Best Buy 2002 Annual Report Download - page 28

26 MD&A
Consolidated Results
Net Interest (Expense) Income
Net interest expense was $1 million in fiscal 2002,
compared with net interest income of $37 million last
fiscal year. Fiscal 2002 included an $8 million pre-tax
charge from the early retirement of debt acquired as part
of the Musicland acquisition. The balance of the change
in net interest resulted primarily from lower yields on
short-term investments as the average interest rate declined
by more than 2% compared with last fiscal year. The
impact of lower short -term investment yields was partially
offset by higher average cash balances resulting from
strong operating cash flows and net proceeds from the
issuance of convertible debentures.
Net interest income increased to $37 million in fiscal
2001 compared with $24 million in fiscal 2000. The
increase was due to higher cash balances compared with
the prior fiscal year. The higher cash balances were the
result of cash flows generated from operations, including
improved inventory management and a $200 million
investment in Best Buy common stock by Microsoft
Corporation as part of a strategic alliance. Interest expense
on Musicland debt and lost interest income on the cash
used to acquire Musicland and Magnolia Hi-Fi reduced
net interest income by approximately $4 million.
Effective Income Tax Rate
Our effective income tax rate increased to 39.1%, up from
38.3% last fiscal year. The increase in the effective income
tax rate was primarily due to the nondeductibility of
goodwill amortization expense resulting from our acquisi-
tions in the fourth quarter of fiscal 2001.
Our effective income tax rate in fiscal 2001 was 38.3%,
unchanged from fiscal 2000. Historically, our effective tax
rate has been impacted primarily by the taxability of
investment income and state income taxes.
Liquidity and Capital Resources
Summary
We improved our financial position in fiscal 2002 while
continuing to make significant investments in new growth
initiatives, including the $ 3 77 million, or $368 million net of
cash acquired, acquisition of Future Shop. Cash and cash
equivalents increased to $1.9 billion at the end of fiscal
2002, compared with $ 7 4 7 million at the end of
fiscal 2001. Working capital, the excess of current assets
over current liabilities, increased to $881 million at the end
of fiscal 2002, compared with $214 million at the end of
fiscal 2001. In fiscal 2002, strong operating cash flows
and net proceeds from the issuance of convertible
debentures strengthened our liquidity position; however,
our long-term debt-to-capitalization ratio increased to
24% at the end of fiscal 2002, compared with 9% at the
end of fiscal 2001.
Cash Flows
Cash provided by operating activities was $1.6 billion
in fiscal 2002, compared with $808 million in fiscal
2001 and $ 77 6 million in fiscal 2000. The increase in
operating cash flows in fiscal 2002, compared with the
prior fiscal year, was driven by increased net earnings
and cash generated from changes in net operating assets
and liabilities. The changes were related to increased
accounts payable balances due to higher business volume
and timing of invoice payments, as well as increased
accrued income taxes. In addition, other liabilities
increased due to business growth, advances received
under vendor alliances, increased gift card liabilities and
higher accrued performance-based compensation
expenses resulting from our improvement in net earnings.
The changes were partially offset by increased ending
inventory, which resulted from the operations of 62 new
Best Buy stores and improved in-stock levels.
Net cash used in investing activities in fiscal 2002 was
$965 million, compared with $1.0 billion and $416 million