UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 26, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact name of registrant as specified in its charter)
Minnesota | 41-0907483 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
7601 Penn Avenue South | ||
Richfield, Minnesota | 55423 | |
(Address of principal executive offices) | (Zip Code) | |
(612) 291-1000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | |
Non-accelerated filer ¨ | Smaller reporting company ¨ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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 ¨ No ¨
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, $.10 Par Value — 350,316,613 shares outstanding as of December 29, 2011.
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 26, 2011
INDEX
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PART I — FINANCIAL INFORMATION
ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
BEST BUY CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
($ in millions, except per share amounts)
(Unaudited)
November 26, 2011 | February 26, 2011 | November 27, 2010 | |||||||||
CURRENT ASSETS | |||||||||||
Cash and cash equivalents | $ | 2,392 | $ | 1,103 | $ | 925 | |||||
Short-term investments | — | 22 | 2 | ||||||||
Receivables | 3,212 | 2,348 | 2,793 | ||||||||
Merchandise inventories | 9,220 | 5,897 | 10,064 | ||||||||
Other current assets | 1,085 | 1,103 | 1,045 | ||||||||
Total current assets | 15,909 | 10,473 | 14,829 | ||||||||
PROPERTY AND EQUIPMENT, NET | 3,567 | 3,823 | 3,994 | ||||||||
GOODWILL | 2,420 | 2,454 | 2,441 | ||||||||
TRADENAMES, NET | 129 | 133 | 145 | ||||||||
CUSTOMER RELATIONSHIPS, NET | 165 | 203 | 220 | ||||||||
EQUITY AND OTHER INVESTMENTS | 146 | 328 | 343 | ||||||||
OTHER ASSETS | 412 | 435 | 380 | ||||||||
TOTAL ASSETS | $ | 22,748 | $ | 17,849 | $ | 22,352 | |||||
NOTE: The consolidated balance sheet as of February 26, 2011, 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 EQUITY
($ in millions, except per share amounts)
(Unaudited)
November 26, 2011 | February 26, 2011 | November 27, 2010 | |||||||||
CURRENT LIABILITIES | |||||||||||
Accounts payable | $ | 10,064 | $ | 4,894 | $ | 9,858 | |||||
Unredeemed gift card liabilities | 428 | 474 | 424 | ||||||||
Accrued compensation and related expenses | 497 | 570 | 464 | ||||||||
Accrued liabilities | 1,976 | 1,471 | 1,920 | ||||||||
Accrued income taxes | 11 | 256 | 31 | ||||||||
Short-term debt | 163 | 557 | 690 | ||||||||
Current portion of long-term debt | 427 | 441 | 33 | ||||||||
Total current liabilities | 13,566 | 8,663 | 13,420 | ||||||||
LONG-TERM LIABILITIES | 1,119 | 1,183 | 1,166 | ||||||||
LONG-TERM DEBT | 1,687 | 711 | 1,101 | ||||||||
EQUITY | |||||||||||
Best Buy Co., Inc. shareholders’ equity | |||||||||||
Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none | — | — | — | ||||||||
Common stock, $0.10 par value: Authorized — 1.0 billion shares; Issued and outstanding — 353,991,000, 392,590,000 and 394,067,000 shares, respectively | 35 | 39 | 39 | ||||||||
Additional paid-in capital | — | 18 | — | ||||||||
Retained earnings | 5,663 | 6,372 | 5,824 | ||||||||
Accumulated other comprehensive income | 12 | 173 | 138 | ||||||||
Total Best Buy Co., Inc. shareholders’ equity | 5,710 | 6,602 | 6,001 | ||||||||
Noncontrolling interests | 666 | 690 | 664 | ||||||||
Total equity | 6,376 | 7,292 | 6,665 | ||||||||
TOTAL LIABILITIES AND EQUITY | $ | 22,748 | $ | 17,849 | $ | 22,352 | |||||
NOTE: The consolidated balance sheet as of February 26, 2011, 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 | Nine Months Ended | ||||||||||||||
November 26, 2011 | November 27, 2010 | November 26, 2011 | November 27, 2010 | ||||||||||||
Revenue | $ | 12,099 | $ | 11,890 | $ | 34,386 | $ | 34,016 | |||||||
Cost of goods sold | 9,155 | 8,907 | 25,802 | 25,322 | |||||||||||
Restructuring charges – cost of goods sold | 13 | — | 13 | — | |||||||||||
Gross profit | 2,931 | 2,983 | 8,571 | 8,694 | |||||||||||
Selling, general and administrative expenses | 2,616 | 2,598 | 7,683 | 7,585 | |||||||||||
Restructuring charges | 137 | — | 141 | — | |||||||||||
Operating income | 178 | 385 | 747 | 1,109 | |||||||||||
Other income (expense) | |||||||||||||||
Gain on sale of investments | 55 | — | 55 | — | |||||||||||
Investment income and other | 8 | 8 | 26 | 33 | |||||||||||
Interest expense | (37 | ) | (20 | ) | (102 | ) | (64 | ) | |||||||
Earnings before income tax expense and equity in loss of affiliates | 204 | 373 | 726 | 1,078 | |||||||||||
Income tax expense | 72 | 133 | 270 | 400 | |||||||||||
Equity in loss of affiliates | (1 | ) | — | (2 | ) | — | |||||||||
Net earnings including noncontrolling interests | 131 | 240 | 454 | 678 | |||||||||||
Net loss (earnings) attributable to noncontrolling interests | 23 | (23 | ) | 13 | (52 | ) | |||||||||
Net earnings attributable to Best Buy Co., Inc. | $ | 154 | $ | 217 | $ | 467 | $ | 626 | |||||||
Earnings per share attributable to Best Buy Co., Inc. | |||||||||||||||
Basic | $ | 0.43 | $ | 0.55 | $ | 1.25 | $ | 1.53 | |||||||
Diluted | $ | 0.42 | $ | 0.54 | $ | 1.23 | $ | 1.50 | |||||||
Dividends declared per common share | $ | 0.16 | $ | 0.15 | $ | 0.46 | $ | 0.43 | |||||||
Weighted-average common shares outstanding (in millions) | |||||||||||||||
Basic | 359.7 | 397.1 | 373.1 | 410.3 | |||||||||||
Diluted | 368.8 | 407.8 | 382.4 | 420.7 | |||||||||||
See Notes to Condensed Consolidated Financial Statements.
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BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED NOVEMBER 26, 2011, AND NOVEMBER 27, 2010
($ and shares in millions)
(Unaudited)
Best Buy Co., Inc. | ||||||||||||||||||||||||||||||
Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Best Buy Co., Inc. | Non controlling Interests | Total | |||||||||||||||||||||||
Balances at February 26, 2011 | 393 | $ | 39 | $ | 18 | $ | 6,372 | $ | 173 | $ | 6,602 | $ | 690 | $ | 7,292 | |||||||||||||||
Net earnings, nine months ended November 26, 2011 | — | — | — | 467 | — | 467 | (13 | ) | 454 | |||||||||||||||||||||
Other comprehensive (loss), net of tax | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (84 | ) | (84 | ) | (4 | ) | (88 | ) | ||||||||||||||||||
Unrealized losses on available-for-sale investments | — | — | — | — | (29 | ) | (29 | ) | — | (29 | ) | |||||||||||||||||||
Reclassification adjustment for gain on available-for-sale securities included in net earnings | — | — | — | — | (48 | ) | (48 | ) | — | (48 | ) | |||||||||||||||||||
Cash flow hedging instruments — unrealized losses | — | — | — | — | — | — | — | — | ||||||||||||||||||||||
Total comprehensive income (loss) | 306 | (17 | ) | 289 | ||||||||||||||||||||||||||
Dividend distribution | — | — | — | — | — | — | (7 | ) | (7 | ) | ||||||||||||||||||||
Stock-based compensation | — | — | 93 | — | — | 93 | — | 93 | ||||||||||||||||||||||
Stock options exercised | 1 | — | 26 | — | — | 26 | — | 26 | ||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan | 2 | — | 38 | — | — | 38 | — | 38 | ||||||||||||||||||||||
Tax deficit from stock options exercised, restricted stock vesting and employee stock purchase plan | — | — | (6 | ) | — | — | (6 | ) | — | (6 | ) | |||||||||||||||||||
Common stock dividends, $0.46 per share | — | — | — | (171 | ) | — | (171 | ) | — | (171 | ) | |||||||||||||||||||
Repurchase of common stock | (42 | ) | (4 | ) | (169 | ) | (1,005 | ) | — | (1,178 | ) | — | (1,178 | ) | ||||||||||||||||
Balances at November 26, 2011 | 354 | $ | 35 | $ | — | $ | 5,663 | $ | 12 | $ | 5,710 | $ | 666 | $ | 6,376 | |||||||||||||||
Balances at February 27, 2010 | 419 | $ | 42 | $ | 441 | $ | 5,797 | $ | 40 | $ | 6,320 | $ | 644 | $ | 6,964 | |||||||||||||||
Net earnings, nine months ended November 27, 2010 | — | — | — | 626 | — | 626 | 52 | 678 | ||||||||||||||||||||||
Other comprehensive income (loss), net of tax | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 40 | 40 | (35 | ) | 5 | |||||||||||||||||||||
Unrealized gains on available-for-sale investments | — | — | — | — | 55 | 55 | — | 55 | ||||||||||||||||||||||
Cash flow hedging instruments — unrealized gains | — | — | — | — | 3 | 3 | 3 | 6 | ||||||||||||||||||||||
Total comprehensive income | 724 | 20 | 744 | |||||||||||||||||||||||||||
Stock-based compensation | — | — | 87 | — | — | 87 | — | 87 | ||||||||||||||||||||||
Stock options exercised | 5 | — | 127 | — | — | 127 | — | 127 | ||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan | 1 | — | 44 | — | — | 44 | — | 44 | ||||||||||||||||||||||
Tax benefit from stock options exercised, restricted stock vesting and employee stock purchase plan | — | — | 5 | — | — | 5 | — | 5 | ||||||||||||||||||||||
Common stock dividends, $0.43 per share | — | — | — | (178 | ) | — | (178 | ) | — | (178 | ) | |||||||||||||||||||
Repurchase of common stock | (31 | ) | (3 | ) | (704 | ) | (421 | ) | — | (1,128 | ) | — | (1,128 | ) | ||||||||||||||||
Balances at November 27, 2010 | 394 | $ | 39 | $ | — | $ | 5,824 | $ | 138 | $ | 6,001 | $ | 664 | $ | 6,665 | |||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
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BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
Nine Months Ended | |||||||
November 26, 2011 | November 27, 2010 | ||||||
OPERATING ACTIVITIES | |||||||
Net earnings including noncontrolling interests | $ | 454 | $ | 678 | |||
Adjustments to reconcile net earnings including noncontrolling interests to total cash provided by operating activities | |||||||
Depreciation | 668 | 668 | |||||
Amortization of definite-lived intangible assets | 38 | 63 | |||||
Restructuring charges | 154 | — | |||||
Realized gain on sale of investments | (55 | ) | — | ||||
Stock-based compensation | 93 | 87 | |||||
Deferred income taxes | 148 | (6 | ) | ||||
Other, net | 16 | 3 | |||||
Changes in operating assets and liabilities | |||||||
Receivables | (761 | ) | (805 | ) | |||
Merchandise inventories | (3,402 | ) | (4,561 | ) | |||
Other assets | 20 | 80 | |||||
Accounts payable | 5,278 | 4,492 | |||||
Other liabilities | 340 | 159 | |||||
Income taxes | (364 | ) | (313 | ) | |||
Total cash provided by operating activities | 2,627 | 545 | |||||
INVESTING ACTIVITIES | |||||||
Additions to property and equipment | (616 | ) | (529 | ) | |||
Purchases of investments | (111 | ) | (245 | ) | |||
Sales of investments | 167 | 383 | |||||
Proceeds from sale of business, net of cash transferred | — | 21 | |||||
Change in restricted assets | (31 | ) | (1 | ) | |||
Other, net | (7 | ) | 10 | ||||
Total cash used in investing activities | (598 | ) | (361 | ) | |||
FINANCING ACTIVITIES | |||||||
Repurchase of common stock | (1,165 | ) | (1,128 | ) | |||
Borrowings of debt | 2,438 | 1,925 | |||||
Repayments of debt | (1,870 | ) | (1,884 | ) | |||
Dividends paid | (172 | ) | (178 | ) | |||
Issuance of common stock under employee stock purchase plan and for the exercise of stock options | 64 | 171 | |||||
Other, net | (22 | ) | 1 | ||||
Total cash used in financing activities | (727 | ) | (1,093 | ) | |||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (13 | ) | 8 | ||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1,289 | (901 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 1,103 | 1,826 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 2,392 | $ | 925 | |||
See Notes to Condensed Consolidated Financial Statements.
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BEST BUY CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share amounts)
(Unaudited)
1. | Basis of Presentation |
Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” in these Notes to Condensed Consolidated Financial Statements refers to Best Buy Co., Inc. and its consolidated subsidiaries.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”). All adjustments were comprised of normal recurring adjustments, except as noted in these Notes to Condensed Consolidated Financial Statements.
Historically, we have realized more of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Europe and Canada, than in any other fiscal quarter. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. The interim financial statements and the related notes in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 26, 2011.
In order to align our fiscal reporting periods and comply with statutory filing requirements in certain foreign jurisdictions, we consolidate the financial results of our Europe, China and Mexico operations on a two-month lag. Our policy is to accelerate recording the effect of events occurring in the lag period that significantly affect our consolidated financial statements. In November 2011, we announced plans to close our large-format Best Buy branded stores in the United Kingdom ("U.K."). Accordingly, $109 of restructuring charges related to the store closures were included in our third quarter of fiscal 2012 results. Except for these restructuring activities, no significant intervening events occurred which would have materially affected our financial condition, results of operations or liquidity had they been recorded during the three months ended November 26, 2011. We plan to close our large-format Best Buy branded stores in the U.K. during the fourth quarter of fiscal 2012; however, the stores remained open and continued operations throughout the third quarter of fiscal 2012. For further information about our fiscal 2012 restructuring and the nature of the charges we recorded, refer to Note 5, Restructuring Charges.
In preparing the accompanying condensed consolidated financial statements, we evaluated the period from November 27, 2011, through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. Other than as described in Note 13, Subsequent Event, no such events were identified for this period.
Fiscal Year
On November 7, 2011, we announced our intention to change our fiscal year-end from the Saturday nearest the end of February to the Saturday nearest the end of January, effective beginning with our fiscal year 2013. This change will not impact our current fiscal year (fiscal year 2012), which will end on March 3, 2012. However, our fiscal year 2013 will be shortened from 12 months to 11 months and end on February 2, 2013.
New Accounting Standards
Comprehensive Income — In June 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe our adoption of the new guidance in the first quarter of fiscal 2013 will have an impact on our consolidated financial position, results of operations or cash flows.
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Fair Value Measurement — In April 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe our adoption of the new guidance in the first quarter of fiscal 2013 will have an impact on our consolidated financial position, results of operations or cash flows.
2. | Investments |
Investments were comprised of the following:
November 26, 2011 | February 26, 2011 | November 27, 2010 | |||||||||
Short-term investments | |||||||||||
Money market fund | $ | — | $ | 2 | $ | 2 | |||||
U.S. Treasury bills | — | 20 | — | ||||||||
Total short-term investments | $ | — | $ | 22 | $ | 2 | |||||
Equity and other investments | |||||||||||
Debt securities (auction rate securities) | $ | 81 | $ | 110 | $ | 131 | |||||
Marketable equity securities | 1 | 146 | 145 | ||||||||
Other investments | 64 | 72 | 67 | ||||||||
Total equity and other investments | $ | 146 | $ | 328 | $ | 343 | |||||
Debt Securities
Our debt securities are comprised of auction rate securities (“ARS”). ARS were intended to behave like short-term debt instruments because their interest rates reset periodically through an auction process, most commonly at intervals of seven, 28 and 35 days. The auction process had historically provided a means by which we could rollover the investment or sell these securities at par in order to provide us with liquidity as needed. As a result, we classify our investments in ARS as available-for-sale and carry them at fair value.
In February 2008, auctions began to fail due to insufficient buyers, as the amount of securities submitted for sale in auctions exceeded the aggregate amount of the bids. For each failed auction, the interest rate on the security moves to a maximum rate specified for each security, and generally resets at a level higher than specified short-term interest rate benchmarks. To date, we have collected all interest due on our ARS and expect to continue to do so in the future. Due to persistent failed auctions, and the uncertainty of when these investments could be liquidated at par, we have classified all of our investments in ARS as non-current assets within equity and other investments in our condensed consolidated balance sheet at November 26, 2011.
We sold $4 of ARS at par during the third quarter of fiscal 2012. However, at November 26, 2011, our entire remaining ARS portfolio, consisting of 18 investments in ARS having an aggregate value at par of $89, was subject to failed auctions.
Our ARS portfolio consisted of the following, at fair value:
Description | Nature of collateral or guarantee | November 26, 2011 | February 26, 2011 | November 27, 2010 | ||||||||||
Student loan bonds | Student loans guaranteed 95% to 100% by the U.S. government | $ | 79 | $ | 108 | $ | 113 | |||||||
Municipal revenue bonds | 100% insured by AA/Aa-rated bond insurers at November 26, 2011 | 2 | 2 | 18 | ||||||||||
Total fair value plus accrued interest(1) | $ | 81 | $ | 110 | $ | 131 | ||||||||
(1) | The par value and weighted-average interest rates (taxable equivalent) of our ARS were $89, $115 and $141, and 0.46%, 0.80% and 0.91%, respectively, at November 26, 2011, February 26, 2011, and November 27, 2010, respectively. |
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At November 26, 2011, our ARS portfolio was 88% AAA/Aaa-rated, 3% AA/Aa-rated and 9% A/A-rated.
The investment principal associated with failed auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process, the issuers establish a different form of financing to replace these securities, or final payments are due according to the contractual maturities of the debt issuances, which range from five to 30 years. We do not intend to sell our remaining ARS until we can recover the full principal amount through one of the means described above. In addition, we do not believe it is more likely than not that we would be required to sell our remaining ARS until we can recover the full principal amount based on our other sources of liquidity.
We evaluated our entire ARS portfolio of $89 (par value) for impairment at November 26, 2011, based primarily on the methodology described in Note 3, Fair Value Measurements. As a result of this review, we determined that the fair value of our ARS portfolio at November 26, 2011, was $81. Accordingly, a $8 pre-tax unrealized loss is recognized in accumulated other comprehensive income. This unrealized loss reflects a temporary impairment on all of our investments in ARS. The estimated fair value of our ARS portfolio could change significantly based on future market conditions. We will continue to assess the fair value of our ARS portfolio for substantive changes in relevant market conditions, changes in our financial condition or other changes that may alter our estimates described above.
We may be required to record an additional unrealized holding loss or an impairment charge to earnings if we determine that our ARS portfolio has incurred a further decline in fair value that is temporary or other-than-temporary, respectively. Factors that we consider when assessing our ARS portfolio for other-than-temporary impairment include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period, the nature of the collateral or guarantees in place and our intent and ability to hold an investment.
We had $(5), $(3) and $(6) of unrealized loss, net of tax, recorded in accumulated other comprehensive income at November 26, 2011, February 26, 2011, and November 27, 2010 respectively, related to our investments in debt securities.
Marketable Equity Securities
We invest in marketable equity securities and classify them as available-for-sale. Investments in marketable equity securities are classified as non-current assets within equity and other investments in our condensed consolidated balance sheets and are reported at fair value based on quoted market prices.
Our investments in marketable equity securities were as follows:
November 26, 2011 | February 26, 2011 | November 27, 2010 | |||||||||
Common stock of TalkTalk Telecom Group PLC | $ | — | $ | 62 | $ | 63 | |||||
Common stock of Carphone Warehouse Group plc | — | 84 | 78 | ||||||||
Other | 1 | — | 4 | ||||||||
Total | $ | 1 | $ | 146 | $ | 145 | |||||
We purchased shares of The Carphone Warehouse Group PLC (“CPW”) common stock in fiscal 2008, representing nearly 3% of CPW’s then outstanding shares. In March 2010, CPW demerged into two new holding companies: TalkTalk Telecom Group PLC (“TalkTalk”), which is the holding company for the fixed line voice and broadband telecommunications business of the former CPW, and Carphone Warehouse Group plc (“Carphone Warehouse”), which includes the former CPW’s 50% ownership interest in Best Buy Europe Distributions Limited (“Best Buy Europe”). Accordingly, our investment in CPW was exchanged for equivalent levels of investment in TalkTalk and Carphone Warehouse. In the third quarter of fiscal 2012, we sold our shares of TalkTalk and Carphone Warehouse for $112 ($51 for TalkTalk and $61 for Carphone Warehouse) and recognized a $55 pre-tax gain on the sale.
We review all investments for other-than-temporary impairment at least quarterly or as indicators of impairment exist. Indicators of impairment include the duration and severity of the decline in fair value as well as the intent and ability to hold the investment to allow for a recovery in the market value of the investment. In addition, we consider qualitative factors that include, but are not limited to: (i) the financial condition and business plans of the investee including its future earnings potential, (ii) the investee’s credit rating, and (iii) the current and expected market and industry conditions in which the investee operates. If a decline in the fair value of an investment is deemed by
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management to be other-than-temporary, the cost basis of the investment is written down to fair value, and the amount of the write-down is included in net earnings.
All unrealized holding gains or losses related to our investments in marketable equity securities are reflected net of tax in accumulated other comprehensive income in shareholders’ equity. The total unrealized gain, net of tax, included in accumulated other comprehensive income was $0, $75 and $75 at November 26, 2011, February 26, 2011, and November 27, 2010, respectively.
Other Investments
The aggregate carrying values of investments accounted for using either the cost method or the equity method, at November 26, 2011, February 26, 2011, and November 27, 2010, were $64, $72 and $67, respectively.
3. | Fair Value Measurements |
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.
Level 2 — Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
• | Quoted prices for similar assets or liabilities in active markets; |
• | Quoted prices for identical or similar assets in non-active markets; |
• | Inputs other than quoted prices that are observable for the asset or liability; and |
• | Inputs that are derived principally from or corroborated by other observable market data. |
Level 3 — Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following tables set forth by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis at November 26, 2011, February 26, 2011, and November 27, 2010, according to the valuation techniques we used to determine their fair values.
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Fair Value Measurements Using Inputs Considered as | |||||||||||||||
Fair Value at November 26, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
ASSETS | |||||||||||||||
Cash and cash equivalents | |||||||||||||||
Money market funds | $ | 851 | $ | 851 | $ | — | $ | — | |||||||
Commercial paper | 60 | — | 60 | — | |||||||||||
Other current assets | |||||||||||||||
Money market funds (restricted cash) | 160 | 160 | — | — | |||||||||||
U.S. Treasury bills (restricted cash) | 20 | 20 | — | — | |||||||||||
Foreign currency derivative instruments | 4 | — | 4 | — | |||||||||||
Equity and other investments | |||||||||||||||
Auction rate securities | 81 | — | — | 81 | |||||||||||
Marketable equity securities | 1 | 1 | — | — | |||||||||||
Other assets | |||||||||||||||
Marketable equity securities that fund deferred compensation | 81 | 81 | — | — | |||||||||||
LIABILITIES | |||||||||||||||
Long-term liabilities | |||||||||||||||
Deferred compensation | 63 | 63 | — | — | |||||||||||
Fair Value Measurements Using Inputs Considered as | |||||||||||||||
Fair Value at February 26, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
ASSETS | |||||||||||||||
Cash and cash equivalents | |||||||||||||||
Money market funds | $ | 70 | $ | 70 | $ | — | $ | — | |||||||
Short-term investments | |||||||||||||||
Money market fund | 2 | — | 2 | — | |||||||||||
U.S. Treasury bills | 20 | 20 | — | — | |||||||||||
Other current assets | |||||||||||||||
Money market funds (restricted cash) | 63 | 63 | — | — | |||||||||||
U.S. Treasury bills (restricted cash) | 105 | 105 | — | — | |||||||||||
Foreign currency derivative instruments | 2 | — | 2 | — | |||||||||||
Equity and other investments | |||||||||||||||
Auction rate securities | 110 | — | — | 110 | |||||||||||
Marketable equity securities | 146 | 146 | — | — | |||||||||||
Other assets | |||||||||||||||
Marketable equity securities that fund deferred compensation | 83 | 83 | — | — | |||||||||||
LIABILITIES | |||||||||||||||
Accrued liabilities | |||||||||||||||
Foreign currency derivative instruments | 1 | — | 1 | — | |||||||||||
Long-term liabilities | |||||||||||||||
Deferred compensation | 64 | 64 | — | — | |||||||||||
Foreign currency derivative instruments | 2 | — | 2 | — | |||||||||||
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Fair Value Measurements Using Inputs Considered as | |||||||||||
Fair Value at November 27, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
ASSETS | |||||||||||
Short-term investments | |||||||||||
Money market fund | 2 | — | 2 | — | |||||||
Other current assets | |||||||||||
Money market funds (restricted assets) | 66 | 66 | — | — | |||||||
U.S. Treasury bills (restricted assets) | 85 | 85 | — | — | |||||||
Foreign currency derivative instruments | 5 | — | 5 | — | |||||||
Equity and other investments | |||||||||||
Auction rate securities | 131 | — | — | 131 | |||||||
Marketable equity securities | 145 | 145 | — | — | |||||||
Other assets | |||||||||||
Marketable equity securities that fund deferred compensation | 80 | 80 | — | — | |||||||
Foreign currency derivative instruments | 4 | — | 4 | — | |||||||
LIABILITIES | |||||||||||
Long-term liabilities | |||||||||||
Deferred compensation | 67 | 67 | — | — | |||||||
The following tables provide a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the tables above that used significant unobservable inputs (Level 3) for the three and nine months ended November 26, 2011, and November 27, 2010.
Debt securities- Auction rate securities only | |||||||||||
Student loan bonds | Municipal revenue bonds | Total | |||||||||
Balances at August 27, 2011 | $ | 86 | $ | 2 | $ | 88 | |||||
Changes in unrealized losses included in other comprehensive income | (3 | ) | — | (3 | ) | ||||||
Sales | (4 | ) | — | (4 | ) | ||||||
Balances at November 26, 2011 | $ | 79 | $ | 2 | $ | 81 | |||||
Debt securities- Auction rate securities only | |||||||||||
Student loan bonds | Municipal revenue bonds | Total | |||||||||
Balances at February 26, 2011 | $ | 108 | $ | 2 | $ | 110 | |||||
Changes in unrealized losses included in other comprehensive income | (3 | ) | — | (3 | ) | ||||||
Sales | (26 | ) | — | (26 | ) | ||||||
Balances at November 26, 2011 | $ | 79 | $ | 2 | $ | 81 | |||||
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Debt securities- Auction rate securities only | |||||||||||
Student loan bonds | Municipal revenue bonds | Total | |||||||||
Balances at August 28, 2010 | $ | 116 | $ | 18 | $ | 134 | |||||
Changes in unrealized losses included in other comprehensive income | — | — | — | ||||||||
Sales | (3 | ) | — | (3 | ) | ||||||
Balances at November 27, 2010 | $ | 113 | $ | 18 | $ | 131 | |||||
Debt securities- Auction rate securities only | |||||||||||
Student loan bonds | Municipal revenue bonds | Total | |||||||||
Balances at February 27, 2010 | $ | 261 | $ | 19 | $ | 280 | |||||
Changes in unrealized losses included in other comprehensive income | (5 | ) | — | (5 | ) | ||||||
Sales | (142 | ) | (1 | ) | (143 | ) | |||||
Interest received | (1 | ) | — | (1 | ) | ||||||
Balances at November 27, 2010 | $ | 113 | $ | 18 | $ | 131 | |||||
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Money Market Funds. Our money market fund investments that are traded in an active market were measured at fair value using quoted market prices and, therefore, were classified as Level 1. Our money market fund investments not traded on a regular basis or in an active market, and for which we have been unable to obtain pricing information on an ongoing basis, were measured using inputs other than quoted market prices that are observable for the investments and, therefore, were classified as Level 2.
U.S. Treasury Bills. Our U.S. Treasury notes were classified as Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Commercial Paper. Our investments in commercial paper were measured using inputs based upon quoted prices for similar instruments in active markets and, therefore, were classified as Level 2.
Foreign Currency Derivative Instruments. Comprised primarily of foreign currency forward contracts and foreign currency swap contracts, our foreign currency derivative instruments were measured at fair value using readily observable market inputs, such as quotations on forward foreign exchange points and foreign interest rates. Our foreign currency derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
Auction Rate Securities. Our investments in ARS were classified as Level 3 as quoted prices were unavailable due to events described in Note 2, Investments. Due to limited market information, we utilized a discounted cash flow (“DCF”) model to derive an estimate of fair value. The assumptions we used in preparing the DCF model included estimates with respect to the amount and timing of future interest and principal payments, forward projections of the interest rate benchmarks, the probability of full repayment of the principal considering the credit quality and guarantees in place, and the rate of return required by investors to own such securities given the current liquidity risk associated with ARS.
Marketable Equity Securities. Our marketable equity securities were measured at fair value using quoted market prices. They were classified as Level 1 as they trade in an active market for which closing stock prices are readily available.
Deferred Compensation. Our deferred compensation liabilities and the assets that fund our deferred compensation consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible fixed assets, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value on our condensed consolidated balance sheets. For these assets, we do not periodically adjust carrying value to fair value except in the event of impairment. When we determine that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded within operating income in our consolidated statements of earnings. Other than as described below, we had no significant remeasurements of such assets or liabilities to fair value during the nine months ended November 26, 2011, and November 27, 2010.
As a result of our fiscal 2011 and 2012 restructuring activities described in Note 5, Restructuring Charges, we remeasured the fair value of certain fixed assets and tradenames and recorded the consequent impairments. The following table summarizes the fair value remeasurements (impairments) recorded during the nine months ended November 26, 2011:
Nine Months Ended | |||||||
November 26, 2011 | |||||||
Impairments | Remaining Net Carrying Value | ||||||
Property and equipment | $ | 124 | $ | — | |||
Tradename | 3 | — | |||||
Total | $ | 127 | $ | — | |||
All of the fair value remeasurements included in the table above were based on significant unobservable inputs (Level 3). Fixed asset fair values were derived using a discounted cash flow ("DCF") model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate. For the tradename, fair value was derived using the relief from royalty method, as described in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 26, 2011. In the case of these specific assets, for which their impairment was the result of restructuring activities, no future cash flows have been assumed as the assets will cease to be used and expected sale values are nominal.
Fair Value of Financial Instruments
Our financial instruments, other than those presented in the disclosures above, include cash, receivables, other investments, accounts payable, accrued liabilities and short- and long-term debt. The fair values of cash, receivables, accounts payable, accrued liabilities and short-term debt approximated carrying values because of the short-term nature of these instruments. Fair values for other investments held at cost are not readily available, but we estimate that the carrying values for these investments approximate fair value. See Note 6, Debt, for information about the fair value of our long-term debt.
4. | Goodwill and Intangible Assets |
The changes in the carrying values of goodwill and indefinite-lived tradenames by segment were as follows in the nine months ended November 26, 2011, and November 27, 2010:
Goodwill | Indefinite-lived Tradenames | ||||||||||||||||||||||
Domestic | International | Total | Domestic | International | Total | ||||||||||||||||||
Balances at February 26, 2011 | $ | 422 | $ | 2,032 | $ | 2,454 | $ | 21 | $ | 84 | $ | 105 | |||||||||||
Changes in foreign currency exchange rates | — | (38 | ) | (38 | ) | — | (2 | ) | (2 | ) | |||||||||||||
Acquisitions | 4 | — | 4 | 1 | — | 1 | |||||||||||||||||
Impairments | — | — | — | (3 | ) | — | (3 | ) | |||||||||||||||
Other(1) | — | — | — | — | 28 | 28 | |||||||||||||||||
Balances at November 26, 2011 | $ | 426 | $ | 1,994 | $ | 2,420 | $ | 19 | $ | 110 | $ | 129 | |||||||||||
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(1) | Represents the transfer of certain definite-lived tradenames (at their net book value) to indefinite-lived tradenames following our decision to no longer phase out certain tradenames. We believe these tradenames will continue to contribute to our future cash flows indefinitely. |
Goodwill | Indefinite-lived Tradenames | ||||||||||||||||||||||
Domestic | International | Total | Domestic | International | Total | ||||||||||||||||||
Balances at February 27, 2010 | $ | 434 | $ | 2,018 | $ | 2,452 | $ | 32 | $ | 80 | $ | 112 | |||||||||||
Sale of business(1) | (12 | ) | — | (12 | ) | (1 | ) | — | (1 | ) | |||||||||||||
Acquisition of noncontrolling interests | — | 5 | 5 | — | — | — | |||||||||||||||||
Changes in foreign currency exchange rates | — | (4 | ) | (4 | ) | — | 2 | 2 | |||||||||||||||
Balances at November 27, 2010 | $ | 422 | $ | 2,019 | $ | 2,441 | $ | 31 | $ | 82 | $ | 113 | |||||||||||
(1) | As a result of the sale of our Speakeasy business in the second quarter of fiscal 2011, we eliminated the carrying value of the related goodwill and indefinite-lived tradenames as of the date of sale. |
The following table provides the gross carrying amount of goodwill and cumulative goodwill impairment losses:
November 26, 2011 | February 26, 2011 | November 27, 2010 | |||||||||||||||||||||
Gross Carrying Amount | Cumulative Impairment | Gross Carrying Amount | Cumulative Impairment | Gross Carrying Amount | Cumulative Impairment | ||||||||||||||||||
Goodwill | $ | 2,485 | $ | (65 | ) | $ | 2,519 | $ | (65 | ) | $ | 2,506 | $ | (65 | ) | ||||||||
The following table provides the gross carrying values and related accumulated amortization of definite-lived intangible assets:
November 26, 2011 | February 26, 2011 | November 27, 2010 | |||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||
Tradenames | $ | — | $ | — | $ | 73 | $ | (45 | ) | $ | 74 | $ | (42 | ) | |||||||||
Customer relationships | 382 | (217 | ) | 383 | (180 | ) | 387 | (167 | ) | ||||||||||||||
Total | $ | 382 | $ | (217 | ) | $ | 456 | $ | (225 | ) | $ | 461 | $ | (209 | ) | ||||||||
Total amortization expense for the three months ended November 26, 2011, and November 27, 2010, was $8 and $20, respectively, and was $38 and $63 for the nine months then ended, respectively. The estimated future amortization expense for identifiable intangible assets is as follows:
Fiscal Year | |||
Remainder of fiscal 2012 | $ | 9 | |
2013 | 35 | ||
2014 | 35 | ||
2015 | 35 | ||
2016 | 35 | ||
Thereafter | 16 | ||
Best Buy Europe
In November 2011, we announced strategic changes in respect of Best Buy Europe, our consolidated subsidiary in which Carphone Warehouse holds a 50% noncontrolling interest. The strategic changes included an agreement to buy out Carphone Warehouse's share of the interest in the profit share-based management fee paid to Best Buy Europe pursuant to the 2007 Best Buy Mobile agreement (the "profit share agreement") for approximately $1,300 (the "Mobile buy-out"), subject to Carphone Warehouse shareholder approval. This transaction would result in the profit share agreement being fully assigned to a wholly-owned subsidiary of Best Buy and, accordingly, no further profit
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share payments would be payable to Best Buy Europe. The strategic changes also included plans to close our large-format Best Buy branded stores in the U.K. in the fourth quarter of fiscal 2012.
As of the end of the third quarter of fiscal 2012 and in light of strategic changes outlined above, we performed an interim evaluation of potential impairment of goodwill associated with the Best Buy Europe reporting unit. The fair value of the reporting unit, adjusted to reflect the exit plans for our large-format Best Buy branded stores in the U.K. and the fair value of the profit share agreement indicated by the Mobile buy-out price agreed upon with Carphone Warehouse, was determined to be in excess of carrying value of the Best Buy reporting unit as of the end of the third quarter of fiscal 2012.
However, upon approval by the shareholders of Carphone Warehouse of the Mobile buy-out, no further profit share payments would be payable to Best Buy Europe, which would lead to the new fair value of the reporting unit being significantly lower than the carrying value. Analysis to determine the extent of goodwill impairment that would arise as a result of the Mobile buy-out is ongoing, and preliminary estimates suggest substantially all of the goodwill attributable to the Best Buy Europe reporting unit (approximately $1,200 as of the end of the third quarter of fiscal 2012) would be impaired. If the shareholders of Carphone Warehouse approve the Mobile buy-out, we would record this non-cash impairment of goodwill in the consolidated statement of earnings in the fourth quarter of fiscal 2012.
5. | Restructuring Charges |
Fiscal 2012 Restructuring
In the third quarter of fiscal 2012, we implemented a series of actions to restructure operations in our Domestic and International segments. The fiscal 2012 restructuring included plans to close our Best Buy branded large-format stores in the U.K. by the end of the fourth quarter of fiscal 2012 and refocus our Best Buy Europe strategy on our small-format stores. Within our Domestic segment, the actions included a decision to modify our strategy for certain mobile broadband offerings. We view these restructuring activities as necessary to meet our long-term financial performance objectives by refocusing our investments on areas that meet our return expectations.
We incurred $131 of charges related to the fiscal 2012 restructuring in the first nine months of fiscal 2012. Of the total charges, $17 related to our Domestic segment and consisted primarily of property and equipment impairments (primarily information technology assets) resulting from the modified strategy for certain mobile broadband offerings. The remaining $114 of charges related to our International segment and consisted primarily of property and equipment impairments, inventory write-downs, termination benefits and other costs, and were directly associated with the closure of our Best Buy branded stores in the U.K.
We expect further restructuring charges related to these activities to impact both our Domestic and International segments in the fourth quarter of fiscal 2012. We expect to incur approximately $10 of restructuring charges in our Domestic segment in the fourth quarter of fiscal 2012 related to the changes in our mobile broadband offerings discussed above. In addition, we expect to incur between $100 and $115 of restructuring charges in our International segment in the fourth quarter of fiscal 2012 related to the closure of the Best Buy branded stores in the U.K. The remaining charges in the International segment will consist primarily of facility closure costs, employee termination benefits and other contractual obligations and costs. We expect to substantially complete these restructuring activities in fiscal 2012.
Of the charges incurred in the first nine months of fiscal 2012 related to these restructuring activities, the inventory write-downs are presented in the restructuring charges – cost of goods sold line item in our condensed consolidated statements of earnings, and the remainder of the restructuring charges are included in the restructuring charges line item in our condensed consolidated statements of earnings. The composition of the restructuring charges we incurred in the nine months ended November 26, 2011, as well as the cumulative amount incurred through November 26, 2011, for our fiscal 2012 restructuring activities for both the Domestic and International segments, were as follows:
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Domestic | International | Total | |||||||||||||||||||||
Nine Months Ended November 26, 2011 | Cumulative Amount through November 26, 2011 | Nine Months Ended November 26, 2011 | Cumulative Amount through November 26, 2011 | Nine Months Ended November 26, 2011 | Cumulative Amount through November 26, 2011 | ||||||||||||||||||
Inventory write-downs | $ | — | $ | — | $ | 13 | $ | 13 | $ | 13 | $ | 13 | |||||||||||
Property and equipment impairments | 17 | 17 | 92 | 92 | 109 | 109 | |||||||||||||||||
Termination benefits | — | — | 7 | 7 | 7 | 7 | |||||||||||||||||
Facility closure and other costs, net | — | — | 2 | 2 | 2 | 2 | |||||||||||||||||
Total | $ | 17 | $ | 17 | $ | 114 | $ | 114 | $ | 131 | $ | 131 | |||||||||||
The following table summarizes our restructuring accrual activity related to our fiscal 2012 restructuring activities during the nine months ended November 26, 2011, related to termination benefits and facility closure and other costs:
Termination Benefits | Facility Closure and Other Costs | Total | |||||||||
Balance at February 26, 2011 | $ | — | $ | — | $ | — | |||||
Charges | 7 | 2 | 9 | ||||||||
Cash payments | — | — | — | ||||||||
Adjustments | — | — | — | ||||||||
Changes in foreign currency exchange rates | — | — | — | ||||||||
Balance at November 26, 2011 | $ | 7 | $ | 2 | $ | 9 | |||||
Fiscal 2011 Restructuring
In the fourth quarter of fiscal 2011, we implemented a series of actions to restructure operations in our domestic and international businesses. The fiscal 2011 restructuring included plans to exit the Turkey market, restructure the Best Buy branded stores in China and improve efficiencies in our Domestic segment’s operations. As part of the international restructuring, we also recognized the impairment of certain information technology assets supporting the restructured activities in our International segment. We view these restructuring activities as necessary to meet our long-term growth goals by investing in businesses that have the potential to meet our internal rate of return expectations. We believe these actions will improve the financial performance of our International segment and increase efficiency, enhance customer service and reduce costs in our Domestic segment’s operations.
We incurred $23 of charges related to the fiscal 2011 restructuring in the first nine months of fiscal 2012. Of the total charges, $23 related to our Domestic segment and consisted primarily of property and equipment impairments (notably information technology assets), facility closure costs and a tradename impairment. The restructuring charges recorded in the third quarter of fiscal 2012 were primarily related to our exit from certain digital delivery services within our entertainment product category, for which we entered into a sale agreement with a third party during the quarter. As the proceeds from the sale were lower than original expectations, additional impairments totaling $18 were recorded during the third quarter of fiscal 2012 to write down the tangible and intangible assets to their realizable value. Within our International segment, charges resulting from the completion of our exit from the Turkey market were effectively offset by adjustments associated with the restructure of our Best Buy branded stores in China during the first nine months of fiscal 2012. The net reduction in restructuring charges recorded in the third quarter of fiscal 2012 were primarily associated with adjustments to estimated facility closure costs, as we exited leased locations in China.
We do not expect to incur further material restructuring charges related to our fiscal 2011 restructuring activities in either our Domestic or International segments. We expect to substantially complete these restructuring activities in fiscal 2012.
All charges incurred in the first nine months of fiscal 2012 related to our fiscal 2011 restructuring activities are included in the restructuring charges line item in our consolidated statements of earnings. The composition of the restructuring charges we incurred in the nine months ended November 26, 2011, as well as the cumulative amount
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incurred through November 26, 2011, for our fiscal 2011 restructuring activities for both the Domestic and International segments, were as follows:
Domestic | International | Total | |||||||||||||||||||||
Nine Months Ended November 26, 2011 | Cumulative Amount through November 26, 2011 | Nine Months Ended November 26, 2011 | Cumulative Amount through November 26, 2011 | Nine Months Ended November 26, 2011 | Cumulative Amount through November 26, 2011 | ||||||||||||||||||
Inventory write-downs | $ | — | $ | 10 | $ | — | $ | 14 | $ | — | $ | 24 | |||||||||||
Property and equipment impairments | 15 | 30 | — | 132 | 15 | 162 | |||||||||||||||||
Termination benefits | 1 | 17 | 7 | 19 | 8 | 36 | |||||||||||||||||
Intangible asset impairments | 3 | 13 | — | — | 3 | 13 | |||||||||||||||||
Facility closure and other costs, net | 4 | 4 | (7 | ) | 6 | (3 | ) | 10 | |||||||||||||||
Total | $ | 23 | $ | 74 | $ | — | $ | 171 | $ | 23 | $ | 245 | |||||||||||
The following table summarizes our restructuring accrual activity related to our fiscal 2011 restructuring activities during the nine months ended November 26, 2011, related to termination benefits and facility closure and other costs:
Termination Benefits | Facility Closure and Other Costs(1) | Total | |||||||||
Balance at February 26, 2011 | $ | 28 | $ | 13 | $ | 41 | |||||
Charges | 11 | 2 | 13 | ||||||||
Cash payments | (26 | ) | (13 | ) | (39 | ) | |||||
Adjustments | (3 | ) | 4 | 1 | |||||||