UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

Commission File Number: 1-9595

BEST BUY CO., INC.

(Exact name of registrant as specified in its charter)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.10 Par Value — 473,898,000 shares outstanding as of June 2, 2007.

BEST BUY CO., INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 2, 2007

INDEX

Part I —			Financial Information
			Item 1.		Consolidated Financial Statements (Unaudited)	3
				a)	Condensed consolidated balance sheets as of June 2, 2007; March 3, 2007; and May 27, 2006	3
				b)	Consolidated statements of earnings for the three months ended June 2, 2007, and May 27, 2006	5
				c)	Consolidated statement of changes in shareholders’ equity for the three months ended June 2, 2007	6
				d)	Consolidated statements of cash flows for the three months ended June 2, 2007, and May 27, 2006	7
				e)	Notes to condensed consolidated financial statements	8
			Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
			Item 3.		Quantitative and Qualitative Disclosures About Market Risk	35
			Item 4.		Controls and Procedures	35
Part II —			Other Information
			Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	36
			Item 6.		Exhibits	37
Signatures						38

 

2

PART I —                 FINANCIAL INFORMATION

ITEM 1.                              CONSOLIDATED FINANCIAL STATEMENTS

BEST BUY CO., INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

($ in millions, except per share amounts)

(Unaudited)

		June 2, 2007			March 3, 2007			May 27, 2006
CURRENT ASSETS
Cash and cash equivalents		$	1,366		$	1,205		$	772
Short-term investments		1,436			2,588			1,554
Receivables		476			548			409
Merchandise inventories		4,298			4,028			3,737
Other current assets		730			712			406
Total current assets		8,306			9,081			6,878
PROPERTY AND EQUIPMENT
Property and equipment		5,131			4,904			4,957
Less accumulated depreciation		2,105			1,966			2,245
Net property and equipment		3,026			2,938			2,712
GOODWILL		1,049			919			955
TRADENAMES		93			81			63
LONG-TERM INVESTMENTS		332			318			302
OTHER ASSETS		336			233			359
TOTAL ASSETS		$	13,142		$	13,570		$	11,269

 

NOTE:  The consolidated balance sheet as of March 3, 2007, has been condensed from the audited consolidated financial statements.

See Notes to Condensed Consolidated Financial Statements.

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BEST BUY CO., INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

($ in millions, except per share amounts)

(Unaudited)

		June 2, 2007			March 3, 2007			May 27, 2006
CURRENT LIABILITIES
Accounts payable		$	3,957		$	3,934		$	3,055
Unredeemed gift card liabilities		455			496			415
Accrued compensation and related expenses		243			332			278
Accrued liabilities		930			990			840
Accrued income taxes		34			489			291
Short-term debt		48			41			—
Current portion of long-term debt		19			19			418
Total current liabilities		5,686			6,301			5,297
LONG-TERM LIABILITIES		655			443			383
LONG-TERM DEBT		598			590			180
MINORITY INTERESTS		33			35			—
SHAREHOLDERS’ EQUITY
Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none		—			—			—
Common stock, $.10 par value: Authorized — 1.5 billion shares; Issued and outstanding — 473,898,000, 480,655,000 and 484,014,000 shares, respectively		47			48			48
Additional paid-in capital		101			430			546
Retained earnings		5,638			5,507			4,500
Accumulated other comprehensive income		384			216			315
Total shareholders’ equity		6,170			6,201			5,409
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	13,142		$	13,570		$	11,269

 

NOTE:  The consolidated balance sheet as of March 3, 2007, has been condensed from the audited consolidated financial statements.

See Notes to Condensed Consolidated Financial Statements.

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BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF EARNINGS

($ in millions, except per share amounts)

(Unaudited)

		Three Months Ended
		June 2, 2007			May 27, 2006
Revenue		$	7,927		$	6,959
Cost of goods sold		6,035			5,194
Gross profit		1,892			1,765
Selling, general and administrative expenses		1,626			1,428
Operating income		266			337
Other income (expense)
Investment income and other		44			31
Interest expense		(7		)	(8		)
Earnings before income tax expense and minority interest		303			360
Income tax expense		113			126
Minority interest		2			—
Net earnings		$	192		$	234
Earnings per share
Basic		$	0.40		$	0.48
Diluted		$	0.39		$	0.47
Dividends declared per common share		$	0.10		$	0.08
Weighted average common shares outstanding (in millions)
Basic		478.8			484.6
Diluted		491.5			500.8

 

See Notes to Condensed Consolidated Financial Statements.

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BEST BUY CO., INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED JUNE 2, 2007

($ and shares in millions)

(Unaudited)

		Common Shares		Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances at March 3, 2007		481		$	48		$	430		$	5,507		$	216		$	6,201
Net earnings, three months ended June 2, 2007		—		—			—			192			—			192
Foreign currency translation adjustments		—		—			—			—			168			168
Total comprehensive income																360
Cumulative effect of adopting a new accounting standard		—		—			—			(13		)	—			(13		)
Stock-based compensation		—		—			32			—			—			32
Issuance of common stock under employee stock purchase plan		1		—			25			—			—			25
Stock options exercised		1		—			17			—			—			17
Tax benefit from stock options exercised and employee stock purchase plan		—		—			8			—			—			8
Repurchase of common stock		(9	)	(1		)	(411		)	—			—			(412		)
Common stock dividends, $0.10 per share		—		—			—			(48		)	—			(48		)
Balances at June 2, 2007		474		$	47		$	101		$	5,638		$	384		$	6,170

 

See Notes to Condensed Consolidated Financial Statements.

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BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)

		Three Months Ended
		June 2, 2007			May 27, 2006
OPERATING ACTIVITIES
Net earnings		$	192		$	234
Adjustments to reconcile net earnings to total cash used in operating activities
Depreciation		135			121
Asset impairment charges		2			12
Stock-based compensation		32			28
Deferred income taxes		(78		)	(16		)
Excess tax benefits from stock-based compensation		(8		)	(23		)
Other, net		(3		)	8
Changes in operating assets and liabilities, net of acquired assets and liabilities
Receivables		81			34
Merchandise inventories		(210		)	(343		)
Other assets		(42		)	(10		)
Accounts payable		(25		)	(201		)
Other liabilities		(232		)	(179		)
Accrued income taxes		(272		)	(391		)
Total cash used in operating activities		(428		)	(726		)
INVESTING ACTIVITIES
Additions to property and equipment, net of $36 non-cash capital expenditures in the three months ended May 27, 2006		(179		)	(154		)
Purchases of available-for-sale securities		(2,238		)	(497		)
Sales of available-for-sale securities		3,398			1,908
Acquisition of businesses, net of cash acquired		(89		)	(408		)
Change in restricted assets		28			6
Other, net		—			9
Total cash provided by investing activities		920			864
FINANCING ACTIVITIES
Repurchase of common stock		(412		)	(238		)
Issuance of common stock under employee stock purchase plan and for the exercise of stock options		42			89
Dividends paid		(48		)	(38		)
Proceeds from issuance of debt		42			17
Repayments of debt		(35		)	(2		)
Excess tax benefits from stock-based compensation		8			23
Other, net		3			15
Total cash used in financing activities		(400		)	(134		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		69			20
INCREASE IN CASH AND CASH EQUIVALENTS		161			24
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		1,205			748
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,366		$	772

See Notes to Condensed Consolidated Financial Statements.

7

BEST BUY CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in millions, except per share amounts)

(Unaudited)

1.                         Basis of Presentation

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States. All adjustments were comprised of normal recurring adjustments, except as noted in the Notes to Condensed Consolidated Financial Statements. Historically, we have realized more of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday selling season in the United States and Canada, than in any other fiscal quarter. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. These interim financial statements and the related notes should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007.

Consistent with China’s statutory requirements, our China operations’ fiscal year ends on December 31. Therefore, we have elected to consolidate our China financial results on a two-month lag. There was no significant intervening event that would have materially affected our consolidated financial statements had it been recorded during the fiscal quarter.

Reclassifications

To maintain consistency and comparability, we reclassified certain prior-year amounts to conform to the current-year presentation as described in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007. In addition, to conform to the current-year presentation, we reclassified to the International segment certain selling, general and administrative (“SG&A”) support costs which were previously reported as part of the Domestic segment in fiscal 2007. These reclassifications had no effect on previously reported consolidated operating income, net earnings, shareholders’ equity or cash flows.

New Accounting Standards

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. We plan to adopt SFAS No. 159 beginning in the first quarter of fiscal 2009. We are evaluating the impact, if any, the adoption of SFAS No. 159 will have on our operating income or net earnings.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We plan to adopt SFAS No. 157 beginning in the first quarter of fiscal 2009. We are evaluating the impact, if any, the adoption of SFAS No. 157 will have on our operating income or net earnings.

2.                         Acquisitions

Speakeasy, Inc.

On May 1, 2007, we acquired Speakeasy, Inc. (“Speakeasy”) for $103 in cash, or $89 net of cash acquired, including transaction costs and the repayment of $5 of Speakeasy’s debt.  We acquired Speakeasy, an independent U.S. broadband voice, data, and IT services provider, to strengthen our portfolio of technology solutions.  The acquisition was accounted for using the purchase method in accordance with SFAS No. 141, Business Combinations. Accordingly, we recorded the net assets at their estimated fair values, and included operating results in our Domestic segment from the date of acquisition. We allocated the purchase price on a preliminary basis using information currently available. The

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$ in millions, except per share amounts

allocation of the purchase price to the assets and liabilities acquired will be finalized no later than the first quarter of fiscal 2009, as we obtain more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of purchase. The premium we paid in excess of the fair value of the net assets acquired was primarily for the expected future synergies we believe Speakeasy will generate by providing new technology solutions for our existing and future customers, as well as to obtain Speakeasy’s skilled, established workforce. None of the goodwill is deductible for tax purposes.

The preliminary purchase price allocation, net of cash acquired, was as follows:

Receivables		$	8
Property and equipment		8
Other assets		21
Tradename		6
Goodwill		76
Current liabilities		(30		)
Total		$	89

 

Jiangsu Five Star Appliance Co., Ltd.

On June 8, 2006, we acquired a 75% interest in Jiangsu Five Star Appliance Co., Ltd. (“Five Star”) for $184, including a working capital injection of $122 and transaction costs. Five Star is an appliance and consumer electronics retailer with 135 stores located in seven of China’s 34 provinces. We made the investment in Five Star to further our international growth plans, to increase our knowledge of Chinese customers and to obtain an immediate retail presence in China. 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 International segment 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 first quarter of fiscal 2008. There was no significant adjustment to the preliminary purchase price allocation. None of the goodwill is deductible for tax purposes.

The final purchase price allocation, net of cash acquired, was as follows:

Restricted cash		$	204
Merchandise inventories		109
Property and equipment		78
Other assets		78
Tradename		21
Goodwill		24
Accounts payable		(368		)
Other current liabilities		(35		)
Debt		(64		)
Long-term liabilities		(1		)
Minority interests1		(33		)
Total		$	13

 

1       The minority interests’ proportionate ownership of assets and liabilities were recorded at historical carrying values.

3.                         Investments

Debt Securities

Short-term and long-term investments are comprised of municipal and U.S. government debt securities, as well as auction-rate securities and variable-rate demand notes. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and based on our ability to market and to sell these instruments, we classify auction-rate securities, variable-rate demand notes and other investments in debt securities as available-for-sale and carry them at amortized cost, which approximates fair value. Auction-rate securities and variable-rate demand notes are similar to short-term debt instruments because their interest rates are reset periodically. Investments in these securities can be sold for cash on the auction date. We classify auction-rate securities and variable-rate demand notes as short-term or long-term investments based on the reset dates.

In accordance with our investment policy, we place our investments in debt securities with issuers who have high-quality credit and limit the amount of investment exposure to any one issuer. We seek to preserve principal and minimize exposure to interest-rate fluctuations by limiting default risk, market risk and reinvestment risk.

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$ in millions, except per share amounts

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

		June 2, 2007					March 3, 2007					May 27, 2006
		Amortized Principal Amount			Weighted- Average Interest Rate		Amortized Principal Amount			Weighted- Average Interest Rate		Amortized Principal Amount			Weighted- Average Interest Rate
Short-term investments (less than one year)		$	1,436		5.90	%	$	2,588		5.68	%	$	1,554		5.61	%
Long-term investments (one to three years)		332			5.84	%	318			5.68	%	302			5.80	%
Total		$	1,768				$	2,906				$	1,856
Municipal debt securities		$	1,711				$	2,840				$	1,780
Auction-rate and asset-backed securities		57					66					76
Total		$	1,768				$	2,906				$	1,856

 

The carrying values of our investments in debt securities approximated fair value at June 2, 2007; March 3, 2007; and May 27, 2006, due to the rapid turnover of our portfolio and the highly liquid nature of these investments. Therefore, there were no significant unrealized holding gains or losses.

See Note 10, Subsequent Events, for information on investments used subsequent to June 2, 2007, to finance our accelerated share repurchase program.

Marketable Equity Securities

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

The carrying values of our investments in marketable equity securities at June 2, 2007; March 3, 2007; and May 27, 2006, were $4, $4 and $25, respectively. The decrease in marketable equity securities compared with May 27, 2006, was due to the sale of our investment in Golf Galaxy, Inc. (“Golf Galaxy”) on February 13, 2007. At May 27, 2006, the carrying value of our investment in Golf Galaxy was $21.

Net unrealized (loss)/gain, net of tax, included in accumulated other comprehensive income were $(1), $(1) and $10 at June 2, 2007; March 3, 2007; and May 27, 2006, respectively.

4.                         Income Taxes

We adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109, effective March 4, 2007.  FIN No. 48 provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. The adoption of FIN No. 48 resulted in the reclassification of $214 of certain tax liabilities from current to long-term and a $13 increase in our liability for unrecognized tax benefits, which was accounted for as a reduction to the March 4, 2007 retained earnings balance.

At March 4, 2007, our total liability for unrecognized tax benefits, after the adoption of FIN No. 48, was $214, of which $81 represented tax benefits that, if recognized, would favorably impact the effective tax rate. Our liability for unrecognized tax benefits was $222 at June 2, 2007.

We recognize interest and penalties in income tax expense in our consolidated statements of earnings. At March 4, 2007, we had accrued interest and penalties of $17. There has been no significant change in our accrued interest and penalties since March 4, 2007.

We file a consolidated U.S. federal income tax return, as well as income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal 2003. In April 2007, the Internal Revenue Service (“IRS”) completed its examination of our U.S. federal income tax returns for fiscal 2003 and fiscal 2004 and resolution of the issues pertaining to those years is expected in fiscal 2009. However, we do not expect that the resolution of these issues will have a significant effect on our financial condition or results of operations.

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$ in millions, except per share amounts

5.                         Earnings per Share

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

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

		Three Months Ended
		June 2, 2007			May 27, 2006
Numerator
Net earnings, basic		$	192		$	234
Adjustment for assumed dilution
Interest on convertible debentures, net of tax		2			2
Net earnings, diluted		$	194		$	236
Denominator
Weighted-average common shares outstanding		478.8			484.6
Effect of potentially dilutive securities
Shares from assumed conversion of convertible debentures		8.8			8.8
Stock options and other		3.9			7.4
Weighted-average common shares outstanding, assuming dilution		491.5			500.8
Earnings per share
Basic		$	0.40		$	0.48
Diluted		$	0.39		$	0.47

 

The computation of average dilutive shares outstanding excluded stock options to purchase 4.7 million and 0.1 million shares of common stock for the three months ended June 2, 2007, and May 27, 2006, respectively. These amounts were excluded as the options’ exercise prices were greater than the average market price of our common stock for the periods presented and, therefore, the effect would be antidilutive (i.e., including such options would result in higher earnings per share).

6.                       Common Stock Repurchases

Our Board of Directors (“Board”) authorized a $1,500 share repurchase program in June 2006. The program, which was announced on June 21, 2006, terminated and replaced a $1,500 share repurchase program authorized by our Board in April 2005.

For the three months ended June 2, 2007, we purchased and retired 8.7 million shares at a cost of $412 under our June 2006 share repurchase program.  For the three months ended May 27, 2006, we purchased and retired 4.4 million shares at a cost of $238 under our April 2005 share repurchase program.

See Note 10, Subsequent Events, for additional information on common stock repurchases.

7.                         Comprehensive Income

Comprehensive income is computed as net earnings plus certain other items that are recorded directly to shareholders’ equity. In addition to net earnings, the significant components of comprehensive income include foreign currency translation adjustments

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$ in millions, except per share amounts

and unrealized gains or losses, net of tax, on available-for-sale marketable equity securities. Foreign currency translation adjustments do not include a provision for income tax expense when earnings from foreign operations are considered to be indefinitely reinvested outside the United States. Comprehensive income was $360 and $288 for the three months ended June 2, 2007, and May 27, 2006, respectively.

8.                         Segments

We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all U.S. store and online operations. The International segment is comprised of all store and online operations outside the U.S. We have included Speakeasy, which was acquired on May 1, 2007, and Pacific Sales Kitchen and Bath Centers, Inc. (“Pacific Sales”), which was acquired on March 7, 2006, in the Domestic segment. We have included Five Star, which was acquired on June 8, 2006, in the International segment. Our segments are evaluated on an operating income basis, and a stand-alone tax provision is not calculated for each segment. To conform to the current-year presentation, we reclassified to the International segment certain SG&A support costs which were previously reported as part of the Domestic segment in fiscal 2007. The other accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007.

Revenue by reportable segment was as follows:

		Three Months Ended
		June 2, 2007			May 27, 2006
Domestic		$	6,704		$	6,162
International		1,223			797
Total revenue		$	7,927		$	6,959

 

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

		Three Months Ended
		June 2, 2007			May 27, 2006
Domestic		$	270		$	334
International		(4		)	3
Total operating income		266			337
Other income (expense)
Investment income and other		44			31
Interest expense		(7		)	(8		)
Earnings before income tax expense and minority interest		$	303		$	360

 

Assets by reportable segment were as follows:

		June 2, 2007			March 3, 2007			May 27, 2006
Domestic		$	9,913		$	10,614		$	9,053
International		3,229			2,956			2,216
Total assets		$	13,142		$	13,570		$	11,269

 

Goodwill by reportable segment was as follows:

		June 2, 2007			March 3, 2007			May 27, 2006
Domestic		$	451		$	375		$	383
International		598			544			572
Total goodwill		$	1,049		$	919		$	955

 

The changes in the Domestic goodwill balance since March 3, 2007, and May 27, 2006, were primarily the result of the acquisitions of Pacific Sales and Speakeasy. The changes in the International goodwill balance since March 3, 2007, and May 27, 2006, were due primarily to the acquisition of Five Star totaling $24, and an adjustment related to the resolution of certain

12

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$ in millions, except per share amounts

tax matters associated with our acquisition of Future Shop $(21), with the remainder due primarily to fluctuations in foreign currency exchange rates.

Tradenames included in our balance sheets were comprised of indefinite-lived intangible assets related to our Pacific Sales and Speakeasy tradenames, which are included in the Domestic segment, and to our Future Shop and Five Star tradenames, which are included in the International segment. Tradenames by reportable segment were as follows:

		June 2, 2007			March 3, 2007			May 27, 2006
Domestic		$	24		$	17		$	17
International		69			64			46
Total tradenames		$	93		$	81		$	63

 

9.                         Contingencies

We are involved in various legal proceedings arising in the normal course of conducting business. We believe the amounts provided in our consolidated financial statements are adequate in consideration of the probable and estimable liabilities. The resolution of those proceedings is not expected to have a material effect on our results of operations or financial condition.

10.                Subsequent Events

Repurchase of Common Stock

On June 26, 2007, our Board authorized a new $5,500 share repurchase program.  The program, which has no stated expiration date, terminated and replaced our prior $1,500 share repurchase program announced in June 2006.  Approximately $730 of common stock was purchased under the prior program.

In accordance with the new share repurchase program, on June 26, 2007, we entered into an accelerated share repurchase (“ASR”) program authorized by our Board. The ASR consists of two agreements to purchase shares of our common stock from Goldman, Sachs & Co. (“Goldman”) for an aggregate purchase price of $3,000.  Goldman will borrow the shares to be delivered and is expected to purchase sufficient shares of our common stock in the open market to return to lenders over the terms of the agreements.  The ASR program will conclude in February 2008, although in certain circumstances the termination date may be accelerated at Goldman’s option.  The actual number of shares repurchased will be determined at the completion of the ASR program.  We do not expect to make significant additional share repurchases prior to the conclusion of the ASR program.  Repurchased shares will be retired and constitute authorized but unissued shares.

Collared ASR

One of  the agreements (the “Collared ASR”) provides that the number of shares to be repurchased will be based generally on the volume-weighted average price (“VWAP”) of our common stock during the term of the Collared ASR, subject to collar provisions that will establish minimum and maximum numbers of shares based on the VWAP of our common stock over the hedge period, which is expected to conclude during the second quarter of fiscal 2008.  We will receive an initial number of shares of common stock on certain specified settlement dates.  At the conclusion of the hedge period, we may receive additional shares based on the VWAP of our common stock during the hedge period.  At the conclusion of the Collared ASR, we may also receive additional shares based on the VWAP of our common stock during the agreement term.

On July 2, 2007, we paid $2,000 to Goldman in exchange for an initial delivery of 28.3 million shares to us on July 2-6, 2007, under the terms of the Collared ASR.  The minimum and maximum numbers of shares that we will ultimately repurchase pursuant to the Collared ASR will not be known until the conclusion of the hedge period.

Uncollared ASR

Under the second agreement (the “Uncollared ASR”), the number of shares to be repurchased will be based generally on the VWAP of our common stock during the term of the Uncollared ASR.  We will receive an initial number of shares of common stock on certain specified settlement dates during the second quarter of fiscal 2008.  At the conclusion of the Uncollared ASR, we may receive additional shares, or we may be required to pay additional cash or shares (at our option), based on the VWAP of our common stock during the agreement term.

13

---

$ in millions, except per share amounts

On July 2, 2007, we paid $1,000 to Goldman under the terms of the Uncollared ASR. The numbers of shares that we will ultimately repurchase pursuant to the Uncollared ASR will not be known until the conclusion of the agreement.

Credit Facilities

Simultaneously with the execution of the ASR program, we entered into a $3,000 bridge loan facility with Goldman Sachs Credit Partners L.P. (the “Bridge Facility”).  We initially borrowed $2,500 under the Bridge Facility and used $500 of our existing cash and investments to finance the ASR program.  We subsequently used additional existing cash and investments to to repay $788 of our initial borrowing under the Bridge Facility.  The Bridge Facility is guaranteed by certain of our subsidiaries and expires on June 24, 2008.  Borrowings under the Bridge Facility are unsecured and bear interest at rates specified in the credit agreement.  The Bridge Facility contains covenants that require us to maintain certain financial ratios. Effective July 11, 2007, we reduced the amount we may borrow under the Bridge Facility to $2,500.  At July 10, 2007, $1,712 was outstanding under the Bridge Facility.

Additionally, we received a commitment letter from JPMorgan Chase Bank, N.A. and J.P. Morgan Securities Inc. (“JPMorgan”) for a five-year senior unsecured revolving credit facility of $2,000. The final terms of the credit facility are subject to negotiation by us and JPMorgan.

Finally, effective July 2, 2007, we terminated our previous $200 bank revolving credit facility that was scheduled to expire on December 22, 2009.

11.                Condensed Consolidating Financial Information

Our convertible debentures, due in 2022, are guaranteed by our wholly-owned indirect subsidiary Best Buy Stores, L.P. Investments in subsidiaries of Best Buy Stores, L.P., which have not guaranteed the convertible debentures, are accounted for under the equity method. We reclassified certain prior-year amounts as described in Note 1, Basis of Presentation, in this Quarterly Report on Form 10-Q. The aggregate principal balance and carrying amount of our convertible debentures, which mature in 2022, was $402 at June 2, 2007.

The debentures may be converted into shares of our common stock if the criteria, as described in Note 5, Debt, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007, are met. During a portion of the three months ended May 27, 2006, our closing stock price exceeded the specified stock price for more than 20 trading days in a 30-trading-day period. Therefore, debenture holders had the option to convert their debentures into shares of our common stock. However, no debentures were so converted. Due to changes in the price of our common stock, the debentures were no longer convertible as of May 27, 2006.

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

The following tables present condensed consolidating balance sheets as of June 2, 2007; March 3, 2007; and May 27, 2006; condensed consolidating statements of earnings for the three months ended June 2, 2007, and May 27, 2006; and condensed consolidating statements of cash flows for the three months ended June 2, 2007, and May 27, 2006:

14

$ in millions, except per share amounts

Condensed Consolidating Balance Sheets

As of June 2, 2007

(Unaudited)

		Best Buy Co., Inc.			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents		$	255		$	56		$	1,055		$	—		$	1,366
Short-term investments		1,430			—			6			—			1,436
Receivables		13			316			147			—			476
Merchandise inventories		—			3,604			1,016			(322		)	4,298
Other current assets		20			189			559			(38		)	730
Intercompany receivable		—			—			4,965			(4,965		)	—
Intercompany note receivable		500			—			—			(500		)	—
Total current assets		2,218			4,165			7,748			(5,825		)	8,306
Net Property and Equipment		237			1,940			852			(3		)	3,026
Goodwill		—			6			1,043			—			1,049
Tradenames		—			—			93			—			93
Long-Term Investments		332			—			—			—			332
Other Assets		91			265			105			(125		)	336
Investments in Subsidiaries		6,493			265			1,301			(8,059		)	—
Total Assets		$	9,371		$	6,641		$	11,142		$	(14,012	)	$	13,142
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable		$	—		$	—		$	3,957		$	—		$	3,957
Unredeemed gift card liabilities		—			410			45			—			455
Accrued compensation and related expenses		—			169			74			—			243
Accrued liabilities		27			505			398			—			930
Accrued income taxes		34			—			—			—			34
Short-term debt		—			—			48			—			48
Current portion of long-term debt		2			13			4			—			19
Intercompany payable		2,170			2,795			—			(4,965		)	—
Intercompany note payable		—			500			—			(500		)	—
Total current liabilities		2,233			4,392			4,526			(5,465		)	5,686
Long-Term Liabilities		209			814			360			(728		)	655
Long-Term Debt		407			134			57			—			598
Minority Interests		—			—			33			—			33
Shareholders’ Equity		6,522			1,301			6,166			(7,819		)	6,170
Total Liabilities and Shareholders’ Equity		$	9,371		$	6,641		$	11,142		$	(14,012	)	$	13,142

 

15

---

$ in millions, except per share amounts

Condensed Consolidating Balance Sheets

As of March 3, 2007

(Unaudited)

		Best Buy Co., Inc.			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents		$	235		$	77		$	893		$	—		$	1,205
Short-term investments		2,582			—			6			—			2,588
Receivables		33			363			152			—			548
Merchandise inventories		—			3,465			960			(397		)	4,028
Other current assets		20			202			596			(106		)	712
Intercompany receivable		—			—			4,891			(4,891		)	—
Intercompany note receivable		500			—			—			(500		)	—
Total current assets		3,370			4,107			7,498			(5,894		)	9,081
Net Property and Equipment		239			1,898			804			(3		)	2,938
Goodwill		—			6			913			—			919
Tradenames		—			—			81			—			81
Long-Term Investments		318			—			—			—			318
Other Assets		91			263			14			(135		)	233
Investments in Subsidiaries		6,099			162			1,293			(7,554		)	—
Total Assets		$	10,117		$	6,436		$	10,603		$	(13,586	)	$	13,570
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable		$	—		$	—		$	3,934		$	—		$	3,934
Unredeemed gift card liabilities		—			452			44			—			496
Accrued compensation and related expenses		—			198			134			—			332
Accrued liabilities		7			564			544			(125		)	990
Accrued income taxes		484			5			—			—			489
Short-term debt		—			—			41			—			41
Current portion of long-term debt		2			12			5			—			19
Intercompany payable		2,460			2,431			—			(4,891		)	—
Intercompany note payable		—			500			—			(500		)	—
Total current liabilities		2,953			4,162			4,702			(5,516		)	6,301
Long-Term Liabilities		219			849			102			(727		)	443
Long-Term Debt		407			132			51			—			590
Minority Interests		—			—			35			—			35
Shareholders’ Equity		6,538			1,293			5,713			(7,343		)	6,201
Total Liabilities and Shareholders’ Equity		$	10,117		$	6,436		$	10,603		$	(13,586	)	$	13,570

 

16

---

$ in millions, except per share amounts

Condensed Consolidating Balance Sheets

As of May 27, 2006

(Unaudited)

		Best Buy Co., Inc.			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents		$	25		$	64		$	683		$	—		$	772
Short-term investments		1,376			—			178			—			1,554
Receivables		19			298			92			—			409
Merchandise inventories		—			3,308			725			(296		)	3,737
Other current assets		18			143			279			(34		)	406
Intercompany receivable		—			—			3,399			(3,399		)	—
Intercompany note receivable		500			—			—			(500		)	—
Total current assets		1,938			3,813			5,356			(4,229		)	6,878
Net Property and Equipment		243			1,738			734			(3		)	2,712
Goodwill		—			6			949			—			955
Tradenames		—			—			63			—			63
Long-Term Investments		302			—			—			—			302
Other Assets		118			262			133			(154		)	359
Investments in Subsidiaries		5,178			12			1,314			(6,504		)	—
Total Assets		$	7,779		$	5,831		$	8,549		$	(10,890	)	$	11,269
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable		$	—		$	—		$	3,055		$	—		$	3,055
Unredeemed gift card liabilities		—			381			34			—			415
Accrued compensation and related expenses		7			157			114			—			278
Accrued liabilities		8			443			421			(32		)	840
Accrued income taxes		289			2			—			—			291
Current portion of long-term debt		404			9			5			—			418
Intercompany payable		1,088			2,149			—			(3,237		)	—
Intercompany note payable		—			500			—			(500		)	—
Total current liabilities		1,796			3,641			3,629			(3,769		)	5,297
Long-Term Liabilities		260			760			30			(667		)	383
Long-Term Debt		6			116			58			—			180
Shareholders’ Equity		5,717			1,314			4,832			(6,454		)	5,409
Total Liabilities and Shareholders’ Equity		$	7,779		$	5,831		$	8,549		$	(10,890	)	$	11,269

 

17

---

$ in millions, except per share amounts

Condensed Consolidating Statements of Earnings

For the Three Months Ended June 2, 2007

(Unaudited)

		Best Buy Co., Inc.			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenue		$	4		$	6,270		$	7,275		$	(5,622	)	$	7,927
Cost of goods sold		—			5,113			6,637			(5,715		)	6,035
Gross profit		4			1,157			638			93			1,892
Selling, general and administrative expenses		39			1,098			484			5			1,626
Operating (loss) income		(35		)	59			154			88			266
Other income (expense)
Investment income and other		39			—			18			(13		)	44
Interest expense		(2		)	(11		)	(7		)	13			(7		)
Earnings before equity in earnings (loss) of subsidiaries		2			48			165			88			303
Equity in earnings (loss) of subsidiaries		136			(6		)	30			(160		)	—
Earnings before income tax expense and minority interest		138			42			195			(72		)	303
Income tax expense		34			18			61			—			113
Minority interest		—			—			2			—			2
Net earnings		$	104		$	24		$	136		$	(72	)	$	192

 

18

---

$ in millions, except per share amounts

Condensed Consolidating Statements of Earnings

For the Three Months Ended May 27, 2006

(Unaudited)

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		Best Buy Co., Inc.			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenue		$	4		$	5,828		$	6,352		$	(5,225	)	$