Sears Canada Reports Third Quarter Results
Operating net earnings for the third quarter were
Operating EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was
Cash, restricted cash and investments increased
Total revenues for the 39-week period ended
Operating net earnings for the first nine months this year were
For the 39-week period ending
Commenting on the third quarter and first nine months of the year, Dene Rogers, President and Chief Executive Officer, Sears
"The economic uncertainty continued to affect consumer confidence during the third quarter especially as it relates to future employment," continued
This release contains information which is forward-looking and is subject to important risks and uncertainties. Forward-looking information concerns the Company's future financial performance, business strategy, plans, goals and objectives. Factors which could cause actual results to differ materially from current expectations include, but are not limited to: the ability of the Company to successfully implement its cost reduction, productivity improvement and strategic initiatives and whether such initiatives will yield the expected benefits; the impact of the sale of the Company's Credit and Financial Services operations and the results achieved pursuant to the Company's long-term marketing and servicing alliance with JPMorgan
Sears
SEARS CANADA INC.
RECONCILIATION OF NET EARNINGS TO OPERATING EBITDA
Unaudited
Third Quarter(1) Year-to-Date(1)
--------------------- ---------------------
(in millions) 2009 2008 2009 2008
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Net earnings(2) $ 47.1 $ 59.3 $ 106.5 $ 191.6
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Non-operating activities,
net of taxes
Restructuring expense - - 6.5 -
Unusual items(3) (gain) - (1.1) - (29.4)
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Operating net earnings(2),(4) $ 47.1 $ 58.2 $ 113.0 $ 162.2
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Depreciation and amortization 28.2 31.5 87.1 95.5
Interest expense, net 6.1 2.9 18.0 5.5
Income taxes expense excluding
operating adjustments(2) 22.3 22.9 56.6 71.7
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Operating EBITDA(4) $ 103.7 $ 115.5 $ 274.7 $ 334.9
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Net earnings per share $ 0.44 $ 0.55 $ 0.99 $ 1.78
Operating net earnings
per share $ 0.44 $ 0.54 $ 1.05 $ 1.51
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(1) The third quarter and YTD periods of 2009 and 2008 represent the
13 and 39-week periods ended October 31, 2009 and November 1, 2008,
respectively.
(2) Net earnings and income taxes expense for the third quarter and
year-to-date ("YTD") 2008 have been restated as a result of the
retrospective application of the change in accounting policy related
to the adoption of Goodwill and Intangible Assets.
(3) Primarily due to the sale of a real estate/joint venture and the
reversal of the remaining severance expense accrued in 2005.
(4) Operating net earnings and Operating EBITDA are non-GAAP measures
which exclude non-operating gains and losses and are used by
management to better assess the Company's underlying performance.
SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
As at As at
November 1, January 31,
As at 2008 2009
October 31, (Restated (Restated
(in millions) 2009 - Note 2) - Note 2)
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ASSETS
Current Assets
Cash and short-term investments
(Note 5) $ 1,045.2 $ 803.5 $ 819.8
Restricted cash and investments
(Note 15) 68.6 5.9 144.8
Accounts receivable 161.9 181.1 138.7
Income taxes recoverable 27.4 51.7 16.6
Inventories 1,025.9 1,179.4 968.3
Prepaid expenses and other assets 79.0 172.2 147.9
Current portion of future income
tax assets 33.2 5.9 8.7
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2,441.2 2,399.7 2,244.8
Capital assets 633.3 697.8 696.0
Deferred charges 178.4 188.7 185.2
Intangible assets 16.9 8.3 16.8
Goodwill 11.2 11.2 11.2
Future income tax assets 36.6 27.7 28.4
Other long-term assets 47.9 31.6 54.9
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$ 3,365.5 $ 3,365.0 $ 3,237.3
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LIABILITIES
Current Liabilities
Accounts payable $ 717.8 $ 816.6 $ 640.9
Accrued liabilities 377.6 425.0 383.6
Income and other taxes payable 46.2 48.2 39.4
Principal payments on long-term
obligations due within one year
(Note 6) 322.6 14.8 32.1
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1,464.2 1,304.6 1,096.0
Long-term obligations (Note 6) 37.7 353.6 332.5
Accrued benefit liabilities (Note 14) 165.5 156.7 158.5
Other long-term liabilities 165.2 168.4 167.1
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1,832.6 1,983.3 1,754.1
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SHAREHOLDERS' EQUITY
Capital stock (Note 11) 15.7 15.7 15.7
Retained earnings 1,505.6 1,300.0 1,399.1
Accumulated other comprehensive
income 11.6 66.0 68.4
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1,532.9 1,381.7 1,483.2
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$ 3,365.5 $ 3,365.0 $ 3,237.3
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
For the 13 and 39-week periods ended October 31, 2009 and November 1,
2008
Unaudited
13-Week Period 39-Week Period
--------------------- ---------------------
2008 2008
(in millions, except per (Restated (Restated
share amounts) 2009 - Note 2) 2009 - Note 2)
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Total revenues $ 1,309.0 $ 1,442.2 $ 3,675.5 $ 4,116.9
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Cost of merchandise sold,
operating, administrative
and selling expenses 1,205.3 1,326.7 3,410.1 3,782.0
Depreciation and amortization 28.2 31.5 87.1 95.5
Interest expense, net (Note 6) 6.1 2.9 18.0 5.5
Unusual items - (gain) (Note 7) - (1.6) - (38.8)
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Earnings before income taxes 69.4 82.7 160.3 272.7
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Income taxes expense (recovery)
Current 25.7 28.8 60.3 107.6
Future (3.4) (5.4) (6.5) (26.5)
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22.3 23.4 53.8 81.1
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Net earnings $ 47.1 $ 59.3 $ 106.5 $ 191.6
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Net earnings per share
(Note 8) $ 0.44 $ 0.55 $ 0.99 $ 1.78
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Diluted net earnings per
share (Note 8) $ 0.44 $ 0.55 $ 0.99 $ 1.78
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Net earnings $ 47.1 $ 59.3 $ 106.5 $ 191.6
Other comprehensive income
(loss), net of taxes:
Mark-to-market adjustment
related to short-term
investments, net of income
taxes expense of less than
$0.1 and Nil (2008: Nil
and recovery of less
than $0.1) 0.1 - - (0.1)
Gain (loss) on foreign
exchange derivatives
designated as cash flow
hedges, net of income
taxes expense of $0.8 and
recovery of $14.8 (2008:
expense of $29.3 and $31.7) 1.8 61.8 (32.1) 66.8
Reclassification to net
earnings of gain on
foreign exchange
derivatives designated as
cash flow hedges, net of
income taxes expense of
$2.8 and $11.5 (2008:
expense of $0.4 and $0.3) (6.3) (0.8) (24.9) (0.7)
Gain on fuel derivatives
designated as cash flow
hedges, net of income
taxes expense of Nil and
$0.1 (2008: Nil and Nil) - - 0.2 -
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Other comprehensive (loss)
income (Note 17) (4.4) 61.0 (56.8) 66.0
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Comprehensive income $ 42.7 $ 120.3 $ 49.7 $ 257.6
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
For the 13 and 39-week periods ended October 31, 2009 and November 1,
2008
Unaudited
13-Week Period 39-Week Period
--------------------- ---------------------
2008 2008
(Restated (Restated
(in millions) 2009 - Note 2) 2009 - Note 2)
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Retained earnings
Opening balance $ 1,458.5 $ 1,240.7 $ 1,424.0 $ 1,135.4
Adjustment to opening
retained earnings resulting
from adoption of new
accounting standards for
goodwill and intangible
assets, net of income taxes
of $12.4 (Note 2) - - (24.9) (27.0)
Net earnings 47.1 59.3 106.5 191.6
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Closing balance $ 1,505.6 $ 1,300.0 $ 1,505.6 $ 1,300.0
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Accumulated other
comprehensive income
Opening balance $ 16.0 $ 5.0 $ 68.4 $ -
Other comprehensive (loss)
income (4.4) 61.0 (56.8) 66.0
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Closing balance $ 11.6 $ 66.0 $ 11.6 $ 66.0
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Retained earnings and
accumulated other
comprehensive income $ 1,517.2 $ 1,366.0 $ 1,517.2 $ 1,366.0
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 13 and 39-weeks ended October 31, 2009 and November 1, 2008
Unaudited
13-Week Period 39-Week Period
--------------------- ---------------------
2008 2008
(Restated (Restated
(in millions) 2009 - Note 2) 2009 - Note 2)
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Cash flow generated from
(used for) operating
activities
Net earnings $ 47.1 $ 59.3 $ 106.5 $ 191.6
Non-cash items included in
net earnings, principally
depreciation, pension
expense, future income
taxes and gain on sale of
real estate and real
estate joint ventures 31.3 36.4 94.9 50.7
Changes in non-cash working
capital balances related
to operations 153.3 (36.2) (3.7) (255.2)
Other, principally pension
contributions and changes
to long-term assets and
liabilities (1.9) (12.3) (7.1) (16.8)
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229.8 47.2 190.6 (29.7)
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Cash flow generated from
(used for) investing
activities
Purchases of capital assets (10.6) (22.5) (44.4) (66.7)
Proceeds from sale of
capital assets 0.2 0.1 1.0 40.2
Deferred charges - (0.2) (0.7) (0.5)
Changes in restricted cash
and investments (Current
and Long-term) 45.2 (3.3) 83.2 (0.7)
Acquisition, net of cash
acquired - - - (7.0)
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34.8 (25.9) 39.1 (34.7)
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Cash flow used for
financing activities
Repayment of long-term
obligations (1.4) (0.8) (4.3) (3.7)
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Increase (decrease) in cash
and short-term investments 263.2 20.5 225.4 (68.1)
Cash and short-term
investments at beginning
of period 782.0 783.0 819.8 871.6
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Cash and short-term
investments at end
of period $ 1,045.2 $ 803.5 $ 1,045.2 $ 803.5
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Cash at end of period $ 89.5 $ 90.3 $ 89.5 $ 90.3
Short-term investments at
end of period 955.7 713.2 955.7 713.2
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Total cash and short-term
investments at end
of period $ 1,045.2 $ 803.5 $ 1,045.2 $ 803.5
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SEARS CANADA INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2009
Unaudited
1. BASIS OF PRESENTATION
These unaudited interim consolidated financial statements (the "Financial
Statements") of Sears Canada Inc. (the "Company") have been prepared in
accordance with Canadian Generally Accepted Accounting Principles
("GAAP") but do not contain all disclosures required by Canadian GAAP for
annual financial statements. Accordingly, these Financial Statements
should be read in conjunction with the most recently prepared audited
annual consolidated financial statements for the 52-week period ended
January 31, 2009 ("2008 Annual Financial Statements"). These Financial
Statements for the third quarter ended October 31, 2009 follow the same
accounting policies and methods of application as those used in the
preparation of the 2008 Annual Financial Statements, except as described
in Note 2, Accounting Policies and Estimates.
The Company's operations are seasonal in nature. Accordingly, merchandise
and service revenues, as well as performance payments received from
JPMorgan Chase & Co, N.A. (Toronto Branch) ("JPMorgan Chase") under the
long-term credit card marketing and servicing alliance, will vary by
quarter based upon consumer spending behaviour. Historically, the
Company's revenues and earnings are higher in the fourth quarter than in
any of the other three quarters due to the holiday season. The Company is
able to adjust certain variable costs in response to seasonal revenue
patterns; however, costs such as occupancy are fixed, causing the Company
to report a disproportionate level of earnings in the fourth quarter.
This business seasonality results in quarterly performance that is not
necessarily indicative of the year's performance.
2. ACCOUNTING POLICIES AND ESTIMATES
New Policies:
These Financial Statements follow the same accounting policies and
methods of application as the 2008 Annual Financial Statements, with the
following exceptions:
Goodwill and Intangible Assets
In February 2008, the Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 3064, "Goodwill and Intangible
Assets" ("Section 3064"), which replaced Section 3062, "Goodwill and
Other Intangible Assets" and Section 3450, "Research and Development
Costs". The new standard is effective for interim and annual
financial statements issued for fiscal years beginning on or after
October 1, 2008. The new standard provides further guidance on the
recognition and treatment of internally developed intangibles and
requires elimination of the practice of deferring costs that do not
meet the definition and recognition criteria of assets. Section 3064
reinforces a principle-based approach to the recognition of costs as
assets in accordance with the definition of an asset and criteria for
the recognition of an asset in CICA Handbook Section 1000, "Financial
Statement Concepts".
The Company has adopted the new accounting standard issued by the
CICA Section 3064, effective fiscal 2009. The primary impact of
implementing this standard was with respect to the accounting policy
for Catalogue Production Costs ("CPC"). On adoption of the standard,
CPC will be expensed once the catalogue has been mailed to the
customer. Prior to the adoption of the standard CPC costs were
capitalized and amortized over the life of the catalogue. As a
result, certain figures from the prior year have been restated due to
the retrospective application of a change in accounting policy, as
required under CICA Handbook Section 1506, "Accounting Changes". As a
result of this retrospective restatement the following table
summarizes the increase (decrease) to the 2008 comparative figures
contained herein as at and for the 13 and 39-week periods ended
November 1, 2008 and the year ended January 31, 2009 from the figures
previously reported:
As at As at As at
and for and for and for
the 13-week the 39-week the 52-week
Period Ended Period Ended Period Ended
(increase (decrease) November 1, November 1, January 31,
in millions) 2008 2008 2009
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Prepaid expenses and
other assets $ (39.8) $ (39.8) $ (34.6)
Current portion of future
income tax assets 5.8 5.8 8.4
Deferred charges (1.8) (1.8) (1.7)
Future income tax assets - - 0.5
Future income tax liabilities (7.3) (7.3) (2.5)
Net earnings (9.6) (1.5) 2.1
Opening retained earnings (18.9) (27.0) (27.0)
Closing retained earnings (28.5) (28.5) (24.9)
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The Company's intangible assets are comprised of software costs.
These costs were previously recorded as a Capital Asset prior to the
adoption of Section 3064. Intangible assets are amortized on a
straight-line basis over their estimated useful lives, and are
reported separately as "Intangible Assets" in the interim
Consolidated Statements of Financial Position. Intangible Assets are
tested for impairment annually or more frequently if changes in
circumstances indicate a potential impairment. Impairment is
recognized in net earnings and is measured as the amount by which the
carrying amount exceeds its fair value.
Goodwill represents the excess of the cost of acquisition over the
fair value of the identifiable assets acquired, resulting from the
acquisition of a duct cleaning business in 2008, Cantrex Group Inc.
("Cantrex") in 2005 and a home services operation in 2001. Goodwill
is not amortized, and is reported separately as "Goodwill" in the
interim Consolidated Statements of Financial Position. Goodwill is
tested for impairment annually or more frequently if changes in
circumstances indicate a potential impairment. Impairment is
recognized in net earnings and is measured as the amount by which the
carrying amount of the goodwill exceeds its fair value. No impairment
has been recognized on the Company's goodwill since acquisition.
Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
The Company adopted Emerging Issues Committee "EIC"-173, "Credit Risk
and the Fair Value of Financial Assets and Financial Liabilities".
The EIC reached a consensus that the Company's credit risk and the
credit risk of the counterparty should be taken into account in
determining the fair value of financial assets and financial
liabilities. The abstract is to be applied retrospectively without
restatement of prior periods to interim and annual financial
statements for periods ending on or after January 20, 2009. The
implementation of the new abstract has had no material impact on the
Company's results of operations, financial position or disclosures.
Financial Instruments - Recognition and Measurement
In April 2009, the CICA amended Handbook Section 3855, "Financial
Instruments - Recognition and Measurement", ("Section 3855") to
converge with International Accounting Standards 39, "Financial
Instruments: Recognition and Measurement" ("IAS 39"). The amendment
was made to clarify the calculation of interest on an interest-
bearing asset after recognition of an impairment loss. The amendment
is effective on issuance. The Company adopted the section with no
impact on the Company's results of operations, financial position or
disclosures.
In June 2009, the CICA amended Handbook Section 3855 to converge with
IAS 39 and International Financial Reporting Interpretations
Committee 9, "Reassessment of Embedded Derivatives" ("IFRIC 9"). The
amendment was made to provide guidance concerning the assessment of
embedded derivatives upon reclassification of a financial asset out
of the held-for-trading category. The amendment is effective for
reclassifications made on or after July 1, 2009. The Company adopted
the section with no impact on the Company's results of operations,
financial position or disclosures.
Future Accounting Policies:
International Financial Reporting Standards ("IFRS")
The Canadian Accounting Standards Board confirmed, in February 2008,
that it will require all public companies to adopt IFRS for interim
and annual financial statements relating to fiscal years beginning on
or after January 1, 2011. In the year of adoption, companies will be
required to provide comparative information as if IFRS had been used
in the preceding fiscal year. The transition from Canadian GAAP to
IFRS will be applicable to the Company's first quarter of operations
for fiscal 2011, at which time the Company will prepare both its
fiscal 2011 and fiscal 2010 comparative financial information using
IFRS. The Company expects the transition to IFRS to impact financial
reporting, business processes, internal controls and information
systems. The Company is currently assessing the impact of the
transition to IFRS on these areas and will continue to invest in
training and resources throughout the transition period to facilitate
a timely conversion.
Financial Instruments - Recognition and Measurement
In April 2009, the CICA amended Handbook Section 3855 to converge
with IAS 39 to provide guidance on when a put, call, surrender or
prepayment option embedded in a host debt instrument is closely
related to the host instrument. The amendment is effective for
interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2011 with earlier adoption
permitted. The Company is currently evaluating the future impact of
this amendment on its consolidated financial statements.
In July 2009, the CICA amended Handbook Section 3855 to converge with
IFRS for impairment of debt instruments by changing the categories
into which debt instruments are required and permitted to be
classified. The amendments are effective for annual financial
statements relating to fiscal years beginning on or after November 1,
2008. An entity is permitted, but not required, to apply these
amendments to interim financial statements relating to periods within
the fiscal year of adoption only if those interim financial
statements are issued on or after August 20, 2009. The Company is
currently evaluating the future impact of this amendment on its 2009
consolidated financial statements.
Financial Instruments - Disclosures
In June 2009, the CICA amended Handbook Section 3862, "Financial
Instruments - Disclosures" ("Section 3862"), to adopt the amendments
recently proposed by the International Accounting Standards Board
("IASB") to IFRS 7, "Financial Instruments: Disclosures". The
amendments were made to enhance disclosures about fair value
measurements, including the relative reliability of the inputs used
in those measurements, and about the liquidity risk of financial
instruments. The amendments are effective for annual financial
statements relating to fiscal years ending after September 30, 2009
for publicly accountable enterprises, private enterprises, co-
operative business enterprises, rate-regulated enterprises and not-
for-profit organizations that choose to apply Section 3862.
Comparative information for the disclosures required by the
amendments is not required in the first year of application. The
Company is currently evaluating the future impact of this amendment
on its 2009 consolidated financial statements.
Estimates:
Loyalty Program Reserves
During the second quarter ended August 1, 2009, the Company revised
certain assumptions used to calculate the loyalty program reserves
based on new information regarding redemption rates and the
associated cost of the program. The net impact was an increase to
pre-tax earning of $7.0 million due to a decrease in the loyalty
reserve.
Vendor Rebate Estimates
During the third quarter ended October 31, 2009, the Company revised
certain assumptions used to estimate the value of vendor rebates
remaining in inventory. The net impact was a reduction to inventory
and pre-tax earnings of $7.1 million.
3. INVENTORIES
The amount of inventories recognized as an expense during the 13 and 39-
week periods ended October 31, 2009 was $667.5 million (2008:
$718.5 million) and $1,869.1 million (2008: $2,075.0 million),
respectively, including $32.9 million (2008: $22.9 million) and
$75.9 million (2008: $65.3 million), related to write-downs. This expense
is included in "Cost of merchandise sold, operating, administrative and
selling expenses" in the Consolidated Statements of Earnings and
Comprehensive Income. A negligible amount of write-downs were reversed
during each of the 13 and 39-week periods ended October 31, 2009.
With the exception of $30.7 million (2008: $32.1 million) of inventories
from the Company's parts and service and home improvement businesses, the
Company's entire inventories balance consists of merchandise finished
goods. (Comparative figures for 2008 represent balances as at January 31,
2009.)
4. VENDOR REBATES
The Company has recognized $0.4 million and $1.4 million, as a reduction
in the cost of purchases for the 13 and 39-week periods ended October 31,
2009 related to binding agreements for which full entitlement has not yet
been met but is probable.
5. CASH AND SHORT-TERM INVESTMENTS
The components of cash and short-term investments as at October 31, 2009,
November 1, 2008 and January 31, 2009 were as follows:
As at As at As at
October 31, November 1, January 31,
(in millions) 2009 2008 2009
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Cash $ 89.5 $ 90.3 $ 66.4
Short-term investments
Government treasury bills 906.7 376.2 732.4
Corporate commercial paper - 252.3 -
Bank term deposits 42.0 - 15.0
Other 7.0 84.7 6.0
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Total $ 1,045.2 $ 803.5 $ 819.8
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6. LONG-TERM OBLIGATIONS
The Company has a corporate credit rating of BB and BB- from Dominion
Bond Ratings Service and Standard and Poor's, respectively, and a
corporate family rating of Ba1 from Moody's Investors Service, Inc.
During the second quarter $200.0 million of medium-term notes due May 10,
2010 were reclassified from long-term obligations to current liabilities.
During the third quarter $100.0 million of medium-term notes due
September 20, 2010 were reclassified from long-term obligations to
current liabilities.
The Company is not subject to any financial covenants and the Company's
debt consists of unsecured medium-term notes with fixed interest rates
and payment terms. The Company also includes its proportionate share of
the long-term debt of its joint venture interests. As at October 31, 2009
the Company had outstanding letters of credit of U.S. $19.0 million used
to support the Company's offshore merchandise purchasing program with
restricted cash and investments pledged as collateral.
Interest expense on long-term debt including the current portion and the
Company's proportionate share of interest on long-term debt of joint
ventures for the 13 and 39-week periods ended October 31, 2009 amounted
to $6.6 million (2008: $7.2 million) and $19.8 million (2008:
$21.7 million), respectively. Interest expense on short-term debt for the
13 and 39-week periods ended October 31, 2009 totaled Nil (2008:
$0.2 million) and less than $0.1 million (2008: $0.6 million). Interest
revenue primarily related to cash and short-term investments for the 13
and 39-week periods ended October 31, 2009 totaled $0.5 million (2008:
$4.5 million) and $1.8 million (2008: $16.8 million), respectively.
The Company's cash payments for interest on long-term debt for the 13 and
39-week periods ended October 31, 2009 totaled $4.6 million (2008:
$5.2 million) and $17.7 million (2008: $19.4 million), respectively. Cash
payments for interest on short-term debt for the 13 and 39-week periods
ended October 31, 2009 totaled Nil (2008: $0.2 million) and less than
$0.1 million (2008: $0.7 million) respectively. The Company received cash
related to interest revenue for the 13 and 39-week periods totaling
$0.4 million (2008: $5.5 million) and $2.2 million (2008: $18.9 million),
respectively.
7. UNUSUAL ITEMS
There were no unusual items for the 13 and 39-week periods ended
October 31, 2009.
During the first quarter ended May 3, 2008, the Company completed the
sale of property in Calgary, Alberta where it operated a full-line store.
The Company received proceeds of approximately $40.0 million recording a
pre-tax gain of $37.2 million, net of transaction costs.
During the third quarter ended November 1, 2008, the Company reversed
$1.6 million of severance expense which had been accrued in a prior year.
As at November 1, 2008, the restructuring accrual has a balance of Nil.
8. NET EARNINGS PER SHARE
A reconciliation of the number of shares used in the net earnings per
share calculation is as follows:
13-week 13-week 39-week 39-week
Period Ended Period Ended Period Ended Period Ended
October 31, November 1, October 31, November 1,
(Number of shares) 2009 2008 2009 2008
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Average number of
shares per basic
net earnings
per share
calculation 107,620,995 107,620,995 107,620,995 107,620,995
Effect of dilutive
instruments
outstanding 5,297 2,595 4,132 7,628
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Average number
of shares per
diluted net
earnings
per share
calculation 107,626,292 107,623,590 107,625,127 107,628,623
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For the 13 and 39-week periods ended October 31, 2009, 117,021 options
(2008: 163,251 options) were excluded from the calculation of diluted net
earnings per share as they were anti-dilutive.
9. SEGMENTED INFORMATION
Segmented Statements of Earnings
13-Week 39-Week
Period Ended Period Ended
13-Week November 1, 39-Week November 1,
Period Ended 2008 Period Ended 2008
October 31, (Restated October 31, (Restated
(in millions) 2009 - Note 2) 2009 - Note 2)
-------------------------------------------------------------------------
Total revenues
Merchandising $ 1,296.8 $ 1,431.0 $ 3,639.0 $ 4,081.7
Real Estate
Joint Ventures 12.2 11.2 36.5 35.2
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Total revenues $ 1,309.0 $ 1,442.2 $ 3,675.5 $ 4,116.9
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Segmented
operating profit
Merchandising $ 70.6 $ 79.0 $ 163.2 $ 223.5
Real Estate
Joint Ventures 4.9 5.0 15.1 15.9
Interest expense, net 6.1 2.9 18.0 5.5
Unusual items - (gain) - (1.6) - (38.8)
Income taxes 22.3 23.4 53.8 81.1
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Net earnings $ 47.1 $ 59.3 $ 106.5 $ 191.6
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Segmented Statements of Capital Employed(1)
As at As at
November 1, January 31,
As at 2008 2009
October 31, (Restated (Restated
(in millions) 2009 - Note 2) - Note 2)
-------------------------------------------------------------------------
Merchandising $ 1,794.8 $ 1,645.4 $ 1,743.5
Real Estate Joint Ventures 98.4 104.7 104.3
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Total $ 1,893.2 $ 1,750.1 $ 1,847.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Capital Employed represents the total of long-term obligations,
including principal payments on long-term obligations due within one
year, and shareholders' equity, which includes capital stock,
retained earnings and accumulated other comprehensive income
("AOCI").
Segmented Statements of Total Assets
As at As at
November 1, January 31,
As at 2008 2009
October 31, (Restated (Restated
(in millions) 2009 - Note 2) - Note 2)
-------------------------------------------------------------------------
Merchandising $ 3,255.6 $ 3,254.7 $ 3,120.9
Real Estate Joint Ventures 109.9 110.3 116.4
-------------------------------------------------------------------------
Total $ 3,365.5 $ 3,365.0 $ 3,237.3
-------------------------------------------------------------------------
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10. INCOME TAXES
The Company's total net cash payments of income taxes in the 13 and
39-week periods ended October 31, 2009 were $5.5 million (2008:
$52.6 million) and $75.2 million (2008: $186.6 million), respectively.
In the ordinary course of business, the Company is subject to ongoing
audits by tax authorities. While the Company believes that its tax filing
positions are appropriate and supportable, periodically, certain matters
are challenged by tax authorities. As the Company routinely evaluates and
provides for potentially unfavourable outcomes with respect to any tax
audits, the Company believes that the final disposition of tax audits
will not have a material adverse effect on its liquidity, consolidated
financial position or results of operations. If the result of a tax audit
materially differs from the existing provisions, the Company's effective
tax rate and its net earnings may be affected positively or negatively in
the period in which the tax audits are completed. Included in other long-
term assets are receivables of $20.2 million related to payments made by
the Company for tax assessments that are being disputed.
11. CAPITAL STOCK
As at October 31, 2009, 107,620,995 common shares were issued and
outstanding. Sears Holdings Corporation, the controlling shareholder of
the Company, is the beneficial holder of 78,680,790, or 73.1%, of the
common shares of the Company as at October 31, 2009. The number of
outstanding common shares did not change from the end of fiscal 2008.
12. STOCK-BASED COMPENSATION
The Employees Stock Plan expired on April 19, 2008 however; the
expiration of the plan does not affect the rights of current option
holders. Options were last granted in 2004 which are exercisable within
10 years from the grant date. All options currently outstanding will
expire before or in February 2014. As at October 31, 2009 there were
154,241 stock options outstanding under the Employees Stock Plan.
At the end of each fiscal period, the Company records a liability for
previously issued tandem awards equal to the amount by which the market
price of its shares at the end of the period exceeds the exercise price
of the vested tandem awards. Stock compensation expense is recorded to
adjust the liability for changes in the market price of the Company's
shares and for awards exercised in the period. Total stock-based
compensation expense related to tandem awards issued from the Employees
Stock Plan during the 13 and 39-week periods ended October 31, 2009 was
expense of less than $0.1 million (2008: credit of $0.1 million) and
expense of $0.2 million (2008: credit of $0.2 million), respectively.
13. GUARANTEES
The Company has provided the following significant guarantees to third
parties:
Sub-Lease Agreements
The Company has a number of sub-lease agreements with third parties. The
Company retains ultimate responsibility to the landlord for payment of
amounts under the lease agreements should the sub-lessee fail to pay. The
total future lease payments under such agreements are $20.2 million.
Royalty License Agreements
The Company pays royalties under various merchandise license agreements,
which are generally based on sales of products under these agreements.
The Company currently has licence agreements for which it pays royalties
regardless of sales, as guarantee royalties under these license
agreements. Total future minimum royalty payments under such agreements
are $5.2 million.
Other Indemnification Agreements
In the ordinary course of business the Company has provided
indemnification commitments to counterparties in transactions such as
leasing transactions, service arrangements, investment banking
agreements, director and officer indemnification agreements and
indemnification of trustees under indentures for outstanding public debt.
The Company has also provided certain indemnification agreements in
connection with the sale of the Credit and Financial Services operations
in November 2005. The foregoing indemnification agreements require the
Company to compensate the counterparties for costs incurred as a result
of changes in laws and regulations or as a result of litigation claims or
statutory claims or statutory sanctions that may be suffered by a
counterparty as a consequence of the transaction. The terms of these
indemnification agreements will vary based on the contract and typically
do not provide for any limit on the maximum potential liability.
Historically, the Company has not made any significant payments under
such indemnifications and no amount has been accrued in the Financial
Statements with respect to these indemnification commitments.
14. ASSOCIATE FUTURE BENEFITS
The net expense for the defined benefit, defined contribution and other
benefit plans for the 13-week period ended October 31, 2009 was
$0.3 million (2008: recovery of $1.3 million), $3.2 million (2008:
$6.2 million) and $2.5 million (2008: $2.6 million), respectively. The
net expense for the defined benefit, defined contribution and other
benefit plans for the 39-week period ended October 31, 2009 was
$1.1 million (2008: $3.4 million), $11.9 million (2008: $8.0 million) and
$7.4 million (2008: $7.8 million), respectively. The Company introduced
the defined contribution plan on July 1, 2008.
15. COMMITMENTS AND CONTINGENCIES
In addition to the class action suit described in the annual financial
statements, the Company is involved in various legal proceedings
incidental to the normal course of business. The Company is of the view
that although the outcome of such legal proceedings cannot be predicted
with certainty, the final disposition is not expected to have a material
adverse effect on the Company's consolidated financial position or
results of operations.
Restricted Cash and Investments
Cash and investments are considered to be restricted when it is subject
to contingent rights of a third party customer, vendor, or government
agency. As at October 31, 2009, the Company recorded $68.6 million (2008:
$144.8 million) of restricted cash and investments recorded as current
assets and Nil (2008: $6.9 million) of restricted cash deposits recorded
in other long-term assets. These balances represent cash and investments
pledged as collateral for letter of credit obligations issued under the
Company's offshore merchandise purchasing program of $27.1 million (2008:
$110.4 million), current and long-term cash deposits pledged as
collateral with counterparties related to outstanding derivative
contracts of $36.8 million (2008: $28.3 million) and Nil (2008:
$6.9 million), respectively, and funds held in trust in accordance with
regulatory requirements governing advance ticket sales related to Sears
Travel of $4.7 million (2008: $6.1 million). (Comparative figures for
2008 represent balances as at January 31, 2009.)
16. CAPITAL DISCLOSURES
The Company's objectives when managing capital are:
- Maintain financial flexibility thus allowing the Company to preserve
its ability to meet financial objectives and continue as a going
concern;
- Provide an appropriate return to shareholders; and
- Maintain a capital structure that allows the Company to obtain
financing should the need arise.
The Company manages and makes adjustments to its capital structure, when
necessary, in light of changes in economic conditions, the objectives of
its shareholders, the cash requirements of the business and the condition
of capital markets. In order to maintain or adjust the capital structure
the Company may pay a dividend or return capital to shareholders,
increase/decrease debt or sell assets.
The Company defines capital as follows:
- Long-term obligations, including the current portion ("Long-term
obligations"); and
- Shareholders' equity.
The following table presents summary quantitative data with respect to
the Company's capital:
As at As at
November 1, January 31,
As at 2008 2009
October 31, (Restated (Restated
(in millions) 2009 - Note 2) - Note 2)
-------------------------------------------------------------------------
Long-term obligations $ 360.3 $ 368.4 $ 364.6
Shareholders' equity 1,532.9 1,381.7 1,483.2
-------------------------------------------------------------------------
$ 1,893.2 $ 1,750.1 $ 1,847.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at October 31, 2009, the Company is not subject to any financial
covenants or ratios and the outstanding notes are unsecured. The Company
has a U.S. $120.0 million letter of credit facility with restricted cash
and investments pledged as collateral against outstanding amounts.
17. FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into financial
agreements with banks and other financial institutions to reduce
underlying risks associated with interest rates and foreign currency. The
Company does not hold or issue derivative financial instruments for
trading or speculative purposes.
Financial Instrument Risk Management
The Company's adoption of Section 3862, "Financial Instruments-
Disclosure" and Section 3863, "Financial Instruments-Presentation" on
February 3, 2008, has resulted in additional disclosure relating to the
Company's exposure to risks arising from financial instruments. The
Company is exposed to credit, liquidity and market risk as a result of
holding financial instruments. Market risk consists of foreign exchange,
interest rate and commodity price risk.
Credit Risk
Credit risk refers to the possibility that the Company can suffer
financial losses due to the failure of the Company's counterparties to
meet their payment obligations. Exposure to credit risk exists for
derivative instruments, cash and short-term investments, restricted cash
and investments and accounts receivable.
As at October 31, 2009, the Company's only exposure to counterparty risk
as it relates to derivative instruments is represented by the fair value
of the derivative contracts of $13.6 million. These contracts are placed
with financial institutions with secure credit ratings.
Cash and short-term investments, restricted cash and investments and
other long-term assets of $1,115.3 million also expose the Company to
credit risk should the borrower default on maturity of the investment.
The Company manages this exposure through policies that require borrowers
to have a minimum credit rating of A, and limiting investments with
individual borrowers at maximum levels based on credit rating.
The Company is exposed to minimal credit risk from customers as a result
of ongoing credit evaluations and review of accounts receivable
collectability. As at October 31, 2009, approximately 54% of the
Company's accounts receivable are due from two customers who are both
current on their account.
Liquidity Risk
Liquidity risk is the risk that the Company may not have cash available
to satisfy financial liabilities as they come due. The Company actively
maintains access to adequate funding sources to ensure it has sufficient
available funds to meet current and foreseeable financial requirements at
a reasonable cost.
The following table summarizes the carrying amount and the contractual
maturities of both the interest and principal portion of significant
financial liabilities as at October 31, 2009:
Contractual Cash Flow Maturities
-----------------------------------------------------------
1 year 3 years
Carrying Within to to Beyond
(in millions) Amount Total 1 year 3 years 5 years 5 years
-------------------------------------------------------------------------
Accounts
payable $ 717.8 $ 717.8 $ 717.8 $ - $ - $ -
Accrued
liabilities 377.6 377.6 377.6 - - -
Long-term
obligations
and payments
due within
1 year 360.3 395.7 351.2 20.9 22.4 1.2
Operating
lease
obligations(2) - 670.1 105.5 178.1 130.6 255.9
-------------------------------------------------------------------------
$1,455.7 $2,161.2 $1,552.1 $ 199.0 $ 153.0 $ 257.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(2) Operating lease obligations are not reported on the consolidated
statement of financial position.
Of the $670.1 million of operating lease commitments disclosed in the
table above, $5.1 million relate to the Company's proportionate share of
the commitments of its Real Estate Joint Ventures.
Management believes that cash on hand, future cash flows generated from
operations and availability of current and future funding will be
adequate to support these financial liabilities.
Market Risk
Market risk exists as a result of the potential for losses caused by
changes in market factors such as interest rates, foreign currency
exchange rates and commodity prices.
Foreign Exchange Risk
The Company enters into foreign exchange contracts to reduce the foreign
exchange risk with respect to U.S. dollar denominated assets,
liabilities, goods or services.
- As at October 31, 2009, there were derivative contracts outstanding
with a notional value of U.S. $272.2 million and a combined carrying
value of $12.8 million, included in prepaid expenses and other
assets. These derivative contracts have settlement dates extending to
October 2010. Option contracts with a notional value of U.S
$269.6 million and a carrying value of $12.8 million have been
designated as a cash flow hedge for hedge accounting treatment under
CICA Handbook Section 3865, "Hedges" ("Section 3865"). These
contracts are intended to reduce the foreign exchange risk with
respect to anticipated purchases of U.S. dollar denominated goods and
services, including goods purchased for resale ("hedged item"). As at
October 31, 2009 all hedges were considered effective with no
ineffectiveness recognized in income.
- As at October 31, 2009, there were swap contracts outstanding with a
notional value of U.S. $25.0 million and a carrying value of
$1.0 million, included in accrued liabilities. These contracts are
intended to reduce the foreign exchange risk on U.S. dollar
denominated short-term investments pledged as collateral for letter
of credit obligations issued under the Company's offshore merchandise
purchasing program.
While the notional principal amounts of these outstanding financial
instruments are not recorded on the consolidated statements of financial
position, the fair value of the contracts is included on the consolidated
statements of financial position in one of the following categories,
depending on the derivative's maturity and value: prepaid expenses and
other assets, other long-term assets, accrued liabilities or other long-
term liabilities. Changes in fair value of those contracts designated as
hedges are included in other comprehensive income ("OCI") for cash flow
hedges to the extent the hedges continue to be effective. Amounts
previously included in OCI are reclassified to net earnings in the same
period in which the hedged item impacts net earnings.
For the 13 and 39-week periods ended October 31, 2009, the Company
recorded a gain of $1.9 million and $9.2 million, respectively relating
to the translation or settlement of U.S. dollar denominated monetary
items.
Based on historic movements, volatilities in foreign exchange and
management's current assessment of the financial markets, the Company
believes a variation of +10% (appreciation of the Canadian dollar) and -
10% (depreciation of the Canadian dollar) in foreign exchange rate
against the U.S. dollar is reasonably possible over a 12 month period.
The period end rate was 0.9243 U.S. dollar to Canadian dollar. Cash and
short-term investments (other than those discussed above), derivative
contracts that have not been designated as cash flow hedges, accounts
receivable and accounts payable include U.S. dollar denominated balances
which net to an insignificant balance, therefore, any changes in the
U.S./Canadian dollar exchange rates would have an immaterial impact on
net earnings.
Interest Rate Risk
From time to time the Company enters into interest rate swap contracts
with Schedule I banks, to manage exposure to interest rate risks. As at
October 31, 2009, the Company had no interest rate swap contracts in
place.
Interest rate risk reflects the sensitivity of the Company's financial
condition to movements in interest rates. Financial assets and
liabilities which do not bear interest or bear interest at fixed rates
are classified as non-interest rate sensitive. Based on historic
movements, volatilities in interest rates and management's current
assessment of the financial markets, the Company believes a variation of
+1%/-1% in the interest rates applicable to the Company's cash and short-
term investments and restricted cash and investments are reasonably
possible over a 12 month period.
Cash and short-term investments and restricted cash and investments are
subject to interest rate risk. The total subject to interest rate risk as
at October 31, 2009 was $1,110.6 million. A movement in interest rate of
+/-1% would cause a variance in net earnings in the amount of
$7.6 million.
Fuel Price Risk
The Company entered into a fuel derivative contract to manage the
exposure to diesel fuel prices to help mitigate volatility in cash flow
for the transportation service business. As at October 31, 2009 there was
a fixed to floating rate swap contract outstanding for a notional volume
of 3.4 million litres and a carrying value of $0.5 million. This
derivative contract has settlement dates extending to February 2010 and a
portion has been designated as a cash flow hedge for hedge accounting
treatment under Section 3865. Changes in the fair value of the effective
portion of the designated component of the derivative contract that
qualifies as a cash flow hedge is recognized in accumulated other
comprehensive income. Upon maturity of the designated component of the
swap contract, the effective gains and losses are recorded in net
earnings. Any gain or loss in fair value relating to the ineffective
portion is recognized immediately in net earnings.
Classification and Fair Value of Financial Instruments
The estimated fair values of financial instruments as at October 31,
2009, November 1, 2008 and January 31, 2009, are based on relevant market
prices and information available at those dates. The following tables
summarize the classification and fair value ("FV") of certain financial
instruments as at October 31, 2009, November 1, 2008 and January 31, 2009
and the pre-tax change in fair value of those instruments during the 13
and 39-week periods ended October 31, 2009 and the 13 and 39-week periods
ended November 1, 2008 with the offset included in either OCI or net
earnings. The Company determines the classification of a financial
instrument when it is originally recorded, based on the underlying
purpose of the instrument. As a significant number of the Company's
assets and liabilities, including inventories and capital assets, do not
meet the definition of financial instruments, values in the tables below
do not reflect the fair value of the Company as a whole.
(in millions)
-------------------------------------------------------------------------
As at As at As at
Balance Sheet October 31, August 1, January
Classification Category 2009 2009 31, 2009
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and short-term
investments investments(3) $ 955.7 $ 707.7 $ 753.4
Long-term Other long-term
investments assets 1.5 1.5 1.6
-------------------------------------------------------------------------
Held for trading
Cash Cash and short-term
investments 89.5 74.3 66.4
Cash and Restricted cash and
investments investments(3) 68.6 113.1 144.8
U.S. $ Prepaid expenses &
derivative other assets 12.8 16.3 90.4
contracts
U.S. $ Prepaid expenses &
derivative other assets
contracts (Accrued liabilities) (1.0) 4.2 0.7
Cash Other long-term assets - 0.7 6.9
Fixed price
energy Accrued liabilities - - -
contracts
Commodity Accrued liabilities 0.8 1.2 (0.1)
derivative
contracts
-------------------------------------------------------------------------
13-week Period 39-week Period
Ended Ended
October 31, October 31,
2009 2009
--------------------------------------
(in millions) Pre-tax change in FV included in
-------------------------------------------------------------------------
Balance Sheet Net Net
Classification Category OCI earnings OCI earnings
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and
investments short-term
investments(3) $ (0.1) $ - $ - $ -
Long-term Other long-term
investments assets - - - 0.1
-------------------------------------------------------------------------
Held for trading
Cash Cash and short-term
investments - - - -
Cash and Restricted cash and
investments investments(3) - - - -
U.S. $ Prepaid expenses &
derivative other assets 6.5 (3.0) 83.3 (5.7)
contracts
U.S. $ Prepaid expenses
derivative & other assets
contracts (Accrued
liabilities) - 5.2 - 1.7
Cash Other long-term
assets - - - -
Fixed price Accrued
energy liabilities - - - -
contracts
Commodity Accrued
derivative liabilities - 0.4 (0.2) (0.7)
contracts
-------------------------------------------------------------------------
$ 6.4 $ 2.6 $ 83.1 $ (4.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions)
-------------------------------------------------------------------------
As at As at As at
Balance Sheet November 1, August 2, February
Classification Category 2008 2008 2, 2008
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and short-term
investments investments(3) $ 713.2 $ 725.3 $ 806.9
Long-term Other long-term
investments assets 2.2 2.2 2.6
-------------------------------------------------------------------------
Held for trading
Cash Cash and short-term
investments 90.3 57.7 64.7
Cash and Restricted cash and
investments investments(3) 5.9 2.6 5.2
U.S. $ Prepaid expenses &
derivative other assets
contracts (Accrued liabilities) 94.5 7.9 (0.2)
U.S. $
derivative Accrued liabilities - - -
contracts
Cash Other long-term assets - - -
Fixed price
energy Accrued liabilities - - (0.1)
contracts
Commodity
derivative Accrued liabilities - - -
contracts
-------------------------------------------------------------------------
13-week Period 39-week Period
Ended Ended
November 1, November 1,
2008 2008
--------------------------------------
(in millions) Pre-tax change in FV included in
-------------------------------------------------------------------------
Balance Sheet Net Net
Classification Category OCI earnings OCI earnings
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and
investments short-term
investments(3) $ 0.1 $ - $ 0.2 $ -
Long-term Other long-term
investments assets - - - 0.4
-------------------------------------------------------------------------
Held for trading
Cash Cash and short-term
investments - - - -
Cash and Restricted cash and
investments investments(3) - - - -
U.S. $ Prepaid expenses
derivative & other assets
contracts (Accrued
liabilities) (89.9) 3.3 (97.4) 2.7
U.S. $ Accrued
derivative liabilities - - - -
Cash Other long-term
assets - - - -
Fixed price Accrued
energy liabilities - - - (0.1)
contracts
Commodity Accrued
derivative liabilities - - - -
contracts
-------------------------------------------------------------------------
$ (89.8) $ 3.3 $ (97.2) $ 3.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(3) Interest revenue related to short-term investments is disclosed in
Note 6 Long-term Obligations.
All other assets that are financial instruments, excluding long-term
notes discussed below, have been classified as "loans and receivables"
and all other financial instrument liabilities have been classified as
"other liabilities" and are measured at amortized cost on the
consolidated statements of financial position. The carrying value of
these financial instruments, with the exception of long-term obligations,
approximates fair value. Long-term obligations with a carrying value of
$357.9 million, including the portion due within one year, but excluding
all capital lease obligations, have a fair value as at October 31, 2009
of $361.5 million. The fair value of the Company's proportionate share of
long-term debt of joint ventures, with a carrying value of $57.9 million
as at October 31, 2009, was calculated using a valuation technique based
on assumptions that are not supported by observable market prices or
rates. The term and interest rate applicable to each joint venture's debt
together with management's estimate of a risk-adjusted discount rate were
used to determine the fair value of $57.8 million. The fair value of the
Company's medium term notes, with a carrying value of $300.0 million as
at October 31, 2009, is $303.7 million and was determined with reference
to observable market prices and rates.
Included in other long-term assets on the consolidated statement of
financial position is an investment in long-term notes, with an original
cost of $3.0 million and a fair value as at October 31, 2009 of
$1.5 million, which has been classified as available for sale. The fair
value as at October 31, 2009, has been calculated using a valuation
technique based on assumptions that are not supported by observable
market prices or rates. Information disclosed in the Master Asset Vehicle
2 (MAV2) trust indenture together with management's estimates based
thereon regarding interest rate, risk-adjusted discount rate and expected
term of the various classes of restructured notes, resulted in a Nil and
$0.1 million reduction for the 13 and 39-week periods ended October 31,
2009 respectively, in the investment's fair value. The Company does not
intend to dispose of the investment within a year.
For further information: Contact for Media: Vincent Power, Sears Canada, Corporate Communications, (416) 941-4422, [email protected]
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