increase was related to construction of new retail locations, approximately $35 million was related to distribution center improvements and construction, and approximately $31 million of the increase was associated with the construction of our new corporate campus which will be completed in fiscal 2004. The remainder of the increase in capital spending was primarily due to information systems improvements and other additions to property, plant and equipment.

 

Cash provided by financing activities was $42 million in the first nine months of fiscal 2003, compared with $83 million for the same period in the prior fiscal year. The change is primarily due to the issuance of convertible debentures in the second quarter of fiscal 2002, partially offset by the retirement of certain debt instruments during the first six months of fiscal 2002 that were acquired as part of the Musicland acquisition.

 

Sources of Liquidity

Funds generated by operations and existing cash and cash equivalents continue to be our most significant sources of liquidity. We believe funds generated from the expected results of operations and available cash and cash

 

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equivalents will be sufficient to finance anticipated expansion plans and strategic initiatives. In addition, our revolving credit facilities are available for additional working capital needs or investment opportunities. Our liquidity is not dependent on the use of off-balance sheet financing arrangements other than operating leases.

 

We have a $200 million unsecured revolving credit facility scheduled to mature in March 2005, of which $196 million was available at November 30, 2002. We also have a $200 million inventory financing line. Borrowings under this line are collateralized by a security interest in certain merchandise inventories approximating the outstanding borrowings.  At November 30, 2002, approximately $130 million was available under this facility. In addition, we have a $43 million unsecured facility scheduled to mature in September 2003. At November 30, 2002, $32 million was available under this facility.

 

Our credit ratings remained unchanged from our fiscal 2002 year-end ratings. As of November 30, 2002, our ratings were as follows:

 

Rating Agency

 

Rating

 

Outlook

 

Fitch

 

BBB

 

Stable

 

Moody’s

 

Baa3

 

Stable

 

Standard & Poor’s

 

BBB-

 

Negative

 

 

Factors that can impact our credit ratings include changes in the economic environment, conditions in the retail and consumer electronics industries, our financial position and changes in our business strategy. We do not foresee any reasonable circumstances under which our credit ratings would be significantly downgraded. However, if a significant downgrade were to occur, it could adversely impact, among other things, our future borrowing costs, access to capital markets, vendor financing terms and future new store operating lease costs. In addition, the conversion rights of the holders of our convertible debentures could be accelerated if our credit ratings were to be downgraded.

 

Debt and Capital

See our Annual Report on Form 10-K for the fiscal year ended March 2, 2002, for additional details regarding our debt and capital.

 

The amount of debt outstanding as of November 30, 2002, was essentially unchanged from the end of fiscal 2002.

 

Significant Accounting Policies and Estimates

Our significant accounting policies are described in note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended March 2, 2002. A discussion of our critical accounting policies, and the related estimates, are included in Management’s Discussion and Analysis of Results of Operations and Financial Condition in our Annual Report on Form 10-K for the fiscal year ended March 2, 2002.  Management has discussed the development and selection of these policies with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures relating to them.  There have been no significant changes in our existing accounting policies or estimates since our fiscal year ended March 2, 2002.

 

Goodwill Impairment Testing

As a result of our adoption of SFAS No. 142, we review goodwill for impairment annually and otherwise when events or changes in circumstances indicate the carrying value of the goodwill might exceed its current fair value. We determine fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analyses. These types of analyses require us to make certain assumptions and judgments regarding industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our most current business strategy in light of present industry economic conditions, as well as future expectations. If actual results were not consistent with our assumptions and judgments, we could be exposed to a goodwill impairment charge that is material in nature. We will perform goodwill testing with respect to our Future Shop acquisition in the fourth quarter of fiscal 2003.

 

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Outlook for Fiscal 2003

The following section should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 2, 2002.

 

On January 9, 2003, we announced that we revised our fiscal 2003 fourth-quarter earnings expectations from our previously communicated range of $1.00 to $1.10 per diluted share, to $1.05 to $1.10 per diluted share. The revision was based on slightly higher than expected December sales at U.S. Best Buy stores and the expectation that results for the remainder of the fourth quarter will be in line with our projections.  As announced on December 17, 2002, we had reduced our fourth quarter earnings estimate to $1.00 to $1.10 per diluted share from our September 17, 2002 estimate of $1.05 to $1.15 per diluted share.  The $0.05 per diluted share reduction was primarily due to the unexpected weakness in comparable store sales at our Musicland stores. Fiscal 2003 earnings per diluted share are projected at $1.72 to $1.77 per share (before cumulative effect of a change in accounting principle) as compared with $1.77 per share in fiscal 2002.

 

We expect fourth-quarter total revenue growth of approximately 10% over last fiscal year, reflecting the impact of new stores and flat comparable store sales. For our Domestic segment, we anticipate fourth-quarter comparable store sales to be essentially flat, with U.S. Best Buy stores expected to generate a low single-digit comparable store sales increase that will be offset by the double-digit decline at Musicland stores. Our International segment, which will be included in our total Company comparable store sales calculation beginning in the fourth quarter of fiscal 2003, is forecasted to generate a comparable store sales change of 0% to 3%. A softer Canadian economy and increased competition are expected to constrain the International segment’s fourth quarter comparable store sales increase as compared to last fiscal year when comparable store sales increased 16.5%.

 

We expect our fourth quarter gross profit percentage to decline as compared with the fourth quarter of fiscal 2002, with anticipated declines in both the Domestic and International segments’ gross profit percentages. Our Domestic segment’s projected gross profit percentage decline is expected to result from a more promotional environment compared with last fiscal year, increased commoditization of products such as DVD players and big-screen televisions, and a lower contribution from our higher-margin mall-based business. Our International segment’s expected gross profit percentage decline is due to a more promotional environment and increased costs associated with customer financing promotions.

 

We expect a decrease in the SG&A percentage for the fourth quarter, as compared with fiscal 2002, as a result of our continuing efforts to reduce operating expenses. The actual decrease in the SG&A percentage is partially dependent on revenue growth.

 

Finally, we have revised our fiscal 2003 capital expenditure forecast to approximately $875 million, down from our original guidance of $1 billion.

 

A labor dispute between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) caused a work stoppage at west coast ports the last two days of September and first eight days of October. This work stoppage disrupted trade between the United States and Asia causing some interruption in the flow of merchandise to our distribution centers. We do not believe the work stoppage significantly affected our results for the three-months and nine-months ended November 30, 2002. A tentative six-year agreement has been reached between the ILWU and the PMA, which must be ratified by the union membership in late January 2003.

 

On January 9, 2003, we closed 107 Musicland stores with expiring or month-to-month leases as part of the ongoing evaluation of our store portfolio.  The store closings represented approximately 5% of our retail square footage and affected approximately 700 full- and part-time store employees. The related store closing expenses are expected to total approximately $7 million, with the bulk of these expenses being incurred in fiscal 2003.

 

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Comparable store sales for our Musicland stores declined by 11.5% in the third quarter of fiscal 2003 and 14.7% in December of fiscal 2003.  Musicland stores continue to be challenged by declining sales of prerecorded music and reduced mall traffic.  During the fourth quarter of fiscal 2003, we will be performing a comprehensive review of business alternatives. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we are required to perform a test for recoverability of Musicland’s long-lived assets, which we expect to complete during the fourth quarter of fiscal 2003. The impact, if any, resulting from this test is not known at this time.

 

Our outlook is based on certain assumptions regarding future economic conditions. Differences in actual economic conditions as compared with our assumptions could have a material impact on our fiscal 2003 fourth quarter operating results.

 

Safe Harbor Statement Under the Private Securities Litigation Reform Act

 

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide a “safe harbor” for forward–looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Quarterly Report on Form 10-Q are forward–looking statements and may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential.” Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our actual results to differ materially from the anticipated results expressed in such forward–looking statements, including, among other things, general economic conditions, acquisitions and development of new businesses, product availability, sales volumes, profit margins, weather, foreign currency fluctuation, availability of suitable real estate locations, and the impact of labor markets and new product introductions on our overall profitability. Readers should review our Current Report on Form 8-K filed on January 10, 2003, that describes additional important factors that could cause actual results to differ materially from those contemplated by the forward–looking statements made in this Quarterly Report on Form 10-Q.

 

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our debt is not subject to material interest rate volatility risk. The rates on a substantial portion of our debt may be reset, but not more than one percentage point higher than the current rates. If the rates on the debt were to be reset one percentage point higher, annual interest expense would increase by approximately $8 million. We do not manage the risk through the use of derivative instruments.

 

We have market risk arising from changes in foreign currency exchange rates as a result of our acquisition of Future Shop in Canada in November 2001. At this time, we do not manage the risk through the use of derivative instruments. A 10% adverse exchange-rate fluctuation would not have a significant impact on our results of operations or financial position.

 

ITEM 4.     CONTROLS AND PROCEDURES

 

(a)          Evaluation of disclosure controls and procedures

 

The term “disclosure controls and procedures” is defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934 (Exchange Act). These Rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days before the filing of this Quarterly Report (the Evaluation Date), and they have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

 

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(b)        Changes in internal controls

 

We maintain a system of internal accounting controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. For the quarter ended November 30, 2002, there were no significant changes to our internal controls or in other factors that could significantly affect our internal controls.

 

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PART II — OTHER INFORMATION

 

ITEM 6.          EXHIBITS AND REPORTS ON FORM 8-K:

 

 

a.

 

Exhibits:

 

 

 

 

 

 

99.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer.

 

 

 

 

 

 

99.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer.

 

 

 

 

 

b.

 

Reports on Form 8-K:

 

 

 

 

 

 

 

(1)

Announcement of our second quarter sales and earnings outlook for the quarter ended August 31, 2002 and a goodwill impairment charge as a result of fair value assessments of our Musicland and Magnolia Hi-Fi businesses, filed on September 6, 2002.

 

 

 

 

 

 

 

 

(2)

Certification of financial statements by our principal executive officer, Bradbury H. Anderson, and our principal financial officer, Darren R. Jackson, filed on September 17, 2002.

 

 

 

 

 

 

 

 

(3)

Amended safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, filed on October 15, 2002.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

BEST BUY CO., INC.

 

 

(Registrant)

 

 

 

 

 

 

 

 

Date:  January 14, 2003

 

By:

/s/  Darren R. Jackson

 

 

 

Darren R. Jackson

 

 

 

Executive Vice President — Finance
and Chief Financial Officer
(principal financial and accounting officer)

 

35



 

I, Bradbury H. Anderson, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Best Buy Co., Inc.;

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)             evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a)              all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  January 14, 2003

 

 

 

 

/s/ Bradbury H. Anderson

 

 

Bradbury H. Anderson

 

 

Vice Chairman
and Chief Executive Officer

 

36



 

I, Darren R. Jackson, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Best Buy Co., Inc.;

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)             evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a)              all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  January 14, 2003

 

 

 

 

/s/ Darren R. Jackson

 

 

Darren R. Jackson

 

 

Executive Vice President — Finance
and Chief Financial Officer

 

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