Best Buy 2007 Annual Report Download - page 53

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Our effective income tax rate decreased to 33.7% in fiscal
2006, compared with 35.3% in fiscal 2005. The decrease
in the effective income tax rate in fiscal 2006 was due
primarily to increased income tax benefits from our foreign
operations and higher levels of tax-exempt interest.
Impact of Inflation and Changing Prices
Highly competitive market conditions and the general
economic environment minimized inflation’s impact on the
selling prices of our products and services, and on our
expenses. In addition, price deflation and the continued
commoditization of key technology products affect our
ability to increase our gross profit rate.
Liquidity and Capital Resources
Summary
We ended fiscal 2007 with $3.8 billion of cash and cash
equivalents and short-term investments, consistent with the
end of fiscal 2006. Working capital, the excess of current
assets over current liabilities, was $2.8 billion at the end of
fiscal 2007, up from $1.9 billion at the end of fiscal 2006.
The increase in working capital was due primarily to the
reclassification of $402 million of convertible debentures
from short-term to long-term debt and an increase in other
current assets, driven by restricted cash assumed in
connection with the acquisition of Five Star. Five Star’s
restricted cash represents bank deposits pledged as security
for certain vendor payables.
Cash equivalents consist primarily of money market accounts
and other highly liquid investments with an original maturity
of three months or less when purchased. Our short-term
investments are comprised of municipal and U.S. government
debt securities as well as auction-rate securities and variable-
rate demand notes, with original maturities greater than 90
days but less than one year. Long-term investments are also
comprised of municipal and U.S. government debt securities,
but with original maturities of one year or more.
In accordance with our investment policy, we place our
investments with issuers who have high-quality credit and
limit the amount of investment exposure to any one issuer.
We seek to preserve principal and minimize exposure to
interest-rate fluctuations by limiting default risk, market risk
and reinvestment risk.
The carrying amount of our investments approximated fair
value at March 3, 2007, and February 25, 2006, due to
the rapid turnover of our portfolio and the highly liquid
nature of these investments. Therefore, there were no
significant realized or unrealized gains or losses.
Our liquidity is affected by restricted cash and investments in
debt securities that are pledged as collateral or restricted to
use for vendor payables, general liability insurance, workers’
compensation insurance and warranty programs. Restricted
cash and investments in debt securities, which are included in
other current assets, totaled $382 million and $178 million
as of March 3, 2007, and February 25, 2006, respectively.
The increase in restricted cash and investments in debt
securities was due primarily to restricted cash assumed in
connection with the acquisition of Five Star.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for each of the past three
fiscal years ($ in millions):
2007 2006 2005
Total cash provided by (used in):
Operating activities $1,762 $1,740 $ 1,981
Investing activities (780) (754) (1,422)
Financing activities (513) (619) (459)
Effect of exchange rate changes on cash (12) 27 9
Increase in cash and cash equivalents $ 457 $ 394 $ 109
Operating Activities
Cash provided by operating activities was $1.8 billion in
fiscal 2007, compared with $1.7 billion in fiscal 2006 and
$2.0 billion in fiscal 2005. For fiscal 2007, compared with
fiscal 2006, increased net earnings and increases in
deferred income taxes and depreciation expense were
partially offset by changes in operating assets and liabilities.
Net earnings increased to $1.4 billion in fiscal 2007,
compared with $1.1 billion in fiscal 2006. The changes in
operating assets and liabilities were due primarily to