BBY 8/27/11 10Q
Table of Contents

 
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 August 27, 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 — 362,295,405 shares outstanding as of September 27, 2011.


Table of Contents

BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED AUGUST 27, 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)
 
August 27,
2011
 
February 26,
2011
 
August 28,
2010
CURRENT ASSETS
 

 
 

 
 

Cash and cash equivalents
$
2,040

 
$
1,103

 
$
843

Short-term investments
80

 
22

 
2

Receivables
1,945

 
2,348

 
1,720

Merchandise inventories
6,403

 
5,897

 
6,346

Other current assets
1,033

 
1,103

 
1,048

Total current assets
11,501

 
10,473

 
9,959

 
 
 
 
 
 
PROPERTY AND EQUIPMENT, NET
3,761

 
3,823

 
3,915

 
 
 
 
 
 
GOODWILL
2,486

 
2,454

 
2,365

 
 
 
 
 
 
TRADENAMES, NET
134

 
133

 
147

 
 
 
 
 
 
CUSTOMER RELATIONSHIPS, NET
179

 
203

 
227

 
 
 
 
 
 
EQUITY AND OTHER INVESTMENTS
284

 
328

 
293

 
 
 
 
 
 
OTHER ASSETS
484

 
435

 
456

 
 
 
 
 
 
TOTAL ASSETS
$
18,829

 
$
17,849

 
$
17,362

 
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.

3
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BEST BUY CO., INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS 
LIABILITIES AND EQUITY 
($ in millions, except per share amounts)
(Unaudited)
 
August 27,
2011
 
February 26,
2011
 
August 28,
2010
CURRENT LIABILITIES
 

 
 

 
 

Accounts payable
$
5,830

 
$
4,894

 
$
5,573

Unredeemed gift card liabilities
410

 
474

 
400

Accrued compensation and related expenses
489

 
570

 
467

Accrued liabilities
1,580

 
1,471

 
1,589

Accrued income taxes
2

 
256

 
27

Short-term debt
392

 
557

 
383

Current portion of long-term debt
444

 
441

 
32

Total current liabilities
9,147

 
8,663

 
8,471

 
 
 
 
 
 
LONG-TERM LIABILITIES
1,176

 
1,183

 
1,181

 
 
 
 
 
 
LONG-TERM DEBT
1,696

 
711

 
1,088

 
 
 
 
 
 
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 — 365,556,000, 392,590,000 and 402,961,000 shares, respectively
37

 
39

 
40

Additional paid-in capital
—

 
18

 
—

Retained earnings
5,839

 
6,372

 
6,000

Accumulated other comprehensive income (loss)
211

 
173

 
(25
)
Total Best Buy Co., Inc. shareholders’ equity
6,087

 
6,602

 
6,015

Noncontrolling interests
723

 
690

 
607

Total equity
6,810

 
7,292

 
6,622

 
 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
$
18,829

 
$
17,849

 
$
17,362

 
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.

4
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BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF EARNINGS 
($ in millions, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
August 27,
2011
 
August 28,
2010
 
August 27,
2011
 
August 28,
2010
Revenue
$
11,347

 
$
11,339

 
$
22,287

 
$
22,126

Cost of goods sold
8,475

 
8,421

 
16,647

 
16,415

Gross profit
2,872

 
2,918

 
5,640

 
5,711

Selling, general and administrative expenses
2,583

 
2,507

 
5,067

 
4,987

Restructuring charges
2

 
—

 
4

 
—

Operating income
287

 
411

 
569

 
724

Other income (expense)
 

 
 

 
 
 
 
Investment income and other
6

 
13

 
18

 
25

Interest expense
(34
)
 
(21
)
 
(65
)
 
(44
)
 
 
 
 
 
 
 
 
Earnings before income tax expense and equity in loss of affiliates
259

 
403

 
522

 
705

Income tax expense
99

 
146

 
198

 
267

Equity in loss of affiliates
—

 
—

 
(1
)
 
—

Net earnings including noncontrolling interests
160

 
257

 
323

 
438

Net loss (earnings) attributable to noncontrolling interests
17

 
(3
)
 
(10
)
 
(29
)
 
 
 
 
 
 
 
 
Net earnings attributable to Best Buy Co., Inc.
$
177

 
$
254

 
$
313

 
$
409

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

 
 

 
 
 
 
Basic
$
0.48

 
$
0.61

 
$
0.82

 
$
0.98

Diluted
$
0.47

 
$
0.60

 
$
0.81

 
$
0.96

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.15

 
$
0.14

 
$
0.30

 
$
0.28

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (in millions)
 

 
 

 
 
 
 
Basic
371.9

 
413.5

 
379.8

 
416.9

Diluted
381.4

 
423.6

 
389.5

 
427.7

 
See Notes to Condensed Consolidated Financial Statements. 

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BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY 
FOR THE SIX MONTHS ENDED AUGUST 27, 2011, AND AUGUST 28, 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, six months ended August 27, 2011
—

 
—

 
—

 
313

 
—

 
313

 
10

 
323

Other comprehensive income (loss), net of tax
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
57

 
57

 
25

 
82

Unrealized losses on available-for-sale investments
—

 
—

 
—

 
—

 
(21
)
 
(21
)
 
—

 
(21
)
Cash flow hedging instruments — unrealized gains
—

 
—

 
—

 
—

 
2

 
2

 
2

 
4

Total comprehensive income
 

 
 

 
 

 
 

 
 

 
351

 
37

 
388

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend distribution
—

 
—

 
—

 
—

 
—

 
—

 
(4
)
 
(4
)
Stock-based compensation
—

 
—

 
63

 
—

 
—

 
63

 
—

 
63

Stock options exercised
1

 
—

 
26

 
—

 
—

 
26

 
—

 
26

Issuance of common stock under employee stock purchase plan
1

 
—

 
23

 
—

 
—

 
23

 
—

 
23

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

 
—

 
(3
)
 
—

 
—

 
(3
)
 
—

 
(3
)
Common stock dividends, $0.30 per share
—

 
—

 
—

 
(112
)
 
—

 
(112
)
 
—

 
(112
)
Repurchase of common stock
(29
)
 
(2
)
 
(127
)
 
(734
)
 
—

 
(863
)
 
—

 
(863
)
Balances at August 27, 2011
366

 
$
37

 
$
—

 
$
5,839

 
$
211

 
$
6,087

 
$
723

 
$
6,810

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at February 27, 2010
419

 
$
42

 
$
441

 
$
5,797

 
$
40

 
$
6,320

 
$
644

 
$
6,964

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings, six months ended August 28, 2010
—

 
—

 
—

 
409

 
—

 
409

 
29

 
438

Other comprehensive income (loss), net of tax
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
(83
)
 
(83
)
 
(70
)
 
(153
)
Unrealized gains on available-for-sale investments
—

 
—

 
—

 
—

 
14

 
14

 
—

 
14

Cash flow hedging instruments — unrealized gains
—

 
—

 
—

 
—

 
4

 
4

 
4

 
8

Total comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
344

 
(37
)
 
307

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
—

 
—

 
58

 
—

 
—

 
58

 
—

 
58

Stock options exercised
3

 
—

 
90

 
—

 
—

 
90

 
—

 
90

Issuance of common stock under employee stock purchase plan
1

 
—

 
23

 
—

 
—

 
23

 
—

 
23

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

 
—

 
3

 
—

 
—

 
3

 
—

 
3

Common stock dividends, $0.28 per share
—

 
—

 
—

 
(118
)
 
—

 
(118
)
 
—

 
(118
)
Repurchase of common stock
(20
)
 
(2
)
 
(615
)
 
(88
)
 
—

 
(705
)
 
—

 
(705
)
Balances at August 28, 2010
403

 
$
40

 
$
—

 
$
6,000

 
$
(25
)
 
$
6,015

 
$
607

 
$
6,622

 
See Notes to Condensed Consolidated Financial Statements. 

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BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions) 
(Unaudited)
 
Six Months Ended
 
August 27,
2011
 
August 28,
2010
OPERATING ACTIVITIES
 

 
 

Net earnings including noncontrolling interests
$
323

 
$
438

Adjustments to reconcile net earnings including noncontrolling interests to total cash provided by operating activities
 
 
 
Depreciation
445

 
438

Amortization of definite-lived intangible assets
30

 
43

Stock-based compensation
63

 
58

Deferred income taxes
62

 
50

Excess tax benefits from stock-based compensation
—

 
(10
)
Other, net
12

 
5

Changes in operating assets and liabilities
 
 
 
Receivables
464

 
197

Merchandise inventories
(474
)
 
(909
)
Other assets
36

 
75

Accounts payable
936

 
361

Other liabilities
(96
)
 
(225
)
Income taxes
(264
)
 
(437
)
Total cash provided by operating activities
1,537

 
84

 
 
 
 
INVESTING ACTIVITIES
 

 
 

Additions to property and equipment
(411
)
 
(342
)
Purchases of investments
(106
)
 
(241
)
Sales of investments
66

 
379

Proceeds from sale of business, net of cash transferred
—

 
21

Change in restricted assets
(45
)
 
12

Settlement of net investment hedges
—

 
12

Other, net
—

 
(1
)
Total cash used in investing activities
(496
)
 
(160
)
 
 
 
 
FINANCING ACTIVITIES
 

 
 

Repurchase of common stock
(846
)
 
(667
)
Borrowings of debt
1,996

 
955

Repayments of debt
(1,187
)
 
(1,207
)
Dividends paid
(115
)
 
(118
)
Issuance of common stock under employee stock purchase plan and for the exercise of stock options
49

 
113

Excess tax benefits from stock-based compensation
—

 
10

Other, net
(2
)
 
9

Total cash used in financing activities
(105
)
 
(905
)
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
1

 
(2
)
 
 
 
 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
937

 
(983
)
 
 
 
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
1,103

 
1,826

 
 
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
2,040

 
$
843


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, Mexico and Turkey operations on a two-month lag. There were no significant intervening events which would have materially affected our consolidated financial statements had they been recorded during the three months ended August 27, 2011. In February 2011, we announced plans to exit the Turkey market; however, the stores remained open and continued operations until closed in the second quarter of fiscal 2012.
 
In preparing the accompanying condensed consolidated financial statements, we evaluated the period from August 28, 2011, through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.
 
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.
 
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.


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2.
Investments
 
Investments were comprised of the following:

 
 
August 27,
2011
 
February 26,
2011
 
August 28,
2010
Short-term investments
 

 
 

 
 

Money market fund
$
—

 
$
2

 
$
2

U.S. Treasury bills
80

 
20

 
—

Total short-term investments
$
80

 
$
22

 
$
2

 
 
 
 
 
 
Equity and other investments
 

 
 

 
 

Debt securities (auction rate securities)
$
88

 
$
110

 
$
134

Marketable equity securities
122

 
146

 
97

Other investments
74

 
72

 
62

Total equity and other investments
$
284

 
$
328

 
$
293

 
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 August 27, 2011.
 
We sold $8 of ARS at par during the second quarter of fiscal 2012. However, at August 27, 2011, our entire remaining ARS portfolio, consisting of 19 investments in ARS having an aggregate value at par of $93, was subject to failed auctions.
 
Our ARS portfolio consisted of the following, at fair value:
 
Description
 
Nature of collateral or guarantee
 
August 27,
2011
 
February 26,
2011
 
August 28,
2010
Student loan bonds
 
Student loans guaranteed 95% to 100% by the U.S. government
 
$
86

 
$
108

 
$
116

Municipal revenue bonds
 
100% insured by AA/Aa-rated bond insurers at August 27, 2011
 
2

 
2

 
18

Total fair value plus accrued interest(1)
 
 
 
$
88

 
$
110

 
$
134

 
(1) 
The par value and weighted-average interest rates (taxable equivalent) of our ARS were $93, $115 and $144, and 0.40%, 0.80% and 0.91%, respectively, at August 27, 2011, February 26, 2011, and August 28, 2010, respectively.
 
At August 27, 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.

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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 $93 (par value) for impairment at August 27, 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 August 27, 2011, was $88. Accordingly, a $5 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 $(3), $(3) and $(6) of unrealized loss, net of tax, recorded in accumulated other comprehensive income at August 27, 2011, February 26, 2011, and August 28, 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:
 
 
August 27,
2011
 
February 26,
2011
 
August 28,
2010
Common stock of TalkTalk Telecom Group PLC
$
69

 
$
62

 
$
51

Common stock of Carphone Warehouse Group plc
53

 
84

 
44

Other
—

 
—

 
2

Total
$
122

 
$
146

 
$
97

 
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. A $63 pre-tax unrealized gain is recorded in accumulated other comprehensive income related to these investments at August 27, 2011.
 
We review all investments for other-than-temporary impairment at least quarterly or as indicators of impairment exist. Indicators of impairment include the duration and severity of the decline in fair value as well as the intent and ability to hold the investment to allow for a recovery in the market value of the investment. In addition, we consider qualitative factors that include, but are not limited to: (i) the financial condition and business plans of the investee including its future earnings potential, (ii) the investee’s credit rating, and (iii) the current and expected market and industry conditions in which the investee operates. If a decline in the fair value of an investment is deemed by management to be other-than-temporary, 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 $54, $75 and $35 at August 27, 2011, February 26, 2011, and August 28, 2010, respectively.

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Other Investments
 
The aggregate carrying values of investments accounted for using either the cost method or the equity method, at August 27, 2011, February 26, 2011, and August 28, 2010, were $74, $72 and $62, 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 that are Measured at Fair Value on a Recurring Basis
 
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following tables set forth by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis at August 27, 2011, February 26, 2011, and August 28, 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
August 27, 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
$
560

 
$
560

 
$
—

 
$
—

Commercial paper
15

 
—

 
15

 
—

Short-term investments
 

 
 

 
 

 
 

U.S. Treasury bills
80

 
80

 
—

 
—

Other current assets
 

 
 

 
 

 
 

Money market funds (restricted cash)
157

 
157

 
—

 
—

U.S. Treasury bills (restricted cash)
30

 
30

 
—

 
—

Foreign currency derivative instruments
6

 
—

 
6

 
—

Equity and other investments
 

 
 

 
 

 
 

Auction rate securities
88

 
—

 
—

 
88

Marketable equity securities
122

 
122

 
—

 
—

Other assets
 

 
 

 
 

 
 

Marketable equity securities that fund deferred compensation
83

 
83

 
—

 
—

Foreign currency derivative instruments
1

 
—

 
1

 
—

 
 
 
 
 
 
 
 
LIABILITIES
 

 
 

 
 

 
 

Long-term liabilities
 

 
 

 
 

 
 

Deferred compensation
65

 
65

 
—

 
—

 
 
 
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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Table of Contents

 
 
 
Fair Value Measurements
Using Inputs Considered as
 
Fair Value at
August 28, 2010
 
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
$
1

 
$
1

 
$
—

 
$
—

Short-term investments
 

 
 

 
 

 
 

Money market fund
2

 
—

 
2

 
—

Other current assets
 

 
 

 
 

 
 

Money market funds (restricted cash)
49

 
49

 
—

 
—

U.S. Treasury bills (restricted cash)
100

 
100

 
—

 
—

Foreign currency derivative instruments
6

 
—

 
6

 
—

Equity and other investments
 

 
 

 
 

 
 

Auction rate securities
134

 
—

 
—

 
134

Marketable equity securities
97

 
97

 
—

 
—

Other assets
 

 
 

 
 

 
 

Marketable equity securities that fund deferred compensation
77

 
77

 
—

 
—

Foreign currency derivative instruments
6

 
—

 
6

 
—

 
 
 
 
 
 
 
 
LIABILITIES
 

 
 

 
 

 
 

Long-term liabilities
 

 
 

 
 

 
 

Deferred compensation
64

 
64

 
—

 
—


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 six months ended August 27, 2011, and August 28, 2010.
 
 
Debt securities-
Auction rate securities only
 
Student loan
bonds
 
Municipal
revenue bonds
 
Total
Balances at May 28, 2011
$
97

 
$
2

 
$
99

Changes in unrealized losses included in other comprehensive income
(3
)
 
—

 
(3
)
Sales
(8
)
 
—

 
(8
)
Balances at August 27, 2011
$
86

 
$
2

 
$
88

 
 
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
—

 
—

 
—

Sales
(22
)
 
—

 
(22
)
Balances at August 27, 2011
$
86

 
$
2

 
$
88

 


13
Table of Contents

 
Debt securities-
Auction rate securities only
 
Student loan
bonds
 
Municipal
revenue bonds
 
Total
Balances at May 29, 2010
$
214

 
$
19

 
$
233

Changes in unrealized losses included in other comprehensive income
—

 
—

 
—

Sales
(98
)
 
(1
)
 
(99
)
Balances at August 28, 2010
$
116

 
$
18

 
$
134

 
 
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
(139
)
 
(1
)
 
(140
)
Interest received
(1
)
 
—

 
(1
)
Balances at August 28, 2010
$
116

 
$
18

 
$
134


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.


14
Table of Contents

Assets and Liabilities that are 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. During the six months ended August 27, 2011, and August 28, 2010, we had no significant remeasurements of such assets or liabilities to fair value.
 
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 six months ended August 27, 2011, and August 28, 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
—

 
32

 
32

 
—

 
1

 
1

Other(1)
—

 
—

 
—

 
—

 
28

 
28

Balances at August 27, 2011
$
422

 
$
2,064

 
$
2,486

 
$
21

 
$
113

 
$
134

 
(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
)
Changes in foreign currency exchange rates
—

 
(75
)
 
(75
)
 
—

 
—

 
—

Balances at August 28, 2010
$
422

 
$
1,943

 
$
2,365

 
$
31

 
$
80

 
$
111

 
(1)            
As a result of the sale of our Speakeasy business in the second quarter of fiscal 2011, we wrote off 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:
 
 
August 27, 2011
 
February 26, 2011
 
August 28, 2010
 
Gross
Carrying
Amount
 
Cumulative
Impairment
 
Gross
Carrying
Amount
 
Cumulative
Impairment
 
Gross
Carrying
Amount
 
Cumulative
Impairment
Goodwill
$
2,551

 
$
(65
)
 
$
2,519

 
$
(65
)
 
$
2,430

 
$
(65
)
 

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Table of Contents

The following table provides the gross carrying values and related accumulated amortization of definite-lived intangible assets:
 
 
August 27, 2011
 
February 26, 2011
 
August 28, 2010
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Tradenames
$
—

 
$
—

 
$
73

 
$
(45
)
 
$
71

 
$
(35
)
Customer relationships
393

 
(214
)
 
383

 
(180
)
 
372

 
(145
)
Total
$
393

 
$
(214
)
 
$
456

 
$
(225
)
 
$
443

 
$
(180
)

Total amortization expense for the three months ended August 27, 2011, and August 28, 2010, was $15 and $21, respectively, and was $30 and $43 for the six months then ended, respectively. The estimated future amortization expense for identifiable intangible assets is as follows:
 
Fiscal Year
 
Remainder of fiscal 2012
$
18

2013
36

2014
36

2015
36

2016
36

Thereafter
17

 
5.
Restructuring Charges
 
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 $4 of charges related to the fiscal 2011 restructuring in the first six months of fiscal 2012. Of the total charges, $1 related to our Domestic segment and consisted primarily of facility closure costs, partially offset by reductions in expected termination benefits. The remaining $3 related to our International segment, primarily due to the completion of our exit from the Turkey market. We do not expect to incur further material restructuring charges related to our fiscal 2011 restructuring activities in either our Domestic or International segments in the remainder of fiscal 2012. We expect to substantially complete these restructuring activities in fiscal 2012.
 

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Table of Contents

All charges incurred in the first six months of fiscal 2012 related to our fiscal 2011 restructuring are included in the restructuring charges line item in our consolidated statements of earnings. The composition of the restructuring charges we incurred in the six months ended August 27, 2011, as well as the cumulative amount incurred through August 27, 2011, for our fiscal 2011 restructuring activities for both the Domestic and International segments, were as follows:
 
 
Domestic
 
International
 
Total
 
Six Months
Ended
August 27, 2011
 
Cumulative
Amount
through
August 27, 2011
 
Six Months
Ended
August 27, 2011
 
Cumulative
Amount
through
August 27, 2011
 
Six Months
Ended
August 27, 2011
 
Cumulative
Amount
through
August 27, 2011
Inventory write-downs
$
—

 
$
10

 
$
—

 
$
14

 
$
—

 
$
24

Property and equipment impairments
—

 
15

 
—

 
132

 
—

 
147

Termination benefits
(3
)
 
13

 
6

 
18

 
3

 
31

Intangible asset impairments
—

 
10

 
—

 
—

 
—

 
10

Facility closure and other costs, net
4

 
4

 
(3
)
 
10

 
1

 
14

Total
$
1

 
$
52

 
$
3

 
$
174

 
$
4

 
$
226

 
The following table summarizes our restructuring accrual activity during the six months ended August 27, 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
6

 
2

 
8

Cash payments
(25
)
 
(11
)
 
(36
)
Adjustments
(3
)
 
8

 
5

Changes in foreign currency exchange rates
—

 
1

 
1

Balance at August 27, 2011
$
6

 
$
13

 
$
19

 
(1) 
Included within the facility closure and other costs adjustments is $10 from the first quarter of fiscal 2011, representing an adjustment to exclude non-cash charges or benefits, which had no impact on our consolidated statements of earnings in the first six months of fiscal 2012.

6.
Debt
 
Short-Term Debt
 
Short-term debt consisted of the following:
 
 
August 27,
2011
 
February 26,
2011
 
August 28,
2010
JPMorgan revolving credit facility
$
—

 
$
—

 
$
—

Europe receivables financing facility(1)
386

 
455

 
350

Europe revolving credit facility
—

 
98

 
—

Canada revolving demand facility
—

 
—

 
—

China revolving demand facilities
6

 
4

 
33

Total short-term debt
$
392

 
$
557

 
$
383

 
(1)        
This facility is secured by certain network carrier receivables of Best Buy Europe, which are included within receivables in our condensed consolidated balance sheets.  The total amount available for borrowing under this facility is based on a percentage of the available acceptable receivables, as defined in the agreement for the facility, and was £277 (or $445) at August 27, 2011.

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Europe Revolving Credit Facility

In July 2011, Best Buy Europe entered into a new £400 ($642 based on the exchange rate in effect as of the end of the second quarter of fiscal 2012) unsecured revolving credit facility agreement (the “New RCF”) with ING Bank N.V., London Branch, as agent, and a syndicate of banks to finance its working capital needs. The New RCF expires on July 27, 2015.

Interest rates under the New RCF are variable, based on the London Interbank Offering Rate (“LIBOR”) plus an applicable margin based on Best Buy Europe’s fixed charges coverage ratio. The New RCF includes a commitment fee of 40% of the applicable margin on unused available capacity, as well as a utilization fee ranging from 0.0% to 0.5% of the aggregate amount outstanding based on the percentage of the aggregate amount outstanding to the total New RCF. The New RCF also required an initial arrangement fee of 0.75%.

The New RCF is guaranteed by certain subsidiaries of Best Buy Europe and does not provide for any recourse to Best Buy Co., Inc. The New RCF contains customary affirmative and negative covenants. Among other things, these covenants restrict or prohibit Best Buy Europe’s ability to incur certain types or amounts of indebtedness, make material changes in the nature of its business, dispose of material assets, make guarantees, or engage in a change in control transaction. The New RCF also contains covenants that require Best Buy Europe to comply with a maximum annual leverage ratio and a maximum fixed charges coverage ratio.

The New RCF replaced the existing £350 receivables financing facility (the “ERF”) between a subsidiary of Best Buy Europe and a syndicate of banks, including Barclays Bank PLC acting as administrative agent. The ERF was originally scheduled to expire in July 2012. The New RCF also replaced Best Buy Europe’s existing £125 revolving credit facility (the “RCF”) with one of Best Buy Co., Inc.’s subsidiaries and Carphone Warehouse as lenders. The RCF was originally scheduled to expire in March 2013. The ERF and the RCF were still reflected in our condensed consolidated financial statements at the end of the second quarter of fiscal 2012, as we consolidate the financial results of our Europe operations on a two-month lag.
  
Long-Term Debt
 
Long-term debt consisted of the following:
 
 
August 27,
2011
 
February 26,
2011
 
August 28,
2010
2021 Notes
$
648

 
$
—

 
$
—

2013 Notes
500

 
500

 
500

2016 Notes
349

 
—

 
—

Convertible debentures
402

 
402

 
402

Financing lease obligations
167

 
170

 
175

Capital lease obligations
72

 
79

 
41

Other debt
2

 
1

 
2

Total long-term debt
2,140

 
1,152

 
1,120

Less: current portion(1)
(444
)
 
(441
)
 
(32
)
Total long-term debt, less current portion
$
1,696

 
$
711

 
$
1,088

 
(1)           
Since holders of our convertible debentures may require us to purchase all or a portion of the debentures on January 15, 2012, we classified the $402 for such debentures in the current portion of long-term debt at August 27, 2011, and February 26, 2011.
 
The fair value of long-term debt approximated $2,169, $1,210 and $1,194 at August 27, 2011, February 26, 2011, and August 28, 2010, respectively, based primarily on the ask prices quoted from external sources, compared with carrying values of $2,140, $1,152 and $1,120, respectively.
 

18
Table of Contents

2016 and 2021 Notes
 
In March 2011, we issued $350 principal amount of notes due March 15, 2016 (the “2016 Notes”) and $650 principal amount of notes due March 15, 2021 (the “2021 Notes”, and together with the 2016 Notes, the “Notes”). The 2016 Notes bear interest at a fixed rate of 3.75% per year, while the 2021 Notes bear interest at a fixed rate of 5.50% per year. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2011. The Notes were issued at a slight discount to par, which when coupled with underwriting discounts of $6, resulted in net proceeds from the sale of the Notes of $990.
 
We may redeem some or all of the Notes at any time at a redemption price equal to the greater of (i) 100% of the principal amount of the Notes redeemed and (ii) the sum of the present values of each remaining scheduled payment of principal and interest on the Notes redeemed discounted to the redemption date on a semiannual basis, plus accrued and unpaid interest on the principal amount of the Notes to the redemption date as described in the indenture (including the supplemental indenture) relating to the Notes. Furthermore, if a change of control triggering event occurs, we will be required to offer to purchase the remaining unredeemed Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the purchase date.

The Notes are unsecured and unsubordinated obligations and rank equally with all of our other unsecured and unsubordinated debt. The Notes contain covenants that, among other things, limit our ability to incur debt secured by liens or to enter into sale and lease-back transactions.

See Note 6, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 26, 2011, for additional information regarding the terms of our debt facilities, debt instruments and other obligations.
 
7.
Derivative Instruments
 
We manage our economic and transaction exposure to certain market-based risks through the use of foreign currency derivative instruments. Our objective in holding derivatives is to reduce the volatility of net earnings and cash flows associated with changes in foreign currency exchange rates. We do not hold or issue derivative financial instruments for trading or speculative purposes.
 
We record all foreign currency derivative instruments on our condensed consolidated balance sheets at fair value and evaluate hedge effectiveness prospectively and retrospectively when electing to apply hedge accounting treatment. We formally document all hedging relationships at inception for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions. In addition, we have derivatives which are not designated as hedging instruments. We have no derivatives that have credit risk-related contingent features, and we mitigate our credit risk by engaging with major financial institutions as our counterparties.
 
Cash Flow Hedges
 
We enter into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on certain revenue streams denominated in non-functional currencies. The contracts have terms of up to two years. We report the effective portion of the gain or loss on a cash flow hedge as a component of other comprehensive income, and it is subsequently reclassified into net earnings in the period in which the hedged transaction affects net earnings or the forecast transaction is no longer probable of occurring. We report the ineffective portion, if any, of the gain or loss in net earnings.
 
Derivatives Not Designated as Hedging Instruments
 
Derivatives not designated as hedging instruments include foreign exchange forward contracts used to manage the impact of fluctuations in foreign currency exchange rates relative to recognized receivable and payable balances denominated in non-functional currencies and on certain forecast inventory purchases denominated in non-functional currencies. The contracts have terms of up to six months. These derivative instruments are not designated in hedging relationships and, therefore, we record gains and losses on these contracts directly in net earnings.
 

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Table of Contents

Summary of Derivative Balances
 
The following table presents the gross fair values for derivative instruments and the corresponding classification at August 27, 2011, February 26, 2011, and August 28, 2010:
 
 
 
August 27, 2011
 
February 26, 2011
 
August 28, 2010
Contract Type
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Cash flow hedges (foreign exchange forward contracts)
 
$
6