10-Q 1 shldq32012.htm FORM 10-Q SHLD.Q3.2012

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 27, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-51217
SEARS HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
 
DELAWARE
 
20-1920798
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
3333 BEVERLY ROAD, HOFFMAN ESTATES, ILLINOIS
 
60179
(Address of principal executive offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (847) 286-2500
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 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 (§232.405 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
As of November 9, 2012, the registrant had 106,425,638 common shares, $0.01 par value, outstanding.
 





SEARS HOLDINGS CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 and 39 Weeks Ended October 27, 2012 and October 29, 2011
 
 
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.




SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
 
13 Weeks Ended
 
39 Weeks Ended
millions, except per share data
October 27,
2012
 
October 29,
2011
 
October 27,
2012
 
October 29,
2011
REVENUES
 
 
 
 
 
 
 
Merchandise sales and services
$
8,857

 
$
9,405

 
$
27,594

 
$
29,083

COSTS AND EXPENSES
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
6,604

 
7,011

 
20,243

 
21,544

Selling and administrative
2,496

 
2,635

 
7,378

 
7,743

Depreciation and amortization
211

 
210

 
625

 
641

Gain on sales of assets
(26
)
 
(4
)
 
(436
)
 
(35
)
Total costs and expenses
9,285

 
9,852

 
27,810

 
29,893

Operating loss
(428
)
 
(447
)
 
(216
)
 
(810
)
Interest expense
(68
)
 
(70
)
 
(199
)
 
(216
)
Interest and investment income
7

 
6

 
28

 
31

Other income (loss)
2

 
6

 
3

 
(2
)
Loss from continuing operations before income taxes
(487
)
 
(505
)
 
(384
)
 
(997
)
Income tax (expense) benefit
(11
)
 
91

 
(53
)
 
264

Loss from continuing operations
(498
)
 
(414
)
 
(437
)
 
(733
)
Loss from discontinued operations, net of tax

 
(11
)
 

 
(10
)
Net loss
(498
)
 
(425
)
 
(437
)
 
(743
)
(Income) loss attributable to noncontrolling interests

 
4

 
(4
)
 
6

NET LOSS ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
$
(498
)
 
$
(421
)
 
$
(441
)
 
$
(737
)
Amounts attributable to Holdings’ shareholders:
 
 
 
 
 
 
 
Loss from continuing operations, net of tax
$
(498
)
 
$
(410
)
 
$
(441
)
 
$
(727
)
Loss from discontinued operations, net of tax

 
(11
)
 

 
(10
)
Net loss
$
(498
)
 
$
(421
)
 
$
(441
)
 
$
(737
)
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
(4.70
)
 
$
(3.85
)
 
$
(4.16
)
 
$
(6.80
)
Discontinued operations

 
(0.10
)
 

 
(0.09
)
 
$
(4.70
)
 
$
(3.95
)
 
$
(4.16
)
 
$
(6.89
)
Diluted:
 
 
 
 
 
 
 
Continuing operations
$
(4.70
)
 
$
(3.85
)
 
$
(4.16
)
 
$
(6.80
)
Discontinued operations

 
(0.10
)
 

 
(0.09
)
 
$
(4.70
)
 
$
(3.95
)
 
$
(4.16
)
 
$
(6.89
)
Basic weighted average common shares outstanding
105.9

 
106.5

 
105.9

 
107.0

Diluted weighted average common shares outstanding
105.9

 
106.5

 
105.9

 
107.0

See accompanying notes.

1


SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
 
13 Weeks Ended
 
39 Weeks Ended
millions
October 27,
2012
 
October 29,
2011
 
October 27,
2012
 
October 29,
2011
Net loss
$
(498
)
 
$
(425
)
 
$
(437
)
 
$
(743
)
Other comprehensive income
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
46

 
11

 
138

 
74

Deferred gain on derivatives, net of tax

 
14

 
5

 
8

Currency translation adjustments, net of tax
4

 
(24
)
 
4

 
(47
)
Total other comprehensive income
50

 
1

 
147

 
35

Comprehensive loss
(448
)
 
(424
)
 
(290
)
 
(708
)
Comprehensive (income) loss attributable to noncontrolling interests

 
4

 
(5
)
 
7

Comprehensive loss attributable to Holdings’ shareholders
$
(448
)
 
$
(420
)
 
$
(295
)
 
$
(701
)
See accompanying notes.

2


SEARS HOLDINGS CORPORATION
Condensed Consolidated Balance Sheets
 
 
(Unaudited)
 
 
millions
October 27,
2012
 
October 29,
2011
 
January 28,
2012
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
622

 
$
591

 
$
747

Restricted cash
11

 
8

 
7

Accounts receivable
665

 
653

 
695

Merchandise inventories
9,567

 
10,941

 
8,407

Prepaid expenses and other current assets
413

 
617

 
388

Current assets of discontinued operations

 
226

 

Total current assets
11,278

 
13,036

 
10,244

Property and equipment, net
6,174

 
6,796

 
6,577

Goodwill
674

 
1,392

 
841

Trade names and other intangible assets
2,894

 
2,950

 
2,937

Other assets
782

 
1,056

 
782

Non-current assets of discontinued operations

 
376

 

TOTAL ASSETS
$
21,802

 
$
25,606

 
$
21,381

LIABILITIES
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term borrowings
$
1,890

 
$
2,002

 
$
1,175

Current portion of long-term debt and capitalized lease obligations
154

 
157

 
230

Merchandise payables
3,851

 
4,471

 
2,912

Other current liabilities
2,818

 
2,927

 
2,892

Unearned revenues
940

 
948

 
964

Other taxes
516

 
502

 
523

Short-term deferred tax liabilities
506

 
214

 
516

Current liabilities of discontinued operations

 
148

 

Total current liabilities
10,675

 
11,369

 
9,212

Long-term debt and capitalized lease obligations
1,960

 
2,073

 
2,088

Pension and postretirement benefits
2,260

 
1,859

 
2,738

Other long-term liabilities
2,137

 
2,227

 
2,186

Long-term deferred tax liabilities
869

 

 
816

Non-current liabilities of discontinued operations

 
362

 

Total Liabilities
17,901

 
17,890

 
17,040

Commitments and contingencies

 

 

EQUITY
 
 
 
 
 
Total Equity
3,901

 
7,716

 
4,341

TOTAL LIABILITIES AND EQUITY
$
21,802

 
$
25,606


$
21,381

See accompanying notes.

3


SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
39 Weeks Ended
millions
October 27,
2012
 
October 29,
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(437
)
 
$
(743
)
Loss from discontinued operations, net of tax

 
10

Loss from continuing operations
(437
)
 
(733
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
625

 
641

Gain on sales of assets
(436
)
 
(35
)
Pension and postretirement plan contributions
(493
)
 
(323
)
Settlement of Canadian dollar hedges
6

 
(23
)
Change in operating assets and liabilities (net of acquisitions and dispositions):
 
 
 
Deferred income taxes
49

 
(129
)
Merchandise inventories
(1,583
)
 
(1,981
)
Merchandise payables
974

 
1,420

Income and other taxes
(33
)
 
(260
)
Mark-to-market adjustments and settlements on Sears Canada U.S. dollar collar contracts
1

 
2

Other operating assets
(69
)
 
22

Other operating liabilities
115

 
73

Net cash used in operating activities—continuing operations
(1,281
)
 
(1,326
)
Net cash provided by operating activities—discontinued operations

 
18

Net cash used in operating activities
(1,281
)
 
(1,308
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Proceeds from sales of property and investments
511

 
44

Net (increase) decrease in investments and restricted cash
(4
)
 
7

Purchases of property and equipment
(257
)
 
(315
)
Net cash provided by (used in) investing activities—continuing operations
250

 
(264
)
Net cash provided by investing activities—discontinued operations

 
11

Net cash provided by (used in) investing activities
250

 
(253
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from debt issuances
3

 
4

Repayments of long-term debt
(247
)
 
(597
)
Increase in short-term borrowings, primarily 90 days or less
715

 
1,642

Sears Hometown and Outlet Stores, Inc. pre-separation funding
100

 

Proceeds from the sale of Sears Hometown and Outlet Stores, Inc.
347

 

Debt issuance costs
(3
)
 
(35
)
Purchase of Sears Canada shares
(10
)
 
(32
)
Purchase of treasury stock

 
(163
)
Net cash provided by financing activities—continuing operations
905

 
819

Net cash used in financing activities—discontinued operations

 
(29
)
Net cash provided by financing activities
905

 
790

Effect of exchange rate changes on cash and cash equivalents
1

 
3

NET DECREASE IN CASH AND CASH EQUIVALENTS
(125
)
 
(768
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
747

 
1,359

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
622

 
$
591

Supplemental Cash Flow Data:
 
 
 
Income taxes paid, net of refunds
$
48

 
$
90

Cash interest paid
168

 
186

Unpaid liability to acquire equipment and software
65

 
55

See accompanying notes.

4


SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Equity
(Unaudited)
 
Equity Attributable to Holdings’ Shareholders
 
 
 
 
millions
Number
of
Shares
 
Common
Stock
 
Treasury
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Balance at January 29, 2011
109

 
$
1

 
$
(5,826
)
 
$
10,185

 
$
4,930

 
$
(779
)
 
$
103

 
$
8,614

Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 
(737
)
 

 
(6
)
 
(743
)
Pension and postretirement adjustments, net of tax

 

 

 

 

 
70

 
4

 
74

Deferred gain on derivatives, net of tax

 

 

 

 

 
8

 

 
8

Currency translation adjustments, net of tax

 

 

 

 

 
(42
)
 
(5
)
 
(47
)
Total Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(708
)
Stock awards

 

 
17

 
(13
)
 

 

 

 
4

Purchase of Sears Canada shares

 

 

 
(20
)
 

 
(1
)
 
(11
)
 
(32
)
Shares repurchased
(2
)
 

 
(163
)
 

 

 

 

 
(163
)
Associate stock purchase

 

 
3

 

 

 

 

 
3

Other

 

 

 

 

 

 
(2
)
 
(2
)
Balance at October 29, 2011
107

 
$
1

 
$
(5,969
)
 
$
10,152

 
$
4,193

 
$
(744
)
 
$
83

 
$
7,716

Balance at January 28, 2012
106

 
$
1

 
$
(5,981
)
 
$
10,005

 
$
1,865

 
$
(1,609
)
 
$
60

 
$
4,341

Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 

 
(441
)
 

 
4

 
(437
)
Pension and postretirement adjustments, net of tax

 

 

 

 

 
137

 
1

 
138

Deferred gain on derivatives, net of tax

 

 

 

 

 
5

 

 
5

Currency translation adjustments, net of tax

 

 

 

 

 
4

 

 
4

Total Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(290
)
Stock awards

 

 
7

 
(1
)
 

 

 

 
6

Purchase of Sears Canada shares

 

 

 
(3
)
 

 
(1
)
 
(6
)
 
(10
)
Associate stock purchase

 

 
3

 

 

 

 

 
3

Separation of Sears Hometown and Outlet Stores, Inc.

 

 

 
(149
)
 


 

 

 
(149
)
Balance at October 27, 2012
106

 
$
1

 
$
(5,971
)
 
$
9,852

 
$
1,424

 
$
(1,464
)
 
$
59

 
$
3,901









See accompanying notes.

5

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)


NOTE 1 – BASIS OF PRESENTATION
Sears Holdings Corporation (“Holdings”) is the parent company of Kmart Holding Corporation (“Kmart”) and Sears, Roebuck and Co. (“Sears”). Holdings (together with its subsidiaries, “we,” “us,” “our,” or the “Company”) was formed as a Delaware corporation in 2004 in connection with the merger of Kmart and Sears (the “Merger”), on March 24, 2005. We are a broadline retailer with 2,066 full-line and 52 specialty retail stores in the United States, operating through Kmart and Sears, and 483 full-line and specialty retail stores in Canada operating through Sears Canada Inc. (“Sears Canada”), a 96%-owned subsidiary.
These interim unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The retail business is seasonal in nature, and we generate a high proportion of our revenues and operating cash flows during the fourth quarter of our fiscal year, which includes the holiday season. These interim financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.
Depreciation Expense
Depreciation expense included within depreciation and amortization expense reported on the Condensed Consolidated Statements of Operations was $198 million, $586 million, $196 million and $599 million for the 13- and 39- week periods ended October 27, 2012 and October 29, 2011, respectively.
Spin-Off of Orchard Supply Hardware Stores Corporation
On December 30, 2011, we completed the spin-off to our shareholders of all the capital stock of Orchard Supply Hardware Stores Corporation (“Orchard”) that was owned by Holdings immediately prior to the spin-off. Holdings has no significant continuing involvement in the operations of Orchard. Accordingly, the operating results for Orchard are presented as discontinued operations in the accompanying Condensed Consolidated Statement of Operations and the Condensed Consolidated Statement of Comprehensive Loss for the 13- and 39- week periods ended October 29, 2011, and the current and non-current assets and liabilities of Orchard are presented separately in the accompanying Condensed Consolidated Balance Sheet at October 29, 2011. In addition, the cash flows from operating, investing and financing activities for Orchard have been separately stated as discontinued operations in the accompanying Condensed Consolidated Statement of Cash Flows for the 39- week period ended October 29, 2011. The Notes to Condensed Consolidated Financial Statements have been restated to exclude the impact of Orchard for all periods presented. Prior to completion of the spin-off, Orchard’s results of operations, financial position and cash flows were presented within the Sears Domestic segment.
Separation of Sears Hometown and Outlet Businesses
On October 11, 2012, we completed the separation of our Sears Hometown and Outlet businesses through a rights offering transaction. Holdings received gross proceeds of $446.5 million with respect to the transaction, consisting of $346.5 million for the sale of Sears Hometown and Outlet Stores, Inc. ("SHO") common shares and $100 million through a dividend from SHO prior to the separation. Prior to the separation, SHO entered into an asset-based senior secured revolving credit facility with a group of financial institutions to provide (subject to availability under a borrowing base) for aggregate maximum borrowings of $250 million. Borrowings of $100 million from this revolving credit facility were used to fund the dividend paid to Holdings. We accounted for this separation in accordance with accounting standards applicable to common control transactions as ESL Investments, Inc. (together with its affiliated funds, "ESL") is a majority shareholder of Holdings and became a majority shareholder of SHO as a result of exercising subscription rights pursuant to the rights offering. Accordingly, we classified the difference between the proceeds received and the carrying value of net assets contributed to SHO as a reduction of capital in excess of par value in the Consolidated Statement of Equity for the period ended October 27, 2012.
In connection with the separation, Holdings and certain of its subsidiaries entered into various agreements with SHO under the terms described in Note 14. Because of the various agreements with SHO, Holdings has determined that it has significant continuing cash flows with SHO. Accordingly, the operating results for SHO through the date of the separation are presented within the consolidated continuing operations of Holdings and the Sears Domestic segment in the accompanying Condensed

6

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Consolidated Financial Statements. Additionally, Holdings has guaranteed lease obligations for certain SHO store leases that were assigned as a result of the separation. See Note 14 to the Condensed Consolidated Financial Statements for further information related to the agreements with SHO.
Goodwill
Changes in the carrying amount of goodwill by segment, which reflects the impact related to the separation of SHO, are as follows:
millions
Sears Domestic
 
Sears
Canada
 
Total
Balance, January 29, 2011 and October 29, 2011:
 
 
 
 
 
Goodwill
$
1,097

 
$
295

 
$
1,392

2011 activity:
 
 
 
 
 
Impairment charges
(551
)
 

 
(551
)
Balance, January 28, 2012
546

 
295

 
841

2012 activity:
 
 
 
 
 
Separation of Sears Hometown and Outlet Stores, Inc.
(167
)
 

 
(167
)
Balance, October 27, 2012
$
379

 
$
295

 
$
674


NOTE 2 – BORROWINGS
Total borrowings were as follows:
 
millions
October 27,
2012
 
October 29,
2011
 
January 28,
2012
Short-term borrowings:
 
 
 
 
 
Unsecured commercial paper
$
417

 
$
350

 
$
337

Secured borrowings
1,473

 
1,652

 
838

Long-term debt, including current portion:
 
 
 
 
 
Notes and debentures outstanding
1,668

 
1,756

 
1,863

Capitalized lease obligations
446

 
474

 
455

Total borrowings
$
4,004

 
$
4,232

 
$
3,493

The fair value of long-term debt, excluding capitalized lease obligations, was $1.5 billion at October 27, 2012, October 29, 2011 and January 28, 2012. The fair value of our debt was estimated based on quoted market prices for the same or similar issues or on current rates offered to us for debt of the same remaining maturities. Our long-term debt instruments are valued using Level 2 measurements as defined in Note 4 to the Condensed Consolidated Financial Statements.
Unsecured Commercial Paper
We borrow through the commercial paper markets. At October 27, 2012October 29, 2011 and January 28, 2012, we had outstanding commercial paper borrowings of $417 million, $350 million and $337 million, respectively. ESL held $325 million, $220 million and $250 million, respectively, of our commercial paper at October 27, 2012October 29, 2011 and January 28, 2012, including $178 million, $100 million and $130 million, respectively, held by Edward S. Lampert. See Note 14 for further discussion of these borrowings.
Domestic Credit Agreement
During the first quarter of 2011, we entered into a $3.275 billion credit agreement (the “Domestic Credit Agreement”) which expires in April 2016. We view this credit facility as our most cost efficient funding mechanism and therefore use it as a primary source of funding.

7

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Advances under the Domestic Credit Agreement bear interest at a rate equal to, at the election of the Borrowers, either the London Interbank Offered Rate (“LIBOR”) or a base rate, in either case plus an applicable margin. The Domestic Credit Agreement’s interest rates for LIBOR-based borrowings vary based on leverage in the range of LIBOR plus 2.0% to 2.5%. Interest rates for base rate-based borrowings vary based on leverage in the range of the applicable base rate plus 1.0% to 1.5%. Commitment fees are in a range of 0.375% to 0.625% based on usage.
The Domestic Credit Agreement includes a $1.5 billion letter of credit sub-limit and an uncommitted accordion feature that provides us the flexibility, subject to certain terms and conditions, to use the existing collateral under the credit facility to obtain an aggregate amount of up to $1.0 billion in additional borrowing capacity if we so choose. The Domestic Credit Agreement permits aggregate second lien indebtedness of up to $2.0 billion, of which $1.2 billion second lien notes were outstanding at October 27, 2012, providing the Company the capacity to issue up to an additional $760 million in second lien indebtedness. The Domestic Credit Agreement is in place as a funding source for general corporate purposes and is an asset based revolving credit facility under which Sears Roebuck Acceptance Corp. (“SRAC”) and Kmart Corporation are the borrowers. The Domestic Credit Agreement is secured by a first lien on most of our domestic inventory and credit card and pharmacy receivables, and is subject to a borrowing base formula to determine availability.
The Domestic Credit Agreement limits our ability to make restricted payments, including dividends and share repurchases, if availability under the credit facility, as defined, is less than 15%. It also imposes various other requirements, which take effect if availability falls below designated thresholds, including a cash dominion requirement and a requirement that the fixed charge ratio at the last day of any quarter be not less than 1.0 to 1.0. Based on availability, none of these requirements was in effect at October 27, 2012.    
At October 27, 2012October 29, 2011 and January 28, 2012, we had $1.5 billion, $1.7 billion and $838 million, respectively, of borrowings and $779 million, $622 million and $626 million, respectively, of letters of credit outstanding under the Domestic Credit Agreement. As a result, our availability under the agreement was $1.0 billion, $1.0 billion and $1.8 billion, respectively, at October 27, 2012October 29, 2011 and January 28, 2012. The majority of the letters of credit outstanding are used to provide collateral for our insurance programs.
Senior Secured Notes
In October 2010, we sold $1 billion aggregate principal amount of senior secured notes (the “Notes”), which bear interest at 6 5/8% per annum and mature on October 15, 2018. Concurrent with the closing of the sale of the Notes, the Company sold $250 million aggregate principal amount of Notes to the Company’s domestic pension plan in a private placement. The Notes are guaranteed by certain subsidiaries of the Company and are secured by a security interest in certain assets consisting primarily of domestic inventory and credit card receivables (the “Collateral”). The lien that secures the Notes is junior in priority to the lien on such assets that secures obligations under the Domestic Credit Agreement, as well as certain other first priority lien obligations. The Company used the net proceeds of this offering to repay borrowings outstanding under a previous domestic credit agreement on the settlement date and to fund the working capital requirements of our retail businesses, capital expenditures and for general corporate purposes. The indenture under which the Notes were issued contains restrictive covenants that, among other things, (1) limit the ability of the Company and certain of its domestic subsidiaries to create liens and enter into sale and leaseback transactions and (2) limit the ability of the Company to consolidate with or merge into, or sell other than for cash or lease all or substantially all of its assets to, another person. The indenture also provides for certain events of default, which, if any were to occur, would permit or require the principal and accrued and unpaid interest on all the then outstanding notes to be due and payable immediately. Generally, the Company is required to offer to repurchase all outstanding Notes at a purchase price equal to 101% of the principal amount if the borrowing base (as calculated pursuant to the indenture) falls below the principal value of the notes plus any other indebtedness for borrowed money that is secured by liens on the Collateral for two consecutive quarters or upon the occurrence of certain change of control triggering events. The Company may call the Notes at a premium based on the “Treasury Rate” as defined in the indenture, plus 50 basis points. On September 6, 2011, we completed our offer to exchange the Notes held by nonaffiliates for a new issue of substantially identical notes registered under the Securities Act of 1933, as amended.
Sears Canada Credit Agreement
In September 2010, Sears Canada entered into a five-year, $800 million Canadian senior secured revolving credit facility (the “Sears Canada Facility”). The Sears Canada Facility is available for Sears Canada’s general corporate purposes and is secured by a first lien on inventory and credit card receivables. Availability under the Sears Canada Facility is determined pursuant to a borrowing base formula based on inventory and account and credit card receivables, subject to certain limitations. At October 27, 2012 and October 29, 2011, we had no borrowings outstanding under the Sears Canada Facility. At January 28,

8

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

2012, we had approximately $101 million ($101 million Canadian) of borrowings outstanding under the Sears Canada Facility. Availability under this agreement was approximately $734 million ($733 million Canadian), $800 million ($794 million Canadian) and $415 million ($415 million Canadian), respectively, at October 27, 2012October 29, 2011 and January 28, 2012. The current availability may be reduced by reserves currently estimated by the Company to be $300 million which may be applied by the lenders at their discretion pursuant to the Credit Facility agreement. The availability reserves are the result of judicial developments relating to the priorities of pension liability relative to certain secured obligations and ensuing negotiations with the Company's lenders. These judicial developments are currently under review by the Supreme Court of Canada. Subsequent to October 27, 2012, the Company signed an amendment to its Credit Facility agreement which would provide additional security to the lenders, with respect to the Company's unfunded pension liability by pledging certain real estate assets in an amount up to $300 million as collateral thereby partially reducing the potential reserve amounts the lenders could apply. The potential additional reserve amount may increase or decrease in the future based on estimated pension liabilities and the outcome of the matter currently under review by the Supreme Court of Canada.
Letters of Credit Facility
On January 20, 2011, we and certain of our subsidiaries entered into a letter of credit facility (the “LC Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), pursuant to which Wells Fargo may, on a discretionary basis and with no commitment, agree to issue standby letters of credit upon our request in an aggregate amount not to exceed $500 million for general corporate purposes. Any letters of credit issued under the LC Facility are secured by a first priority lien on cash placed on deposit at Wells Fargo pursuant to a pledge and security agreement in an amount equal to 103% of the face value of all issued and outstanding letters of credit. The LC Facility has a term ending on January 20, 2014, unless terminated sooner pursuant to its terms. Wells Fargo may, in its sole discretion, terminate the LC Facility at any time. At October 27, 2012, October 29, 2011 and January 28, 2012, no letters of credit were outstanding under the facility. We may replace any letters of credit issued under our LC Facility with letters of credit issued under the Domestic Credit Agreement and as such, any cash collateral is considered unrestricted cash.
Wholly owned Insurance Subsidiary and Intercompany Securities
We have numerous types of insurable risks, including workers’ compensation, product and general liability, automobile, warranty, asbestos and environmental claims and the extended service contracts we sell to our customers. In addition, we provide credit insurance to third party creditors of the Company to mitigate their credit risk with the Company. The associated risks are managed through Holdings’ wholly owned insurance subsidiary, Sears Reinsurance Company Ltd. (“Sears Re”), a Bermuda Class 3 insurer.
In accordance with applicable insurance regulations, Sears Re holds marketable securities to support the insurance coverage it provides. Sears utilizes two securitization structures to issue specific securities in which Sears Re invests its capital to fund its insurance obligations. In November 2003, Sears formed a Real Estate Mortgage Investment Conduit, or REMIC. The real estate associated with 125 full-line stores was contributed to indirect wholly owned subsidiaries of Sears, and then leased back to Sears. The contributed stores were mortgaged and the REMIC issued securities that are secured by the mortgages and collateral assignments of the store leases. Sears Re and two other indirect wholly owned subsidiaries of Holdings own $1.3 billion (par value) of these mortgage-backed securities. Payments to Sears Re on these securities are funded by the lease payments. In May 2006, a subsidiary of Holdings contributed the rights to use the Kenmore, Craftsman and DieHard trademarks in the U.S. and its possessions and territories to KCD IP, LLC, an indirect wholly owned subsidiary of Holdings. KCD IP, LLC has licensed the use of the trademarks to subsidiaries of Holdings, including Sears and Kmart. Asset-backed securities with a par value of $1.8 billion were issued by KCD IP, LLC and subsequently purchased by Sears Re, the collateral for which includes the trademark rights and royalty income. Payments to Sears Re on these asset-backed securities are funded by the royalty payments. The issuers of these mortgage-backed and asset-backed securities and the owners of these real estate and trademark assets are bankruptcy remote, special purpose entities that are indirect wholly owned subsidiaries of Holdings. Cash flows received from rental streams and licensing fee streams paid by Sears, Kmart, other affiliates and third parties, are used for the payment of fees and interest on these securities. Since the inception of the REMIC and KCD IP, LLC, these mortgage-backed and asset-backed securities have been entirely held by our wholly owned consolidated subsidiaries in support of our insurance activities. At October 27, 2012October 29, 2011 and January 28, 2012, the net book value of the securitized trademark rights was approximately $1.0 billion. The net book value of the securitized real estate assets was approximately $0.8 billion at October 27, 2012October 29, 2011 and January 28, 2012.

9

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Trade Creditor Matters
We have ongoing discussions concerning our liquidity and financial position with the vendor community and third parties that offer various credit protection services to our vendors. The topics discussed have included such areas as pricing, payment terms and ongoing business arrangements. As of the date of this report, we have not experienced any significant disruption in our access to merchandise or our operations.
NOTE 3 – DERIVATIVE FINANCIAL INSTRUMENTS
We primarily use derivatives as a risk management tool to decrease our exposure to fluctuations in the foreign currency market. We are exposed to fluctuations in foreign currency exchange rates as a result of our net investment in Sears Canada. Further, Sears Canada is exposed to fluctuations in foreign currency exchange rates due to inventory purchase contracts denominated in U.S. dollars.
Earnings Effects of Derivatives on the Statements of Operations
For derivatives that were designated as hedges of our net investment in Sears Canada, we assess effectiveness based on changes in forward currency exchange rates. Changes in forward rates on the derivatives are recorded in the currency translation adjustments line in accumulated other comprehensive loss and will remain there until we substantially liquidate or sell our holdings in Sears Canada.
Changes in the fair value of any derivatives that are not designated as hedges are recorded in earnings each period. Sears Canada mitigates the risk of currency fluctuations on offshore merchandise purchases denominated in U.S. currency by purchasing U.S. dollar denominated collar contracts for a portion of its expected requirements. Since Holdings’ functional currency is the U.S. dollar, we are not directly exposed to the risk of exchange rate changes due to Sears Canada’s merchandise purchases, and therefore we do not account for these instruments as a hedge of our foreign currency exposure risk.
Sears Canada Hedges of Merchandise Purchases
Sears Canada had no outstanding foreign currency collar contracts at October 27, 2012 or January 28, 2012. Sears Canada had entered into foreign currency collar contracts with a total notional value of $57 million at October 29, 2011. As discussed previously, these collar contracts were used to hedge Sears Canada’s purchase of inventory under U.S. dollar denominated contracts. We recorded mark-to-market adjustments based on the total notional value of these outstanding collar contracts at the end of each period. We recorded mark-to-market liabilities related to these foreign currency collar contracts of $1 million at October 29, 2011.
We record the earnings impact of mark-to-market and settlement adjustments for foreign currency collar contracts in other income (loss) at the end of each period. We recorded mark-to-market and settlement gains on these contracts of $11 million and $3 million for the 13- and 39- week periods ended October 29, 2011, respectively.

Sears Canada’s above noted foreign currency collar contracts were entered into as a hedge of merchandise purchase contracts denominated in U.S. currency. We also record mark-to-market adjustments for the value of the merchandise purchase contracts (considered embedded derivatives under relevant accounting rules) at the end of each period. We recorded assets of $1 million at January 28, 2012 related to the fair value of these embedded derivatives.
We record the earnings impact of mark-to-market and settlement adjustments related to the embedded derivative in the merchandise purchase contracts in other income (loss) at the end of each period. We recorded net mark-to-market gains and settlements of $2 million for the 39-week period ended October 27, 2012. We recorded mark-to-market and settlement losses of $6 million and $5 million for the 13- and 39- week periods ended October 29, 2011, respectively.
We recorded total mark-to-market gains and settlements of $2 million in other income (loss) for the 39-week period ended October 27, 2012. At October 29, 2011, we had net derivative mark-to-market liabilities related to the collar contracts and embedded derivatives of $1 million. We recorded total mark-to-market gains and settlements of $5 million and total mark-to-market losses and settlements of $2 million in other income (loss) for the 13- and 39- week periods ended October 29, 2011, respectively. See Note 4 for further information regarding fair value of these collar and merchandise purchase contracts and the respective balance sheet classifications at October 27, 2012October 29, 2011 and January 28, 2012.

10

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Hedges of Net Investment in Sears Canada
At October 29, 2011 and January 28, 2012, we had foreign currency forward contracts outstanding with a total Canadian notional value of $629 million, and with a weighted-average remaining life of 0.7 years at October 29, 2011 and 0.1 years at January 28, 2012. We had no foreign currency forward contracts outstanding at October 27, 2012. These contracts were designated and qualified as hedges of the foreign currency exposure of our net investment in Sears Canada. Accordingly, the aggregate fair value of the forward contracts outstanding at October 29, 2011 of approximately $14 million was recorded as an asset on our Condensed Consolidated Balance Sheet, and the aggregate fair value of the forward contracts outstanding at January 28, 2012 of approximately $(6) million was recorded as a liability on our Condensed Consolidated Balance Sheet. The increase in fair value of $14 million related to the forward contract outstanding at October 29, 2011, net of tax, was recorded as a component of other comprehensive loss for the 39-week period ended October 29, 2011.
We settled foreign currency forward contracts during 2012 and received net amounts of $6 million for the 39-week period ended October 27, 2012, relative to these contract settlements. We settled foreign currency forward contracts during 2011 and paid net amounts of $23 million for the 39-week period ended October 29, 2011, relative to these contract settlements. As hedge accounting was applied to these contracts, an offsetting amount was recorded as a component of other comprehensive loss.
Our currency forward contracts require collateral be posted in the event our liability under such contracts reaches a predetermined threshold. Cash collateral posted under these contracts is recorded as part of our accounts receivable balance. We had no cash collateral posted under these contracts at October 27, 2012 or October 29, 2011 and $5 million at January 28, 2012.

NOTE 4 – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
We determine fair value of financial assets and liabilities based on the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels:
Level 1 inputs – unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide ongoing pricing information.
Level 2 inputs – inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.
Level 3 inputs – unobservable inputs for the asset or liability.
Accounts receivable, merchandise payables, short-term borrowings, accrued liabilities and domestic cash and cash equivalents are reflected in the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. The fair value of our debt is disclosed in Note 2 to the Condensed Consolidated Financial Statements. The following tables provide the fair value measurement amounts for other financial assets and liabilities recorded in our Condensed Consolidated Balance Sheets at fair value at October 27, 2012October 29, 2011 and January 28, 2012:
 
 
Total Fair Value
Amounts at
 
 
 
 
 
 
millions
October 27, 2012
 
Level 1
 
Level 2
 
Level 3
Cash equivalents(1)
$
160

 
$
160

 
$

 
$

Restricted cash(2)
11

 
11

 

 

Total
$
171

 
$
171

 
$

 
$

 

11

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
Total Fair Value
Amounts at
 
 
 
 
 
 
millions
October 29, 2011
 
Level 1
 
Level 2
 
Level 3
Cash equivalents(1)
$
99

 
$
99

 
$

 
$

Restricted cash(2)
8

 
8

 

 

Foreign currency derivative assets(3)
14

 

 
14

 

Foreign currency derivative liabilities(4)
(1
)
 

 
(1
)
 

Total
$
120

 
$
107

 
$
13

 
$

 
 
Total Fair Value
Amounts at
 
 
 
 
 
 
millions
January 28, 2012
 
Level 1
 
Level 2
 
Level 3
Cash equivalents(1)
$
341

 
$
341

 
$

 
$

Restricted cash(2)
7

 
7

 

 

Foreign currency derivative assets(3)
1

 

 
1

 

Foreign currency derivative liabilities(4)
(6
)
 

 
(6
)
 

Total
$
343

 
$
348

 
$
(5
)
 
$

 
(1)
Included within Cash and cash equivalents in our Condensed Consolidated Balance Sheets.
(2)
Included within Restricted cash in our Condensed Consolidated Balance Sheets.
(3)
Included within Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.
(4)
Included within Accrued expenses and other current liabilities in our Condensed Consolidated Balance Sheets.
The fair values of derivative assets and liabilities traded in the over-the-counter market are determined using quantitative models that require the use of multiple inputs including interest rates, prices and indices to generate pricing and volatility factors. The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. Our derivative instruments are valued using Level 2 measurements.
NOTE 5 – SEARS CANADA
Sears Canada Share Repurchases
During the second quarter of 2011, Sears Canada renewed its Normal Course Issuer Bid with the Toronto Stock Exchange that permits it to purchase for cancellation up to 5% of its issued and outstanding common shares, representing approximately 5.3 million common shares. The purchase authorization expired on May 24, 2012. Prior to the expiration, Sears Canada purchased and canceled approximately 0.9 million common shares for $10 million during the 39-week period ended October 27, 2012.
Sears Holdings Ownership of Sears Canada
At October 27, 2012, October 29, 2011, and January 28, 2012, Sears Holdings was the beneficial holder of approximately 97 million, or 96%, 97 million, or 94%, and 97 million, or 95%, respectively, of the common shares of Sears Canada.
Partial Spin-Off
On November 13, 2012, we completed a partial spin-off (the “spin-off”) of our interest in Sears Canada. Prior to the spin-off, Holdings owned approximately 96% of the issued and outstanding common shares of Sears Canada. In connection with the spin-off, we distributed approximately 45 million common shares of Sears Canada held by Holdings on a pro rata basis to holders of Holdings' common stock. Following the spin-off, Holdings was beneficial holder of approximately 51% of the issued and outstanding common shares of Sears Canada, and as such, Holdings expects to maintain control of Sears Canada and will continue to consolidate the results of Sears Canada. We will account for the spin-off as an equity transaction in accordance with accounting standards applicable to noncontrolling interests. Accordingly, we will reclassify a portion of our ownership interest in Sears Canada and accumulated other comprehensive loss to noncontrolling interest in the Consolidated Statement of Equity for the period ended February 2, 2013.

12

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 6 – STORE CLOSINGS, CONVERSIONS AND REAL ESTATE TRANSACTIONS
In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rent payments for which we no longer intend to receive any economic benefit are accrued for when we cease to use the leased space and have been reduced for any income that we believe can be realized through sub-leasing the leased space. During the first nine months of 2012, we closed 91 stores we previously announced would close and recorded charges of $40 million at Sears Domestic and $7 million at Kmart for the related lease obligations. We recorded charges of $1 million at Sears Domestic related to closed store lease obligations during the first nine months of 2011. We expect to record an additional charge of approximately $30 million in the fourth quarter of 2012 related to stores we had previously made the decision to close.
 
We made the decision to close 39 and 4 stores in our Kmart segment, and 12 and 6 stores in our Sears Domestic segment during the third quarter of 2012 and 2011, respectively, and change the format of 8 stores in our Sears Domestic segment during the third quarter of 2011. Store closing costs recorded for the 13- and 39- week periods ended October 27, 2012 and October 29, 2011 were as follows:

millions
Markdowns(1)
 
Severance
Costs(2)
 
Lease
Termination
Costs(2)
 
Other
Charges(2)
 
Impairment
and
Accelerated
Depreciation(3)
 
Total Store
Closing
Costs
Kmart
$
18

 
$
7

 
$
(4
)
 
$
6

 
$
5

 
$
32

Sears Domestic
14

 
(1
)
 
1

 
(6
)
 
4

 
12

Sears Canada

 
1

 
(1
)
 
3

 

 
3

Total costs for the 13-week period ended October 27, 2012
$
32

 
$
7

 
$
(4
)
 
$
3

 
$
9

 
$
47

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
4

 
$

 
$

 
$
1

 
$

 
$
5

Sears Domestic
10

 
1

 

 
2

 

 
13

Sears Canada

 
5

 

 

 

 
5

Total costs for the 13-week period ended October 29, 2011
$
14

 
$
6

 
$

 
$
3

 
$

 
$
23

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
18

 
$
7

 
$
7

 
$
6

 
$
6

 
$
44

Sears Domestic
14

 
(1
)
 
40

 
(6
)
 
10

 
57

Sears Canada

 
3

 
(1
)
 
3

 

 
5

Total costs for the 39-week period ended October 27, 2012
$
32

 
$
9

 
$
46

 
$
3

 
$
16

 
$
106

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
11

 
$
1

 
$

 
$
3

 
$

 
$
15

Sears Domestic
26

 
11

 
1

 
7

 
8

 
53

Sears Canada

 
5

 

 

 

 
5

Total costs for the 39-week period ended October 29, 2011
$
37

 
$
17

 
$
1

 
$
10

 
$
8

 
$
73


(1)
Recorded within Cost of sales, buying and occupancy on the Condensed Consolidated Statements of Operations.
(2)
Recorded within Selling and administrative on the Condensed Consolidated Statements of Operations. Lease termination costs are net of estimated sublease income, and include the reversal of closed store reserves for which the lease agreement has been terminated and the reversal of deferred rent balances related to closed stores.
(3)
Recorded within Depreciation and amortization on the Condensed Consolidated Statements of Operations.
 

13

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Store closing cost accruals of $159 million, $80 million and $159 million at October 27, 2012October 29, 2011 and January 28, 2012, respectively, were as follows:
 
millions
Severance
Costs
 
Lease
Termination
Costs
 
Other
Charges
 
Total
Balance at October 29, 2011
$
11

 
$
65

 
$
4

 
$
80

Store closing costs
56

 
4

 
36

 
96

Payments/utilizations
(8
)
 
(5
)
 
(4
)
 
(17
)
Balance at January 28, 2012
59

 
64

 
36

 
159

Store closing costs
9

 
63

 
3

 
75

Store closing capital lease obligations

 
9

 

 
9

Payments/utilizations
(46
)
 
(16
)
 
(22
)
 
(84
)
Balance at October 27, 2012
$
22

 
$
120

 
$
17

 
$
159

During the first quarter of 2012, we recorded gains on the sales of assets of $386 million in connection with real estate transactions which included a gain of $223 million recognized on the sale of eleven (6 owned and 5 leased) Sears Full-line store locations to General Growth Properties for $270 million in cash proceeds, and a gain of $163 million recognized on the surrender and early termination of the leases on three properties operated by Sears Canada, under an agreement with The Cadillac Fairview Corporation Limited for which Sears Canada received $170 million Canadian in cash proceeds. In connection with these transactions, we surrendered substantially all of our rights and obligations under our preexisting lease agreements and agreed to surrender each of the premises in periods ranging from 6 to 23 months from the date of closing.
NOTE 7 – EQUITY
Share Repurchase Program
During the 13- and 39- week periods ended October 27, 2012, we repurchased no shares of our common stock under our common share repurchase program. During the 13- and 39- week periods ended October 29, 2011, we repurchased 0.2 million and 2.2 million of our common shares at a total cost of $9 million and $163 million, respectively, under our common share repurchase program. Our repurchases for the 13- and 39- week periods ended October 29, 2011 were made at average prices of $52.58 and $74.80 per share, respectively. At October 27, 2012, we had approximately $504 million of remaining authorization under our common share repurchase program.
The share repurchase program has no stated expiration date and share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods.
 Accumulated Other Comprehensive Loss
The following table displays the components of accumulated other comprehensive loss:
 
millions
October 27,
2012
 
October 29,
2011
 
January 28,
2012
Pension and postretirement adjustments (net of tax of $(488), $(442) and $(492), respectively)
$
(1,440
)
 
$
(715
)
 
$
(1,575
)
Cumulative unrealized derivative gain (loss) (net of tax of $0, $5 and $0, respectively)

 
9

 
(5
)
Currency translation adjustments (net of tax of $(26), $(34) and $(26), respectively)
(24
)
 
(38
)
 
(29
)
Accumulated other comprehensive loss
$
(1,464
)
 
$
(744
)
 
$
(1,609
)
Pension and postretirement adjustments relate to the net actuarial loss on our pension and postretirement plans recognized as a component of accumulated other comprehensive loss.

14

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Accumulated other comprehensive loss attributable to noncontrolling interests at October 27, 2012October 29, 2011, and January 28, 2012 was $7 million, $5 million and $9 million, respectively.
Income Tax Expense Allocated to Each Component of Other Comprehensive Income (Loss)
Income tax expense allocated to each component of other comprehensive income (loss) was as follows:
 
 
13 Weeks Ended October 27, 2012
 
13 Weeks Ended October 29, 2011
millions
Before
Tax
Amount
 
Tax
Expense
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax
Expense
 
Net of
Tax
Amount
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments
$
48

 
$
(2
)
 
$
46

 
$
20

 
$
(9
)
 
$
11

Deferred gain (loss) on derivatives

 

 

 
22

 
(8
)
 
14

Currency translation adjustments
5

 
(1
)
 
4

 
(24
)
 

 
(24
)
Total other comprehensive income (loss)
$
53

 
$
(3
)
 
$
50

 
$
18

 
$
(17
)
 
$
1

 
39 Weeks Ended October 27, 2012
 
39 Weeks Ended October 29, 2011
millions
Before
Tax
Amount
 
Tax
Expense
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax
(Expense)
or Benefit
 
Net of
Tax
Amount
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments
$
143

 
$
(5
)
 
$
138

 
$
114

 
$
(40
)
 
$
74

Deferred gain (loss) on derivatives
5

 

 
5

 
13

 
(5
)
 
8

Currency translation adjustments
4

 

 
4

 
(74
)
 
27

 
(47
)
Total other comprehensive income (loss)
$
152

 
$
(5
)
 
$
147

 
$
53

 
$
(18
)
 
$
35

 

NOTE 8 – BENEFIT PLANS
Pension and Postretirement Benefit Plans
We provide benefits to certain associates who are eligible under various defined benefit pension plans, contributory defined benefit pension plans and other postretirement plans, primarily retiree medical benefits. For purposes of determining the periodic expense of our defined benefit plans, we use the fair value of plan assets as the market related value. The following table summarizes the components of total net periodic benefit expense for our retirement plans:
 
 
13 Weeks Ended
 
39 Weeks Ended
millions
October 27,
2012
 
October 29,
2011
 
October 27,
2012
 
October 29,
2011
Components of net periodic expense:
 
 
 
 
 
 
 
Benefits earned during the period
$

 
$
1

 
$

 
$
5

Interest cost
96

 
100

 
288

 
292

Expected return on plan assets
(93
)
 
(93
)
 
(279
)
 
(271
)
Amortization of experience losses
48

 
17

 
143

 
51

Net periodic expense
$
51

 
$
25

 
$
152

 
$
77


15

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Contributions
During the 13- and 39- week periods ended October 27, 2012, we made total contributions of $329 million and $493 million, respectively, to our pension and postretirement plans. During the 13- and 39- week periods ended October 29, 2011, we made total contributions of $180 million and $323 million, respectively, to our pension and postretirement plans. We anticipate making aggregate contributions to our domestic and Canadian defined benefit and postretirement plans of approximately $91 million over the remainder of 2012.
In our Annual Report on Form 10-K for the fiscal year ended January 28, 2012, we disclosed that we expected our contributions to our domestic pension plans to be approximately $310 million in 2012 and $740 million in 2013. As previously reported, on July 6, 2012, federal legislation signed into law allows pension plan sponsors to use higher interest rate assumptions in valuing plan liabilities and determining funding obligations. As a result of this legislation, the Company's domestic pension plan was within $203 million of being 80% funded under applicable law. As disclosed in our Quarterly Report on Form 10-Q for the fiscal quarter ended July 28, 2012, we may elect, in our discretion, to contribute more to our pension plan than the minimum amounts required under applicable law. In order to reduce the risks of gross pension obligations, the Company elected to contribute an additional $203 million to its domestic pension plan on September 14, 2012, after which its domestic pension plan was 80% funded under applicable law.
Effective September 17, 2012, the Company amended its domestic pension plan, primarily related to lump sum benefit eligibility, and began notifying certain former employees of the Company of its offer to pay those employees' pension benefit in a lump sum. Former employees eligible for the voluntary lump sum payment option are generally those who are vested traditional formula participants of the Plan who terminated employment prior to January 1, 2012 and who have not yet started receiving monthly payments of their pension benefits.
The Company is offering the one-time voluntary lump sum window in an effort to reduce its long-term pension obligations and ongoing annual pension expense. This voluntary offer was made to approximately 86,000 eligible terminated vested participants, representing approximately $2.0 billion of the Company's total qualified pension plan liabilities. Eligible participants will have until November 19, 2012 to make their election. The Company expects to make the payments in December 2012 and will fund the payments from existing pension plan assets.
NOTE 9 – INCOME TAXES
At October 27, 2012, we had gross unrecognized tax benefits of $159 million. Of this amount, $92 million would, if recognized, impact our effective tax rate, with the remaining amount being comprised of unrecognized tax benefits related to gross temporary differences or any other indirect benefits. During the 13- and 39- week periods ended October 27, 2012, gross unrecognized tax benefits were decreased by $2 million and $33 million, respectively, due to federal, foreign, and state audit activity. We expect that our unrecognized tax benefits could decrease by as much as $31 million over the next 12 months for tax audit settlements and the expiration of the statute of limitations for certain jurisdictions.
We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. At October 27, 2012, the total amount of interest and penalties included in our tax accounts in our Condensed Consolidated Balance Sheet was $60 million ($41 million net of federal benefit). The total amount of net interest expense recognized as part of income tax expense in our Condensed Consolidated Statements of Operations was $1 million (net of federal benefit) and $3 million (net of federal benefit) for the 13- and 39- week periods ended October 27, 2012, respectively.
We file income tax returns in the United States, as well as various foreign jurisdictions. The U.S. Internal Revenue Service (“IRS”) is currently examining Holdings’ 2008 and 2009 federal income tax returns. The IRS has completed its examination of Holdings’ 2006 and 2007 federal income tax returns, and we are currently working with IRS appeals division to resolve certain matters arising from this exam. We have resolved all matters arising from prior IRS exams. In addition, Holdings and Sears are under examination by various state, local and foreign income tax jurisdictions for the years 2002 through 2010, and Kmart is under examination by such jurisdictions for the years 2003 through 2010.
At the end of 2011, we had a federal and state net operating loss (“NOL”) deferred tax asset of $672 million, which will expire predominately between 2019 and 2032. We have federal credit carryforwards of $385 million, which will expire between 2015 and 2032.
At January 28, 2012, we had a valuation allowance of $2.3 billion to record only the portion of the deferred tax asset that more likely than not will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative

16

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. We will continue to evaluate our valuation allowance as the year progresses for any change in circumstances that causes a change in judgment about the realizability of the deferred tax asset in future years.
In connection with the separation of SHO, the Company incurred a taxable gain of $266 million. The gain primarily related to the determination that the fair value of the consideration received exceeded the tax basis of the net assets of SHO at the date of the separation. The amount of taxes otherwise payable resulting from the gain was reduced by utilization of $105 million of deferred tax assets, primarily NOL carryforwards. As the Company had previously recorded a valuation allowance against these NOL carryforwards, $105 million of the related valuation allowance was released upon their utilization.
NOTE 10 – SUMMARY OF SEGMENT DATA
These reportable segment classifications are based on our business formats, as described in Note 1. The Kmart and Sears Canada formats each represent both an operating and reportable segment. The Sears Domestic reportable segment consists of the aggregation of several business formats. These formats are evaluated by our Chief Operating Decision Maker to make decisions about resource allocation and to assess performance.
In October 2012, we completed the separation of SHO. As a result of the separation, the Company will evaluate the need to update its reporting structure. We continue to assess the impact a new reporting structure may have on the business segment information used by our Chief Operating Decision Maker to operate Holdings on an ongoing basis.
Each of these segments derives its revenues from the sale of merchandise and related services to customers, primarily in the United States and Canada. The merchandise and service categories are as follows:

(i)
Hardlines—consists of appliances, consumer electronics, lawn and garden, tools and hardware, automotive parts, household goods, toys, housewares and sporting goods;
(ii)
Apparel and Soft Home—includes women’s, men’s, kids, footwear, jewelry, accessories and soft home;
(iii)
Food and Drug—consists of grocery and household, pharmacy and drugstore; and
(iv)
Service and Other—includes repair, installation and automotive service and extended contract revenue.
 


17

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
13 Weeks Ended October 27, 2012
millions
Kmart
 
Sears
Domestic
 
Sears
Canada
 
Sears
Holdings
Merchandise sales and services
 
 
 
 
 
 
 
Hardlines
$
881

 
$
2,671

 
$
558

 
$
4,110

Apparel and Soft Home
917

 
1,263

 
443

 
2,623

Food and Drug
1,263

 
9

 

 
1,272

Service and Other
20

 
781

 
51

 
852

Total merchandise sales and services
3,081

 
4,724

 
1,052

 
8,857

Costs and expenses
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
2,409

 
3,448

 
747

 
6,604

Selling and administrative
800

 
1,393

 
303

 
2,496

Depreciation and amortization
39

 
145

 
27

 
211

Gain on sales of assets
(3
)
 
(17
)
 
(6
)
 
(26
)
Total costs and expenses
3,245

 
4,969

 
1,071

 
9,285

Operating loss
$
(164
)
 
$
(245
)
 
$
(19
)
 
$
(428
)
Total assets
$
5,216

 
$
13,690

 
$
2,896

 
$
21,802

Capital expenditures
$
23

 
$
52

 
$
21

 
$
96

 
 
 
 
 
 
 
 
 
13 Weeks Ended October 29, 2011
millions
Kmart
 
Sears
Domestic
 
Sears
Canada
 
Sears
Holdings
Merchandise sales and services
 
 
 
 
 
 
 
Hardlines
$
966

 
$
2,895

 
$
577

 
$
4,438

Apparel and Soft Home
969

 
1,328

 
469

 
2,766

Food and Drug
1,387

 
9

 

 
1,396

Service and Other
21

 
722

 
62

 
805

Total merchandise sales and services
3,343

 
4,954

 
1,108

 
9,405

Costs and expenses
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
2,578

 
3,622

 
811

 
7,011

Selling and administrative
838

 
1,487

 
310

 
2,635

Depreciation and amortization
37

 
146

 
27

 
210

Gain on sales of assets
(2
)
 
(2
)
 

 
(4
)
Total costs and expenses
3,451

 
5,253

 
1,148

 
9,852

Operating loss
$
(108
)
 
$
(299
)
 
$
(40
)
 
$
(447
)
Total assets
$
6,729

 
$
16,012

 
$
2,865

 
$
25,606

Capital expenditures
$
21

 
$
75

 
$
26

 
$
122


18

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
39 Weeks Ended October 27, 2012
millions
Kmart
 
Sears
Domestic
 
Sears
Canada
 
Sears
Holdings
Merchandise sales and services
 
 
 
 
 
 
 
Hardlines
$
2,882

 
$
8,775

 
$
1,629

 
$
13,286

Apparel and Soft Home
3,003

 
3,715

 
1,215

 
7,933

Food and Drug
3,922

 
32

 

 
3,954

Service and Other
63

 
2,202

 
156

 
2,421

Total merchandise sales and services
9,870

 
14,724

 
3,000

 
27,594

Costs and expenses
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
7,560

 
10,546

 
2,137

 
20,243

Selling and administrative
2,315

 
4,197

 
866

 
7,378

Depreciation and amortization
110

 
437

 
78

 
625

Gain on sales of assets
(17
)
 
(250
)
 
(169
)
 
(436
)
Total costs and expenses
9,968

 
14,930

 
2,912

 
27,810

Operating income (loss)
$
(98
)
 
$
(206
)
 
$
88

 
$
(216
)
Total assets
$
5,216

 
$
13,690

 
$
2,896

 
$
21,802

Capital expenditures
$
90

 
$
110

 
$
57

 
$
257

 
 
39 Weeks Ended October 29, 2011
millions
Kmart
 
Sears
Domestic
 
Sears
Canada
 
Sears
Holdings
Merchandise sales and services
 
 
 
 
 
 
 
Hardlines
$
3,098

 
$
9,374

 
$
1,732

 
$
14,204

Apparel and Soft Home
3,107

 
3,788

 
1,377

 
8,272

Food and Drug
4,176

 
26

 

 
4,202

Service and Other
65

 
2,152

 
188

 
2,405

Total merchandise sales and services
10,446

 
15,340

 
3,297

 
29,083

Costs and expenses
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
8,011

 
11,175

 
2,358

 
21,544

Selling and administrative
2,436

 
4,368

 
939

 
7,743

Depreciation and amortization
111

 
452

 
78