Operating EBITDA Increases 5.7% on Comparable Basis
TORONTO, Aug. 26 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced its
unaudited second quarter results. Total revenues for the 13-week period ended
August 2, 2008 were $1.420 billion compared to $1.444 billion for the 13 weeks
ended June 30, 2007, a decrease of 1.6%. Beginning in 2008, the Company
changed its year end to the Saturday closest to January 31st instead of the
Saturday closest to December 31st. Excluding the effect of the fiscal year
change, revenues increased 0.5%.
Same store sales increased 1.8% for the 13 week period ended August 2,
2008 compared to the 13 week period ended August 4, 2007.
Net earnings for the second quarter, including unusual items, were
$61.1 million or 56 cents per share compared to $42.3 million or 39 cents per
share in the second quarter last year, which ended June 30, 2007. There were
no unusual items in the quarter this year. Unusual items in 2007 were
$105,000. Net earnings, excluding unusual items, for the second quarter last
year, which ended June 30, 2007, were $42.4 million or 39 cents per share.
Operating EBITDA (Earnings before interest, taxes, depreciation and
amortization), before unusual items, increased by 5.7% to $124.3 million
versus $117.6 million in the 13-week period ended August 4, 2007. Operating
EBITDA is a non-GAAP measure; please refer to "Reconciliation of Net Earnings
to Operating EBITDA" attached. For this comparable period, gross margins
increased 86 basis points as a percentage to revenue.
Total revenues for the 26-week period ended August 2, 2008 were
$2.675 billion compared to $2.663 billion for the 26-week period last year,
which ended June 30, 2007, an increase of 0.4%. Excluding the effect of the
fiscal year change, revenues decreased 0.8%. Same store sales were flat for
the 26 week period ended August 2, 2008 compared to the 26 week period ended
August 4, 2007.
Net earnings for the 26 weeks ended August 2, 2008, including unusual
items, were $124.2 million or $1.15 per share compared to $56.6 million or
52 cents per share for the 26-week period last year, which ended June 30,
2007. Net earnings for the first 26 weeks of 2008, excluding unusual items,
were $95.9 million or 89 cents per share compared to $47.4 million or 43 cents
per share for 26-week period ended June 30, 2007.
Operating EBITDA before unusual items increased by 6.1% to $207.4 million
versus $195.4 million in the 26-week period ended August 4, 2007. As
previously mentioned, please refer to "Reconciliation of Net Earnings to
Operating EBITDA" attached. For this comparable period, gross margins
increased 101 basis points as a percentage to revenue.
Commenting on the second quarter and first half, Dene Rogers, President
and Chief Executive Officer, Sears Canada Inc. said, "Our same store sales
compared to last year headed in a positive direction during the quarter
despite depressed consumer confidence and a tougher economy. Challenges in our
soft lines were offset by improved performance in our big-ticket areas. We
remain focused on becoming Canada's No. 1 retailer by providing products,
services and solutions that improve the lives of our customers and build
lifetime relationships."
This release contains information which is forward-looking and is subject
to important risks and uncertainties. Forward-looking information concerns the
Company's future financial performance, business strategy, plans, goals and
objectives. Factors which could cause actual results to differ materially from
current expectations include, but are not limited to: the ability of the
Company to successfully implement its cost reduction, productivity improvement
and strategic initiatives and whether such initiatives will yield the expected
benefits; the impact of the sale of the Company's Credit and Financial
Services operations and the results achieved pursuant to the Company's
long-term marketing and servicing alliance with JPMorgan Chase Bank, N.A.;
general economic conditions; competitive conditions in the businesses in which
the Company participates; changes in consumer spending; seasonal weather
patterns; customer preference toward product offerings; changes in the
Company's relationship with its suppliers; interest rate fluctuations and
other changes in funding costs; fluctuations in foreign currency exchange
rates; the possibility of negative investment returns in the Company's pension
plan; the outcome of pending legal proceedings; and changes in laws, rules and
regulations applicable to the Company. While the Company believes that its
forecasts and assumptions are reasonable, results or events predicted in this
forward-looking information may differ materially from actual results or
events.
Sears Canada is a multi-channel retailer with a network of 197 corporate
stores, 185 dealer stores, 45 home improvement showrooms, over 1,850 catalogue
merchandise pick-up locations, 106 Sears Travel offices and a nationwide home
maintenance, repair, and installation network. The Company also publishes
Canada's most extensive general merchandise catalogue and offers shopping
online at www.sears.ca.
SEARS CANADA INC.
RECONCILIATION OF NET EARNINGS TO OPERATING EBITDA
Unaudited
Second Quarter Year-to-Date
(in millions, except -------------------------------------------
per share amounts) 2008 2007 2008 2007
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Net earnings(1) $ 61.1 $ 42.3 $ 124.2 $ 56.6
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Unusual items, net of taxes:
Sale of real estate/joint
venture - - (28.3) (9.3)
Sale of airplane - (2.3) - (2.3)
Settlement of lawsuit - 2.4 - 2.4
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Net earnings excluding
unusual items(1) $ 61.1 $ 42.4 $ 95.9 $ 47.4
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Depreciation and amortization 31.8 35.2 64.0 72.3
Interest expense, net 2.1 5.0 2.6 10.9
Income taxes expense excluding
taxes on unusual items(1) 29.3 24.3 44.9 28.5
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Operating EBITDA(2) $ 124.3 $ 106.9 $ 207.4 $ 159.1
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Adjustments to arrive at
comparable period operating
EBITDA(3) for 2007:
Change in fiscal year end (8.1) 13.1
New inventory standard 10.5 10.5
Retrospective change in
financial instruments
accounting policy 8.3 12.7
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Comparable period operating
EBITDA(3) $ 124.3 $ 117.6 $ 207.4 $ 195.4
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Net earnings per share $ 0.56 $ 0.39 $ 1.15 $ 0.52
Net earnings per share
excluding unusual items $ 0.56 $ 0.39 $ 0.89 $ 0.43
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(1) Net earnings and income taxes expense for the second quarter and
year-to-date ("YTD") 2007 have been restated as a result of the
retrospective application of the change to the Company's financial
instruments accounting policy choice regarding recognition of
embedded derivatives.
(2) The second quarter and YTD periods of 2008 and 2007 represent the
13 and 26-week periods ended August 2, 2008 and June 30, 2007,
respectively.
(3) For the second quarter and YTD 2008 and the comparable second quarter
and YTD 2007, comparable period operating EBITDA represents the
13 and 26-week periods ended August 2, 2008 and August 4, 2007,
respectively.
SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
As at As at
June 30, February
As at 2007 2, 2008
August 2, (Restated (Restated
(in millions) 2008 - Note 1) - Note 1)
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ASSETS
Current Assets
Cash and short-term investments $ 783.0 $ 614.8 $ 871.6
Restricted cash (Note 13) 2.6 3.9 5.2
Accounts receivable 154.6 120.7 118.4
Income taxes recoverable 24.3 2.4 0.4
Inventories 999.5 845.2 879.7
Prepaid expenses and other assets 117.5 92.8 91.1
Current portion of future income
tax assets 23.6 94.5 29.2
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2,105.1 1,774.3 1,995.6
Capital assets 717.3 789.8 742.0
Deferred charges 205.6 212.9 205.0
Future income tax assets 25.1 28.0 24.9
Other long-term assets 32.2 32.9 34.2
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$ 3,085.3 $ 2,837.9 $ 3,001.7
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LIABILITIES
Current liabilities
Accounts payable $ 650.9 $ 627.0 $ 683.6
Accrued liabilities 411.3 444.4 438.6
Income and other taxes payable 39.2 60.7 80.2
Principal payments on long-term
obligations due within one year
(Note 4) 15.2 146.6 16.1
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1,116.6 1,278.7 1,218.5
Long-term obligations (Note 4) 354.1 372.0 356.0
Accrued benefit liability (Note 12) 169.0 174.5 164.1
Other long-term liabilities 165.3 168.8 169.7
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1,805.0 1,994.0 1,908.3
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SHAREHOLDERS' EQUITY
Capital stock (Note 9) 15.7 15.7 15.7
Retained earnings 1,259.6 828.3 1,077.7
Accumulated other comprehensive income 5.0 (0.1) -
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1,280.3 843.9 1,093.4
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$ 3,085.3 $ 2,837.9 $ 3,001.7
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
For the 13 and 26-week periods ended August 2, 2008 and June 30, 2007
Unaudited
13-Week Period 26-Week Period
--------------------- ---------------------
2007 2007
(in millions, except (Restated (Restated
per share amounts) 2008 - Note 1) 2008 - Note 1)
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Total revenues $ 1,420.3 $ 1,443.9 $ 2,674.7 $ 2,663.0
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Cost of merchandise sold,
operating, administrative
and selling expenses (Note 2) 1,296.0 1,337.0 2,467.3 2,503.9
Depreciation and amortization 31.8 35.2 64.0 72.3
Interest expense, net 2.1 5.0 2.6 10.9
Unusual items - (gain)
expense (Note 5) - 0.1 (37.2) (9.2)
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Earnings before income taxes 90.4 66.6 178.0 85.1
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Income taxes expense (recovery)
Current 27.4 8.1 78.8 17.0
Future 1.9 16.2 (25.0) 11.5
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29.3 24.3 53.8 28.5
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Net earnings $ 61.1 $ 42.3 $ 124.2 $ 56.6
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Net earnings per share
(Note 6) $ 0.56 $ 0.39 $ 1.15 $ 0.52
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Diluted net earnings per
share (Note 6) $ 0.56 $ 0.39 $ 1.15 $ 0.52
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Net earnings $ 61.1 $ 42.3 $ 124.2 $ 56.6
Other comprehensive income
(loss), net of taxes:
Mark-to-market adjustment
related to short-term
investments, net of
income taxes recovery of
less than $0.1 - (0.1) (0.1) (0.1)
Gain on derivatives
designated as cash flow
hedges, net of income
taxes expense of $2.4 2.8 - 5.0 -
Reclassification to net
earnings of loss on
derivatives designated as
cash flow hedges, net of
income taxes expense of
less than $0.1 - - 0.1 -
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Other comprehensive
income (loss) 2.8 (0.1) 5.0 (0.1)
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Comprehensive income $ 63.9 $ 42.2 $ 129.2 $ 56.5
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND ACCUMULATED OTHER
COMPREHENSIVE INCOME
For the 13 and 26-week periods ended August 2, 2008 and June 30, 2007
Unaudited
13-Week Period 26-Week Period
--------------------- ---------------------
2007 2007
(Restated (Restated
(in millions) 2008 - Note 1) 2008 - Note 1)
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Retained earnings
Opening balance $ 1,198.5 $ 786.0 $ 1,077.7 $ 769.3
Adjustment to opening
retained earnings resulting
from adoption of new
accounting standard for
inventories, net of income
taxes of $27.7 (Note 2) - - 57.7 -
Adjustment to opening retained
earnings resulting from
adoption of new accounting
standards for financial
instruments, net of income
taxes of $1.2 (Note 1) - - - 2.4
Net earnings $ 61.1 42.3 124.2 56.6
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Closing balance $ 1,259.6 $ 828.3 $ 1,259.6 $ 828.3
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Accumulated other
comprehensive income
Opening balance $ 2.2 $ - $ - $ -
Other comprehensive
income (loss) 2.8 (0.1) 5.0 (0.1)
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Closing balance $ 5.0 $ (0.1) $ 5.0 $ (0.1)
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Retained earnings and
accumulated other
comprehensive income $ 1,264.6 $ 828.2 $ 1,264.6 $ 828.2
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 13 and 26-week periods ended August 2, 2008 and June 30, 2007
Unaudited
13-Week Period 26-Week Period
--------------------- ---------------------
2007 2007
(Restated (Restated
(in millions) 2008 - Note 1) 2008 - Note 1)
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Cash flow generated from
(used for) operating
activities
Net earnings $ 61.1 $ 42.3 $ 124.2 $ 56.6
Non-cash items included in
net earnings, principally
depreciation, pension
expense, future income
taxes and gain on sale
of real estate and real
estate joint venture 40.7 63.5 10.4 102.0
Changes in non-cash working
capital balances related
to operations (72.1) 103.6 (207.0) (270.5)
Other, principally pension
contributions and changes
to long-term assets and
liabilities (2.2) (3.0) (4.5) (1.7)
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27.5 206.4 (76.9) (113.6)
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Cash flow generated from
(used for) investing
activities
Acquisition, net of cash
acquired (Note 3) - - (7.0) -
Purchases of capital assets (12.8) (12.2) (44.2) (20.4)
Proceeds from sale of
capital assets - 15.7 40.1 15.7
Proceeds on sale of real
estate joint venture, net
of cash sold (Note 5) - - - 5.2
Deferred charges (0.3) - (0.3) -
Changes in restricted cash
(Note 13) 4.4 1.5 2.6 6.2
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(8.7) 5.0 (8.8) 6.7
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Cash flow generated from
(used for) financing
activities
Repayment of long-term
obligations (Note 4) (2.2) (0.6) (2.9) (1.2)
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Increase (decrease) in cash
and short-term investments 16.6 210.8 (88.6) (108.1)
Cash and short-term
investments at beginning
of period 766.4 404.0 871.6 722.9
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Cash and short-term
investments at end of period $ 783.0 $ 614.8 $ 783.0 $ 614.8
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Cash at end of period $ 57.7 $ 99.3 $ 57.7 $ 99.3
Short-term investments at
end of period 725.3 515.5 725.3 515.5
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Total cash and short-term
investments at end of period $ 783.0 $ 614.8 $ 783.0 $ 614.8
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SEARS CANADA INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 2, 2008
Unaudited
1. BASIS OF PRESENTATION
These unaudited interim consolidated financial statements (the "Financial
Statements") of Sears Canada Inc. (the "Company") have been prepared in
accordance with Canadian generally accepted accounting principles
("GAAP") but do not contain all disclosures required by Canadian GAAP for
annual financial statements. Accordingly, these Financial Statements
should be read in conjunction with the most recently prepared audited
annual consolidated financial statements for the 57-week period ended
February 2, 2008 ("2007 Annual Financial Statements"). These Financial
Statements for the second quarter ended August 2, 2008 follow the same
accounting policies and methods of application as those used in the
preparation of the 2007 Annual Financial Statements, except as described
in Note 2 Accounting Policies and Estimates.
The Company's operations are seasonal in nature. Accordingly, merchandise
and service revenues, as well as performance payments received from
JPMorgan Chase & Co, N.A. (Toronto Branch) ("JPMorgan Chase") under the
long-term credit card marketing and servicing alliance, will vary by
quarter based upon consumer spending behaviour. Historically, the
Company's revenues and earnings are higher in the fourth quarter than in
any of the other three quarters due to the holiday season. The Company is
able to adjust certain variable costs in response to seasonal revenue
patterns; however, costs such as occupancy are fixed, causing the Company
to report a disproportionate level of earnings in the fourth quarter.
This business seasonality results in quarterly performance that is not
necessarily indicative of the year's performance.
In 2007, the Company changed its fiscal year end to the Saturday closest
to January 31. Prior to the change, the Company's fiscal year consisted
of a 52 or 53-week period ending on the Saturday closest to December 31.
The 2008 fiscal year is comprised of 52 weeks, with the first, second,
third and fourth quarters ending on May 3, 2008, August 2, 2008,
November 1, 2008 and January 31, 2009, respectively. The Company's 2007
fiscal year, presented as comparatives herein, was a transition year
comprised of 57 weeks ended February 2, 2008, with the first, second,
third and fourth quarters ended on March 31, 2007, June 30, 2007,
September 29, 2007 and February 2, 2008, respectively ("2007").
Certain comparative figures have been reclassified to conform to the
current period's presentation. Also, as explained in Note 15 Financial
Instruments, certain figures from the prior year have been restated as a
result of the retrospective application of a change in accounting policy,
as required under the Canadian Institute of Chartered Accountants
("CICA") Handbook Section 1506 "Accounting Changes" ("Section 1506"). As
a result of this retrospective restatement, the fiscal 2007 opening
retained earnings adjustment, related to the adoption of CICA Handbook
Section 3855 "Financial Instruments - Recognition and Measurement"
("Section 3855"), reported in Note 1 of the 2007 Annual Financial
Statements, has been restated to reflect a credit of $2.8 million.
Consequently, the restated Section 3855 adjustment to 2007 opening
retained earnings is a total credit of $2.4 million, net of taxes of
$1.2 million. In addition to the adjustment to 2007 opening retained
earnings, the following table summarizes the increase (decrease) to the
2007 comparative figures contained herein as at and for the 13 and
26-week periods ended June 30, 2007 and the year ended February 2, 2008
from figures previously reported:
As at and As at and As at and
for the for the for the
13-week 26-week 57-week
Period Period Period
Ended Ended Ended
June 30, June 30, February
(increase (decrease) in millions) 2007 2007 2, 2008
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Prepaid expenses and other assets $ (8.5) $ (8.5) $ -
Current portion of future income
tax assets 3.0 3.0 (1.4)
Accrued liabilities - - (0.4)
Income and other taxes payable - - (1.3)
Net earnings (5.4) (8.3) (2.5)
Opening retained earnings (0.1) 2.8 2.8
Closing retained earnings (5.5) (5.5) 0.3
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2. ACCOUNTING POLICIES AND ESTIMATES
New Policies:
These Financial Statements follow the same accounting policies and
methods of application as the 2007 Annual Financial Statements, with the
following exceptions:
Inventories
On February 3, 2008, the Company adopted CICA Handbook Section 3031
"Inventories" ("Section 3031"), which replaced Section 3030
"Inventories". The new standard applies to interim and annual financial
statements relating to fiscal years beginning on or after January 1, 2008
and provides guidance on the determination of cost and requires
inventories to be measured at the lower of cost and net realizable value.
The new standard also requires additional disclosures, including the
accounting policies adopted in measuring inventories, amount of
inventories recognized as an expense during the period, the amount of any
write-downs and reversal of any write-downs during the period and the
carrying amount of inventories pledged as security for liabilities.
According to the new standard, the cost of inventories should be
determined using the first-in, first-out or weighted average cost method.
Techniques for the measurement of the costs of inventories, such as the
retail method or the standard cost method, are permitted if the results
approximate cost. Reversal of previous write-downs to net realizable
value is now required when there is a subsequent increase in the value of
inventories.
For those companies that are required to adopt a new inventory
measurement policy as a result of Section 3031, transitional provisions
in Section 3031 allow companies to either report opening inventory in
accordance with the new standard, with the difference in inventory
measurement treated as a retrospective adjustment to opening retained
earnings without restatement of prior periods, or report opening
inventory in accordance with the new standard and apply the change in
measurement retrospectively with a restatement of prior periods.
The Company has adopted this new standard retrospectively, without
restatement of prior period amounts. The initial impact of measuring
inventories under the new standard is an increase to the carrying amount
of opening inventories as at February 3, 2008 of $85.4 million. Opening
retained earnings has been adjusted by $57.7 million, equal to the change
in opening inventories net of taxes of $27.7 million.
Following adoption of Section 3031, the Company values its inventories at
the lower of cost and net realizable value. Cost is determined using the
weighted average cost method, based on individual items. The cost of
inventories is comprised of the purchase price plus other costs incurred
in bringing the inventories to their present location and condition, such
as freight and is reduced by the value of rebates and allowances received
from vendors. Costs that do not contribute to bringing inventories to
their present location and condition, such as storage and administrative
overheads, are specifically excluded from the cost of inventories and are
expensed in the period incurred.
The amount of inventories recognized as an expense during the 13 and
26-week periods ended August 2, 2008 totals $726.2 million and
$1,356.5 million, respectively, including $21.3 million and $42.4 million
related to write-downs. A negligible amount of write-downs were reversed
during the 13 and 26-week periods ended August 2, 2008. The entire
carrying amount of inventories has been pledged as security for the
Company's credit facility and outstanding medium-term notes, as described
in Note 6 to the 2007 Annual Financial Statements.
With the exception of $25.9 million of inventories from the Company's
parts and service and home improvement businesses, the Company's entire
inventories balance consists of merchandise finished goods. As a result
of the Company's change in accounting policy for inventories, the
inventories balances on the consolidated statements of financial position
as at August 2, 2008 and June 30, 2007 are not comparable.
Financial Instruments
As explained in Note 15 Financial Instruments, the Company discontinued
the recognition of certain embedded derivatives on February 3, 2008, as a
result of a change in accounting policy made in accordance with Section
1506.
On February 3, 2008, the Company adopted CICA Handbook Section 3862
"Financial Instruments - Disclosures" ("Section 3862") and Section 3863
"Financial Instruments - Presentation" ("Section 3863"). These two new
sections replaced Section 3861 "Financial Instruments - Disclosure and
Presentation" ("Section 3861"). The disclosure requirements in Section
3862 revise and enhance the disclosure requirements of Section 3861,
prior to that section being superseded, with particular focus on
additional disclosure surrounding risk and risk management of financial
instruments. Section 3863 contains the standards for presentation of
financial instruments and non-financial derivatives and is essentially
consistent with the presentation requirements previously found in Section
3861. These two new sections apply to interim and annual financial
statements relating to fiscal years beginning on or after October 1,
2007. All new disclosure required under Section 3862 has been included in
Note 15 Financial Instruments, contained herein. The adoption of Section
3863 has had no significant impact on the Company's Financial Statements.
Capital Disclosures
On February 3, 2008, the Company adopted CICA Handbook Section 1535
"Capital Disclosures" ("Section 1535"). Section 1535 applies to interim
and annual financial statements relating to fiscal years beginning on or
after October 1, 2007. This new guidance establishes standards for
disclosing information about an entity's capital and how it is managed.
This section requires the disclosure of an entity's objectives, policies
and processes for managing capital and information regarding an entity's
compliance or non-compliance with any capital requirements. The new
disclosure required under Section 1535 has been included in Note 14
Capital Disclosures, contained herein. The adoption of Section 1535 has
had no significant impact on the Company's Financial Statements.
Embedded Foreign Currency Derivatives
In January 2008, the CICA issued CICA Emerging Issues Committee ("EIC")
EIC-169 "Embedded Foreign Currency Derivatives" ("EIC-169"). Guidance in
EIC-169 should be applied retrospectively to embedded foreign currency
derivatives in host contracts that are not financial instruments
accounted for in accordance with Section 3855 in financial statements
issued for interim and annual periods ending on or after March 15, 2008.
This new EIC assists in the interpretation of the phrase "routinely
denominated" as used in Section 3855 and also assists in determining what
factors can be used to determine whether a contract for the purchase or
sale of a non-financial item such as a commodity is routinely denominated
in a particular currency in commercial transactions around the world.
This EIC has had no affect on these Financial Statements because, as
explained in Note 15 Financial Instruments, the Company has not
recognized any financial instruments with embedded foreign currency
derivatives.
Future Accounting Policies:
Goodwill
In February 3, 2008, the CICA issued CICA Handbook Section 3064 "Goodwill
and Intangible Assets" ("Section 3064"), which is effective for interim
and annual financial statements issued for fiscal years beginning on or
after October 1, 2008. This new standard replaces Section 3062 "Goodwill
and Other Intangible Assets" and Section 3450 "Research and Development
Costs". The primary reason for the issuance of this new standard is to
provide clarity on the recognition and treatment of internally developed
intangibles. Section 3064 reinforces a principle-based approach to the
recognition of cost as assets in accordance with the definition of an
asset and criteria for the recognition of an asset in CICA Handbook
Section 1000 "Financial Statement Concepts". The Company is currently
evaluating the effect this standard will have on financial statements for
future periods.
International Financial Reporting Standards ("IFRS")
The Canadian Accounting Standards Board confirmed, in February 2008, that
it will require all public companies to adopt IFRS for interim and annual
financial statements relating to fiscal years beginning on or after
January 1, 2011. In the year of adoption, companies will be required to
provide comparative information as if IFRS had been used in the preceding
fiscal year. The transition from Canadian GAAP to IFRS will be applicable
to the Company's first quarter of operations for fiscal 2011, at which
time the Company will prepare both its fiscal 2011 and fiscal 2010
comparative financial information using IFRS. The Company expects the
transition to IFRS to impact financial reporting, business processes,
internal controls and information systems. The Company is currently
assessing the impact of the transition to IFRS on these areas and will
continue to invest in training and resources throughout the transition
period to facilitate a timely conversion.
3. ACQUISITION
On February 24, 2008, the Company acquired the assets of Excell Duct
Cleaning Inc. and 1150681 Ontario Inc., two related, privately-held
companies based in Ontario. As a result of this $7.0 million acquisition,
net of cash acquired of Nil, assets with a fair value of $0.4 million and
goodwill in the amount of $6.6 million were recorded on the Company's
statement of financial position during the 26-week period ended August 2,
2008.
4. LONG-TERM OBLIGATIONS
Interest expense on long-term debt for the 13 and 26-week periods ended
August 2, 2008 amounted to $7.2 million (2007: $10.3 million) and
$14.5 million (2007: $20.8 million), respectively. The Company's cash
payments for interest on long-term debt in the 13 and 26-week periods
ended August 2, 2008 totalled $9.0 million (2007: $14.1 million) and
$14.2 million (2007: $20.5 million), respectively.
In the 13 and 26-week periods ended August 2, 2008, the Company recorded
$5.1 million (2007: $5.3 million) and $11.9 million (2007: $9.9 million),
respectively, of interest revenue, net of short-term interest expense,
primarily related to cash and short-term investments. The Company
received cash in the amount of $5.0 million and $11.7 million in respect
of short-term interest revenue, net of short-term interest expense,
during the 13 and 26-week periods ended August 2, 2008, respectively
(2007: $5.3 million and $9.8 million).
During the 26-week period ended June 30, 2007, the Company disposed of
its interest in a real estate joint venture. As part of this transaction,
the purchaser assumed associated long-term debt totalling $22.5 million.
As at August 2, 2008, there were Nil borrowings from the revolving
$200.0 million credit facility other than letters of credit issued under
the Company's offshore merchandise purchasing program of $103.5 million.
5. UNUSUAL ITEMS
The Company recorded a pre-tax gain of Nil (2007: pre-tax expense of
$0.1 million) and $37.2 million (2007: $9.2 million) related to unusual
items in the 13 and 26-week periods ended August 2, 2008, respectively.
The unusual items are as follows:
13-Week 13-Week 26-Week 26-Week
Period Period Period Period
Ended Ended Ended Ended
August 2, June 30, August 2, June 30,
(in millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Sale of real estate $ - $ - $ 37.2 $ -
Sale of real estate joint
venture - - - 9.3
Sale of corporate airplane - 3.5 - 3.5
Settlement of lawsuit - (3.6) - (3.6)
-------------------------------------------------------------------------
Total unusual items - gain
(expense) $ - $ (0.1) $ 37.2 $ 9.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sale of real estate
In February 2008, the Company completed the sale of property in Calgary,
Alberta where it operated a full-line store, receiving proceeds of
approximately $40.0 million. A pre-tax gain of $37.2 million, net of
transaction costs, was recorded in the 26-week period ended August 2,
2008.
Sale of real estate joint venture
During the 26-week period ended June 30, 2007, the Company sold its
interest in a real estate joint venture for proceeds of $5.2 million, net
of cash sold of $0.9 million, resulting in a pre-tax gain of
$9.3 million. As part of this transaction, the Company disposed of total
assets and liabilities in the amount of $20.4 million and $23.6 million,
respectively, including long-term debt assumed by the purchaser of
$22.5 million.
Restructuring activities
Pre-tax restructuring charges for the 13 and 26-week periods ended
August 2, 2008 were Nil (2007: Nil) and Nil (2007: Nil), respectively. A
summary by fiscal year of the changes in the accrued liability related to
restructuring activities in prior periods ("restructuring accrual") is
presented in Note 9 of the 2007 Annual Financial Statements. As at
February 2, 2008, the restructuring accrual had a balance of
$1.6 million. For both the 13 and 26-week periods ended August 2, 2008,
there have been cash payments of less than $0.1 million and adjustments
to the restructuring accrual of $0.3 million (2007: cash payments of
$0.9 million and $2.3 million, respectively, adjustments of Nil). As at
August 2, 2008, the restructuring accrual had a balance of $1.3 million.
6. NET EARNINGS PER SHARE
A reconciliation of the number of shares used in the net earnings per
share calculation is as follows:
13-Week 13-Week 26-Week 26-Week
Period Period Period Period
Ended Ended Ended Ended
August 2, June 30, August 2, June 30,
(number of shares) 2008 2007 2008 2007
-------------------------------------------------------------------------
Average number of
shares per basic net
earnings per share
calculation 107,620,995 107,620,995 107,620,995 107,620,995
Effect of dilutive
instruments
outstanding 9,428 30,031 11,481 30,003
-------------------------------------------------------------------------
Average number of
shares per diluted
net earnings per
share calculation 107,630,423 107,651,026 107,632,476 107,650,998
-------------------------------------------------------------------------
For the 13 and 26-week periods ended August 2, 2008, 166,481 options
(2007: 185,361) were excluded from the calculation of diluted net
earnings per share as they were anti-dilutive.
7. SEGMENTED INFORMATION
Segmented Statements of Earnings
-------------------------------------------------------------------------
13-Week 26-Week
Period Period
13-Week Ended 26-Week Ended
Period June 30, Period June 30,
Ended 2007 Ended 2007
August 2, (Restated August 2, (Restated
(in millions) 2008 - Note 1) 2008 - Note 1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total revenues
Merchandising $ 1,408.4 $ 1,431.6 $ 2,650.7 $ 2,635.4
Real Estate Joint Ventures 11.9 12.3 24.0 27.6
-------------------------------------------------------------------------
Total revenues $ 1,420.3 $ 1,443.9 $ 2,674.7 $ 2,663.0
-------------------------------------------------------------------------
Earnings before interest,
unusual items and income taxes
Merchandising $ 87.3 $ 66.1 $ 132.5 $ 74.3
Real Estate Joint Ventures 5.2 5.6 10.9 12.5
-------------------------------------------------------------------------
Earnings before interest,
unusual items and income taxes 92.5 71.7 143.4 86.8
Interest expense, net 2.1 5.0 2.6 10.9
Unusual items - (gain) expense - 0.1 (37.2) (9.2)
Income taxes 29.3 24.3 53.8 28.5
-------------------------------------------------------------------------
Net earnings $ 61.1 $ 42.3 $ 124.2 $ 56.6
-------------------------------------------------------------------------
Segmented Statements of Capital Employed(1)
-------------------------------------------------------------------------
As at As at
June 30 February
As at 2007 2, 2008
August 2, (Restated (Restated
(in millions) 2008 - Note 1) - Note 1)
-------------------------------------------------------------------------
Merchandising $ 1,549.3 $ 1,247.4 $ 1,366.7
Real Estate Joint Ventures 100.3 115.1 98.8
-------------------------------------------------------------------------
Total $ 1,649.6 $ 1,362.5 $ 1,465.5
-------------------------------------------------------------------------
(1) Capital Employed represents the total of long-term obligations,
including principal payments on long-term obligations due within one
year, and shareholders' equity, which includes capital stock,
retained earnings and accumulated other comprehensive income
("AOCI").
Segmented Statements of Total Assets
-------------------------------------------------------------------------
As at As at
June 30, February
As at 2007 2, 2008
August 2, (Restated (Restated
(in millions) 2008 - Note 1) - Note 1)
-------------------------------------------------------------------------
Merchandising $ 2,975.9 $ 2,708.1 $ 2,893.2
Real Estate Joint Ventures 109.4 129.8 108.5
-------------------------------------------------------------------------
Total $ 3,085.3 $ 2,837.9 $ 3,001.7
-------------------------------------------------------------------------
8. INCOME TAXES
The Company's total net cash payments of income taxes in the 13 and
26-week periods ended August 2, 2008 were $24.6 million (2007:
$9.6 million) and $134.0 million (2007: $32.8 million), respectively.
In the ordinary course of business, the Company is subject to ongoing
audits by tax authorities. While the Company believes that its tax filing
positions are appropriate and supportable, from time to time certain
matters are reviewed and challenged by the tax authorities.
The Company regularly reviews the potential for adverse outcomes in
respect of tax matters. The Company believes that the ultimate
disposition of any reassessments will not have a material adverse effect
on its liquidity, consolidated financial position or results of
operations because the Company believes that it has adequate provision
for any tax matters that may arise from a tax audit. Should the ultimate
outcome of a tax audit differ materially from the provision, the
Company's effective tax rate and its earnings could be affected
positively or negatively in the period in which the tax matters, if any,
are resolved.
9. CAPITAL STOCK
As at August 2, 2008, 107,620,995 common shares were issued and
outstanding. Sears Holdings Corporation, the controlling shareholder of
the Company, is the beneficial holder of 75,572,390, or 70.2%, of the
common shares of the Company as at August 2, 2008.
10. STOCK-BASED COMPENSATION
Details of the Company's stock-based compensation plans are contained in
Note 8 to the Company's 2007 Annual Financial Statements.
Since the last grant in 2004, the Company discontinued the granting of
options and Special Incentive Shares and Options under the Employees
Stock Plan (the "Plan"). The Plan expired during the first quarter of
2008, however, the expiration of the Plan does not affect the rights of
current option-holders under the Plan. Options expire ten years from the
grant date. As there have been no options granted since February 2004,
options that are currently outstanding will expire before or in February
2014. As at August 2, 2008, there were 234,436 stock options, Nil Special
Incentive Shares and Options and Nil DSUs outstanding under the Employees
Stock Plan.
At the end of each fiscal period, the Company records a liability for
tandem awards equal to the amount by which the market price of its shares
at the end of the period exceeds the exercise price of the vested tandem
awards. Compensation expense is recorded to adjust the liability for
changes in the market price of the Company's shares and for awards
exercised in the period. During the 13 and 26-week periods ended
August 2, 2008, a credit of $0.2 million (2007: a credit of less than
$0.1 million) and $0.1 million (2007: expense of $0.1 million),
respectively were recorded related to tandem awards.
Cash payments for stock appreciation rights made during the 13 and
26-week periods ended August 2, 2008 were less than $0.1 million (2007:
less than $0.1 million) and less than $0.1 million (2007: $0.2 million),
respectively.
11. GUARANTEES
The Company has provided the following significant guarantees to third
parties:
Sub-lease agreements
The Company has entered into a number of agreements to sub-lease premises
to third parties. The Company retains ultimate responsibility to the
landlord for payment of amounts under the lease agreements should the
sub-lessee fail to pay. The total future minimum lease payments under
such agreements are $22.8 million.
Other indemnification agreements
In the ordinary course of business the Company has provided
indemnification commitments to counterparties in transactions such as
leasing transactions, royalty agreements, service arrangements,
investment banking agreements, director and officer indemnification
agreements and indemnification of trustees under indentures for
outstanding public debt. The Company has also provided certain
indemnification agreements in connection with the sale of the Credit and
Financial Services operations in November 2005. The foregoing
indemnification agreements require the Company to compensate the
counterparties for costs incurred as a result of changes in laws and
regulations or as a result of litigation claims or statutory claims or
statutory sanctions that may be suffered by a counterparty as a
consequence of the transaction. The terms of these indemnification
agreements will vary based on the contract and typically do not provide
for any limit on the maximum potential liability. Historically, the
Company has not made any significant payments under such indemnifications
and no amount has been accrued in the Financial Statements with respect
to these indemnification commitments.
12. ASSOCIATE FUTURE BENEFITS
Information about the Company's post-retirement plans is contained in
Note 5 of the Company's 2007 Annual Financial Statements. The net expense
for the plans for the 13 and 26-week periods ended August 2, 2008 was
$5.9 million (2007: $4.7 million) and $11.7 million (2007:
$14.8 million), respectively. The Company contributed a total of
$0.9 million (2007: $2.2 million) and $1.8 million (2007: $3.4 million),
respectively, to its post-retirement plans during the 13 and 26-week
periods ended August 2, 2008.
13. COMMITMENTS AND CONTINGENCIES
As discussed in Note 11 of the Company's 2007 Annual Financial
Statements, the Company was named in three class action lawsuits in the
provinces of Quebec, Saskatchewan and Ontario in 2005 arising out of the
Company's pricing of tires. The Company believes these allegations are
without merit. The outcome of these actions is indeterminable, and the
monetary damages, if any, cannot be reliably estimated. Therefore, the
Company has not made a provision for any potential liability.
In addition, the Company is involved in various legal proceedings
incidental to the normal course of business. The Company is of the view
that although the outcome of such litigation cannot be predicted with
certainty, the final disposition is not expected to have a material
adverse effect on the Company's consolidated financial position or
results of operations.
Restricted Cash
Cash is considered to be restricted when it is subject to contingent
rights of a third party customer, vendor, or government agency. As at
August 2, 2008, the Company recorded $2.6 million (2007: $3.9 million) of
restricted cash, under current assets, representing funds held in trust
in accordance with regulatory requirements governing advance ticket sales
related to Sears Travel.
14. CAPITAL DISCLOSURES
The Company's objectives when managing capital are:
- Maintain financial flexibility thus allowing the Company to preserve
its ability to meet financial objectives and continue as a going
concern;
- Provide an appropriate return to shareholders; and
- Maintain a capital structure that allows the Company to obtain
financing should the need arise.
The Company manages and makes adjustments to its capital structure, when
necessary, in light of changes in economic conditions, the objectives of
its shareholders, the cash requirements of the business and the condition
of capital markets. In order to maintain or adjust the capital structure
the Company may pay a dividend or return capital to shareholders,
increase/decrease debt or sell assets.
The Company defines capital as follows:
- Long-term obligations, including the current portion ("Long-term
obligations"); and
- Shareholders' equity.
The following table presents summary quantitative data with respect to
the Company's capital:
-------------------------------------------------------------------------
As at As at
June 30, February
As at 2007 2, 2008
August 2, (Restated (Restated
(in millions) 2008 - Note 1) - Note 1)
-------------------------------------------------------------------------
Long-term obligations $ 369.3 $ 518.6 $ 372.1
Shareholders' equity 1,280.3 843.9 1,093.4
-------------------------------------------------------------------------
$ 1,649.6 $ 1,362.5 $ 1,465.5
-------------------------------------------------------------------------
The Company's $200.0 million revolving credit facility, which will mature
in December 2008, contains financial and non-financial covenants which
can impact the Company's ability to draw funds and determines the cost of
those funds. The Company monitors and manages its capital structure to
ensure it remains in compliance with its Fixed Charge, Debt to EBITDA and
Liquidity ratios on a quarterly basis. As at August 2, 2008, the Company
was in compliance with all applicable covenants under this credit
facility.
The Company has a corporate credit rating of BB from Dominion Bond
Ratings Service and Standard and Poor's and a corporate family rating of
Ba1 from Moody's Investors Service, Inc.
15. FINANCIAL INSTRUMENTS
Financial instrument fair values
The following two tables summarize the classification and fair value
("FV" or "fair value") of certain financial instruments as at the end of
the second quarter of 2008 and 2007 and the pre-tax change in fair value
of those instruments during the 13 and 26-week periods ended August 2,
2008 and June 30, 2007, the offset of which is included in either other
comprehensive income ("OCI") or net earnings. The Company determines the
classification of a financial instrument when it is originally recorded,
based on the underlying purpose of the instrument.
(in millions)
-------------------------------------------------------------------------
As at As at As at
Balance Sheet August 2, May 3, February
Classification Category 2008 2008 2, 2008
-------------------------------------------------------------------------
Available for
sale
Short-term Cash and short-term
investments investments(2) $725.3 $690.9 $806.9
-------------------------------------------------------------------------
Held for trading
Cash and cash Cash and short-term
equivalents investments 57.7 75.5 64.7
Cash Restricted cash 2.6 7.0 5.2
U.S. $ derivative Prepaid expenses &
contracts other assets
(accrued
liabilities) 7.9 3.9 (0.2)
Fixed price Accrued
energy liabilities
contracts - - (0.1)
-------------------------------------------------------------------------
13-week 26-week
Period Period
Ended Ended
August 2, August 2,
2008 2008
--------------- ---------------
(in millions) Pre-tax change in FV included in
-------------------------------------------------------------------------
Balance Sheet Net Net
Classification Category OCI earnings OCI earnings
-------------------------------------------------------------------------
Available for
sale
Short-term Cash and short-term
investments investments(2) $- $- $0.1 $-
-------------------------------------------------------------------------
Held for trading
Cash and cash Cash and short-term
equivalents investments - - - -
Cash Restricted cash - - - -
U.S. $ derivative Prepaid expenses &
contracts other assets
(accrued
liabilities) (4.1) 0.1 (7.5) (0.6)
Fixed price Accrued
energy liabilities
contracts - - - (0.1)
-------------------------------------------------------------------------
$(4.1) $0.1 $(7.4) $(0.7)
--------------- ---------------
(in millions)
-------------------------------------------------------------------------
As at As at As at
Balance Sheet June 30, March 31, December
Classification Category 2007 2007 30, 2006
-------------------------------------------------------------------------
Available for
sale
Short-term Cash and short-term
investments investments(2) $515.5 $307.1 $627.9
-------------------------------------------------------------------------
Held for trading
Cash and cash Cash and short-term
equivalents investments 99.3 96.9 95.0
Cash Restricted cash 3.9 5.4 10.1
U.S. $ derivative Prepaid expenses &
contracts other assets
(accrued
liabilities) (10.6) (0.8) 4.2
Fixed price Accrued
energy liabilities
contracts (0.4) (0.1) (0.6)
-------------------------------------------------------------------------
13-week Period 26-week Period
Ended June 30, Ended June 30,
2007 2007
--------------- ---------------
(in millions) Pre-tax change in FV included in
-------------------------------------------------------------------------
Balance Sheet Net Net
Classification Category OCI earnings OCI earnings
-------------------------------------------------------------------------
Available for
sale
Short-term Cash and short-term
investments investments(2) $0.1 $- $0.1 $-
-------------------------------------------------------------------------
Held for trading
Cash and cash Cash and short-term
equivalents investments - - - -
Cash Restricted cash - - - -
U.S. $ derivative Prepaid expenses &
contracts other assets
(accrued
liabilities) - 9.8 - 14.8
Fixed price Accrued
energy liabilities
contracts - 0.3 - (0.2)
-------------------------------------------------------------------------
$0.1 $10.1 $0.1 $14.6
--------------- ---------------
(2) Interest revenue related to short-term investments is disclosed in
Note 4 Long-term Obligations.
All other assets that are financial instruments, excluding asset-backed
commercial paper ("ABCP"), as discussed below, have been classified as
"loans and receivables" and all other financial instrument liabilities
have been classified as "other liabilities" and are measured at amortized
cost on the consolidated statements of financial position. The carrying
value of these financial instruments, with the exception of long-term
obligations, approximates fair value. Long-term obligations with a
carrying value of $365.2 million, including the portion due within one
year, but excluding all capital lease obligations, have a fair value at
August 2, 2008 of $376.1 million. The fair value of the Company's
proportionate share of long-term debt of joint ventures, with a carrying
value of $65.2 million at August 2, 2008, was calculated using a
valuation technique based on assumptions that are not supported by
observable market prices or rates. The term and interest rate applicable
to each joint venture's debt together with management's estimate of a
risk-adjusted discount rate were used to determine the fair value of
$68.1 million. The fair value of the Company's medium term notes, with a
carrying value of $300.0 million at August 2, 2008, is $308.0 million and
was determined with reference to observable market prices and rates.
Included in other long-term assets on the consolidated statement of
financial position is an investment in ABCP, with an original cost of
$3.0 million and a fair value as at August 2, 2008 of $2.2 million, which
has been classified as available for sale. The August 2, 2008 fair value
has been calculated using a valuation technique based on assumptions that
are not supported by observable market prices or rates. Information
disclosed in the Pan-Canadian Investors Committee for Third-Party
Structured Asset Backed Commercial Paper June 5, 2008 Second Amended Plan
of Compromise and Arrangements, together with management's estimates
based thereon regarding interest rate, risk-adjusted discount rate and
term of the various classes of restructured notes resulted in a
$0.4 million reduction in the investment's fair value during the 26-week
period ended August 2, 2008. The Company does not intend to dispose of
the investment within the next year.
Financial instrument risk management
The Company's adoption of Section 3862 and Section 3863 on February 3,
2008 has resulted in additional disclosure relating to the Company's
exposure to risks arising from financial instruments. The Company is
exposed to credit, liquidity and market risk as a result of holding
financial instruments. Market risk consists of foreign exchange and
interest rate risk. The nature of the Company's risks and the financial
instruments used to manage its exposures have not changed from those
disclosed in Note 15 of the Company's 2007 Annual Financial Statements,
except as described herein under the heading "Foreign exchange risk".
Credit risk
Credit risk refers to the possibility that the Company can suffer
financial losses due to failure of the Company's counterparties to meet
their payment obligations. Exposure to credit risk exists for derivative
instruments, short-term investments and accounts receivable.
As at August 2, 2008, the Company's only exposure to counterparty risk as
it relates to derivative instruments is represented by the fair value of
the foreign exchange derivative contracts of $7.9 million. These
contracts are placed with approved financial institutions with secure
credit ratings.
Short-term investments of $725.3 million also expose the Company to
credit risk should the borrower default on maturity of the investment.
The Company manages this exposure through policies that require borrowers
to have a minimum credit rating of A and limiting investments with
individual borrowers at maximum levels based on credit rating.
The Company is exposed to minimal credit risk from customers as a result
of ongoing credit evaluations and review of accounts receivable
collectability.
Liquidity risk
Liquidity risk is the risk that the Company may not have cash available
to satisfy financial liabilities as they come due. The Company actively
maintains a committed credit facility to ensure it has sufficient
available funds to meet current and foreseeable financial requirements at
a reasonable cost.
The following table summarizes the carrying amount and the contractual
maturities of both the interest and principal portion of significant
financial liabilities as at August 2, 2008:
Contractual Cash Flow Maturities
------------------------------------------
Carrying Within
(in millions) Amount Total 1 year
-------------------------------------------------------------------------
Accounts payable $650.9 $650.9 $650.9
Accrued liabilities 411.3 411.3 411.3
Long-term obligations 369.3 439.5 42.8
Operating lease obligations(3) - 730.8 108.3
-------------------------------------------------------------------------
$1,431.5 $2,232.5 $1,213.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contractual Cash Flow Maturities
------------------------------------------
1 year to 3 years to Beyond
(in millions) 3 years 5 years 5 years
-------------------------------------------------------------------------
Accounts payable $- $- $-
Accrued liabilities - - -
Long-term obligations 361.6 9.7 25.4
Operating lease obligations(3) 181.8 140.0 300.7
-------------------------------------------------------------------------
$543.4 $149.7 $326.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(3) Operating lease obligations are not reported on the consolidated
statement of financial position.
Management believes that cash on hand, future cash flows generated from
operations and availability of current and future funding will be
adequate to support these financial liabilities.
Market risk
Market risk exists as a result of the potential for losses caused by
changes in market factors such as interest rates and foreign currency
exchange rates.
Interest rate risk
There has been no change in the Company's exposure to interest rate risk
from that disclosed in the 2007 Annual Financial Statements.
Foreign exchange risk
There has been no change in the Company's exposure to foreign exchange
risk from that disclosed in the 2007 Annual Financial Statements.
However, as described below, the instruments used to manage foreign
exchange risk have changed since the February 2, 2008 fiscal year end.
Concurrent with the implementation of hedge accounting, the Company
discontinued the recognition of certain embedded derivatives as a result
of a change in accounting policy made in accordance with Section 1506 and
retrospectively restated the 2007 fiscal year results (Note 1 Basis of
Presentation). The Company believes this change in accounting policy
results in more relevant net earnings and OCI, as the change in market
value of the hedged item is now recognized consistent with the change in
market value of the hedging item.
While the notional principal amounts of these outstanding financial
instruments are not recorded on the consolidated statements of financial
position, the fair value of the contracts is included on the consolidated
statements of financial position in one of the following categories,
depending on the derivative's maturity and value: prepaid expenses and
other assets, other long-term assets, accrued liabilities or other long-
term liabilities. Changes in fair value of those contracts designated as
hedges are included in OCI for cash flow hedges to the extent the hedges
continue to be effective. Amounts previously included in OCI are
reclassified to net earnings in the same period in which the hedged item
impacts net earnings.
As at August 2, 2008, there were option contracts outstanding with a
notional value of U.S. $623.6 million and a combined carrying value of
$7.9 million, included in prepaid expenses and other assets. These option
contracts have settlement dates extending to June 2010 and have been
designated for hedge accounting treatment under CICA Handbook Section
3865 "Hedges". These contracts are intended to reduce the foreign
exchange risk with respect to anticipated purchases of U.S. dollar
denominated goods and services, including goods purchased for resale
("hedged item").
Based on historic movements and volatilities in foreign exchange and
interest rates and management's current assessment of the financial
markets, the Company believes the following variations are reasonably
possible over a 12 month period:
- A foreign exchange rate variation of +10% (appreciation of the
Canadian $) and -10% (depreciation of the Canadian $) against the
U.S. $ from a period end rate of 1.0271 U.S. $ to Canadian $.
- A variation of +1%/-1% in the interest rates applicable to the
Company's cash and short-term investments.
If the above estimated variations were to occur, the annualized impact on
consolidated net earnings would be as follows:
Cash and short-term investments totalling $783.0 million earn interest
income and are therefore sensitive to changes in interest rates. Movement
in interest rates of +/-1% would cause a variance in net earnings in the
amount of $5.3 million.
Cash and short-term investments, accounts receivable and accounts payable
include U.S. $ denominated balances which net to an insignificant
balance, therefore, any changes in the U.S./Canadian dollar exchange
rates would have an immaterial impact on net earnings.
Financial instrument policies
The following policies were adopted on December 31, 2006:
Transaction costs - The Company has a policy of recognizing all
transaction costs related to financial assets and liabilities as a
reduction to net earnings in the period in which the costs were
incurred.
Hedge accounting - The Company formally identifies, designates and
documents all relationships between hedging instruments and hedged
items, as well as its risk assessment objective and strategy for
undertaking various hedge transactions. The Company assesses, both at
the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of
hedged items. When such derivative instruments cease to exist or be
effective as hedges, or when designation of a hedging relationship is
terminated, any associated deferred gains or losses are recognized in
net earnings in the same period as the corresponding gains or losses
associated with the hedged item. When a hedged item ceases to exist,
any associated deferred gains or losses are recognized in net
earnings in the period the hedged item ceases to exist. Changes in
the fair value of the Company's derivatives are non-cash transactions
and are therefore not recognized in the consolidated statement of
cash flows.
