Best Buy 2003 Annual Report Download - page 147

Loss from discontinued operations, net of tax $ (441) $ — $ — $ (5)
(1) As−adjusted information conforms the accounting for vendor allowances to the fiscal 2003 method.
(2) Reflects results of operations of Musicland subsequent to its acquisition in the fourth quarter of fiscal 2001.
(3) Fiscal 2003 includes a $25 million tax benefit resulting from the differences between the basis of assets and liabilities for
financial reporting and income taxes arising at acquisition which will be realized upon the disposition of Musicland.
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Musicland incurred an operating loss of $72 million before impairment in fiscal 2003 compared with $31 million of operating income
on an as−adjusted basis in the prior fiscal year. The decline in operating income was primarily due to reduced revenue and a lower
gross profit rate. The reduced revenue resulted from the continued decline in revenue from prerecorded music, a reduction in the
number of customers visiting shopping malls and increased competition from discount stores and big−box retailers. The gross profit
rate declined in fiscal 2003 as a result of a change in the revenue mix at Musicland stores, due to increased revenue from
lower−margin DVD movies and video gaming hardware and software and decreased revenue from higher−margin prerecorded music.
In addition, a more promotional environment negatively impacted Musicland’s gross profit rate. The loss from discontinued
operations, net of tax, was $441 million in fiscal 2003, compared with break−even results in fiscal 2002 as adjusted and a $5 million
loss in fiscal 2001, which included results of operations only subsequent to the date of acquisition.
In fiscal 2003, the $441 million loss from discontinued operations, net of tax, includes significant non−cash charges totaling $418
million. The charges include a $308 million after−tax goodwill impairment charge, an $8 million after−tax charge related to the
change in accounting for vendor allowances and a $102 million after−tax charge ($166 million before tax) related to impairment of
long−lived assets. In addition, discontinued operations includes a $23 million net loss from operations comprised of a $72 million
operating loss before asset impairment charge, $6 million of interest expense and $55 million of income tax benefit. The $55 million
income tax benefit includes $25 million resulting from differences between the basis of assets and liabilities for financial reporting and
income taxes arising at acquisition which will be realized upon disposition of Musicland. Refer to the Significant Accounting Matters
section on page 22 for additional details.
The fiscal 2003 loss from discontinued operations excludes future operating results and any future gains or losses resulting from the
potential sale of our interest in Musicland. The final financial impact of the planned sale of our interest in Musicland is dependent
upon the results of negotiations with the ultimate buyer(s).
Additional Consolidated Results
Net Interest Income
Net interest income from continuing operations decreased to $4 million in fiscal 2003, compared with $18 million in fiscal 2002. The
decrease in net interest income was primarily due to lower yields on short−term investments and a full year of interest expense
associated with convertible debentures issued during fiscal 2002.
Net interest income from continuing operations declined to $18 million in fiscal 2002, compared with $38 million in fiscal 2001. The
decrease in net interest income was primarily due to lower yields on short−term investments, as average interest rates declined by
more than 200 basis points in fiscal 2002 compared with fiscal 2001. The impact of lower yields was partially offset by higher average
cash balances resulting from strong operating cash flows and net proceeds from the issuance of convertible debentures.
Effective Income Tax Rate
Our effective income tax rate from continuing operations increased to 38.7% in fiscal 2003, as compared with 38.4% in the prior year
on an as−adjusted basis. The increase in the effective income tax rate in fiscal 2003 was primarily due to increased tax expense related
to our International segment and a slight increase in the effective state income tax rate.
Our effective income tax rate in fiscal 2002 was 38.4%, up slightly from 38.3% in fiscal 2001. Historically, our effective income tax
rate has been impacted primarily by the taxability of investment income and state income taxes.
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