10-Q 1 shldq12013.htm 10-Q SHLD.Q1.2013
                                            
                                                

 
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 MAY 4, 2013
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 (or for such shorter period that the registrant was required to file such reports), 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 May 17, 2013, the registrant had 106,407,219 common shares, $0.01 par value, outstanding.
 




SEARS HOLDINGS CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 Weeks Ended May 4, 2013 and April 28, 2012
 
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.




SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
13 Weeks Ended
millions, except per share data
May 4,
2013
 
April 28,
2012
REVENUES
 
 
 
Merchandise sales and services
$
8,452

 
$
9,270

COSTS AND EXPENSES
 
 
 
Cost of sales, buying and occupancy
6,296

 
6,703

Selling and administrative
2,218

 
2,445

Depreciation and amortization
191

 
202

Impairment charges
8

 

Gain on sales of assets
(14
)
 
(395
)
Total costs and expenses
8,699

 
8,955

Operating income (loss)
(247
)
 
315

Interest expense
(61
)
 
(66
)
Interest and investment income
7

 
12

Income (loss) before income taxes
(301
)
 
261

Income tax (expense) benefit
9

 
(67
)
Net income (loss)
(292
)
 
194

(Income) loss attributable to noncontrolling interests
13

 
(5
)
NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
$
(279
)
 
$
189

NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
 
 
Basic earnings (loss) per share
$
(2.63
)
 
$
1.78

Diluted earnings (loss) per share
$
(2.63
)
 
$
1.78

Basic weighted average common shares outstanding
106.0

 
105.9

Diluted weighted average common shares outstanding
106.0

 
106.1


See accompanying notes.

1


SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
13 Weeks Ended
millions
May 4,
2013
 
April 28,
2012
Net income (loss)
$
(292
)
 
$
194

Other comprehensive income
 
 
 
Pension and postretirement adjustments, net of tax
46

 
46

Deferred gain on derivatives, net of tax

 
2

Currency translation adjustments, net of tax
(7
)
 
(6
)
Total other comprehensive income
39

 
42

Comprehensive income (loss)
(253
)
 
236

Comprehensive (income) loss attributable to noncontrolling interests
14

 
(6
)
Comprehensive income (loss) attributable to Holdings’ shareholders
$
(239
)
 
$
230

See accompanying notes.

2


SEARS HOLDINGS CORPORATION
Condensed Consolidated Balance Sheets
 
(Unaudited)
 
 
millions
May 4,
2013
 
April 28,
2012
 
February 2,
2013
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
471

 
$
777

 
$
609

Restricted cash
10

 
7

 
9

Accounts receivable
608

 
644

 
635

Merchandise inventories
7,900

 
8,817

 
7,558

Prepaid expenses and other current assets
462

 
383

 
454

Total current assets
9,451

 
10,628

 
9,265

Property and equipment, net
5,910

 
6,436

 
6,053

Goodwill
379

 
841

 
379

Trade names and other intangible assets
2,871

 
2,922

 
2,881

Other assets
785

 
780

 
762

TOTAL ASSETS
$
19,396

 
$
21,607

 
$
19,340

LIABILITIES
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term borrowings(1)
$
1,754

 
$
1,103

 
$
1,094

Current portion of long-term debt and capitalized lease obligations
72

 
151

 
83

Merchandise payables
2,862

 
3,258

 
2,761

Other current liabilities
2,403

 
2,885

 
2,683

Unearned revenues
922

 
961

 
931

Other taxes
440

 
511

 
480

Short-term deferred tax liabilities
382

 
518

 
382

Total current liabilities
8,835

 
9,387

 
8,414

Long-term debt and capitalized lease obligations(2)
1,929

 
1,975

 
1,943

Pension and postretirement benefits
2,638

 
2,666

 
2,730

Other long-term liabilities
2,107

 
2,134

 
2,126

Long-term deferred tax liabilities
966

 
867

 
955

Total Liabilities
16,475

 
17,029

 
16,168

Commitments and contingencies

 

 

EQUITY
 
 
 
 
 
Total Equity
2,921

 
4,578

 
3,172

TOTAL LIABILITIES AND EQUITY
$
19,396

 
$
21,607


$
19,340

(1) Includes $305 million, $225 million and $285 million at May 4, 2013, April 28, 2012 and February 2, 2013, respectively, of unsecured commercial paper held by ESL and its affiliates.
(2) Includes $95 million of senior secured notes and $3 million of subsidiary notes held by ESL and its affiliates at both May 4, 2013 and February 2, 2013. Includes $95 million of senior secured notes and $4 million of subsidiary notes held by ESL and its affiliates at April 28, 2012.



See accompanying notes.

3


SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
13 Weeks Ended
millions
May 4,
2013
 
April 28,
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(292
)
 
$
194

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation and amortization
191

 
202

Impairment charges
8

 

Gain on sales of assets
(14
)
 
(395
)
Pension and postretirement plan contributions
(89
)
 
(86
)
Settlement of Canadian dollar hedges

 
(17
)
Change in operating assets and liabilities (net of acquisitions and dispositions):
 
 
 
Deferred income taxes
(1
)
 
72

Merchandise inventories
(350
)
 
(394
)
Merchandise payables
105

 
338

Income and other taxes
(60
)
 
(8
)
Mark-to-market adjustments and settlements on Sears Canada U.S. dollar collar contracts

 
(1
)
Other operating assets
18

 
19

Other operating liabilities
(229
)
 
17

Net cash used in operating activities
(713
)
 
(59
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Proceeds from sales of property and investments
5

 
446

Net (increase) decrease in investments and restricted cash
(1
)
 
1

Purchases of property and equipment
(60
)
 
(80
)
Net cash provided by (used in) investing activities
(56
)
 
367

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from debt issuances
1

 
1

Repayments of long-term debt
(28
)
 
(211
)
Increase (decrease) in short-term borrowings, primarily 90 days or less
660

 
(72
)
Purchase of Sears Canada shares

 
(3
)
Net cash provided by (used in) financing activities
633

 
(285
)
Effect of exchange rate changes on cash and cash equivalents
(2
)
 
7

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(138
)
 
30

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
609

 
747

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
471

 
$
777

Supplemental Cash Flow Data:
 
 
 
Income taxes paid, net of refunds
$
16

 
$
1

Cash interest paid
68

 
71

Unpaid liability to acquire equipment and software
26

 
38

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 28, 2012
106

 
$
1

 
$
(5,981
)
 
$
10,005

 
$
1,865

 
$
(1,609
)
 
$
60

 
$
4,341

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
189

 

 
5

 
194

Pension and postretirement adjustments, net of tax

 

 

 

 

 
45

 
1

 
46

Deferred gain on derivatives, net of tax

 

 

 

 

 
2

 

 
2

Currency translation adjustments, net of tax

 

 

 

 

 
(6
)
 

 
(6
)
Total Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
236

Stock awards

 

 
9

 
(6
)
 

 

 

 
3

Purchase of Sears Canada shares

 

 

 
(1
)
 

 

 
(2
)
 
(3
)
Associate stock purchase

 

 
1

 

 

 

 

 
1

Balance at April 28, 2012
106

 
$
1

 
$
(5,971
)
 
$
9,998

 
$
2,054

 
$
(1,568
)
 
$
64

 
$
4,578

Balance at February 2, 2013
106

 
$
1

 
$
(5,970
)
 
$
9,298

 
$
885

 
$
(1,459
)
 
$
417

 
$
3,172

Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 
(279
)
 

 
(13
)
 
(292
)
Pension and postretirement adjustments, net of tax

 

 

 

 

 
44

 
2

 
46

Currency translation adjustments, net of tax

 

 

 

 

 
(4
)
 
(3
)
 
(7
)
Total Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(253
)
Stock awards

 

 
(1
)
 
2

 

 

 

 
1

Associate stock purchase

 

 
1

 

 

 

 

 
1

Balance at May 4, 2013
106

 
$
1

 
$
(5,970
)
 
$
9,300

 
$
606

 
$
(1,419
)
 
$
403

 
$
2,921










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 an integrated retailer with 2,009 full-line and 53 specialty retail stores in the United States, operating through Kmart and Sears, and 461 full-line and specialty retail stores in Canada operating through Sears Canada Inc. (“Sears Canada”), a 51%-owned subsidiary. We have three reportable segments: Kmart, Sears Domestic and Sears Canada.
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 February 2, 2013.
Depreciation Expense
Depreciation expense included within depreciation and amortization expense reported on the Condensed Consolidated Statements of Operations was $181 million and $189 million for the 13-week periods ended May 4, 2013 and April 28, 2012, respectively.
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. 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 Sears Hometown and Outlet Stores, Inc. ("SHO") as a result of exercising subscription rights pursuant to the rights offering. Accordingly, we classified the difference between the proceeds received and 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 February 2, 2013.
In connection with the separation, Holdings and certain of its subsidiaries entered into various agreements with SHO under the terms described in Note 13. Because of the various agreements with SHO, the Company has determined that it has significant continuing cash flows with SHO. Accordingly, the operating results for the Sears Hometown and Outlet businesses through the date of the separation are presented within the consolidated operations of Holdings and the Sears Domestic segment in the accompanying Condensed Consolidated Financial Statements. Additionally, the Company has guaranteed lease obligations for certain SHO store leases that were assigned as a result of the separation. See Note 13 to the Condensed Consolidated Financial Statements for further information related to the agreements with SHO.

6


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

NOTE 2 – BORROWINGS
Total borrowings were as follows:
millions
May 4,
2013
 
April 28,
2012
 
February 2,
2013
Short-term borrowings:
 
 
 
 
 
Unsecured commercial paper
$
377

 
$
302

 
$
345

Secured borrowings
1,377

 
801

 
749

Long-term debt, including current portion:
 
 
 
 
 
Notes and debentures outstanding
1,582

 
1,669

 
1,593

Capitalized lease obligations
419

 
457

 
433

Total borrowings
$
3,755

 
$
3,229

 
$
3,120

The fair value of long-term debt, excluding capitalized lease obligations, was $1.5 billion at May 4, 2013 and $1.4 billion at both April 28, 2012 and February 2, 2013. 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 3 to the Condensed Consolidated Financial Statements.
Unsecured Commercial Paper
We borrow through the commercial paper markets. At May 4, 2013April 28, 2012 and February 2, 2013, we had outstanding commercial paper borrowings of $377 million, $302 million and $345 million, respectively. ESL held $305 million, $225 million and $285 million, respectively, of our commercial paper at May 4, 2013April 28, 2012 and February 2, 2013, including $178 million, $123 million and $169 million, respectively, held by Edward S. Lampert. See Note 13 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.
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 May 4, 2013, 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, under certain circumstances, including 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,

7


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

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.    
At May 4, 2013April 28, 2012 and February 2, 2013, we had $1.4 billion, $801 million and $749 million, respectively, of borrowings and $747 million, $694 million and $754 million, respectively, of letters of credit outstanding under the Domestic Credit Agreement. As a result, our availability under the agreement was $1.2 billion at May 4, 2013, and $1.8 billion at both April 28, 2012 and February 2, 2013. 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 May 4, 2013, April 28, 2012 and February 2, 2013, we had no borrowings outstanding under the Sears Canada Facility. Availability under this agreement was approximately $602 million ($607 million Canadian), $592 million ($581 million Canadian) and $503 million ($502 million Canadian), respectively, at May 4, 2013April 28, 2012 and February 2, 2013. The current availability may be reduced by reserves currently estimated by the Company to be $440 million which may be applied by the lenders at their discretion pursuant to the Credit Facility agreement. As a result of judicial developments relating to the priorities of pension liability relative to certain secured obligations, Sears Canada has executed an amendment to the Sears Canada Credit Facility which would provide additional security to lenders, with respect to the Company's unfunded pension liability by pledging certain real estate assets as collateral thereby partially reducing the potential reserve amounts by up to $150 million the lenders could apply. The potential additional reserve amount may increase or decrease in the future based on estimated net pension liabilities.
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

8


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

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 May 4, 2013April 28, 2012 and February 2, 2013, 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 $0.7 billion at May 4, 2013, and approximately $0.8 billion at both April 28, 2012 and February 2, 2013.
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 – 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.

9


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

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 May 4, 2013April 28, 2012 and February 2, 2013:
millions
Total Fair Value Amounts at
May 4, 2013
 
Level 1
 
Level 2
 
Level 3
Cash equivalents(1)
$
35

 
$
35

 
$

 
$

Restricted cash(2)
10

 
10

 

 

Total
$
45

 
$
45

 
$

 
$

millions
Total Fair Value Amounts at
April 28, 2012
 
Level 1
 
Level 2
 
Level 3
Cash equivalents(1)
$
291

 
$
291

 
$

 
$

Restricted cash(2)
7

 
7

 

 

Foreign currency derivative assets(3)
2

 

 
2

 

Foreign currency derivative liabilities(4)
(3
)
 

 
(3
)
 

Total
$
297

 
$
298

 
$
(1
)
 
$

millions
Total Fair Value Amounts at
February 2, 2013
 
Level 1
 
Level 2
 
Level 3
Cash equivalents(1)
$
181

 
$
181

 
$

 
$

Restricted cash(2)
9

 
9

 

 

Total
$
190

 
$
190

 
$

 
$

(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 4 – SEARS CANADA
Sears Holdings Ownership of Sears Canada
At both May 4, 2013 and February 2, 2013, Sears Holdings was the beneficial holder of approximately 52 million, or 51% of the common shares of Sears Canada. At April 28, 2012, Sears Holdings was the beneficial holder of approximately 97 million, or 95% of the common shares of Sears Canada.

10


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

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 beneficially 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 the beneficial holder of approximately 51% of the issued and outstanding common shares of Sears Canada, and as such, Holdings has maintained control of Sears Canada and will continue to consolidate the results of Sears Canada. We accounted for the spin-off as an equity transaction in accordance with accounting standards applicable to noncontrolling interests. Accordingly, we reclassified 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.
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 0.2 million common shares for $3 million during the 13-week period ended April 28, 2012.
NOTE 5 – STORE CLOSING COSTS, IMPAIRMENTS AND REAL ESTATE TRANSACTIONS
Store Closing Costs and Severance
We made the decision to close 13 stores in our Kmart segment and 6 stores in our Sears Domestic segment during the first quarter of 2013. 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 quarter of 2013, we closed 4 stores we previously announced would close and recorded charges of $1 million at Kmart for the related lease obligations. During the first quarter of 2012, we closed 31 stores we previously announced would close and recorded charges of $31 million at Sears Domestic and $3 million at Kmart for the related lease obligations.
Store closing costs recorded for the 13-week periods ended May 4, 2013 and April 28, 2012 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
$
5

 
$
1

 
$
(1
)
 
$
3

 
$
1

 
$
9

Sears Domestic
3

 
1

 
(3
)
 
2

 
8

 
11

Sears Canada

 
2

 

 

 

 
2

Total for the 13-week period ended May 4, 2013
$
8

 
$
4

 
$
(4
)
 
$
5

 
$
9

 
$
22

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$

 
$

 
$
3

 
$

 
$

 
$
3

Sears Domestic

 

 
31

 

 

 
31

Total for the 13-week period ended April 28, 2012
$

 
$

 
$
34

 
$

 
$

 
$
34

(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.

11


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

(3) 
Costs for the 13-week period ended May 4, 2013 include $8 million recorded within Impairment charges and $1 million recorded within Depreciation and amortization on the Condensed Consolidated Statements of Operations.
Store closing cost accruals of $169 million, $155 million and $193 million at May 4, 2013April 28, 2012 and February 2, 2013, respectively, were as follows:
millions
Severance
Costs
 
Lease
Termination
Costs
 
Other
Charges
 
Total
Balance at April 28, 2012
$
32

 
$
97

 
$
26

 
$
155

Store closing costs
31

 
52

 
7

 
90

Store closing capital lease obligations

 
9

 

 
9

Payments/utilizations
(22
)
 
(20
)
 
(19
)
 
(61
)
Balance at February 2, 2013
41

 
138

 
14

 
193

Store closing costs
4

 
(4
)
 
5

 
5

Payments/utilizations
(19
)
 
(7
)
 
(3
)
 
(29
)
Balance at May 4, 2013
$
26

 
$
127

 
$
16

 
$
169

Real Estate Transactions
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 11 (six owned and five 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 six to 23 months from the date of closing.
NOTE 6 – EQUITY
 Accumulated Other Comprehensive Loss
The following table displays the components of accumulated other comprehensive loss:
millions
May 4,
2013
 
April 28,
2012
 
February 2,
2013
Pension and postretirement adjustments (net of tax of $(442), $(490) and $(443), respectively)
$
(1,364
)
 
$
(1,530
)
 
$
(1,408
)
Cumulative unrealized derivative loss (net of tax of $0)

 
(3
)
 

Currency translation adjustments (net of tax of $(40), $(26) and $(39), respectively)
(55
)
 
(35
)
 
(51
)
Accumulated other comprehensive loss
$
(1,419
)
 
$
(1,568
)
 
$
(1,459
)
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.
Accumulated other comprehensive loss attributable to noncontrolling interests at May 4, 2013April 28, 2012, and February 2, 2013 was $(64) million, $(8) million and $(64) million, respectively.

12


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

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 May 4, 2013
 
13 Weeks Ended April 28, 2012
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 (1)
$
48

 
$
(2
)
 
$
46

 
$
48

 
$
(2
)
 
$
46

Deferred gain on derivatives

 

 

 
2

 

 
2

Currency translation adjustments
(8
)
 
1

 
(7
)
 
(6
)
 

 
(6
)
Total other comprehensive income (loss)
$
40

 
$
(1
)
 
$
39

 
$
44

 
$
(2
)
 
$
42

(1) 
Included in the computation of net periodic benefit expense. See Note 7 to the Condensed Consolidated Financial Statements.
Share Repurchase Program
During the 13-week periods ended May 4, 2013 and April 28, 2012, we repurchased no shares of our common stock under our common share repurchase program. At May 4, 2013, 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.
NOTE 7 – 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, recorded within Selling and administrative on the Condensed Consolidated Statements of Operations, for our retirement plans:
 
13 Weeks Ended
millions
May 4,
2013
 
April 28,
2012
Components of net periodic expense:
 
 
 
Interest cost
$
75

 
$
96

Expected return on plan assets
(77
)
 
(93
)
Amortization of experience losses
48

 
48

Net periodic expense
$
46

 
$
51

Contributions
During the 13-week periods ended May 4, 2013 and April 28, 2012, we made total contributions of $89 million and $86 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 $323 million over the remainder of 2013.

13


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

NOTE 8 – INCOME TAXES
We had gross unrecognized tax benefits of $151 million at May 4, 2013, and $161 million at both April 28, 2012 and February 2, 2013. Of the amount at May 4, 2013, $88 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-week period ended May 4, 2013, gross unrecognized tax benefits were decreased by $10 million due to foreign and state audit activity. During the 13-week period ended April 28, 2012, gross unrecognized tax benefits were decreased by $31 million due to federal, foreign, and state audit activity. We expect that our unrecognized tax benefits could decrease by as much as $28 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 May 4, 2013, April 28, 2012, and February 2, 2013, the total amount of interest and penalties included in our tax accounts in our Condensed Consolidated Balance Sheet was $53 million ($37 million net of federal benefit), $55 million ($37 million net of federal benefit), and $57 million ($39 million net of federal benefit), respectively. The total amount of net interest income recognized as part of income tax benefit in our Condensed Consolidated Statements of Operations was $2 million (net of federal benefit) for the 13-week period ended May 4, 2013.
We file income tax returns in the United States, as well as various foreign jurisdictions. The IRS has completed its examination of Holdings’ 2006 through 2009 federal income tax returns, and we are currently working with the IRS appeals division to resolve a single issue arising from these exams. 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 2011, and Kmart is under examination by such jurisdictions for the years 2003 through 2011.
At the end of 2012, we had a federal and state net operating loss (“NOL”) deferred tax asset of $722 million, which will expire predominately between 2019 and 2033. We have federal credit carryforwards of $605 million, which will expire between 2015 and 2033.
At February 2, 2013, we had a valuation allowance of $2.7 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 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.
The application of the requirements for accounting for income taxes in interim periods, after consideration of our valuation allowance, causes a significant variation in the typical relationship between income tax expense and pretax accounting income. For the first quarter of 2013, our effective income tax rate was a benefit of 3.0% primarily due to not recognizing the benefit of current period losses in certain domestic jurisdictions where it is not more likely than not that such benefits would be realized. In addition, the first quarter of 2013 benefited from favorable audit settlements.
NOTE 9 – 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 ("CODM") to make decisions about resource allocation and to assess performance.




14


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

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 as well as revenues earned in connection with our agreements with SHO.
 
13 Weeks Ended May 4, 2013
millions
Kmart
 
Sears
Domestic
 
Sears
Canada
 
Sears
Holdings
Merchandise sales and services
 
 
 
 
 
 
 
Hardlines
$
898

 
$
2,183

 
$
441

 
$
3,522

Apparel and Soft Home
993

 
1,165

 
354

 
2,512

Food and Drug
1,190

 
3

 

 
1,193

Service and Other
22

 
1,156

 
47

 
1,225

Total merchandise sales and services
3,103

 
4,507

 
842

 
8,452

Costs and expenses
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
2,398

 
3,293

 
605

 
6,296

Selling and administrative
713

 
1,255

 
250

 
2,218

Depreciation and amortization
33

 
133

 
25

 
191

Impairment charges

 
8

 

 
8

Gain on sales of assets
(13
)
 
(1
)
 

 
(14
)
Total costs and expenses
3,131

 
4,688

 
880

 
8,699

Operating loss
$
(28
)
 
$
(181
)
 
$
(38
)
 
$
(247
)
Total assets
$
4,284

 
$
12,829

 
$
2,283

 
$
19,396

Capital expenditures
$
21

 
$
29

 
$
10

 
$
60


15


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

 
13 Weeks Ended April 28, 2012
millions
Kmart
 
Sears
Domestic
 
Sears
Canada
 
Sears
Holdings
Merchandise sales and services
 
 
 
 
 
 
 
Hardlines
$
968

 
$
2,975

 
$
494

 
$
4,437

Apparel and Soft Home
1,062

 
1,257

 
366

 
2,685

Food and Drug
1,362

 
11

 

 
1,373

Service and Other
23

 
695

 
57

 
775

Total merchandise sales and services
3,415

 
4,938

 
917

 
9,270

Costs and expenses
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
2,565

 
3,487

 
651

 
6,703

Selling and administrative
752

 
1,415

 
278

 
2,445

Depreciation and amortization
33

 
143

 
26

 
202

Gain on sales of assets
(5
)
 
(228
)
 
(162
)
 
(395
)
Total costs and expenses
3,345

 
4,817

 
793

 
8,955

Operating income
$
70

 
$
121

 
$
124

 
$
315

Total assets
$
4,570

 
$
14,050

 
$
2,987

 
$
21,607

Capital expenditures
$
32

 
$
32

 
$
16

 
$
80

NOTE 10 – SUPPLEMENTAL FINANCIAL INFORMATION
Other long-term liabilities at May 4, 2013April 28, 2012 and February 2, 2013 consisted of the following:
millions
May 4,
2013
 
April 28,
2012
 
February 2,
2013
Unearned revenues
$
848

 
$
783

 
$
843

Self-insurance reserves
713

 
733

 
714

Other
546

 
618

 
569

Total
$
2,107

 
$
2,134

 
$
2,126

NOTE 11 – LEGAL PROCEEDINGS
We are a defendant in several lawsuits containing class or collective action allegations in which the plaintiffs are current and former hourly and salaried associates who allege violations of various wage and hour laws, rules and regulations pertaining to alleged misclassification of certain of our employees and the failure to pay overtime and/or the failure to pay for missed meal and rest periods. The complaints generally seek unspecified monetary damages, injunctive relief, or both. Further, certain of these proceedings are in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. We also are a defendant in several putative or certified class action lawsuits in California relating to alleged failure to comply with California laws pertaining to certain operational, marketing and payroll practices. The California laws alleged to have been violated in each of these lawsuits provide the potential for significant statutory penalties. At this time, the Company is not able to either predict the outcome of these lawsuits or reasonably estimate a potential range of loss with respect to the lawsuits.
We are subject to various other legal and governmental proceedings and investigations, including some involving the practices and procedures in our more highly regulated businesses and many involving litigation incidental to those and other businesses. Some matters contain class action allegations, environmental and asbestos exposure allegations and other consumer-based, regulatory or qui tam claims, each of which may seek compensatory, punitive or treble damage claims (potentially in large amounts), as well as other types of relief.
In accordance with accounting standards regarding loss contingencies, we accrue an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and we

16


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

disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. We do not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.
Because litigation outcomes are inherently unpredictable, our evaluation of legal proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies that could be material to any one of our financial statements are not probable, but are reasonably possible, or are probable, but cannot be estimated, then we disclose the nature of the loss contingencies, together with an estimate of the range of possible loss or a statement that such loss is not reasonably estimable. While the consequences of certain unresolved proceedings are not presently determinable, and an estimate of the probable and reasonably possible loss or range of loss in excess of amounts accrued for such proceedings cannot be reasonably made, an adverse outcome from such proceedings could have a material effect on our earnings in any given reporting period. However, in the opinion of our management, after consulting with legal counsel, and taking into account insurance and reserves, the ultimate liability related to current outstanding matters is not expected to have a material effect on our financial position, liquidity or capital resources.
NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS
Disclosures about Reclassification Adjustments out of Accumulated Other Comprehensive Income
In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The update requires entities to disclose additional information about reclassification adjustments, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. The update was effective and adopted by the Company in the first quarter of 2013 and impacted the Company’s disclosures, but otherwise did not have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.
Testing Indefinite-Lived Intangible Assets for Impairment
In July 2012, the FASB issued an accounting standards update which provides, subject to certain conditions, the option to perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. This update was effective and adopted by the Company in the first quarter of 2013 and did not have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.
NOTE 13 – RELATED PARTY DISCLOSURE
Investment of Surplus Cash
Our Board has delegated authority to direct investment of our surplus cash to Edward S. Lampert, subject to various limitations that have been or may be from time to time adopted by the Board of Directors and/or the Finance Committee of the Board of Directors. Mr. Lampert is Chairman of our Board of Directors and its Finance Committee and is the Chairman and Chief Executive Officer of ESL. Additionally, on February 1, 2013, Mr. Lampert became our Chief Executive Officer, in addition to his role as Chairman of the Board. Neither Mr. Lampert nor ESL will receive compensation for any such investment activities undertaken on our behalf, other than Mr. Lampert's compensation as our Chief Executive Officer. ESL beneficially owned approximately 55% of our outstanding common stock at May 4, 2013.
Further, to clarify the expectations that the Board of Directors has with respect to the investment of our surplus cash, the Board has renounced, in accordance with Delaware law, any interest or expectancy of the Company associated with any investment opportunities in securities that may come to the attention of Mr. Lampert or any employee, officer, director or advisor to ESL and its affiliated investment entities (each, a “Covered Party”) who also serves as an officer or director of the Company other than (a) investment opportunities that come to such Covered Party’s attention directly and exclusively in such Covered Party’s capacity as a director, officer or employee of the

17


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

Company, (b) control investments in companies in the mass merchandising, retailing, commercial appliance distribution, product protection agreements, residential and commercial product installation and repair services and automotive repair and maintenance industries and (c) investment opportunities in companies or assets with a significant role in our retailing business, including investment in real estate currently leased by the Company or in suppliers for which the Company is a substantial customer representing over 10% of such companies’ revenues, but excluding investments of ESL that were existing as of May 23, 2005.
Unsecured Commercial Paper
During the first quarter of 2013 and 2012, ESL and its affiliates purchased unsecured commercial paper issued by Sears Roebuck Acceptance Corp. (“SRAC”), an indirect wholly owned subsidiary of Sears Holdings. For the commercial paper outstanding to ESL, the weighted average of each of maturity, annual interest rate, and principal amount outstanding was 30.7 days, 2.78% and $284 million and 28.9 days, 1.78% and $208 million, respectively, in 2013 and 2012. The largest aggregate amount of principal outstanding to ESL at any time since the beginning of 2013 was $305 million and the aggregate amount of interest paid by SRAC to ESL during the first quarter of 2013 was $1.6 million. ESL held $305 million, $225 million and $285 million, respectively, in principal amount of commercial paper at May 4, 2013April 28, 2012 and February 2, 2013, which included $178 million, $123 million and $169 million, respectively, held by Mr. Lampert. The commercial paper purchases were made in the ordinary course of business on substantially the same terms, including interest rates, as terms prevailing for comparable transactions with other persons, and did not present features unfavorable to the Company.
Senior Secured Notes
In 2011, Mr. Lampert and ESL purchased an aggregate of $95 million of principal amount of the Company’s 6 5/8% Senior Secured Notes due 2018 (the "6 5/8% Notes") and $10 million of principal amount of unsecured notes issued by SRAC and another indirect wholly owned subsidiary of Sears Holdings, Sears DC Corp. (the “Subsidiary Notes”). At both May 4, 2013 and February 2, 2013, Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5/8% Notes and $1 million and $2 million, respectively, of principal amount of Subsidiary Notes. At April 28, 2012, Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5/8% Notes and $1 million and $3 million, respectively, of principal amount of Subsidiary Notes.
Trade Receivable Put Agreements
On January 26, 2012, ESL entered into an agreement with a financial institution to acquire from the financial institution an undivided participating interest in a certain percentage of its rights and obligations under trade receivable put agreements that were entered into with certain vendors of the Company. These agreements generally provide that, in the event of a bankruptcy filing by the Company, the financial institution will purchase such vendors’ accounts receivable arising from the sale of goods or services to the Company. ESL may from time to time choose to purchase an 80% undivided participating interest in the rights and obligations primarily arising under future trade receivable put agreements that the financial institution enters into with our vendors during the term of its agreement. The Company is neither a party nor will it become a party to any of these agreements. At May 4, 2013, April 28, 2012 and February 2, 2013, ESL held a participation interest totaling $196 million, $124 million and $234 million, respectively, in the financial institution’s agreements relating to the Company.
Sears Canada
ESL owns approximately 28% of the outstanding common shares of Sears Canada.
SHO
Holdings, and certain of its subsidiaries, engage in transactions with SHO pursuant to various agreements with SHO which, among other things, (1) govern the principal transactions relating to the rights offering and certain aspects of our relationship with SHO following the separation, (2) establish terms under which Holdings and certain of its subsidiaries will provide SHO with services, and (3) establish terms pursuant to which Holdings and certain of its subsidiaries will obtain merchandise for SHO. ESL owns approximately 63% of the outstanding common stock of SHO (based on publicly available information as of October 11, 2012).

18


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

These agreements were made in the context of a parent-subsidiary relationship and were negotiated in the overall context of the separation. The Company believes that the methods by which costs are allocated are reasonable and are based on prorated estimates of costs expected to be incurred by the Company. A summary of the nature of related party transactions involving SHO is as follows:
SHO obtains a significant amount of its merchandise from the Company. We have also entered into certain agreements with SHO to provide logistics, handling, warehouse and transportation services. SHO also pays a royalty related to the sale of Kenmore, Craftsman and DieHard products and fees for participation in the SHOP YOUR WAY program.
SHO receives commissions from the Company for the sale of merchandise made through www.sears.com, extended service agreements, delivery and handling services and credit revenues.
The Company provides SHO with shared corporate services. These services include accounting and finance, legal, human resources, information technology and real estate.
Amounts due to or from SHO are non-interest bearing, settled on a net basis, and have payment terms of 10 days after the invoice date. The Company invoices SHO on a weekly basis. At May 4, 2013 and February 2, 2013, Holdings reported a net amount receivable from SHO of $89 million and $79 million, respectively, in the Accounts receivable line of the Condensed Consolidated Balance Sheets. Amounts related to the sale of inventory and related services, royalties, and corporate shared services was $434 million, and the net amounts SHO earned related to commissions was $39 million for the quarter ended May 4, 2013. Additionally, the Company has guaranteed lease obligations for certain SHO store leases that were assigned as a result of the separation. See Note 4 of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 for further information related to these guarantees.
Also in connection with the separation, the Company entered into an agreement with SHO and the agent under SHO's secured credit facility, whereby the Company committed to continue to provide services to SHO in connection with a realization on the lender's collateral after default under the secured credit facility, notwithstanding SHO's default under the underlying agreement with us, and to provide certain notices and services to the agent, for so long as any obligations remain outstanding under the secured credit facility.
NOTE 14 – GUARANTOR/NON-GUARANTOR SUBSIDIARY FINANCIAL INFORMATION
At May 4, 2013, the principal amount outstanding of the Company’s 6 5/8% senior secured notes due 2018 was $1.24 billion. These notes were issued in 2010 by Sears Holdings Corporation (“Parent”). The notes are guaranteed by certain of our 100% owned domestic subsidiaries that own the collateral for the notes, as well as by SRAC (the “guarantor subsidiaries”). The following condensed consolidated financial information presents the Condensed Consolidating Balance Sheets at May 4, 2013April 28, 2012 and February 2, 2013, the Condensed Consolidating Statements of Operations and the Condensed Consolidating Statements of Comprehensive Income (Loss) for the 13-week periods ended May 4, 2013 and April 28, 2012, and the Condensed Consolidating Statements of Cash flows for the 13-week periods ended May 4, 2013 and April 28, 2012 of (i) Parent; (ii) the guarantor subsidiaries; (iii) the non-guarantor subsidiaries; (iv) eliminations and (v) the Company on a consolidated basis.
The following condensed consolidated financial statements had total assets and total liabilities of approximately $670 million and $130 million, respectively, at April 28, 2012 attributable to the Sears Hometown and Outlet businesses. Merchandise sales and services included revenues of approximately $620 million from the Sears Hometown and Outlet businesses for the period ended April 28, 2012. Net income (loss) attributable to Holdings' shareholders included net income of approximately $20 million from the Sears Hometown and Outlet businesses for the period ended April 28, 2012. The financial information for the Sears Hometown and Outlet businesses is reflected within the guarantor subsidiaries balances for this period. The condensed consolidated financial information at and for the period ended May 4, 2013 reflects the effects of the separation of SHO.
The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions including transactions with our wholly-owned non-guarantor insurance subsidiary. The Company has accounted for investments in subsidiaries under the equity method. The guarantor subsidiaries are 100% owned directly or indirectly by the Parent and all guarantees are joint, several and unconditional. Additionally, the notes are secured by a security interest in certain assets consisting primarily of domestic inventory and credit card receivables of the guarantor subsidiaries, and consequently may not be available to satisfy the claims of the Company’s general

19


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

creditors. Certain investments primarily held by non-guarantor subsidiaries are recorded by the issuers at historical cost and are recorded at fair value by the holder.
Condensed Consolidating Balance Sheet
May 4, 2013
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
347

 
$
124

 
$

 
$
471

Intercompany receivables

 

 
25,818

 
(25,818
)
 

Accounts receivable

 
497

 
111

 

 
608

Merchandise inventories

 
7,019

 
881

 

 
7,900

Prepaid expenses and other current assets
92

 
951

 
459

 
(1,030
)
 
472

Total current assets
92

 
8,814

 
27,393

 
(26,848
)
 
9,451

Total property and equipment, net

 
4,309

 
1,601

 

 
5,910

Goodwill and intangible assets

 
961

 
2,289

 

 
3,250

Other assets
16

 
229

 
3,118

 
(2,578
)
 
785

Investment in subsidiaries
16,174

 
25,105

 

 
(41,279
)
 

TOTAL ASSETS
$
16,282

 
$
39,418

 
$
34,401

 
$
(70,705
)
 
$
19,396

Current liabilities
 
 
 
 
 
 
 
 
 
Short-term borrowings
$

 
$
1,754

 
$

 
$

 
$
1,754

Current portion of long-term debt and capitalized lease obligations

 
55

 
17

 

 
72

Merchandise payables

 
2,522

 
340

 

 
2,862

Intercompany payables
12,556

 
13,262

 

 
(25,818
)
 

Short-term deferred tax liabilities
3

 
412

 

 
(33
)
 
382

Other current liabilities
4

 
2,379

 
2,379

 
(997
)
 
3,765

Total current liabilities
12,563

 
20,384

 
2,736

 
(26,848
)
 
8,835

Long-term debt and capitalized lease obligations
1,237

 
2,937

 
132

 
(2,377
)
 
1,929

Pension and postretirement benefits

 
2,229

 
409

 

 
2,638

Long-term deferred tax liabilities

 
12

 
943

 
11

 
966

Other long-term liabilities

 
843

 
1,512

 
(248
)
 
2,107

Total Liabilities
13,800

 
26,405

 
5,732

 
(29,462
)
 
16,475

EQUITY
 
 
 
 
 
 
 
 
 
Shareholder’s equity
2,482

 
13,013

 
28,669

 
(41,646
)
 
2,518

Noncontrolling interest

 

 

 
403

 
403

Total Equity
2,482

 
13,013

 
28,669

 
(41,243
)
 
2,921

TOTAL LIABILITIES AND EQUITY
$
16,282

 
$
39,418

 
$
34,401

 
$
(70,705
)
 
$
19,396



20


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

Condensed Consolidating Balance Sheet
April 28, 2012
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
385

 
$
392

 
$

 
$
777

Intercompany receivables

 

 
25,292

 
(25,292
)
 

Accounts receivable

 
429

 
215

 

 
644

Merchandise inventories

 
7,910

 
907

 

 
8,817

Prepaid expenses and other current assets
62

 
669

 
466

 
(807
)
 
390

Total current assets
62

 
9,393

 
27,272

 
(26,099
)
 
10,628

Total property and equipment, net

 
4,717

 
1,719

 

 
6,436

Goodwill and intangible assets

 
1,167

 
2,596

 

 
3,763

Other assets
21

 
194

 
2,585

 
(2,020
)
 
780

Investment in subsidiaries
17,614

 
25,899

 

 
(43,513
)
 

TOTAL ASSETS
$
17,697

 
$
41,370

 
$
34,172

 
$
(71,632
)
 
$
21,607

Current liabilities
 
 
 
 
 
 
 
 
 
Short-term borrowings
$

 
$
1,103

 
$

 
$

 
$
1,103

Current portion of long-term debt and capitalized lease obligations

 
134

 
17

 

 
151

Merchandise payables

 
2,811

 
447

 

 
3,258

Intercompany payables
11,934

 
13,358

 

 
(25,292
)
 

Short-term deferred tax liabilities
5

 
543

 

 
(30
)
 
518

Other current liabilities
7

 
2,806

 
2,321

 
(777
)
 
4,357

Total current liabilities
11,946

 
20,755

 
2,785

 
(26,099
)
 
9,387

Long-term debt and capitalized lease obligations
1,237

 
2,412

 
111

 
(1,785
)
 
1,975

Pension and postretirement benefits

 
2,210

 
456

 

 
2,666

Other long-term liabilities

 
56

 
817

 
(6
)
 
867

Non-current liabilities of discontinued operations

 
846

 
1,517

 
(229
)
 
2,134

Total Liabilities
13,183

 
26,279

 
5,686

 
(28,119
)
 
17,029

EQUITY
 
 
 
 
 
 
 
 
 
Shareholder’s equity
4,514

 
15,091

 
28,486

 
(43,577
)
 
4,514

Noncontrolling interest

 

 

 
64

 
64

Total Equity
4,514

 
15,091

 
28,486

 
(43,513
)
 
4,578

TOTAL LIABILITIES AND EQUITY
$
17,697

 
$
41,370

 
$
34,172

 
$
(71,632
)
 
$
21,607



21


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

Condensed Consolidating Balance Sheet
February 2, 2013
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
320

 
$
289

 
$

 
$
609

Intercompany receivables

 

 
25,553

 
(25,553
)
 

Accounts receivable

 
506

 
129

 

 
635

Merchandise inventories

 
6,709

 
849

 

 
7,558

Prepaid expenses and other current assets
92

 
970

 
461

 
(1,060
)
 
463

Total current assets
92

 
8,505

 
27,281

 
(26,613
)
 
9,265

Total property and equipment, net

 
4,412

 
1,641

 

 
6,053

Goodwill and intangible assets

 
968

 
2,292

 

 
3,260

Other assets
17

 
223

 
3,147

 
(2,625
)
 
762

Investment in subsidiaries
16,413

 
24,988

 

 
(41,401
)
 

TOTAL ASSETS
$
16,522

 
$
39,096

 
$
34,361

 
$
(70,639
)
 
$
19,340

Current liabilities
 
 
 
 
 
 
 
 
 
Short-term borrowings
$

 
$
1,094

 
$

 
$

 
$
1,094

Current portion of long-term debt and capitalized lease obligations

 
66

 
17

 

 
83

Merchandise payables

 
2,392

 
369

 

 
2,761

Intercompany payables
12,594

 
12,959

 

 
(25,553
)
 

Short-term deferred tax liabilities
3

 
412

 

 
(33
)
 
382

Other current liabilities
26

 
2,640

 
2,455

 
(1,027
)
 
4,094

Total current liabilities
12,623

 
19,563

 
2,841

 
(26,613
)
 
8,414

Long-term debt and capitalized lease obligations
1,237

 
3,081

 
135

 
(2,510
)
 
1,943

Pension and postretirement benefits

 
2,310

 
420

 

 
2,730

Long-term deferred tax liabilities

 

 
914

 
41

 
955

Other long-term liabilities

 
861

 
1,513

 
(248
)
 
2,126

Total Liabilities
13,860

 
25,815

 
5,823

 
(29,330
)
 
16,168