Sears 2009 Annual Report Download - page 26

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finished its relocation of all head office operations to previously underutilized space in the Toronto Eaton Centre,
Ontario. Given the terms of the leaseback, for accounting purposes, the excess of proceeds received over the
carrying value of the associated property was deferred, and the resulting gain was recognized when Sears Canada
no longer occupied the associated property.
Operating Income
Operating income was $713 million for fiscal 2009 and $302 million for fiscal 2008. Operating income
increased $411 million and was the result of reductions in selling and administrative expenses, partially offset by
lower gross margin dollars given lower overall sales. Operating income for fiscal 2009 includes expenses of $301
million related to domestic pension plans, store closings and severance, a $44 million gain recognized by Sears
Canada on the sale of its former headquarters, and a $32 million gain recorded in connection with the settlement
of Visa/MasterCard antitrust litigation. Operating income for fiscal 2008 included a charge of $437 million
related to costs associated with asset impairments and store closings and severance, as well as the positive impact
of the reversal of a $62 million reserve because of a favorable verdict in connection with a legal settlement.
Interest and Investment Income
We earned $33 million in interest and investment income in fiscal 2009 and $46 million for fiscal 2008.
Interest and investment income includes dividends of $9 million and $10 million in fiscal 2009 and 2008,
respectively, from our cost method investment in Sears Mexico, and interest income of $5 million and $25
million in fiscal 2009 and 2008, respectively. The decrease in interest income in fiscal 2009 was primarily due to
lower yields received on short-term investments during the year, as well as lower average cash balances
throughout the year.
Interest Expense
We incurred $265 million in interest expense during fiscal 2009 and $272 million in fiscal 2008. While our
total debt balances declined throughout the year, our interest expense was flat to fiscal 2008 primarily due to an
increase in amortization expense related to capitalized debt issuance costs related to our amended revolving
credit facility.
Other Income (Loss)
Other income (loss) is primarily comprised of mark-to-market and settlement gains and losses on Sears
Canada hedge transactions. Total net mark-to-market and settlement losses of $67 million were recorded on these
transactions in fiscal 2009. Total net gains of $81 million were recorded on these transactions in fiscal 2008. See
Notes 4 and 5 to the Consolidated Financial Statements for further information regarding these transactions.
Income Taxes
Our effective tax rate was 29.3% in fiscal 2009 and 46.2% in fiscal 2008. The decrease in our tax rate is
primarily due to the resolution of certain federal and state income tax matters during 2009, which resulted in the
recording of a $41 million tax benefit. Income tax expense in 2008 included a benefit of $8 million related to the
resolution of certain tax matters, but was higher mainly due to a portion of our impairment charge for goodwill in
fiscal 2008 not being deductible for tax purposes.
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