10-Q 1 shldq32017.htm 10-Q Document


 

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 28, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-51217, 001-36693
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, a smaller reporting company or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ¨  Accelerated filer    x   Non-accelerated filer (Do not check if a smaller reporting company)   ¨   Smaller reporting company    ¨ Emerging growth company    ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
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 24, 2017, the registrant had 107,613,718 common shares, $0.01 par value, outstanding.
 



SEARS HOLDINGS CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 and 39 Weeks Ended October 28, 2017 and October 29, 2016
 
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
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 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
REVENUES
 
 
 
 
 
 
 
Merchandise sales
$
2,893

 
$
4,061

 
$
9,820

 
$
13,111

Services and other(1)(2)
767

 
968

 
2,506

 
2,975

Total revenues
3,660

 
5,029

 
12,326

 
16,086

COSTS AND EXPENSES
 
 
 
 
 
 
 
Cost of sales, buying and occupancy - merchandise sales(3)
2,535

 
3,497

 
8,320

 
10,928

Cost of sales and occupancy - services and other(1)
423

 
570

 
1,403

 
1,759

Total cost of sales, buying and occupancy
2,958

 
4,067

 
9,723

 
12,687

Selling and administrative
1,339

 
1,543

 
3,975

 
4,530

Depreciation and amortization
89

 
91

 
259

 
278

Impairment charges
9

 
3

 
29

 
18

Gain on sales of assets
(316
)
 
(51
)
 
(1,437
)
 
(166
)
Total costs and expenses
4,079

 
5,653

 
12,549

 
17,347

Operating loss
(419
)
 
(624
)
 
(223
)
 
(1,261
)
Interest expense
(136
)
 
(105
)
 
(387
)
 
(289
)
Interest and investment loss

 
(8
)
 
(14
)
 
(25
)
Loss before income taxes
(555
)
 
(737
)
 
(624
)
 
(1,575
)
Income tax (expense) benefit
(3
)
 
(11
)
 
59

 
(39
)
NET LOSS ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
$
(558
)
 
$
(748
)
 
$
(565
)
 
$
(1,614
)
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
 
 
 
 
 
 
 
Basic loss per share
$
(5.19
)
 
$
(6.99
)
 
$
(5.27
)
 
$
(15.10
)
Diluted loss per share
$
(5.19
)
 
$
(6.99
)
 
$
(5.27
)
 
$
(15.10
)
Basic weighted average common shares outstanding
107.5

 
107.0

 
107.3

 
106.9

Diluted weighted average common shares outstanding
107.5

 
107.0

 
107.3

 
106.9

(1) 
Includes merchandise sales to Sears Hometown and Outlet Stores, Inc. ("SHO") of $209 million and $271 million for the 13 weeks ended October 28, 2017 and October 29, 2016, respectively, and $720 million and $847 million for the 39 weeks ended October 28, 2017 and October 29, 2016, respectively. Pursuant to the terms of the separation, merchandise is sold to SHO at cost.
(2) Includes revenue from Lands' End, Inc. ("Lands' End") for retail services and rent for Lands' End Shops at owned Sears locations, participation in the Shop Your Way® program and corporate shared services of $12 million and $15 million for the 13 weeks ended October 28, 2017 and October 29, 2016, respectively, and $36 million and $38 million for the 39 weeks ended October 28, 2017 and October 29, 2016, respectively.
(3) Includes rent expense (consisting of straight-line rent expense offset by amortization of a deferred gain on sale-leaseback) of $17 million and $22 million for the 13 weeks ended October 28, 2017 and October 29, 2016, respectively, and $55 million and $64 million for the 39 weeks ended October 28, 2017 and October 29, 2016, respectively, pursuant to the master lease with Seritage Growth Properties ("Seritage"). Also includes installment expenses of $10 million and $17 million for the 13 weeks ended October 28, 2017 and October 29, 2016, respectively, and $34 million and $51 million for the 39 weeks ended October 28, 2017 and October 29, 2016, respectively.
See accompanying notes.




SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Comprehensive Loss
 (Unaudited)
 
13 Weeks Ended
 
39 Weeks Ended
millions
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Net loss
$
(558
)
 
$
(748
)
 
$
(565
)
 
$
(1,614
)
Other comprehensive income
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
200

 
64

 
377

 
192

Currency translation adjustments, net of tax
1

 

 
2

 

Total other comprehensive income
201

 
64

 
379

 
192

Comprehensive loss attributable to Holdings' shareholders
$
(357
)
 
$
(684
)
 
$
(186
)
 
$
(1,422
)





































See accompanying notes.




SEARS HOLDINGS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)


millions
October 28,
2017
 
October 29,
2016
 
January 28,
2017
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
200

 
$
258

 
$
286

Restricted cash
154

 

 

Accounts receivable(1)
378

 
372

 
466

Merchandise inventories
3,452

 
5,032

 
3,959

Prepaid expenses and other current assets
347

 
304

 
285

Total current assets
4,531

 
5,966

 
4,996

Property and equipment (net of accumulated depreciation and amortization of $2,451, $2,886 and $2,841)
1,855

 
2,392

 
2,240

Goodwill
269

 
269

 
269

Trade names and other intangible assets
1,244

 
1,904

 
1,521

Other assets
294

 
334

 
336

TOTAL ASSETS
$
8,193

 
$
10,865

 
$
9,362

LIABILITIES
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term borrowings(2)
$
1,061

 
$
618

 
$

Current portion of long-term debt and capitalized lease obligations(3)
1,310

 
594

 
590

Merchandise payables
772

 
1,556

 
1,048

Other current liabilities(4)
1,534

 
1,848

 
1,956

Unearned revenues
676

 
759

 
748

Other taxes
290

 
355

 
339

Total current liabilities
5,643

 
5,730

 
4,681

Long-term debt and capitalized lease obligations(5)
2,032

 
3,087

 
3,573

Pension and postretirement benefits
1,641

 
1,997

 
1,750

Deferred gain on sale-leaseback
446

 
656

 
563

Sale-leaseback financing obligation
247

 
164

 
235

Other long-term liabilities
1,557

 
1,716

 
1,641

Long-term deferred tax liabilities
634

 
890

 
743

Total Liabilities
12,200

 
14,240

 
13,186

Commitments and contingencies


 


 


DEFICIT
 
 
 
 
 
Total Deficit
(4,007
)
 
(3,375
)
 
(3,824
)
TOTAL LIABILITIES AND DEFICIT
$
8,193

 
$
10,865

 
$
9,362


(1) 
Includes $26 million, $20 million and $81 million of net amounts receivable from SHO, and $7 million, $14 million and $14 million of amounts receivable from Seritage at October 28, 2017, October 29, 2016 and January 28, 2017, respectively.
(2) Includes balances held by related parties of $553 million and $249 million at October 28, 2017 and October 29, 2016, respectively, related to our Line of Credit Loans and Incremental Loans (each as defined in Note 2) and commercial paper. See Notes 2 and 11 for further information.
(3) Includes balances held by related parties of $199 million, $216 million and $216 million at October 28, 2017, October 29, 2016 and January 28, 2017, respectively, related to our 2016 Secured Loan Facility for all periods presented and also related to our Senior Secured Notes at October 28, 2017 See Note 2 for defined terms.
(4) Includes $1 million of net amounts payable to Lands' End at October 29, 2016 and January 28, 2017, and $11 million of amounts payable to Seritage at January 28, 2017.
(5) 
Includes balances held by related parties of $1.2 billion, $1.2 billion and $1.7 billion at October 28, 2017, October 29, 2016 and January 28, 2017, respectively, related to our Subsidiary Notes, Senior Unsecured Notes, Second Lien Term Loan, 2016 Term Loan and 2017 Secured Loan Facility for all periods presented and also related to our Senior Secured Notes at October 29, 2016 and January 28, 2017. See Note 2 for defined terms and Notes 2 and Note 11 for further information.
See accompanying notes.




SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
39 Weeks Ended
millions
October 28,
2017
 
October 29,
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(565
)
 
$
(1,614
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Deferred tax valuation allowance
(120
)
 
(37
)
Depreciation and amortization
259

 
278

Impairment charges
29

 
18

Gain on sales of assets
(1,437
)
 
(166
)
Pension and postretirement plan contributions
(271
)
 
(261
)
Pension plan settlements
403

 

Mark-to-market adjustments of financial instruments
17

 
22

Amortization of deferred gain on sale-leaseback
(59
)
 
(66
)
Amortization of debt issuance costs and accretion of debt discount
93

 
58

Other
(36
)
 

Change in operating assets and liabilities (net of acquisitions and dispositions):
 
 
 
Deferred income taxes
11

 
34

Merchandise inventories
490

 
140

Merchandise payables
(276
)
 
(18
)
Income and other taxes
(30
)
 
97

Other operating assets

 
(6
)
Other operating liabilities
(409
)
 
113

Net cash used in operating activities
(1,901
)
 
(1,408
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Proceeds from sales of property and investments
867

 
274

Proceeds from Craftsman Sale
572

 

Proceeds from sales of receivables(1)
293

 

Purchases of property and equipment
(59
)
 
(115
)
Net cash provided by investing activities
1,673

 
159

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from debt issuances(2)
638

 
1,528

Repayments of debt(3)
(887
)
 
(50
)
Increase (decrease) in short-term borrowings, primarily 90 days or less
464

 
(179
)
Proceeds from sale-leaseback financing
106

 

Debt issuance costs(4)
(25
)
 
(30
)
Net cash provided by financing activities
296

 
1,269

 
 
 
 
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
68

 
20

TOTAL CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR
286

 
238

TOTAL CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
$
354

 
$
258

 
 
 
 
Supplemental Cash Flow Data:
 
 
 
Income taxes paid, net of refunds
$
33

 
$
18

Cash interest paid(5)
285

 
186

Unpaid liability to acquire equipment and software
9

 
15

(1) Proceeds in 2017 include $63 million from JPP, LLC and JPP II, LLC, entities affiliated with ESL (as defined in Note 1), for the sale of receivables.
(2) Proceeds in 2017 include $553 million from related parties in connection with the Line of Credit Loans and Incremental Loans. Proceeds in 2016 include $796 million from related parties in connection with the Second Lien Term Loan, 2016 Term Loan and 2016 Secured Loan Facility. See Notes 2 and 11 for further information.
(3) Repayments in 2017 include $299 million to related parties in connection with the 2017 Secured Loan Facility, 2016 Secured Loan Facility, Incremental Loans, 2016 Term Loan and Line of Credit Loans. See Notes 2 and 11 for further information.
(4) Includes a one-time extension fee equal to $4 million to JPP, LLC and JPP II, LLC, entities affiliated with ESL during the 39 weeks ended October 28, 2017. See Note 2 for further information.
(5) Cash interest paid includes $114 million and $53 million interest paid to related parties related to our borrowings during the 39 weeks ended October 28, 2017 and October 29, 2016, respectively. See Notes 2 and 11 for further information.

See accompanying notes.




SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Deficit
(Unaudited)
 
Deficit Attributable to Holdings' Shareholders
 
 
dollars and shares in millions
Number
of
Shares
Common
Stock
Treasury
Stock
Capital in
Excess of
Par Value
Retained Earnings (Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interests
Total
Balance at January 30, 2016
107

$
1

$
(5,928
)
$
9,173

$
(3,291
)
$
(1,918
)
$
7

$
(1,956
)
Comprehensive loss
 
 
 
 
 
 
 
 
Net loss




(1,614
)


(1,614
)
Pension and postretirement adjustments, net of tax





192


192

Total Comprehensive Loss
 
 
 
 
 
 
 
(1,422
)
Stock awards


19

(20
)



(1
)
Associate stock purchase


6






6

Distribution to noncontrolling interest






(2
)
(2
)
Balance at October 29, 2016
107

$
1

$
(5,903
)
$
9,153

$
(4,905
)
$
(1,726
)
$
5

$
(3,375
)
Balance at January 28, 2017
107

$
1

$
(5,891
)
$
9,130

$
(5,512
)
$
(1,552
)
$

$
(3,824
)
Comprehensive loss
 
 
 
 
 
 
 
 
Net loss




(565
)


(565
)
Pension and postretirement adjustments, net of tax





377


377

Currency translation adjustments, net of tax





2


2

Total Comprehensive Loss
 
 
 
 
 
 
 
(186
)
Stock awards
1


42

(44
)



(2
)
Associate stock purchase


5






5

Balance at October 28, 2017
108

$
1

$
(5,844
)
$
9,086

$
(6,077
)
$
(1,173
)
$

$
(4,007
)


























See accompanying notes.




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 1,104 full-line and specialty retail stores as of October 28, 2017 in the United States, operating through Kmart and Sears. We operate under two reportable segments: Kmart and Sears Domestic.
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, 2017.
Pension Benefit Guaranty Corporation Agreement
On March 18, 2016, we entered into a five-year pension plan protection and forbearance agreement (the "PPPFA") with the Pension Benefit Guaranty Corporation ("PBGC"), pursuant to which the Company has agreed to continue to protect, or "ring-fence," pursuant to customary covenants, the assets of certain special purpose subsidiaries (the "Relevant Subsidiaries") holding real estate and/or intellectual property assets. Also under the agreement, the Relevant Subsidiaries granted the PBGC a springing lien on the ring-fenced assets, which lien will be triggered only by (a) failure to make required contributions to the Company's pension plans (the "Plans"), (b) prohibited transfers of ownership interests in the Relevant Subsidiaries, (c) termination events with respect to the Plans, or (d) bankruptcy events with respect to the Company or certain of its material subsidiaries. In November 2017, the Company announced an amendment to the PPPFA which is further described below and in Note 5. Under the PPPFA, the PBGC has agreed to forbear from initiating an involuntary termination of the Plans, except upon the occurrence of specified conditions, one of which is based on the aggregate market value of the Company’s issued and outstanding stock. As of the date of this report, the Company's stock price is such that the PBGC would be permitted to cease forbearance. The PBGC has been given notice in accordance with the terms of the PPPFA and has not communicated any intention to cease its forbearance.
Craftsman Brand Sale
On January 5, 2017, Holdings announced that it had entered into a definitive agreement under which Stanley Black & Decker would purchase the Craftsman brand from Holdings (the "Craftsman Sale"). On March 8, 2017, the Company closed its sale of the Craftsman brand to Stanley Black & Decker. The transaction provides Stanley Black & Decker with the right to develop, manufacture and sell Craftsman-branded products outside of Holdings and Sears Hometown & Outlet Stores, Inc. distribution channels. As part of the agreement, Holdings is permitted to continue to offer Craftsman-branded products, sourced from existing suppliers, through its current retail channels via a perpetual license from Stanley Black & Decker, which will be royalty-free for the first 15 years after closing and royalty-bearing thereafter.
The Company received an initial upfront payment of $525 million, subject to closing costs and an adjustment for working capital changes, at closing. In addition, Stanley Black & Decker will pay a further $250 million in cash in three years (the "Craftsman Receivable") and Holdings will receive payments of between 2.5% and 3.5% on new Stanley Black & Decker sales of Craftsman products made during the 15 year period following the closing. In connection with the Craftsman Sale, we recognized a gain in our Kmart segment of $492 million within gain on sales of assets in the Condensed Consolidated Statements of Operations for the 39 weeks ended October 28, 2017,




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

and initially established a receivable of $234 million for the net present value of the Craftsman Receivable. During the 13 weeks ended July 29, 2017, we sold the Craftsman Receivable to a third-party purchaser.
In connection with the closing of the Craftsman Sale, Holdings reached an agreement with the PBGC pursuant to which the PBGC consented to the sale of the Craftsman-related assets that had been "ring-fenced" under the PPPFA and certain related transactions. As a condition to obtaining this consent, the Company agreed to grant the PBGC a lien on, and subsequently contribute to the Company's pension plans, the value of the Craftsman Receivable, with such payments being fully credited against certain of the Company's minimum pension funding obligations in 2017, 2018 and 2019.
The Company also granted a lien to the PBGC on the 15-year income stream relating to new Stanley Black & Decker sales of Craftsman products, and agreed to contribute the payments from Stanley Black & Decker under such income stream to the Company's pension plans, with such payments to be credited against the Company's minimum pension funding obligations starting no later than five years from the closing date. The Company also agreed to grant the PBGC a lien on $100 million of real estate assets to secure the Company's minimum pension funding obligations through the end of 2019, and agreed to certain other amendments to the PPPFA.
Cash and Cash Equivalents and Restricted Cash
Our cash and cash equivalents include all highly liquid investments with original maturities of three months or less at the date of purchase. The Company classifies cash balances that are legally restricted pursuant to contractual arrangements as restricted cash.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows as of October 28, 2017, October 29, 2016 and January 28, 2017.
millions
October 28,
2017
 
October 29,
2016
 
January 28,
2017
Cash and cash equivalents
$
122

 
$
145

 
$
196

Cash posted as collateral
4

 
3

 
3

Credit card deposits in transit
74

 
110

 
87

Total cash and cash equivalents
200

 
258

 
286

Restricted cash
154

 

 

Total cash balances
$
354

 
$
258

 
$
286

Depreciation Expense
Depreciation expense included within depreciation and amortization reported in the Condensed Consolidated Statements of Operations was $88 million and $90 million for the 13 week periods ended October 28, 2017 and October 29, 2016, respectively, and $256 million and $274 million for the 39 week periods ended October 28, 2017 and October 29, 2016, respectively.
Liquidity
Our primary need for liquidity is to fund working capital requirements of our businesses, capital expenditures and for general corporate purposes, including debt repayments and pension plan contributions. The Company has taken a number of actions to continue to support its operations and meet its obligations in light of the incurred losses and negative cash flows experienced over the past several years.
During 2016, the Company completed various financing transactions, including the closing of the $750 million Senior Secured Term Loan (the "2016 Term Loan") under its domestic credit facility maturing in July 2020, the completion of a $500 million real estate loan facility in April 2016 (the "2016 Secured Loan Facility"), initially maturing in July 2017, the completion of an additional $500 million real estate loan facility in January 2017 (the "2017 Secured Loan Facility") maturing in July 2020, entering into a $300 million Second Lien Credit Agreement in September 2016 maturing in 2020 and entering into a new Letter of Credit and Reimbursement Agreement,




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

originally providing for up to a $500 million secured standby letter of credit facility (the "LC Facility") from certain affiliates of ESL Investments, Inc. ("ESL").
During fiscal year 2017, the Company continued to take actions to improve our liquidity. During the first quarter, the Company closed its previously-announced sale of the Craftsman brand to Stanley Black & Decker. Additionally, the Company entered into an amendment to our existing domestic credit facility which reduced the aggregate revolver commitments from $1.971 billion to $1.5 billion, but also implemented other modifications to covenants and reserves against the domestic credit facility borrowing base that improved net liquidity. The amendment provided additional flexibility in the form of a $250 million increase in the general debt basket from $750 million to $1.0 billion with $99 million available to borrow at October 28, 2017 after giving consideration to existing outstanding borrowings. Our domestic credit facility permits us up to $500 million of FILO loan capacity under the credit agreement and up to $2.0 billion of second lien loan capacity (of which $1.0 billion was utilized at October 28, 2017) outside the credit agreement, all depending on the applicable and available borrowing base as defined in our applicable debt agreements, as well as our ability to secure commitments from lenders. We also have the ability to obtain longer-term secured financing maturing outside of the domestic credit facility maturity date which would not be subject to borrowing base limitations (see Note 2). Other options available to us include refinancing existing debt and additional real estate loans, which we have successfully executed in the past.
In addition, in May 2017, the Company reached agreement to extend the maturity of the 2016 Secured Loan Facility. As of the date of this filing, we had exercised our option to extend the maturity of the 2016 Secured Loan Facility to April 2018 (see Note 2), with the option to further extend the remaining loan balance until July 2018. The Company continued to pay down the 2016 and 2017 Secured Loan Facilities through asset sales during the second and third quarters. As of October 28, 2017, $263 million and $384 million remain outstanding under the 2016 Secured Loan Facility and 2017 Secured Loan Facility, respectively. To date in 2017, the Company has received cash proceeds of approximately $370 million from asset sales, which were used to reduce the amounts outstanding under the 2016 Secured Loan Facility to $263 million, under the 2017 Secured Loan Facility to $384 million and under the Incremental Loans (as defined below) to $185 million. An additional $498 million of net cash proceeds were received from the sales of properties and other assets which were used to reduce outstanding borrowings under the Company's domestic credit facility, as well as for general corporate purposes. Subsequent to third quarter end, the Company executed additional asset sales and commercial arrangements which generated cash proceeds of approximately $167 million, with approximately $21 million utilized to pay down amounts outstanding under the 2017 Secured Loan Facility and the remainder used to pay down revolver borrowings. The Company expects additional real estate sales to occur throughout the remainder of fiscal year 2017 and in 2018. The specific assets involved, the timing and the overall amount will depend on a variety of factors, including market conditions, interest in specific assets, valuations of those assets and our underlying operating performance.
The Company also amended its existing Second Lien Credit Agreement dated September 1, 2016 in July 2017, to provide for the creation of a $500 million Line of Credit Loan Facility (the "Line of Credit Facility"). As of October 28, 2017, $413 million is outstanding under the Line of Credit Facility. In August 2017, the Company executed amendments to its LC Facility. The amendments, among other things, extended the maturity of the $271 million LC Facility from its original maturity date of December 28, 2017 through December 28, 2018.
During October 2017, the Company entered into amended and restated loan agreements (the "Incremental Loans"), with the Incremental Loans maturing on April 23, 2018. The Company borrowed $200 million pursuant to the Incremental Loans, and used the proceeds for general corporate purposes. As of October 28, 2017, $185 million is outstanding under the Incremental Loans. Further, in fiscal 2017, the Company issued commercial paper to meet short-term liquidity needs, with the maximum amount outstanding during this time of $160 million, with $40 million of commercial paper outstanding at October 28, 2017.
Finally, subsequent to the end of the third quarter, the Company and the PBGC entered into an amendment to the PPPFA. The amendment, which is expected to close in February 2018, provides for the release of 138 of our properties from a ring-fence arrangement created under the PPPFA upon, and in exchange for, the payment of approximately $407 million into the Sears pension plans. Holdings expects to raise the $407 million through a sale of properties and/or financing secured by the properties, with such financing to be repaid from the proceeds of sales




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

of the properties. This agreement provides the Company with financial flexibility through the ability to monetize properties, and, in addition, provides funding relief from contributions to the pension plans for the next two years.
During 2017, the Company also achieved its annualized cost savings target of $1.25 billion as part of the restructuring program announced earlier this year. Actions taken to realize the annualized cost savings have included simplification of the organizational structure of Holdings, streamlining of operations, reducing unprofitable categories and the closure of under-performing stores. In fiscal year 2017, we have closed approximately 330 stores previously announced for closure, and approximately an additional 100 stores previously announced for closure are expected to be closed by the end of the fourth quarter of 2017. As a result of these actions, the Company has begun to see improvement in the operations in the second and third quarters as the restructuring program actions, including the closing of unprofitable stores, have begun to take effect.
We acknowledge that we continue to face a challenging competitive environment. The comprehensive restructuring of our operations is delivering cost efficiencies and helping drive improvements in our operating performance. While we continue to focus on our overall profitability, including managing expenses, we reported a loss in the third quarter of 2017, and were required to fund cash used in operating activities with cash from investing and financing activities. We expect that the actions outlined above will further enhance our liquidity and financial flexibility. In addition, as previously discussed, we expect to generate additional liquidity through the monetization of our real estate and other assets and additional financing actions, which may include participation by related parties. We expect that these actions will be executed in alignment with the anticipated timing of our liquidity needs.
We believe that the actions discussed above are probable of occurring and mitigate the liquidity risk raised by our historical operating results and satisfy our estimated liquidity needs during the next 12 months from the issuance of the financial statements. The PPPFA contains certain limitations on our ability to sell assets, which could impact our ability to complete asset sale transactions or our ability to use proceeds from those transactions to fund our operations. Therefore, the planned actions take into account the applicable restrictions under the PPPFA.
We also continue to explore ways to unlock value across a range of assets, including exploring ways to maximize the value of our Home Services and Sears Auto Centers businesses, as well as our Kenmore and DieHard brands, through partnerships, sales or other means of externalization that could expand distribution of our brands and service offerings to realize significant growth. We expect to continue to right-size, redeploy and highlight the value of our assets, including monetizing our real estate portfolio and exploring potential asset sales, in our transition from an asset intensive, historically "store-only" based retailer to a more asset light, integrated membership-focused company.
If we continue to experience operating losses, and we are not able to generate additional liquidity through the actions described above or through some combination of other actions, while not expected, then our liquidity needs may exceed availability under our Amended Domestic Credit Agreement (as defined in Note 2) and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. Moreover, if the borrowing base (as calculated pursuant to our outstanding second lien debt) falls below the principal amount of such second lien debt plus the principal amount of any other indebtedness for borrowed money that is secured by liens on the collateral for such debt on the last day of any two consecutive quarters, it could trigger an obligation to repurchase our Senior Secured Notes in an amount equal to such deficiency. As of October 28, 2017, our borrowing base was below the above threshold, and if our borrowing base is below the above threshold at the end of our fiscal year, it will trigger an obligation to repurchase or repay second lien debt, in an amount equal to the excess of our funded debt secured by liens on our inventory as of year-end over the borrowing base. If we fail to make such repurchase or repayment, we would be in violation of our covenants under our Second Lien Credit Agreement.
Sears Canada
At each of October 28, 2017, October 29, 2016 and January 28, 2017, the Company was the beneficial holder of approximately 12 million, or 12%, of the common shares of Sears Canada. In July 2017, Sears Canada filed for court protection and trading of its common shares was suspended. Accordingly, we recognized other-than-temporary impairment of $12 million within interest and investment loss in our Condensed Consolidated Statements of




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

Operations during the 13 weeks ended July 29, 2017. Our equity method investment in Sears Canada was $23 million and $17 million at October 29, 2016 and January 28, 2017, respectively, and is included within other assets in the Condensed Consolidated Balance Sheets. The fair value of our equity method investment in Sears Canada was determined based on quoted market prices for its common stock. Our equity method investment in Sears Canada is valued using Level 1 measurements as defined in Note 5 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.
NOTE 2—BORROWINGS
Total borrowings were as follows:
millions
October 28,
2017
 
October 29,
2016
 
January 28,
2017
Short-term borrowings:
 
 
 
 
 
Unsecured commercial paper
$
40

 
$
248

 
$

Secured borrowings
424

 
370

 

Line of credit loans
413

 

 

Incremental loans
184

 

 

Long-term debt, including current portion:
 
 
 
 
 
Notes and debentures outstanding
3,261

 
3,517

 
4,018

Capitalized lease obligations
81

 
164

 
145

Total borrowings
$
4,403

 
$
4,299

 
$
4,163

The fair value of long-term debt, excluding capitalized lease obligations, was $3.0 billion at October 28, 2017, $3.6 billion at October 29, 2016 and $4.0 billion at January 28, 2017. 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 5 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.
Unsecured Commercial Paper
We borrow through the commercial paper markets. At October 28, 2017 and October 29, 2016, we had outstanding commercial paper borrowings of $40 million and $249 million, respectively, while at January 28, 2017, we had no commercial paper borrowings outstanding. The carrying value of commercial paper, net of remaining discount, was $40 million and $248 million at October 28, 2017 and October 29, 2016, respectively.
Letter of Credit Facility
On December 28, 2016, the Company, through Sears Roebuck Acceptance Corp. ("SRAC") and Kmart Corporation (together with SRAC, the "Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, entered into the Letter of Credit and Reimbursement Agreement (the "LC Facility") providing for a $500 million secured standby letter of credit facility (of which $271 million was committed at October 28, 2017) from JPP, LLC and JPP II, LLC, entities affiliated with ESL (collectively, the "Lenders"), with Citibank, N.A., serving as administrative agent and issuing bank.
In August, the Company executed amendments to the LC Facility. The amendments, among other things, extended the maturity to December 28, 2018, eliminated the unused portion of the facility and released the real estate collateral that secured the original LC Facility. The amended LC Facility also permits the Lenders to syndicate all or a portion of their commitments under the facility to other lenders, of which $140 million has been syndicated to unaffiliated third party lenders as of the date of this report.
The amended LC Facility is guaranteed by the same subsidiaries of the Company that guarantee the obligations under the Amended Domestic Credit Agreement, as defined below. The amended LC Facility is secured by substantially the same collateral as the Amended Domestic Credit Agreement. The amended LC Facility contains a borrowing base calculation, pursuant to which the borrowers are required to cash collateralize the LC Facility if the




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

aggregate obligations under the Amended Domestic Credit Agreement, amended LC Facility and certain other cash management and similar obligations exceed the Modified Borrowing Base, as defined in the amended LC Facility, as of the end of any calendar month.
To secure their obligation to participate in letters of credit issued under the LC Facility, the lenders under the LC Facility are required to maintain cash collateral on deposit with the Issuing Bank in an amount equal to 102% of the commitments under the LC Facility (the "Lender Deposit"). The Borrowers paid the Lenders an upfront fee equal to 1.00% of the aggregate amount of the Lender Deposit. In addition, the Borrowers are required to pay a commitment fee on the average daily amount of the Lender Deposit (as such amount may be increased or decreased from time to time) equal to the Eurodollar Rate (as defined under the Amended Domestic Credit Facility) plus 11.0%, as well as certain other fees. In the event of reductions of the commitments under the LC Facility or a termination of the LC Facility prior to the six month anniversary of the effective date of the amendments, under certain circumstances the Borrowers will be required to pay an early reduction/termination fee equal to the commitment fee that would have accrued with respect to the reduced or terminated commitments from the date of reduction or termination until the six month anniversary.
The LC Facility includes certain representations and warranties, affirmative and negative covenants and other undertakings, which are subject to important qualifications and limitations set forth in the LC Facility. The LC Facility also contains certain events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. If an event of default occurs, the Lenders may terminate all or any portion of the commitments under the LC Facility, require the Borrowers to cash collateralize the LC Facility and/or exercise any rights they might have under any of the related facility documents (including against the collateral), subject to certain limitations. At October 28, 2017 and January 28, 2017, respectively, we had $271 million and $200 million of letters of credit outstanding under the LC Facility.
2017 Secured Loan Facility
On January 3, 2017, the Company, through Sears, Kmart Stores of Illinois LLC, Kmart of Washington LLC and Kmart Corporation (collectively, "2017 Secured Loan Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, obtained a $500 million real estate loan facility from the Lenders, entities affiliated with ESL. On January 3, 2017, $321 million was funded under the 2017 Secured Loan Facility, and an additional $179 million was drawn by the Company prior to January 28, 2017. The 2017 Secured Loan Facility matures on July 20, 2020. The Company used the proceeds of the 2017 Secured Loan Facility for general corporate purposes.
During October 2017, the Company, through the 2017 Secured Loan Borrowers and SHC Desert Springs, LLC, Innovel Solutions, Inc., Sears Holdings Management Corporation, Maxserv, Inc., Troy Coolidge No. 13, LLC, Sears Development Co. and Big Beaver of Florida Development, LLC (collectively, “Incremental Loan Borrowers”), entities wholly-owned and controlled, directly or indirectly by the Company, entered into amended and restated loan agreements (the "Incremental Loans") with the Lenders. The Incremental Loans mature on April 23, 2018. The Company borrowed $200 million pursuant to the Incremental Loans, and used the proceeds for general corporate purposes.
The 2017 Secured Loan Facility has an annual base interest rate of 8%, with accrued interest payable monthly during the term of the 2017 Secured Loan Facility. The Borrowers paid an upfront commitment fee equal to 1.0% of the full principal amount of the 2017 Secured Loan Facility and paid a funding fee equal to 1.0% of the amounts drawn under the 2017 Secured Loan Facility at the time such amounts were drawn. The Incremental Loans have an annual interest rate of 11%, with accrued interest payable monthly. No upfront or funding fees were paid in connection with the Incremental Loans.
The 2017 Secured Loan Facility and Incremental Loans are guaranteed by the Company and certain of its subsidiaries, and were secured by a first priority lien on 69 real properties owned by the 2017 Secured Loan Borrowers and Incremental Loan Borrowers and guarantors at inception of the 2017 Secured Loan Facility, and an additional 7 real properties owned by the Incremental Loan Borrowers at inception of the Incremental Loans. In certain circumstances, the Lenders and the 2017 Secured Loan Borrowers and Incremental Loan Borrowers may elect to substitute one or more properties as collateral. To the extent permitted under other debt of the Company or its affiliates, the 2017 Secured Loan Facility may be prepaid at any time in whole or in part, without penalty or




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

premium. The 2017 Secured Loan Borrowers are required to apply the net proceeds of the sale of any real property collateral for the 2017 Secured Loan Facility to repay the loan. The Company used proceeds of $116 million to pay interest and a portion of the 2017 Secured Loan Facility and $15 million to pay interest and a portion of the Incremental Loans during the 39 weeks ended October 28, 2017.
The 2017 Secured Loan Facility and Incremental Loans include certain representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of the real property collateral. The 2017 Secured Loan Facility and Incremental Loans have certain events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. If there is an event of default, the Lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the 2017 Secured Loan Facility or Incremental Loan documents (including against the collateral), and require the 2017 Secured Loan Borrowers or Incremental Loan Borrowers to pay a default interest rate equal to the greater of (i) 2.5% in excess of the base interest rate and (ii) the prime rate plus 1%.
The Incremental Loans permit the Lenders to syndicate or participate all or a portion of the outstanding loans, and the Lenders have advised the Incremental Loan Borrowers that they are amenable to syndicating all or a portion of the Incremental Loans to third parties on the same terms.
The carrying value of the 2017 Secured Loan Facility, net of the remaining debt issuance costs, was $373 million and $485 million at October 28, 2017 and January 28, 2017, respectively. The carrying value of the Incremental Loans, net of the remaining debt issuance costs, was $184 million at October 28, 2017. The Incremental Loans are included within short-term borrowings in the Condensed Consolidated Balance Sheets for all periods presented.
2016 Secured Loan Facility
On April 8, 2016, the Company, through Sears, Sears Development Co., Innovel, Big Beaver of Florida Development, LLC and Kmart Corporation (collectively, "2016 Secured Loan Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, obtained a $500 million real estate loan facility from JPP, LLC, JPP II, LLC, and Cascade Investment, LLC (collectively, the "2016 Secured Loan Lenders"). JPP, LLC and JPP II, LLC are entities affiliated with ESL. The first $250 million of the 2016 Secured Loan Facility was funded on April 8, 2016 and the remaining $250 million was funded on April 22, 2016. The funds were used to reduce outstanding borrowings under the Company's asset-based revolving credit facility and for general corporate purposes. The 2016 Secured Loan Facility had an original maturity date of July 7, 2017. In May 2017, the Company reached an agreement to extend the maturity of $400 million of the 2016 Secured Loan Facility to January 2018, with options to further extend the maturity of the loan for up to an additional six months, to July 6, 2018, subject to the satisfaction of certain conditions and the payment of certain fees. On November 21, 2017, the Company notified the 2016 Secured Loan Lenders of its exercise of the first such option to extend the maturity to April 6, 2018, subject to the payment of an extension fee on January 8, 2018. The 2016 Secured Loan Facility is included within current portion of long-term debt in the Condensed Consolidated Balance Sheets for all periods presented. The carrying value of the 2016 Secured Loan Facility, net of the remaining debt issuance costs, was $261 million, $492 million and $494 million at October 28, 2017, October 29, 2016 and January 28, 2017, respectively.
The 2016 Secured Loan Facility has an annual base interest rate of 8%, with accrued interest payable monthly during the term of the 2016 Secured Loan Facility. The 2016 Secured Loan Borrowers paid an upfront commitment fee equal to 1.0% of the full principal amount of the 2016 Secured Loan Facility and paid a funding fee equal to 1.0% of the amounts drawn under the 2016 Secured Loan Facility at the time such amounts were drawn. In connection with the May 2017 maturity extension, the Company paid a one-time extension fee equal to $8 million to the extending lenders.
The 2016 Secured Loan Facility is guaranteed by the Company and was originally secured by a first priority lien on 21 real properties owned by the 2016 Secured Loan Borrowers. The 2016 Secured Loan Facility includes customary representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of the real property collateral.
The 2016 Secured Loan Facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. If there is an event of default, the 2016 Secured Loan Lenders




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

may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the 2016 Secured Loan Facility documents (including against the collateral), and require the 2016 Secured Loan Borrowers to pay a default interest rate equal to the greater of (i) 2.5% in excess of the base interest rate and (ii) the prime rate plus 1%. The 2016 Secured Loan Facility may be prepaid at any time in whole or in part, without penalty or premium and $238 million of proceeds from real estate transactions was used to pay interest and a portion of the loan during the 39 weeks ended October 28, 2017.
Domestic Credit Agreement
The Borrowers and Holdings are party to an amended and restated credit agreement (the "Amended Domestic Credit Agreement") with a syndicate of lenders. Pursuant to the Amended Domestic Credit Agreement, the Borrowers have borrowed two senior secured term loan facilities having original principal amounts of $1.0 billion and $750 million (the "Term Loan" and "2016 Term Loan," respectively). The Amended Domestic Credit Agreement currently provides for a $1.5 billion asset-based revolving credit facility (the "Revolving Facility") with a $1.0 billion letter of credit sub-facility, which matures on July 20, 2020. The Term Loan matures on June 30, 2018 and the 2016 Term Loan matures on July 20, 2020. The Amended Domestic Credit Agreement includes an accordion feature that allows the Borrowers to use, subject to borrowing base requirements, existing collateral for the facility to obtain up to $1.0 billion of additional borrowing capacity, of which $750 million was utilized for the 2016 Term Loan (described below). The Amended Domestic Credit Agreement also includes a FILO tranche feature that allows up to an additional $500 million of borrowing capacity and allows Holdings and its subsidiaries to undertake short-term borrowings outside the facility up to $1.0 billion.
Revolving advances under the Amended 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 dependent on Holdings' consolidated leverage ratio (as measured under the Amended Domestic Credit Agreement). The margin with respect to borrowings ranges from 3.50% to 4.00% for LIBOR loans and from 2.50% to 3.00% for base rate loans. The Amended Domestic Credit Agreement also provides for the payment of fees with respect to issued and undrawn letters of credit at a rate equal to the margin applicable to LIBOR loans and a commitment fee with respect to unused amounts of the Revolving Facility at a rate equal to 0.625% per annum.
The Revolving Facility is in place as a funding source for general corporate purposes and is secured by a first lien on substantially all of our domestic inventory and credit card and pharmacy receivables, and is subject to a borrowing base formula to determine availability. The Revolving Facility is guaranteed by all domestic subsidiaries of Holdings that own inventory or credit card or pharmacy receivables. The Revolving Facility also permits aggregate second lien indebtedness of up to $2.0 billion, of which $1.0 billion in second lien notes were outstanding at October 28, 2017, resulting in $1.0 billion of permitted second lien indebtedness, subject to limitations contained in our other outstanding indebtedness. If, through asset sales or other means, the value of the above eligible assets is not sufficient to support borrowings of up to the full amount of the commitments under this facility, we will not have full access to the facility, but rather could have access to a lesser amount determined by the borrowing base. Such a decline in the value of eligible assets also could result in our inability to borrow up to the full amount of second lien indebtedness permitted by the domestic credit facility, but rather we could be limited to borrowing a lesser amount determined by the borrowing base as calculated pursuant to the terms of such indenture.
The Term Loan bears interest at a rate equal to, at the election of the Borrowers, either LIBOR (subject to a 1.00% LIBOR floor) or a base rate, plus an applicable margin for LIBOR loans of 4.50% and for base rate loans of 3.50%. Currently, the Borrowers are required to repay the Term Loan in quarterly installments of $2.5 million, with the remainder of the Term Loan maturing June 30, 2018. Additionally, the Borrowers are required to make certain mandatory repayments of the Term Loan from excess cash flow (as defined in the Amended Domestic Credit Agreement). The Term Loan may be prepaid in whole or part without penalty. The Term Loan is secured by the same collateral as the Revolving Facility on a pari passu basis with the Revolving Facility, and is guaranteed by the same subsidiaries of the Company that guarantee the Revolving Facility. At October 28, 2017October 29, 2016 and January 28, 2017, respectively, we had borrowings of $724 million, $973 million and $970 million under the Term Loan, and carrying value, net of the remaining discount and debt issuance costs, of $722 million, $964 million and $963 million. A portion of the proceeds received from the Craftsman Sale were used to reduce outstanding borrowings under the Term Loan.




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

Amounts borrowed pursuant to the 2016 Term Loan bear interest at a rate equal to LIBOR plus 750 basis points, subject to a 1.00% LIBOR floor. The Company received approximately $722 million in net proceeds from the 2016 Term Loan, which proceeds were used to reduce outstanding borrowings under its asset-based revolving credit facility. The 2016 Term Loan has a maturity date of July 20, 2020, which is the same maturity date as the Company's revolving credit facility commitments, and does not amortize. The 2016 Term Loan is subject to a prepayment premium of 2% of the aggregate principal amount of the 2016 Term Loan prepaid on or prior to April 8, 2017 and 1% of the aggregate principal amount of the 2016 Term Loan prepaid after April 8, 2017 and on or prior to April 8, 2018. The obligations under the Amended Domestic Credit Agreement, including the 2016 Term Loan, are secured by a first lien on substantially all of the domestic inventory and credit card and pharmacy receivables of the Company and its subsidiaries and aggregate advances under the Amended Domestic Credit Agreement are subject to a borrowing base formula. The carrying value of the 2016 Term Loan, net of the remaining discount and debt issuance costs, was $557 million, $725 million and $726 million at October 28, 2017, October 29, 2016 and January 28, 2017, respectively. A portion of the proceeds received from the Craftsman Sale were used to reduce outstanding borrowings under the 2016 Term Loan.
The Amended Domestic Credit Agreement limits our ability to make restricted payments, including dividends and share repurchases, subject to specified exceptions that are available if, in each case, no event of default under the credit facility exists immediately before or after giving effect to the restricted payment. These include exceptions that require that projected availability under the credit facility, as defined, to be at least 15%, exceptions that may be subject to certain maximum amounts and an exception that requires that the restricted payment is funded from cash on hand and not from borrowings under the credit facility. Further, the Amended Domestic Credit Agreement includes customary covenants that restrict our ability to make dispositions, prepay debt and make investments, subject, in each case, to various exceptions. The Amended Domestic Credit Agreement 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. As of October 28, 2017, our fixed charge ratio was less than 1.0 to 1.0, and we are subject to these other requirements based on our availability. If availability under the domestic revolving credit facility were to fall below 10%, the Company would be required to test the fixed charge coverage ratio, and would not comply with the facility, and the lenders under the facility could demand immediate payment in full of all amounts outstanding and terminate their obligations under the facility. In addition, the domestic credit facility provides that in the event we make certain prepayments of indebtedness, for a period of one year thereafter we must maintain availability under the facility of at least 12.5%, and it prohibits certain other prepayments of indebtedness.
At October 28, 2017 and October 29, 2016, we had $424 million and $370 million, respectively, of Revolving Facility borrowings and $381 million, $660 million and $464 million at October 28, 2017, October 29, 2016 and January 28, 2017, respectively, of letters of credit outstanding under the Revolving Facility. At January 28, 2017, we had no borrowings outstanding under the Revolving Facility. At October 28, 2017October 29, 2016 and January 28, 2017, the amount available to borrow under the Revolving Facility was $39 million, $174 million and $165 million, respectively, which reflects the effect of the springing fixed charge coverage ratio covenant and the borrowing base limitation. The majority of the letters of credit outstanding are used to provide collateral for our insurance programs.
Second Lien Credit Agreement
On September 1, 2016, the Company, SRAC, and Kmart Corporation (together with SRAC, the "ABL Borrowers") entered into a Second Lien Credit Agreement with the Lenders thereunder, entities affiliated with ESL, pursuant to which the ABL Borrowers borrowed $300 million under a term loan (the "Second Lien Term Loan"). The Company received net proceeds of $291 million, which were used for general corporate purposes.
The maturity date for the Second Lien Term Loan is July 20, 2020 and the Second Lien Term Loan will not amortize. The Second Lien Term Loan bears interest at a rate equal to, at the election of the ABL Borrowers, either LIBOR (subject to a 1.00% floor) or a specified prime rate ("Base Rate"), in either case plus an applicable margin. The margin with respect to the Second Lien Term Loan is 7.50% for LIBOR loans and 6.50% for Base Rate loans.
The Second Lien Credit Agreement was amended on July 7, 2017, providing an uncommitted line of credit facility under which subsidiaries of the Company may from time to time borrow line of credit loans ("Line of Credit Loans") with maturities less than 180 days, subject to applicable borrowing base limitations, in an aggregate principal amount not to exceed $500 million at any time outstanding. The Company received proceeds of $438




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

million from the issuance of Line of Credit Loans from a syndicate of lenders, some of which are entities affiliated with ESL, Bruce R. Berkowitz, and Thomas J. Tisch. The Company made repayments of $25 million during the 13 weeks ended October 28, 2017. See Note 11 for further information. The proceeds were used for the repayment of indebtedness and general corporate purposes.
The Company's obligations under the Second Lien Credit Agreement are secured on a pari passu basis with the Company’s obligations under that certain Indenture, dated as of October 12, 2010, pursuant to which the Company issued its Senior Secured Notes (defined below). The collateral includes inventory, receivables and other related assets of the Company and its subsidiaries which are obligated on the Second Lien Term Loan and the Senior Secured Notes. The Second Lien Credit Agreement is guaranteed by all domestic subsidiaries of the Company that guarantee the Company’s obligations under its existing Revolving Facility.
The Second Lien Credit Agreement includes representations and warranties, covenants and other undertakings, and events of default that are substantially similar to those contained in the Amended Domestic Credit Agreement. The Second Lien Credit Agreement requires the ABL Borrowers to prepay amounts outstanding under the Amended Domestic Credit Agreement and/or the Second Lien Credit Agreement in order to avoid a Collateral Coverage Event (as defined below). The carrying value of the Second Lien Term Loan, net of the remaining debt issuance costs, was $293 million and $292 million at October 28, 2017 and January 28, 2017, respectively. The carrying value of the Line of Credit Loans was $413 million at October 28, 2017.
Senior Secured Notes
In October 2010, we sold $1.0 billion aggregate principal amount of senior secured notes (the "Senior Secured 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 Senior Secured Notes, the Company sold $250 million aggregate principal amount of Senior Secured Notes to the Company's domestic pension plan in a private placement, none of which remain in the domestic pension plan as a result of the Tender Offer discussed below. The Senior Secured 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 Senior Secured Notes is junior in priority to the lien on such assets that secures obligations under the Amended 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 Senior Secured 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 Senior Secured Notes to be due and payable immediately. Generally, the Company is required to offer to repurchase all outstanding Senior Secured Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if the borrowing base (as calculated pursuant to the indenture) falls below the principal value of the Senior Secured Notes plus any other indebtedness for borrowed money that is secured by liens on the Collateral for two consecutive quarters (a "Collateral Coverage Event") or upon the occurrence of certain change of control triggering events. Subsequent to the end of our third quarter, we commenced a consent solicitation to amend the borrowing base definition in the indenture. We subsequently terminated the consent solicitation prior to its scheduled expiration. The Company may call the Senior Secured 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 Senior Secured Notes held by nonaffiliates for a new issue of substantially identical notes registered under the Securities Act of 1933, as amended.
On August 3, 2015, the Company commenced a tender offer (the "Tender Offer") to purchase for cash up to $1.0 billion principal amount of its Senior Secured Notes, which expired on August 28, 2015. Approximately $936 million principal amount of the Senior Secured Notes were validly tendered and not validly withdrawn in the Tender Offer. Holders who validly tendered and did not validly withdraw Senior Secured Notes at or prior to the early tender date of August 14, 2015 received total consideration of $990 per $1,000 principal amount of Senior Secured Notes that were accepted for purchase, which included an early tender payment of $30 per $1,000 principal amount




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

of Senior Secured Notes accepted for purchase, plus accrued and unpaid interest up to, but excluding, the settlement date. Holders who validly tendered and did not validly withdraw Senior Secured Notes after the early tender date but at or prior to the expiration date of August 28, 2015 received total consideration of $960 per $1,000 principal amount of Senior Secured Notes accepted for purchase, plus accrued and unpaid interest up to, but excluding, the settlement date.
We accounted for the Tender Offer in accordance with accounting standards applicable to extinguishment of liabilities and debt modifications and extinguishments. Accordingly, we de-recognized the net carrying amount of Senior Secured Notes of $929 million (comprised of the principal amount of $936 million, offset by unamortized debt issuance costs and discount of $7 million), and the reacquisition cost was $929 million.
The carrying value of Senior Secured Notes, net of the remaining discount and debt issuance costs, was $303 million, $302 million and $303 million at October 28, 2017, October 29, 2016 and January 28, 2017, respectively. The carrying value of Senior Secured Notes is included within current portion of long-term debt in the Condensed Consolidated Balance Sheets at October 28, 2017.
Senior Unsecured Notes
On October 20, 2014, the Company announced its Board of Directors had approved a rights offering allowing its stockholders to purchase up to $625 million in aggregate principal amount of 8% senior unsecured notes due 2019 and warrants to purchase shares of its common stock. The subscription rights were distributed to all stockholders of the Company as of October 30, 2014, the record date for this rights offering, and every stockholder had the right to participate on the same terms in accordance with its pro rata ownership of the Company's common stock, except that holders of the Company's restricted stock that was unvested as of the record date received cash awards in lieu of subscription rights. This rights offering closed on November 18, 2014 and was oversubscribed.
Accordingly, on November 21, 2014, the Company issued $625 million aggregate original principal amount of 8% senior unsecured notes due 2019 (the "Senior Unsecured Notes") and received proceeds of $625 million which were used for general corporate purposes. The Senior Unsecured Notes are the unsecured and unsubordinated obligations of the Company and rank equal in right of payment with the existing and future unsecured and unsubordinated indebtedness of the Company. The Senior Unsecured Notes bear interest at a rate of 8% per annum and the Company will pay interest semi-annually on June 15 and December 15 of each year. The Senior Unsecured Notes are not guaranteed.
We accounted for the Senior Unsecured Notes in accordance with accounting standards applicable to distinguishing liabilities from equity and debt with conversion and other options. Accordingly, we allocated the proceeds received for the Senior Unsecured Notes based on the relative fair values of the Senior Unsecured Notes and warrants, which resulted in a discount to the notes of approximately $278 million. The fair value of the Senior Unsecured Notes and warrants was estimated based on quoted market prices for the same issues using Level 1 measurements as defined in Note 5 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2017. The discount is being amortized over the life of the Senior Unsecured Notes using the effective interest method with an effective interest rate of 11.55%. Approximately $40 million and $32 million of the discount was amortized during the 39 week periods ended October 28, 2017 and October 29, 2016, respectively. The remaining discount was approximately $155 million, $207 million and $195 million at October 28, 2017, October 29, 2016 and January 28, 2017, respectively. The carrying value of the Senior Unsecured Notes, net of the remaining discount and debt issuance costs, was approximately $468 million, $416 million and $428 million at October 28, 2017, October 29, 2016 and January 28, 2017, respectively.
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. Certain of 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 has utilized two securitization structures to issue specific securities in which Sears Re has invested its capital to fund its insurance obligations. In November 2003, Sears formed a Real Estate Mortgage




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

Investment Conduit, or REMIC. The real estate associated with 133 properties was contributed to indirect wholly-owned subsidiaries of Sears, and then leased back to Sears. The contributed properties were mortgaged and the REMIC issued to wholly-owned subsidiaries of Sears (including Sears Re) $1.3 billion (par value) of securities (the "REMIC Securities") that are secured by the mortgages and collateral assignments of the store leases. Payments to the holders on the REMIC 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 (the "KCD Securities") 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 the holders on the KCD Securities are funded by the royalty payments. In connection with the Craftsman Sale, KCD Securities with par value of $900 million were redeemed in March 2017. The issuers of the REMIC Securities and KCD 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. In the fourth quarter of fiscal 2013, Holdings contributed all of the outstanding capital stock of Sears Re to SRe Holding Corporation, a direct wholly-owned subsidiary of Holdings. Sears Re thereafter reduced its excess statutory capital through the distribution of all REMIC Securities held by it to SRe Holding Corporation. Since the inception of the REMIC and KCD IP, LLC, the REMIC Securities and the KCD Securities have been entirely held by our wholly-owned consolidated subsidiaries. At October 28, 2017, the net book value of the securitized trademark rights was approximately $0.7 billion. At both October 29, 2016 and January 28, 2017, 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 $0.6 billion at each of October 28, 2017, October 29, 2016 and January 28, 2017.
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—STORE CLOSING CHARGES, SEVERANCE COSTS, IMPAIRMENTS AND REAL ESTATE TRANSACTIONS
Store Closings and Severance
We closed 100 stores in our Kmart segment and 47 stores in our Sears Domestic segment that we previously announced would close during the 13 week period ended October 28, 2017, and 225 stores in our Kmart segment and 98 stores in our Sears Domestic segment during the 39 week period ended October 28, 2017. We made the decision to close 78 stores in our Kmart segment and 24 stores in our Sears Domestic segment during the 13 week period ended October 28, 2017, and 192 stores in our Kmart segment and 79 stores in our Sears Domestic segment during the 39 week period ended October 28, 2017.
We closed 82 stores in our Kmart segment and seven stores in our Sears Domestic segment we previously announced would close during the 13 week period ended October 29, 2016, and 140 stores in our Kmart segment and 30 stores in our Sears Domestic segment during the 39 week period ended October 29, 2016. We made the decision to close 65 stores in our Kmart segment and five stores in our Sears Domestic segment during the 13 week period ended October 29, 2016, and 160 stores in our Kmart segment and 31 stores in our Sears Domestic segment during the 39 week period ended October 29, 2016.
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 estimated sublease income.
We expect to record additional charges of approximately $70 million during 2017 related to stores that we had previously made the decision to close, but have not yet closed.




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

Store closing costs and severance recorded for the 13- and 39- week periods ended October 28, 2017 and October 29, 2016 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
$
43

 
$
6

 
$
30

 
$
8

 
$
9

 
$
96

Sears Domestic
17

 
5

 
4

 
2

 
10

 
38

Total for the 13 week period ended October 28, 2017
$
60

 
$
11

 
$
34

 
$
10

 
$
19

 
$
134

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
36

 
$
5

 
$
58

 
$
8

 
$
2

 
$
109

Sears Domestic
2

 
2

 
1

 
1

 

 
6

Total for the 13 week period ended October 29, 2016
$
38

 
$
7

 
$
59

 
$
9

 
$
2

 
$
115

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
121

 
$
19

 
$
28

 
$
21

 
$
14

 
$
203

Sears Domestic
43

 
39

 
39

 
9

 
19

 
149

Total for the 39 week period ended October 28, 2017
$
164

 
$
58

 
$
67

 
$
30

 
$
33

 
$
352

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
90

 
$
11

 
$
39

 
$
19

 
$
6

 
$
165

Sears Domestic
12

 
4

 
3

 
4

 
1

 
24

Total for the 39 week period ended October 29, 2016
$
102

 
$
15

 
$
42

 
$
23

 
$
7

 
$
189

_____________
(1) 
Recorded within cost of sales, buying and occupancy in the Condensed Consolidated Statements of Operations.
(2) 
Recorded within selling and administrative in 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) 
Costs for the 13- and 39- week periods ended October 28, 2017 and October 29, 2016 are recorded within depreciation and amortization in the Condensed Consolidated Statements of Operations.




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

Store closing costs and severance accruals of $213 million, $178 million and $216 million at October 28, 2017October 29, 2016 and January 28, 2017, respectively, were as shown in the table below. Store closing accruals included $108 million, $84 million and $122 million within other current liabilities and $105 million, $94 million and $94 million within other long-term liabilities in the Condensed Consolidated Balance Sheets at October 28, 2017, October 29, 2016, and January 28, 2017, respectively.
millions
Severance Costs
 
Lease Termination Costs
 
Other Charges
 
Total
Balance at October 29, 2016
$
37

 
$
133

 
$
8

 
$
178

Store closing costs
26

 
43

 
18

 
87

Payments/utilizations
(9
)
 
(32
)
 
(8
)
 
(49
)
Balance at January 28, 2017
54

 
144

 
18

 
216

Store closing costs
58

 
91

 
30

 
179

Store closing capital lease obligations

 
33

 

 
33

Payments/utilizations
(77
)
 
(109
)
 
(29
)
 
(215
)
Balance at October 28, 2017
$
35

 
$
159

 
$
19

 
$
213

Long-Lived Assets
In accordance with accounting standards governing the impairment or disposal of long-lived assets, we performed an impairment test of certain of our long-lived assets due to events and changes in circumstances during the 13- and 39- week periods ended October 28, 2017 that indicated an impairment might have occurred. As a result of impairment testing, the Company recorded impairment charges of $9 million, of which $6 million and $3 million were recorded within the Sears Domestic and Kmart segments, respectively, during the 13 week period ended October 28, 2017, and $29 million, of which $18 million and $11 million were recorded within the Sears Domestic and Kmart segments, respectively, during the 39 week period ended October 28, 2017.
As a result of impairment testing, the Company recorded impairment charges of $3 million, which were recorded within our Kmart segment during the 13 week period ended October 29, 2016, and $18 million, of which $11 million and $7 million were recorded within the Sears Domestic and Kmart segments, respectively, during the 39 week period ended October 29, 2016.
Real Estate Transactions
On April 1, 2015, April 13, 2015 and April 30, 2015, Holdings and General Growth Properties, Inc. ("GGP"), Simon Property Group, Inc. ("Simon") and The Macerich Company ("Macerich"), respectively, announced that they entered into three distinct real estate joint ventures (collectively, the "JVs"). Holdings contributed 31 properties to the JVs where Holdings currently operates stores (the "JV properties"), in exchange for a 50% interest in the JVs and $429 million in cash ($426 million, net of closing costs) (the "JV transactions"). The JV transactions valued the JV properties at $858 million in the aggregate.
On July 7, 2015, Holdings completed its rights offering and sale-leaseback transaction (the "Seritage transaction") with Seritage Growth Properties ("Seritage"), an independent publicly traded real estate investment trust ("REIT"). As part of the Seritage transaction, Holdings sold 235 properties to Seritage (the "REIT properties") along with Holdings' 50% interest in the JVs. Holdings received aggregate gross proceeds from the Seritage transaction of $2.7 billion ($2.6 billion, net of closing costs). The Seritage transaction valued the REIT properties at $2.3 billion in the aggregate.
In connection with the Seritage transaction and JV transactions, Holdings entered into agreements with Seritage and the JVs under which Holdings leases 255 of the properties (the "Master Leases"), with the remaining properties being leased by Seritage to third parties. Holdings has closed 17 stores pursuant to recapture notices from Seritage or the JVs and 54 stores pursuant to lease terminations. Also, in July 2017, Seritage sold a 50% joint venture interest in five of the properties and Holdings will pay rent to the new landlord. Holdings recorded rent expense of $20 million and $22 million within cost of sales, buying and occupancy in the Condensed Consolidated Statements of




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

Operations for the 13 week periods ended October 28, 2017 and October 29, 2016, respectively, and $64 million and $72 million for the 39 week periods ended October 28, 2017 and October 29, 2016, respectively. Rent expense consisted of straight-line rent expense offset by amortization of deferred gain on sale-leaseback, as shown in the tables below.
 
13 Weeks Ended October 28, 2017
 
13 Weeks Ended October 29, 2016
millions
Kmart
 
Sears Domestic
 
Sears Holdings
 
Kmart
 
Sears Domestic
 
Sears Holdings
Straight-line rent expense
$
5

 
$
34

 
$
39

 
$
7

 
$
37

 
$
44

Amortization of deferred gain on sale-leaseback
(3
)
 
(16
)
 
(19
)
 
(4
)
 
(18
)
 
(22
)
Rent expense
$
2

 
$
18

 
$
20

 
$
3

 
$
19

 
$
22

 
39 Weeks Ended October 28, 2017
 
39 Weeks Ended October 29, 2016
millions
Kmart
 
Sears Domestic
 
Sears Holdings
 
Kmart
 
Sears Domestic
 
Sears Holdings
Straight-line rent expense
$
16

 
$
107

 
$
123

 
$
24

 
$
114

 
$
138

Amortization of deferred gain on sale-leaseback
(9
)
 
(50
)
 
(59
)
 
(13
)
 
(53
)
 
(66
)
Rent expense
$
7

 
$
57

 
$
64

 
$
11

 
$
61

 
$
72

We accounted for the Seritage transaction and JV transactions in accordance with accounting standards applicable to real estate sales and sale-leaseback transactions. We determined that the Seritage and JV transactions qualify for sales recognition and sale-leaseback accounting, with the exception of four properties for which we had continuing involvement as a result of an obligation to redevelop the stores for a third-party tenant and pay rent on behalf of the third-party tenant until it commences rent payments to the JVs.
With the exception of the four properties that had continuing involvement, in accordance with accounting standards related to sale-leaseback transactions, Holdings recognized any loss on sale immediately, any gain on sale in excess of the present value of minimum lease payments immediately, and any remaining gain was deferred and will be recognized in proportion to the related rent expense over the lease term. Accordingly, during the second quarter of 2015, Holdings recognized an immediate net gain of $508 million within gain on sales of assets in the Consolidated Statement of Operations for 2015. The remaining gain of $894 million was deferred and will be recognized in proportion to the related rent expense, which is a component of cost of sales, buying and occupancy, in the Condensed Consolidated Statements of Operations, over the lease term.
During the 39 week periods ended October 28, 2017 and October 29, 2016, respectively, Holdings recorded gains of $126 million and $26 million related to the 100% recapture of 11 and three stores that closed pursuant to recapture notices from Seritage, of which $68 million and $13 million related to the gain that had previously been deferred as we no longer have continuing involvement in those properties, and $58 million and $13 million related to lease termination proceeds. In addition, the Master Leases provide Seritage and the JVs a recapture right with respect to approximately 50% of the space within the stores at the REIT properties and JV properties (subject to certain exceptions), in addition to all of the automotive care centers, and all outparcels or outlots, as well as certain portions of parking areas and common areas, except as set forth in the Master Leases, for no additional consideration. As space is recaptured pursuant to the recapture right, Holdings' obligation to pay rent is reduced proportionately. Accordingly, Holdings recognizes gains equal to the unamortized portion of the gain that had previously been deferred which exceeds the present value of minimum lease payments, as reduced due to recapture activity. During the 39 week periods ended October 28, 2017 and October 29, 2016, respectively, Holdings recorded gains as a result of recapture activity of $8 million and $10 million that had previously been deferred. The Master Leases also provide Holdings certain rights to terminate the Master Leases with respect to REIT properties or JV properties that cease to be profitable for operation by Holdings. In order to terminate the Master Lease with respect to a certain property, Holdings must make a payment to Seritage or the JV of an amount equal to one year of rent (together with taxes and other expenses) with respect to such property. Holdings recorded gains related to stores that closed pursuant to lease terminations of $52 million that had previously been deferred during the 39 week period ended October 28, 2017. The corresponding expenses for termination payments to Seritage are recorded when we notify




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

Seritage of our intention to terminate the leases and the stores are announced for closure. A portion of the corresponding expenses were recorded in fiscal 2016 and $24 million was recorded during the second quarter of 2017. Holdings also recorded immediate gains of $40 million during the 39 week period ended October 28, 2017, for the amount of gains on sale in excess of the present value of minimum lease payments for two of the properties that were previously accounted for as financing transactions. As the redevelopment at the stores had been completed and the third-party tenant had commenced rent payments to the JVs, the Company determined that the continuing involvement no longer existed and that the properties qualified for sales recognition and sale-leaseback accounting.
Holdings initially accounted for the four properties that had continuing involvement as a financing transaction in accordance with accounting standards related to sale-leaseback transactions. Accordingly, Holdings recorded a sale-leaseback financing obligation of $164 million, which is classified as a long-term sale-leaseback financing obligation on the Condensed Consolidated Balance Sheets at October 29, 2016 and January 28, 2017. The sale-leaseback financing obligation decreased to $70 million at October 28, 2017 as two of the properties qualified for sales recognition and sale-leaseback accounting as further described above. We continued to report the real property assets of $21 million, $61 million and $62 million at October 28, 2017, October 29, 2016 and January 28, 2017, respectively, in our Condensed Consolidated Balance Sheets, which are included in our Sears Domestic segment.
On October 3, 2017, Holdings completed a sale-leaseback transaction pursuant to which Holdings sold one Sears Full-line store that served as collateral for the 2017 Secured Loan Facility for cash proceeds of $17 million ($15 million net of prepaid rent). The net proceeds were used to pay interest and a portion of the 2017 Secured Loan Facility. We accounted for the transaction as a financing transaction in accordance with accounting standards applicable to sale-leaseback transactions as a result of the requirement to prepay rent for one year. Accordingly, Holdings recorded a sale-leaseback financing obligation of $17 million, which is classified as a sale-leaseback financing obligation in the Condensed Consolidated Balance Sheets at October 28, 2017. We continued to report real property assets of $7 million at October 28, 2017 in our Condensed Consolidated Balance Sheets, which are included in our Sears Domestic segment. The obligation for future minimum lease payments at October 28, 2017 is $13 million over the lease term, and is $0.4 million in 2017 and $1.3 million in each of 2018, 2019, 2020, 2021 and 2022 and $6.2 million thereafter, including $1.3 million that was prepaid upon closing the transaction.
On July 17, 2017, Holdings completed a sale-leaseback transaction pursuant to which Holdings sold three distribution centers that served as collateral for the 2016 Secured Loan Facility for cash proceeds of $89 million ($84 million net of prepaid rent). The net proceeds were used to pay interest and a portion of the 2016 Secured Loan Facility. We accounted for the transaction as a financing transaction in accordance with accounting standards applicable to sale-leaseback transactions as a result of the requirement to prepay rent for one year. Accordingly, Holdings recorded a sale-leaseback financing obligation of $89 million, which is classified as a sale-leaseback financing obligation in the Condensed Consolidated Balance Sheets at October 28, 2017. We continued to report real property assets of $7 million at October 28, 2017 in our Condensed Consolidated Balance Sheets, which are included in our Sears Domestic segment.
On January 27, 2017, Holdings and CBL and Associates Properties, Inc. ("CBL") completed a sale-leaseback transaction pursuant to which Holdings sold five Sears Full-line stores and two Sears Auto Centers located at CBL malls for net proceeds of $71 million (the "CBL transaction"). In connection with the CBL transaction, Holdings entered into 10-year leaseback agreements. The agreements provide both CBL and Holdings the right to terminate each lease, and provide Holdings the option to relocate its operations at each mall to a location of up to 15,000 square feet. The agreement also contains an earn-out provision pursuant to which Holdings would receive a maximum amount of $14.5 million additional consideration if CBL redevelops any of the properties within a specified time period and achieves more than a specified return on investment. We accounted for the CBL transaction as a financing transaction in accordance with accounting standards applicable to sale-leaseback transactions as a result of continuing involvement through the earn-out provision. Accordingly, Holdings recorded a sale-leaseback financing obligation of $71 million, which is classified as a sale-leaseback financing obligation in the Condensed Consolidated Balance Sheets at both October 28, 2017 and January 28, 2017. We continued to report real property assets of $33 million and $34 million at October 28, 2017 and January 28, 2017, respectively, in our Condensed Consolidated Balance Sheets, which are included in our Sears Domestic segment.
In addition to the Seritage transaction, JV transactions and other sale-leaseback financing transactions described above, we recorded gains on the sales of assets for other significant items described as follows.




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

During the 13 week period ended October 28, 2017, we recorded gains of $21 million on the sale and lease-back of four Sears Full-line stores and two non-retail locations that served as collateral for our real estate loan facilities. We received net proceeds of $55 million for the sale of these properties, of which $40 million was used to pay interest and a portion of the 2017 Secured Loan Facility and $15 million was used to pay interest and a portion of the Incremental Loans. During the 13 week period ended October 28, 2017, we also recorded gains of $65 million on the sale and lease-back of one Sears Full-line store, sale of one closed Sears Full-line store and lease termination of three Sears Full-line stores, for which we received $80 million of cash proceeds. In connection with the sale and leaseback transactions, we entered into leaseback agreements with terms ranging from two to five years.
During the 13 week period ended October 28, 2017, we recorded gains of $17 million on the sale and leaseback of one Kmart store and sale of one closed Kmart store that served as collateral for our real estate loan facilities. We received net proceeds of $22 million for the sale of these properties, which was used to pay interest and a portion of the 2017 Secured Loan Facility. In connection with the sale and leaseback transaction, we entered into a leaseback agreement with a five year term.
In addition to the transactions described above, during the 39 week period ended October 28, 2017, we recorded gains of $176 million on the sale of three Sears Full-line stores that served as collateral for our real estate loan facilities. We received net proceeds of $202 million for the sale of these stores, of which $126 million was used to pay interest and a portion of the 2016 Secured Loan Facility, $19 million was used to pay interest and a portion of the 2017 Secured Loan Facility, and $57 million was used to repay a portion of our revolving credit facility. During the 39 week period ended October 28, 2017, we also recorded gains of $170 million on the sale of seven Sears Full-line stores and amendment and lease termination of two Sears Full-line stores for which we received $198 million of cash proceeds, $21 million of which was received in 2016. In connection with the sales of six of the Sears Full-line stores, we entered into leaseback agreements with terms ranging from six months to one year.
Additionally, during the 39 week period ended October 28, 2017, we recorded gains on the sales of assets of $40 million recognized on the sale of two Kmart stores that served as collateral for our real estate loan facilities. We received net proceeds of $48 million for the sale of these stores, of which $28 million was used to pay interest and a portion of the 2016 Secured Loan Facility and $20 million was used to pay interest and a portion of the 2017 Secured Loan Facility.
During the 13 week period ended October 29, 2016, we recorded gains of $15 million on the sale of two Sears Full-line stores for which we received $27 million of cash proceeds. In connection with the sales of the Sears Full-line stores, we entered into leaseback agreements for up to nine months. During the 39 week period ended October 29, 2016, we recorded gains on the sales of assets of $12 million recognized on the sale of one distribution center for which we received $23 million of cash proceeds.
We determined that the transactions with leaseback arrangements qualify for sales recognition and sale-leaseback accounting. In accordance with accounting standards related to sale-leaseback transactions, Holdings recognized any loss on sale immediately, any gain on sale in excess of the present value of minimum lease payments immediately, and any remaining gain was deferred and will be recognized in proportion to the related rent expense over the lease term. At October 28, 2017, October 29, 2016 and January 28, 2017, respectively, $90 million, $97 million and $132 million of the deferred gain on sale-leaseback is classified as current within other current liabilities. At October 28, 2017, October 29, 2016 and January 28, 2017, respectively, $446 million, $656 million and $563 million is classified as long-term deferred gain on sale-leaseback in the Condensed Consolidated Balance Sheets. For the other transactions, we determined that we have surrendered substantially all of our rights and obligations, and, therefore, immediate gain recognition is appropriate.




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

NOTE 4—EQUITY
Loss per Share
The following table sets forth the components used to calculate basic and diluted loss per share attributable to Holdings' shareholders.
 
13 Weeks Ended
 
39 Weeks Ended
millions, except loss per share
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Basic weighted average shares
107.5

 
107.0

 
107.3

 
106.9

Diluted weighted average shares
107.5

 
107.0

 
107.3

 
106.9

 
 
 
 
 
 
 
 
Net loss attributable to Holdings' shareholders
$
(558
)
 
$
(748
)
 
$
(565
)
 
$
(1,614
)
 
 
 
 
 
 
 
 
Loss per share attributable to Holdings' shareholders:
 

 
 

 
 

 
 

Basic
$
(5.19
)
 
$
(6.99
)
 
$
(5.27
)
 
$
(15.10
)
Diluted
$
(5.19
)
 
$
(6.99
)
 
$
(5.27
)
 
$
(15.10
)
Accumulated Other Comprehensive Loss
The following table displays the components of accumulated other comprehensive loss:
millions
October 28,
2017
 
October 29,
2016
 
January 28,
2017
Pension and postretirement adjustments (net of tax of $(225), $(296), and $(225), respectively)
$
(1,172
)
 
$
(1,723
)
 
$
(1,549
)
Currency translation adjustments (net of tax of $0 for all periods presented)
(1
)
 
(3
)
 
(3
)
Accumulated other comprehensive loss
$
(1,173
)
 
$
(1,726
)
 
$
(1,552
)
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.




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

Income Tax Expense Allocated to Each Component of Other Comprehensive Income
Income tax expense allocated to each component of other comprehensive income was as follows:
 
13 Weeks Ended October 28, 2017
 
13 Weeks Ended October 29, 2016
millions
Before
Tax
Amount
 
Tax
Expense
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax Expense
 
Net of
Tax
Amount
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments(1)
$
200

 
$

 
$
200

 
$
64

 
$

 
$
64

Currency translation adjustments
1

 

 
1

 

 

 

Total other comprehensive income
$
201

 
$

 
$
201

 
$
64

 
$

 
$
64

 
39 Weeks Ended October 28, 2017
 
39 Weeks Ended October 29, 2016
millions
Before
Tax
Amount
 
Tax
Expense
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax Expense
 
Net of
Tax
Amount
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments(1)
$
377

 
$

 
$
377

 
$
192

 
$

 
$
192

Currency translation adjustments
2

 

 
2

 

 

 

Total other comprehensive income
$
379

 
$

 
$
379

 
$
192

 
$

 
$
192

(1) 
Included in the computation of net periodic benefit expense. See Note 5 to the Condensed Consolidated Financial Statements.
NOTE 5—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 in the Condensed Consolidated Statements of Operations, for our retirement plans:
 
13 Weeks Ended
 
39 Weeks Ended
millions
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Components of net periodic expense:
 
 
 
 
 
 
 
Interest cost
$
47

 
$
58

 
$
145

 
$
174

Expected return on plan assets
(48
)
 
(51
)
 
(151
)
 
(152
)
Amortization of experience losses(1)
249

 
64

 
546

 
192

Net periodic expense
$
248

 
$
71

 
$
540

 
$
214

(1) Amortization of experience losses for the 13- and 39- weeks ended October 28, 2017, respectively, includes $203 million and $403 million as a result of the pension annuity purchases described below.




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

Contributions
During the 13- and 39- week periods ended October 28, 2017, we made total contributions of $138 million and $271 million, respectively, to our pension and postretirement plans. During the 13- and 39- week periods ended October 29, 2016, we made total contributions of $113 million and $261 million, respectively, to our pension and postretirement plans. We anticipate making aggregate contributions to our defined benefit and postretirement plans of approximately $44 million over the remainder of 2017. As discussed in Note 1, the Company agreed to grant the PBGC a lien on, and subsequently contribute to the Company's pension plans, the value of the Craftsman Receivable, with the value of such payment being fully credited against the Company's minimum pension funding obligations in 2017, 2018 and 2019. The Company also agreed to grant a lien to the PBGC on the 15-year income stream relating to new Stanley Black & Decker sales of Craftsman products, and agreed to contribute the payments from Stanley Black & Decker under such income stream to the Company's pension plans, with such payments to be credited against the Company's minimum pension funding obligations starting no later than five years from the closing date. The Company also agreed to grant the PBGC a lien on $100 million of real estate assets to secure the Company's minimum pension obligations through the end of 2019. In November 2017, the Company announced an amendment to the PPPFA that releases 138 of our properties from a ring-fence arrangement created under the PPPFA upon, and in exchange for, the payment of approximately $407 million into the Sears pension plans. Following the $407 million contribution, the Company will be relieved of contributions to our pension plans for approximately two years (other than the quarterly payment due in December 2017 and a $20 million supplemental payment due in the second quarter of 2018), and the remaining properties will no longer be ring-fenced. The ultimate amount of pension contributions could be affected by changes in applicable regulations, as well as financial market and investment performance.
Pension Plan Amendment
Effective December 1, 2016, the Sears Holdings Pension Plan was amended to change its plan year from a calendar year end to a November 30th year end, to spin off a new Sears Holdings Pension Plan 2 ("Plan 2") and to rename the Sears Holdings Pension Plan as Sears Holdings Pension Plan 1 ("Plan 1"). In conjunction with these amendments, the Company requested that the Internal Revenue Service ("IRS") approve the foregoing change in plan year and to approve a change in actuarial funding method in connection with the spin-off and change in plan year. The Company has received IRS approval of the change in plan year and the request for approval to the change in actuarial funding method remains pending with the IRS.
Pension Annuity Purchase for Retirees    
In May 2017, the Company executed an irrevocable agreement to purchase a group annuity contract from Metropolitan Life Insurance Company ("MLIC"), under which MLIC will pay future pension benefit payments to approximately 51,000 retirees from Plan 2. The agreement calls for a transfer of approximately $515 million of Plan 2's benefit obligations to MLIC. This action had an immaterial impact on the funded status of our total pension obligations, but reduced the size of the Company's combined pension plan, reduced future cost volatility, and reduced future plan administrative expenses. The annuity purchase resulted in a non-cash charge of $200 million for losses previously accumulated in other comprehensive income (loss), which were recognized through the statement of operations upon settlement during the 13 week period ending July 29, 2017.
In August 2017, the Company reached another agreement with MLIC to annuitize an additional $512 million of its pension liability, under which MLIC will pay future pension benefit payments to an additional approximately 20,000 retirees from Plan 2. This action had an immaterial impact on the funded status of our total pension obligations, but reduced the size of the Company's combined pension plan, reduced future cost volatility, and reduced future plan administrative expenses. This annuity purchase resulted in a non-cash charge of $203 million for losses previously accumulated in other comprehensive income (loss), which were recognized through the statement of operations immediately upon settlement during the 13 week period ending October 28, 2017.
NOTE 6—INCOME TAXES
We had gross unrecognized tax benefits of $156 million at October 28, 2017, $148 million at October 29, 2016 and $142 million at January 28, 2017. Of the amount at October 28, 2017, $101 million would, if recognized, impact our




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

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 28, 2017, gross unrecognized tax benefits increased by $3 million and $14 million, respectively, due to state activity. During the 13- and 39- week periods ended October 29, 2016, gross unrecognized tax benefits increased by $4 million and $11 million, respectively, due to state activity. We expect that our unrecognized tax benefits could decrease by as much as $6 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 28, 2017, October 29, 2016 and January 28, 2017, the total amount of interest and penalties included in our tax accounts in our Condensed Consolidated Balance Sheet was $70 million ($46 million net of federal benefit), $62 million ($41 million net of federal benefit) and $61 million ($40 million net of federal benefit), respectively. The total amount of net interest expense (net of federal benefit) recognized as part of income tax expense in our Condensed Consolidated Statements of Operations was $2 million and $1 million, respectively, for the 13 week periods ended October 28, 2017 and October 29, 2016, and $6 million and $4 million, respectively, for the 39 week periods ended October 28, 2017 and October 29, 2016.
We file income tax returns in both the United States and various foreign jurisdictions. The U.S. Internal Revenue Service ("IRS") has completed its examination of all federal tax returns of Holdings through the 2009 return, and all matters arising from such examinations have been resolved. In addition, Holdings and Sears are under examination by various state, local and foreign income tax jurisdictions for the years 2003 through 2016, and Kmart is under examination by such jurisdictions for the years 2006 through 2014.
At the end of 2016, we had a federal and state net operating loss ("NOL") deferred tax asset of $2.3 billion, which will expire predominately between 2019 and 2036. We have credit carryforwards of $875 million, which will expire between 2018 and 2036.
In July 2016, the Company sold shares of an investment for $106 million. The sale resulted in a U.S. taxable gain of $105 million, but no current income tax is payable due to the utilization of NOL attributes of $37 million with a valuation allowance release of the same amount.
In connection with the Craftsman Sale in the first quarter of 2017, the Company realized a tax benefit of $101 million on the deferred taxes related to the indefinite-life intangible for the trade name sold to Stanley Black & Decker. In addition, the Company incurred a taxable gain of approximately $963 million. There was no federal income tax payable resulting from the taxable gain due to the utilization of NOL tax attributes of approximately $361 million with a valuation allowance release of the same amount. However, there was state income tax of $4 million payable after the utilization of state tax attributes.
At January 28, 2017, we had a valuation allowance of $5.5 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 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. As such, for the 13- and 39- week periods ended October 28, 2017, our effective income tax rates were an expense of 0.5% and a benefit of 9.5%, respectively. Our tax rate continues to reflect the effect of 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. During the first quarter of fiscal 2017, the Company realized a significant tax benefit on the reversal of deferred taxes related to the Craftsman trade name. In addition, the 13- and 39- week periods ended October 28, 2017 were positively impacted by the reversal of deferred taxes related to indefinite-life assets associated with property sales and negatively impacted by foreign branch taxes and state income taxes.




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

NOTE 7—SUMMARY OF SEGMENT DATA
These reportable segment classifications are based on our business formats, as described in Note 1. The Kmart format represents 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.
Each of these segments derives its revenues from the sale of merchandise and related services to customers, primarily in the United States. The merchandise and service categories are as follows:
(i)
Hardlines—consists of home appliances, consumer electronics, lawn & garden, tools & 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 & household, pharmacy and drugstore;
(iv)
Service—includes repair, installation and automotive service and extended contract revenue; and
(v)
Other—includes revenues earned in connection with our agreements with SHO and Lands' End, as well as credit revenues and licensed business revenues.
 
13 Weeks Ended October 28, 2017
millions
Kmart
 
Sears Domestic
 
Sears Holdings
Merchandise sales
 
 
 
 
 
Hardlines
$
304

 
$
1,264

 
$
1,568

Apparel and Soft Home
432

 
463

 
895

Food and Drug
427

 
3

 
430

Total merchandise sales
1,163

 
1,730

 
2,893

Services and other
 
 
 
 
 
Services

 
435

 
435

Other
12

 
320

 
332

Total services and other
12

 
755

 
767

Total revenues
1,175

 
2,485

 
3,660

Costs and expenses
 
 
 
 
 
Cost of sales, buying and occupancy - merchandise sales
984

 
1,551

 
2,535

Cost of sales and occupancy - services and other
2

 
421

 
423

Total cost of sales, buying and occupancy
986

 
1,972

 
2,958

Selling and administrative
377

 
962

 
1,339

Depreciation and amortization
19

 
70

 
89

Impairment charges
3

 
6

 
9

Gain on sales of assets
(132
)
 
(184
)
 
(316
)
Total costs and expenses
1,253

 
2,826

 
4,079

Operating loss
$
(78
)
 
$
(341
)
 
$
(419
)
Total assets
$
1,978

 
$
6,215

 
$
8,193

Capital expenditures
$
3

 
$
15

 
$
18





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

 
13 Weeks Ended October 29, 2016
millions
Kmart
 
Sears Domestic
 
Sears Holdings
Merchandise sales
 
 
 
 
 
Hardlines
$
496

 
$
1,651

 
$
2,147

Apparel and Soft Home
639

 
539

 
1,178

Food and Drug
735

 
1

 
736

Total merchandise sales
1,870

 
2,191

 
4,061

Services and other
 
 
 
 
 
Services
2

 
533

 
535

Other
16

 
417

 
433

Total services and other
18

 
950

 
968

Total revenues
1,888

 
3,141

 
5,029

Costs and expenses
 
 
 
 
 
Cost of sales, buying and occupancy - merchandise sales
1,601

 
1,896

 
3,497

Cost of sales and occupancy - services and other
4

 
566

 
570

Total cost of sales, buying and occupancy
1,605

 
2,462

 
4,067

Selling and administrative
555

 
988

 
1,543

Depreciation and amortization
17

 
74

 
91

Impairment charges
3

 

 
3

Gain on sales of assets
(30
)
 
(21
)
 
(51
)
Total costs and expenses
2,150

 
3,503

 
5,653

Operating loss
$
(262
)
 
$
(362
)
 
$
(624
)
Total assets
$
2,857

 
$
8,008

 
$
10,865

Capital expenditures
$
11

 
$
29

 
$
40





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

 
39 Weeks Ended October 28, 2017
millions
Kmart
 
Sears Domestic
 
Sears Holdings
Merchandise sales
 
 
 
 
 
Hardlines
$
1,124

 
$
4,271

 
$
5,395

Apparel and Soft Home
1,496

 
1,441

 
2,937

Food and Drug
1,482

 
6

 
1,488

Total merchandise sales
4,102

 
5,718

 
9,820

Services and other
 
 
 
 
 
Services
3

 
1,388

 
1,391

Other
38

 
1,077

 
1,115

Total services and other
41

 
2,465

 
2,506

Total revenues
4,143

 
8,183

 
12,326

Costs and expenses
 
 
 
 
 
Cost of sales, buying and occupancy - merchandise sales
3,404

 
4,916

 
8,320

Cost of sales and occupancy - services and other
7

 
1,396

 
1,403

Total cost of sales, buying and occupancy
3,411

 
6,312

 
9,723

Selling and administrative
1,092

 
2,883

 
3,975

Depreciation and amortization
46

 
213

 
259

Impairment charges
11

 
18

 
29

Gain on sales of assets
(808
)
 
(629
)
 
(1,437
)
Total costs and expenses
3,752

 
8,797

 
12,549

Operating income (loss)
$
391

 
$
(614
)
 
$
(223
)
Total assets
$
1,978

 
$
6,215

 
$
8,193

Capital expenditures
$
12

 
$
47

 
$
59





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

 
39 Weeks Ended October 29, 2016
millions
Kmart
 
Sears Domestic
 
Sears Holdings
Merchandise sales
 
 
 
 
 
Hardlines
$
1,722

 
$
5,228

 
$
6,950

Apparel and Soft Home
2,127

 
1,681

 
3,808

Food and Drug
2,349

 
4

 
2,353

Total merchandise sales
6,198

 
6,913

 
13,111

Services and other
 
 
 
 
 
Services
7

 
1,610

 
1,617

Other
43

 
1,315

 
1,358

Total services and other
50

 
2,925

 
2,975

Total revenues
6,248

 
9,838

 
16,086

Costs and expenses
 
 
 
 
 
Cost of sales, buying and occupancy - merchandise sales
5,087

 
5,841

 
10,928

Cost of sales and occupancy - services and other
13

 
1,746

 
1,759

Total cost of sales, buying and occupancy
5,100

 
7,587

 
12,687

Selling and administrative
1,597

 
2,933

 
4,530

Depreciation and amortization
51

 
227

 
278

Impairment charges
7

 
11

 
18

Gain on sales of assets
(120
)
 
(46
)