UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

    (Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 28, 2012

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ________________

 

Commission File Number: 1-15274

 

JCP LOGO.jpg

J. C. PENNEY COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

26-0037077

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

6501 Legacy Drive, Plano, Texas

75024 - 3698

(Address of principal executive offices)

(Zip Code)

 

(Registrant's telephone number, including area code)

(972) 431-1000

                 

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   o

 

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   o 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    x          Accelerated filer  o          Non-accelerated filer  o          Smaller reporting company    o          

                                                                                                (Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o  No    x    

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

219,083,344 shares of Common Stock of 50 cents par value, as of August 30, 2012

 

 


 

 

 

J. C. PENNEY COMPANY, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended July 28, 2012

 

INDEX

 

 

 

Page

Part I. Financial Information 

 

 

Item 1. Unaudited Interim Consolidated Financial Statements

 

 

Consolidated Statements of Operations

2

 

 

Consolidated Statements of Comprehensive Income/(Loss)

3

 

 

Consolidated Balance Sheets

4

 

 

Consolidated Statements of Cash Flows

5

 

 

Notes to Unaudited Interim Consolidated Financial Statements

 

 

 

 

1.  Basis of Presentation and Consolidation

6

 

 

 

2.  Effect of New Accounting Standards

7

 

 

 

3.  Earnings/(Loss) per Share

7

 

 

 

4.  Credit Facility 

7

 

 

 

5.  Long-Term Debt

8

 

 

 

6.  Other Assets

8

 

 

 

7.  Fair Value Disclosures    

9

 

 

 

8.  Stockholders’ Equity

10

 

 

 

9.  Stock-Based Compensation 

11

 

 

 

10.  Retirement Benefit Plans 

12

 

 

 

11.  Restructuring and Management Transition

13

 

 

 

12.  Real Estate and Other, Net

14

 

 

 

13.  Income Taxes 

15

 

 

 

14.  Litigation, Other Contingencies and Guarantees

15

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

30

 

Item 4. Controls and Procedures

30

Part II. Other Information 

 

 

Item 1. Legal Proceedings

31

 

Item 1A. Risk Factors

31

 

Item 6. Exhibits

36

SIGNATURES 

38

 

 

 

 

 

 

 

 

 

 

 

 

1

 


 

Table of Contents

 

 

Part I. Financial Information

Item 1. Unaudited Interim Consolidated Financial Statements

 

J. C. PENNEY COMPANY, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

(In millions, except per share data)

 

July 28,

 

 

July 30,

 

 

July 28,

 

 

July 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Total net sales

$

3,022 

 

$

3,906 

 

$

6,174 

 

$

7,849 

Cost of goods sold

 

2,018 

 

 

2,409 

 

 

3,984 

 

 

4,757 

Gross margin

 

1,004 

 

 

1,497 

 

 

2,190 

 

 

3,092 

Operating expenses/(income):

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative (SG&A)

 

1,050 

 

 

1,243 

 

 

2,210 

 

 

2,524 

Pension

 

58 

 

 

28 

 

 

116 

 

 

57 

Depreciation and amortization

 

128 

 

 

128 

 

 

253 

 

 

256 

Real estate and other, net

 

(208)

 

 

(6)

 

 

(215)

 

 

(19)

Restructuring and management transition

 

159 

 

 

23 

 

 

235 

 

 

32 

Total operating expenses

 

1,187 

 

 

1,416 

 

 

2,599 

 

 

2,850 

Operating income/(loss)

 

(183)

 

 

81 

 

 

(409)

 

 

242 

Net interest expense

 

58 

 

 

57 

 

 

114 

 

 

115 

Income/(loss) before income taxes

 

(241)

 

 

24 

 

 

(523)

 

 

127 

Income tax expense/(benefit)

 

(94)

 

 

10 

 

 

(213)

 

 

49 

Net income/(loss)

$

(147)

 

$

14 

 

$

(310)

 

$

78 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.67)

 

$

0.07 

 

$

(1.42)

 

$

0.35 

Diluted

$

(0.67)

 

$

0.07 

 

$

(1.42)

 

$

0.35 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares – basic

 

219.3 

 

 

213.3 

 

 

218.9 

 

 

221.3 

Weighted average shares – diluted

 

219.3 

 

 

216.3 

 

 

218.9 

 

 

224.2 

 

 

The accompanying notes are an integral part of these unaudited Interim Consolidated Financial Statements.

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J. C. PENNEY COMPANY, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

 (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

($ in millions)

 

July 28,

 

 

July 30,

 

 

July 28,

 

 

July 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Net income/(loss)

$

(147)

 

$

14 

 

$

(310)

 

$

78 

Other comprehensive income/(loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on REITs

 

 

 

 

 

33 

 

 

30 

Reclassification adjustment for gain on REIT included in net income

 

(174)

 

 

 -

 

 

(174)

 

 

 -

Reclassification for amortization of net actuarial (gain)/loss included in net periodic benefit expense

 

37 

 

 

23 

 

 

77 

 

 

46 

Reclassification for amortization of prior service (credit)/cost included in net periodic benefit expense

 

(2)

 

 

(4)

 

 

(4)

 

 

(8)

Total other comprehensive income/(loss), net of tax

 

(133)

 

 

26 

 

 

(68)

 

 

68 

Total comprehensive income/(loss), net of tax

$

(280)

 

$

40 

 

$

(378)

 

$

146 

 

 

The accompanying notes are an integral part of these unaudited Interim Consolidated Financial Statements.

 

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J. C. PENNEY COMPANY, INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except per share data)

 

July 28,

 

 

July 30,

 

 

January 28,

 

 

2012

 

 

2011

 

 

2012

Assets

 

(Unaudited)

 

 

(Unaudited)

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash in banks and in transit

$

171 

 

$

244 

 

$

175 

Cash short-term investments

 

717 

 

 

1,307 

 

 

1,332 

    Cash and cash equivalents

 

888 

 

 

1,551 

 

 

1,507 

Merchandise inventory

 

2,993 

 

 

3,572 

 

 

2,916 

Income tax receivable

 

209 

 

 

138 

 

 

168 

Deferred taxes

 

407 

 

 

196 

 

 

245 

Prepaid expenses and other

 

239 

 

 

194 

 

 

245 

Total current assets

 

4,736 

 

 

5,651 

 

 

5,081 

Property and equipment (net of accumulated depreciation of $3,096, $2,930 and $2,965)

 

5,153 

 

 

5,237 

 

 

5,176 

Prepaid pension

 

 -

 

 

788 

 

 

 -

Other assets

 

923 

 

 

778 

 

 

1,167 

Total Assets

$

10,812 

 

$

12,454 

 

$

11,424 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Merchandise accounts payable

$

1,015 

 

$

1,386 

 

$

1,022 

Other accounts payable and accrued expenses

 

1,219 

 

 

1,381 

 

 

1,503 

Current maturities of long-term debt, including capital leases

 

250 

 

 

 -

 

 

231 

Total current liabilities

 

2,484 

 

 

2,767 

 

 

2,756 

Long-term debt, including capital leases

 

2,901 

 

 

3,099 

 

 

2,871 

Deferred taxes

 

904 

 

 

1,216 

 

 

888 

Other liabilities

 

852 

 

 

669 

 

 

899 

Total Liabilities

 

7,141 

 

 

7,751 

 

 

7,414 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock(1)

 

109 

 

 

107 

 

 

108 

Additional paid-in capital

 

3,782 

 

 

3,605 

 

 

3,699 

Reinvested earnings

 

1,057 

 

 

1,728 

 

 

1,412 

Accumulated other comprehensive income/(loss)

 

(1,277)

 

 

(737)

 

 

(1,209)

Total Stockholders’ Equity

 

3,671 

 

 

4,703 

 

 

4,010 

Total Liabilities and Stockholders’ Equity

$

10,812 

 

$

12,454 

 

$

11,424 

 

(1) 1,250 million shares of common stock are authorized with a par value of $0.50 per share. The total shares issued and outstanding were 218.8 million, 213.3 million and 215.9 million as of July 28, 2012, July 30, 2011 and January 28, 2012, respectively.

 

The accompanying notes are an integral part of these unaudited Interim Consolidated Financial Statements.

4

 


 

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J. C. PENNEY COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

($ in millions)

 

July 28,

 

 

July 30,

 

 

July 28,

 

 

July 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

$

(147)

 

$

14 

 

$

(310)

 

$

78 

Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

Restructuring and management transition

 

78 

 

 

13 

 

 

90 

 

 

14 

Asset impairments and other charges

 

 

 

 

 

 

 

(Gain) on redemption of REIT units

 

(202)

 

 

 -

 

 

(202)

 

 

 -

Depreciation and amortization

 

128 

 

 

128 

 

 

253 

 

 

256 

Benefit plans expense

 

41 

 

 

14 

 

 

79 

 

 

28 

Stock-based compensation

 

14 

 

 

13 

 

 

26 

 

 

26 

Excess tax benefits from stock-based compensation

 

(12)

 

 

(1)

 

 

(23)

 

 

(4)

Deferred taxes

 

(153)

 

 

(11)

 

 

(197)

 

 

(105)

Change in cash from:

 

 

 

 

 

 

 

 

 

 

 

Inventory

 

91 

 

 

(164)

 

 

(77)

 

 

(359)

Prepaid expenses and other assets

 

(44)

 

 

(7)

 

 

(15)

 

 

Merchandise accounts payable

 

31 

 

 

112 

 

 

(7)

 

 

253 

Current income taxes payable

 

113 

 

 

(61)

 

 

34 

 

 

74 

Accrued expenses and other

 

27 

 

 

69 

 

 

(264)

 

 

(94)

Net cash provided by/(used in) operating activities

 

(32)

 

 

120 

 

 

(609)

 

 

172 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(132)

 

 

(178)

 

 

(239)

 

 

(295)

Proceeds from redemption of REIT units

 

248 

 

 

 -

 

 

248 

 

 

 -

Acquisition

 

 -

 

 

 -

 

 

(9)

 

 

 -

Net cash provided by/(used in) investing activities

 

116 

 

 

(178)

 

 

 -

 

 

(295)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Financing costs

 

(2)

 

 

 -

 

 

(4)

 

 

(15)

Dividends paid, common

 

(43)

 

 

(45)

 

 

(86)

 

 

(92)

Stock repurchase program

 

 -

 

 

(167)

 

 

 -

 

 

(900)

Proceeds from issuance of stock warrant

 

 -

 

 

50 

 

 

 -

 

 

50 

Proceeds from stock options exercised

 

 

 

 

 

69 

 

 

11 

Excess tax benefits from stock-based compensation

 

12 

 

 

 

 

23 

 

 

Tax withholding payments reimbursed by restricted stock

 

(3)

 

 

 -

 

 

(12)

 

 

(6)

Net cash provided by/(used in) financing activities

 

(35)

 

 

(158)

 

 

(10)

 

 

(948)

Net increase/(decrease) in cash and cash equivalents

 

49 

 

 

(216)

 

 

(619)

 

 

(1,071)

Cash and cash equivalents at beginning of period

 

839 

 

 

1,767 

 

 

1,507 

 

 

2,622 

Cash and cash equivalents at end of period

$

888 

 

$

1,551 

 

$

888 

 

$

1,551 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Income taxes received/(paid), net

 

55 

 

 

(82)

 

 

51 

 

 

(81)

Interest received/(paid), net

 

(23)

 

 

(21)

 

 

(113)

 

 

(112)

The accompanying notes are an integral part of these unaudited Interim Consolidated Financial Statements.

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J. C. PENNEY COMPANY, INC.

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Basis of Presentation and Consolidation

 

Basis of Presentation

J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in Delaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations, and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as “we,” “us,” “our,” “ourselves” or the “Company,” unless otherwise indicated.

 

J. C. Penney Company, Inc. is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee of certain of JCP’s outstanding debt securities by J. C. Penney Company, Inc. is full and unconditional.

 

These unaudited Interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission (SEC).  The accompanying unaudited Interim Consolidated Financial Statements, in our opinion, include all material adjustments necessary for a fair presentation and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012  (2011 Form 10-K). We follow substantially the same accounting policies to prepare quarterly financial statements as are followed in preparing annual financial statements. A description of such significant accounting policies is included in the 2011 Form 10-K. The January 28, 2012 financial information was derived from the audited Consolidated Financial Statements, with related footnotes, included in the 2011 Form 10-K. Because of the seasonal nature of the retail business, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

 

Fiscal Year

Our fiscal year ends on the Saturday closest to January 31.  As used herein, “three months ended July 28, 2012” and “three months ended July 30, 2011” refer to the 13-week periods ended July 28, 2012 and July 30, 2011, respectively.  “Six months ended July 28, 2012,” or “2012 first half,” and “six months ended July 30, 2011,” or “2011 first half,” refer to the 26-week periods ended July 28, 2012 and July 30, 2011, respectively. Fiscal year 2012 contains 53 weeks.

 

Basis of Consolidation

All significant intercompany transactions and balances have been eliminated in consolidation.    Certain reclassifications were made to prior year amounts to conform to the current period presentation. Beginning in the third quarter of 2011, restructuring and management transition charges were reported as a separate operating expense line.  Prior to the third quarter of 2011, these charges were included in Real estate and other.  None of the reclassifications affected our net income/(loss) in any period.    

 

Use of Estimates and Assumptions

The preparation of unaudited Interim Consolidated Financial Statements, in conformity with GAAP, requires us to make assumptions and use estimates that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most significant estimates relate to: inventory valuation under the retail method; valuation of long-lived assets; estimation of reserves and valuation allowances specifically related to closed stores, insurance, income taxes, litigation and environmental contingencies and pension accounting. While actual results could differ from these estimates, we do not expect the differences, if any, to have a material effect on the unaudited Interim Consolidated Financial Statements.

 

 

 

 

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2.  Effect of New Accounting Standards

 

In July 2012, the Financial Accounting Standards Board issued Accounting Standards Update 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” (ASU 2012-02). ASU 2012-02 provides companies with the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If the company concludes that it is more likely than not that the asset is impaired, it is required to determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with Topic 350. If the company concludes otherwise, no further quantitative assessment is required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, although early adoption is permitted. We intend to early adopt ASU 2012-02 beginning with our annual indefinite-lived intangible asset impairment test during the fourth quarter of our fiscal year using our third quarter balances.  We do not expect the adoption to have a material impact on our consolidated results of operations, cash flows or financial position.

 

 

3.  Earnings/(Loss) per Share

 

Net income/(loss) and shares used to compute basic and diluted earnings/(loss) per share (EPS) are reconciled below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

(in millions, except per share data)

 

 

July 28,

 

 

July 30,

 

 

July 28,

 

 

July 30,

 

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Earnings/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

(147)

 

$

14 

 

$

(310)

 

$

78 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic shares)

 

 

219.3 

 

 

213.3 

 

 

218.9 

 

 

221.3 

Adjustment for assumed dilution:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock awards

 

 

 -

 

 

3.0 

 

 

 -

 

 

2.9 

Weighted average shares assuming dilution (diluted shares)

 

 

219.3 

 

 

216.3 

 

 

218.9 

 

 

224.2 

EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.67)

 

$

0.07 

 

$

(1.42)

 

$

0.35 

Diluted

 

$

(0.67)

 

$

0.07 

 

$

(1.42)

 

$

0.35 

 

The following average potential shares of common stock were excluded from the diluted EPS calculation because their effect would have been anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

(Shares in millions)

 

 

July 28,

 

 

July 30,

 

 

July 28,

 

 

July 30,

 

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Stock options, restricted awards and warrant

 

 

26 

 

 

 

 

25 

 

 

 

 

4.  Credit Facility

On January 27, 2012, J. C. Penney Company, Inc., JCP and J. C. Penney Purchasing Corporation entered into a revolving credit facility in the amount up to $1,250 million (2012 Credit Facility), which amended and restated the Company’s prior credit agreement entered into in April 2011, with the same syndicate of lenders under the previous agreement, with JPMorgan Chase Bank, N.A., as administrative agent. The 2012 Credit Facility matures on April 29, 2016.  On February 10, 2012, we increased the size of our 2012 Credit Facility to $1,500 million.

 

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The 2012 Credit Facility is an asset-based revolving credit facility and is secured by a perfected first-priority security interest in substantially all of our eligible credit card receivables, accounts receivable and inventory.  The 2012 Credit Facility is available for general corporate purposes, including the issuance of letters of credit.  Pricing under the 2012 Credit Facility is tiered based on JCP’s senior unsecured long-term credit ratings issued by Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services.  JCP’s obligations under the 2012 Credit Facility are guaranteed by J. C. Penney Company, Inc.

 

Availability under the 2012 Credit Facility is limited to a borrowing base which allows us to borrow up to 85% of eligible accounts receivable, plus 90% of eligible credit card receivables, plus 85% of the liquidation value of our inventory, net of certain reserves. Letters of credit reduce the amount available to borrow by their face value.  In the event that availability under the 2012 Credit Facility is at any time less than the greater of (1) $125 million or (2) 10% of the lesser of the total facility or the borrowing base then in effect, for a period of at least 30 days, the Company will be subject to a fixed charge coverage ratio covenant of 1.0 to 1.0 which is calculated as of the last day of the quarter and measured on a trailing four-quarter basis.

 

The 2012 Credit Facility contains covenants including, but not limited to, restrictions on the Company’s and its subsidiaries’ ability to incur indebtedness; grant liens on assets; guarantee obligations; merge, consolidate, or sell assets; pay dividends or make other restricted payments; make investments; prepay or modify certain indebtedness; engage in transactions with affiliates; or enter into sale-leaseback transactions under certain conditions.

 

No borrowings, other than the issuance of standby and import letters of credit totaling $173 million as of the end of the first half of 2012, have been made under the 2012 Credit Facility.  As of July 28, 2012, the applicable rate for standby and import letters of credit was 2.50% and 1.25%, respectively, while the required commitment fee was 0.40% for the unused portion of the 2012 Credit Facility.  As of July 28, 2012, we had $1,327 million available for borrowing under the 2012 Credit Facility.

 

 

5.  Long-Term Debt    

 

During the first half of 2012, there were no scheduled debt maturities.  During the first half of 2012, we made capital investments totaling $49 million that were financed through short-term and long-term debt and capital lease commitments.  In August 2012, subsequent to the first half of 2012, we repaid $230 million of notes at maturity.  During the first half of 2011, there were no scheduled debt maturities and no issuances of debt.

 

 

6.  Other Assets

 

The market value of our investment in public real estate investment trust (REIT) assets are accounted for as available-for-sale securities and are carried at fair value on an ongoing basis.  As of July 28, 2012, July 30, 2011 and January 28, 2012, our REITs had a cost basis of $34 million, $80 million and $80 million, respectively.

 

On July 20, 2012, Simon Property Group, L.P. (SPG) redeemed two million REIT units for cash at a price of $124.00 per unit for a total redemption price of $248 million.  As of the market close on July 19, 2012, the SPG REIT units had a fair market value of $158.13 per unit.    In connection with the redemption, we realized a  gain of $202 million determined using the first-in-first-out method for determining the cost of REIT units sold.  The gain is recorded in Real estate and other, net (Note 12) in our unaudited Interim Consolidated Statements of Operations.    Following the transaction, we continue to hold approximately 205,000 REIT units in SPG. 

 

See Note 7 for the related fair value disclosures and Note 8 for the net unrealized gains on our REIT assets.

 

 

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7.  Fair Value Disclosures 

 

In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value, as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.

 

Real Estate Investment Trust (REIT) Assets Measured on a Recurring Basis

We determined the fair value of our investments in REITs using quoted market prices.  There were no transfers in or out of any levels during any period presented.  Our REIT assets measured at fair value on a recurring basis are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REIT Assets at Fair Value

 

 

Quoted Prices in Active

 

 

Significant Other

 

 

Significant Unobservable

($ in millions) 

 

Markets of Identical Assets

 

 

Observable Inputs

 

 

Inputs

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

July 28, 2012

$

71 

 

$

 -

 

$

 -

July 30, 2011

 

300 

 

 

 -

 

 

 -

January 28, 2012

 

336 

 

 

 -

 

 

 -

 

Other Financial Instruments

Carrying values and fair values of financial instruments that are not carried at fair value in the Consolidated Balance Sheets are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 28, 2012

 

July 30, 2011

 

January 28, 2012

($ in millions)

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

 

Amount

 

 

Value

Long-term debt, including current maturities

$

3,151 

 

$

2,651 

 

$

3,099 

 

$

3,104 

 

$

3,102 

 

$

3,046 

Cost investment

 

36 

 

 

 -

 

 

 -

 

 

 -

 

 

36 

 

 

 -

 

The fair value of long-term debt is estimated by obtaining quotes from brokers or is based on current rates offered for similar debt.  The cost investment is for equity securities that are not registered and freely tradable shares and their fair values are not readily determinable; however, we believe the carrying value approximates or is less than the fair value.

 

As of July 28, 2012, July 30, 2011 and January 28, 2012, the fair values of cash and cash equivalents, accounts payables and current installments of long-term debt approximate carrying values due to the short-term nature of these instruments. These items have been excluded from the table above with the exception of the current installments of long-term debt.

 

Concentrations of Credit Risk

We have no significant concentrations of credit risk.

 

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8.  Stockholders’ Equity

 

 

The following table shows the change in the components of stockholders’ equity for the first six months of 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

of

 

 

 

 

 

Additional

 

 

Reinvested

 

 

Other

 

 

Total

(in millions)

Common

 

 

Common

 

 

Paid-in

 

 

Earnings/

 

 

Comprehensive

 

 

Stockholders’

 

Shares

 

 

Stock

 

 

Capital

 

 

(Loss)

 

 

Income/(Loss)

 

 

Equity

January 28, 2012

215.9 

 

$

108 

 

$

3,699 

 

$

1,412 

 

$

(1,209)

 

$

4,010 

Net income/(loss)

 -

 

 

 -

 

 

 -

 

 

(310)

 

 

 -

 

 

(310)

Other comprehensive income/(loss)

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(68)

 

 

(68)

Dividends declared, common

 -

 

 

 -

 

 

 -

 

 

(45)

 

 

 -

 

 

(45)

Stock-based compensation

2.9 

 

 

 

 

83 

 

 

 -

 

 

 -

 

 

84 

July 28, 2012

218.8 

 

$

109 

 

$

3,782 

 

$

1,057 

 

$

(1,277)

 

$

3,671 

 

   

The tax effects allocated to each component of other comprehensive income/(loss) are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

July 28, 2012

 

 

July 30, 2011

 

 

 

 

Income

 

 

 

 

 

 

 

Income

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

Tax

 

 

 

($ in millions)

Gross

 

(Expense)

 

Net

 

Gross

 

(Expense)

 

Net

 

Amount

 

Benefit

 

Amount

 

Amount

 

Benefit

 

Amount

Unrealized gain/(loss) on REITs

$

 

$

(2)

 

$

 

$

12 

 

$

(5)

 

$

Reclassification adjustment for gain on REIT included in net income

 

(270)

(1)

 

96 

 

 

(174)

 

 

 -

 

 

 -

 

 

 -

Reclassification for amortization of net actuarial (gain)/loss included in net periodic benefit expense

 

63 

 

 

(26)

 

 

37 

 

 

38 

 

 

(15)

 

 

23 

Reclassification for amortization of prior service (credit)/cost included in net periodic benefit expense

 

(3)

 

 

 

 

(2)

 

 

(7)

 

 

 

 

(4)

Total

$

(202)

 

$

69 

 

$

(133)

 

$

43 

 

$

(17)

 

$

26 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

July 28, 2012

 

 

July 30, 2011

 

 

 

 

Income

 

 

 

 

 

 

 

Income

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

Tax

 

 

 

($ in millions)

Gross

 

(Expense)

 

Net

 

Gross

 

(Expense)

 

Net

 

Amount

 

Benefit

 

Amount

 

Amount

 

Benefit

 

Amount

Unrealized gain/(loss) on REITs

$

51 

 

$

(18)

 

$

33 

 

$

47 

 

$

(17)

 

$

30 

Reclassification adjustment for gain on REIT included in net income

 

(270)

(1)

 

96 

 

 

(174)

 

 

-

 

 

 -

 

 

 -

Reclassification for amortization of net actuarial (gain)/loss included in net periodic benefit expense

 

127 

 

 

(50)

 

 

77 

 

 

75 

 

 

(29)

 

 

46 

Reclassification for amortization of prior service (credit)/cost included in net periodic benefit expense

 

(7)

 

 

 

 

(4)

 

 

(13)

 

 

 

 

(8)

Total

$

(99)

 

$

31 

 

$

(68)

 

$

109 

 

$

(41)

 

$

68 

 

(1) Reclassification adjustment was calculated by using the closing fair market value per unit of $158.13 on July 19, 2012 for the two million REIT units that were redeemed on July 20, 2012.  The REIT units were redeemed at a price of $124.00 per unit (see Note 6).

 

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The following table shows the changes in accumulated other comprehensive income/(loss) balances for the first six months of 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Accumulated Other

 

Gain/(Loss)

 

Net Actuarial

 

Prior Service

 

Comprehensive

 

on REITs

 

Gain/(Loss)

 

Credit/(Cost)

 

Income/(Loss)

January 28, 2012

$

165 

 

$

(1,397)

 

$

23 

 

$

(1,209)

Current period change

 

(141)

 

 

77 

 

 

(4)

 

 

(68)

July 28, 2012

$

24 

 

$

(1,320)

 

$

19 

 

$

(1,277)

 

 

9.  Stock-Based Compensation 

 

We grant stock-based compensation awards to employees and non-employee directors under our equity compensation plan.  On May 18, 2012, our stockholders approved the J. C. Penney Company, Inc. 2012 Long-Term Incentive Plan (2012 Plan), reserving 7 million shares for future grants (1.5 million newly authorized shares plus up to 5.5 million reserved but unissued shares from our prior 2009 Long-Term Incentive Plan (2009 Plan)).  In addition, shares underlying any outstanding stock award or stock option grant cancelled prior to vesting or exercise become available for use under the 2012 Plan.  The 2009 Plan terminated on May 18, 2012, except for outstanding awards, and all subsequent awards have been granted under the 2012 Plan.  As of July 28, 2012, there were approximately 6 million shares of stock available for future grant under the 2012 Plan.

 

The components of total stock-based compensation costs are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

($ in millions)

 

July 28,

 

 

July 30,

 

 

July 28,

 

 

July 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Stock awards (shares and units)

$

10 

 

$

 

$

18 

 

$

12 

Stock options

 

 

 

 

 

 

 

14 

Total stock-based compensation

$

14 

 

$

13 

 

$

26 

(1)

$

26 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Excludes $9 million of stock-based compensation costs reported in restructuring and management transition charges (see Note 11).

 

On March 13, 2012, we made an annual grant of approximately 1.9 million stock options to employees at an option price of $37.63, with a fair value of $11.68 per option and approximately 646,000 time-based restricted stock units (RSUs) to employees with a fair value of $37.63 per RSU award. 

   

During the second quarter of 2012, we granted approximately 704,000 stock options to employees at an option price of $26.29 and a fair value of $11.36 per option.  Additionally, we granted approximately 690,000 time-based RSUs to employees with a fair value of $26.29 per RSU award as well as 50,000 RSUs to directors with a fair value of $27.26 per RSU award.

 

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10.  Retirement Benefit Plans

 

The components of net periodic benefit expense/(income) for our non-contributory qualified defined benefit pension plan (primary plan), non-contributory supplemental pension plans and contributory postretirement health and welfare plan are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

July 28,

 

 

July 30,

 

 

July 28,

 

 

July 30,

Primary Plan

 

2012

 

 

2011

 

 

2012

 

 

2011

Service cost

$

23 

 

$

22 

 

$

46 

 

$

44 

Interest cost

 

62 

 

 

62 

 

 

124 

 

 

124 

Expected return on plan assets

 

(95)

 

 

(97)

 

 

(189)

 

 

(193)

Net amortization

 

58 

 

 

34 

 

 

116 

 

 

68 

Net periodic benefit expense/(income)

$

48 

 

$

21 

 

$

97 

 

$

43 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Plans

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

 

$

 -

 

$

 

$

Interest cost

 

 

 

 

 

 

 

Expected return on plan assets

 

 -

 

 

 -

 

 

 -

 

 

 -

Net amortization

 

 

 

 

 

11 

 

 

Net periodic benefit expense/(income)

$

10 

 

$

 

$

19 

 

$

14 

 

 

 

 

 

 

 

 

 

 

 

 

Primary and Supplemental Plans Total

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

24 

 

$

22 

 

$

47 

 

$

45 

Interest cost

 

66 

 

 

65 

 

 

131 

 

 

130 

Expected return on plan assets

 

(95)

 

 

(97)

 

 

(189)

 

 

(193)

Net amortization

 

63 

 

 

38 

 

 

127 

 

 

75 

Net periodic benefit expense/(income)

$

58 

 

$

28 

 

$

116 

 

$

57 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement Health and Welfare Plan

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

 -

 

$

 -

 

$

 -

 

$

 -

Interest cost

 

 

 

 -

 

 

 

 

 -

Expected return on plan assets

 

 -

 

 

 -

 

 

 -

 

 

 -

Net amortization

 

(3)

 

 

(7)

 

 

(7)

 

 

(13)

Net periodic benefit expense/(income)

$

(2)

 

$

(7)

 

$

(6)

 

$

(13)

 

 

 

 

 

 

 

 

 

 

 

 

Retirement Benefit Plans Total

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

24 

 

$

22 

 

$

47 

 

$

45 

Interest cost

 

67 

 

 

65 

 

 

131 

 

 

130 

Expected return on plan assets

 

(95)

 

 

(97)

 

 

(189)

 

 

(193)

Net amortization

 

60 

 

 

31 

 

 

120 

 

 

62 

Net periodic benefit expense/(income)

$

56 

 

$

21 

 

$

109 

 

$

44 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit expense/(income) for our noncontributory postretirement health and welfare plan is predominantly included in SG&A expense on the Consolidated Statements of Operations.

   

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Defined Contribution Plans  

Our defined contribution plans include a qualified Savings, Profit-Sharing and Stock Ownership Plan (401(k) plan), which includes a non-contributory retirement account, and a non-qualified contributory unfunded mirror savings plan offered to certain members of management. Total expense for our defined contribution plans for the second quarters of 2012 and 2011 was $14 million and $16 million, respectively, and was predominantly included in SG&A expenses on the Consolidated Statements of Operations.  Total expense for the first six months of 2012 and 2011 was $30 million and $32 million, respectively.

 

 

11.  Restructuring and Management Transition

 

Restructuring and management transition charges during the three and six months ended July 28, 2012 and July 30, 2011 included costs related to activities to streamline our supply chain operations; the exit from our catalog and outlet businesses; cost savings initiatives to reduce store and home office expenses; costs associated with the disposal of software and systems; the write-off of store fixtures that were replaced with the new store shop fixtures; management transition charges related to the hiring and departure of certain members of management and other miscellaneous restructuring costs.    The composition of restructuring and management transition charges was as follows:    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

Cumulative

($ in millions)

 

July 28,

 

 

July 30,

 

 

July 28,

 

 

July 30,

 

 

Amount Through

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

July 28, 2012

Supply chain

$

10 

 

$

12 

 

$

16 

 

$

15 

 

$

57 

Catalog and catalog outlet stores(1)

 

 -

 

 

 

 

 -

 

 

 

 

55 

Home office and stores

 

56 

 

 

 

 

101 

 

 

 

 

146 

Software and systems

 

36 

 

 

 -

 

 

36 

 

 

 -

 

 

36 

Store fixtures

 

42 

 

 

 -

 

 

42 

 

 

 -

 

 

42 

Management transition

 

10 

 

 

 

 

30 

 

 

 

 

160 

Voluntary early retirement program (VERP)(1)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

179 

Other

 

 

 

 

 

10 

 

 

 

 

43 

Total

$

159 

 

$

23 

 

$

235 

 

$

32 

 

$

718 

 

(1)  These restructuring activities were completed in 2011 and we do not expect to incur any additional costs related to the exit of our catalog and catalog outlet stores and the enhanced benefits associated with the VERP.

 

Supply chain

As a result of consolidating and streamlining our supply chain organization as part of a restructuring program that began in 2011, during the three months ended July 28, 2012 and July 30, 2011, we recorded charges of $10 million and $12 million, respectively, related to accelerated depreciation, termination benefits and unit closing costs. During the six months ended July 28, 2012 and July 30, 2011, we recorded charges of $16 million and $15 million, respectively. For the remainder of 2012, our current estimate is to incur approximately $1 million of additional charges related to this restructuring activity.    

 

Home office and stores

During the three months ended July 28, 2012 and July 30, 2011, we recorded $56 million and $4 million, respectively, of costs associated with employee termination benefits for actions to reduce our store and home office expenses.  During the six months ended July 28, 2012 and July 30, 2011, we recorded charges of $101 million and $5 million, respectively.     In July 2012, we substantially completed our efforts to create a simplified operating structure in our home office; as a result, for the remainder of 2012 we do not anticipate incurring any additional charges related to this restructuring activity.  As we continue to simplify our store operations, our current estimate for the remainder of 2012 is to incur between $10 million to $20 million of additional charges related to this restructuring activity.

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Software and systems

During the three months ended July 28, 2012, we recorded a charge of $3 million related to consulting fees associated with evaluating our technology infrastructure and, as a result of this evaluation, $33 million of software and systems were disposed of, as they did not support our new long-term strategy. 

 

Store fixtures

During the three months ended July 28, 2012, we recorded $42 million of charges related to the replacement of store fixtures in connection with the launch of our first 10 shops in August and September of 2012.   As we continue to design and implement new shops in conjunction with our efforts to re-organize our department stores, we anticipate additional store fixture write-offs as we determine which store fixtures to replace.

 

Management transition

During the first half of 2012, we implemented several changes within our management leadership team that resulted in management transition costs of $10 million and $30 million for the three and six months ended July 28, 2012, respectively, for both incoming and outgoing members of management.     

 

Other

During the three months ended July 28, 2012 and July 30, 2011, we recorded $5 million and $4 million, respectively, of miscellaneous restructuring charges.  During the six months ended July 28, 2012 and July 30, 2011, we recorded $10 million and $6 million, respectively, of miscellaneous restructuring charges.  The charges in the first quarter of 2012 were primarily related to the exit of our specialty websites CLADTM and Gifting GraceTM  and the charges in the second quarter of 2012 were primarily related to costs associated with the closing of our Pittsburgh, Pennsylvania customer call center.  

 

Activity for the restructuring and management transition liability for the period was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

Supply

 

 

Home Office

 

 

Software

 

 

Store

 

 

Management

 

 

 

 

 

 

 

 

Chain

 

 

and Stores

 

 

and Systems

 

 

Fixtures

 

 

Transition

 

 

Other

 

 

Total

January 28, 2012

$

 

$

28 

 

$

 -

 

$

 -

 

$

10 

 

$

19 

 

$

60 

Charges

 

16 

 

 

101 

 

 

36 

 

 

42 

 

 

30 

 

 

10 

 

 

235 

Cash payments

 

(11)

 

 

(108)

 

 

(3)

 

 

 -

 

 

(30)