Sears 2009 Annual Report Download - page 49

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our dependence on sources outside the United States for significant amounts of our merchandise; our extensive
reliance on computer systems to process transactions, summarize results and manage our business; our reliance
on third parties to provide us with services in connection with the administration of certain aspects of our
business; impairment charges for goodwill and intangible assets or fixed-asset impairment for long-lived assets;
our ability to properly implement and realize the expected benefits from our organizational structure and
operating model; our ability to attract, motivate and retain key executives and other associates; the outcome of
pending and/or future legal proceedings, including product liability claims and bankruptcy claims, including
proceedings with respect to which the parties have reached a preliminary settlement; and the timing and amount
of required pension plan funding.
Certain of these and other factors are discussed in more detail in Item 1A of this Annual Report on
Form 10-K. While we believe that our forecasts and assumptions are reasonable, we caution that actual results
may differ materially. We intend the forward-looking statements to speak only as of the time made and do not
undertake to update or revise them as more information becomes available.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We face market risk exposure in the form of interest rate risk, foreign currency risk and equity price risk.
These market risks arise from our derivative financial instruments and debt obligations.
Interest Rate Risk
We manage interest rate risk through the use of fixed and variable-rate funding and interest rate derivatives.
As of January 30, 2010, we had interest rate derivatives with a notional amount of $120 million, nominal fair
value and a weighted average remaining life of 0.9 years. All debt securities and interest-rate derivative
instruments are considered non-trading. As of January 30, 2010, 25% of our debt portfolio was variable rate.
Based on the size of this variable rate debt portfolio at January 30, 2010, which totaled approximately $621
million, an immediate 100 basis point change in interest rates would have affected annual pretax funding costs by
$6 million. These estimates do not take into account the effect on income resulting from invested cash or the
returns on assets being funded. These estimates also assume that the variable rate funding portfolio remains
constant for an annual period and that the interest rate change occurs at the beginning of the period.
Foreign Currency Risk
As of January 30, 2010, we had a series of foreign currency forward contracts outstanding, totaling
$400 million Canadian notional value and with a weighted average remaining life of 0.5 years, designed to hedge
our net investment in Sears Canada against adverse changes in exchange rates. The aggregate fair value of the
forward contracts as of January 30, 2010 was $15 million. A hypothetical 1% adverse movement in the level of
the Canadian exchange rate relative to the U.S. dollar as of January 30, 2010, with all other variables held
constant, would have resulted in a loss in the fair value of our foreign currency forward contracts of
approximately $4 million as of January 30, 2010. Certain of our currency forward contracts require collateral be
posted in the event our liability under such contracts reaches a predetermined threshold. Cash collateral posted
under these contracts is recorded as part of our accounts receivable balance. We did not have any cash collateral
posted under these contracts as of January 30, 2010.
Sears Canada mitigates the risk of currency fluctuations on offshore merchandise purchases denominated in
U.S. currency by purchasing U.S. dollar denominated option contracts for a portion of its expected requirements.
As of January 30, 2010, these contracts had a notional value of approximately $299 million and a weighted
average remaining life of 0.5 years. The aggregate fair value of the option contracts as of January 30, 2010 was
$9 million. A hypothetical 1% adverse movement in the level of the Canadian exchange rate relative to the U.S.
dollar as of January 30, 2010, with all other variables held constant, would have resulted in a fair value for these
contracts of approximately $7 million as of January 30, 2010, a decrease of $2 million.
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