Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation

v2.4.0.8
Stock-Based Compensation
12 Months Ended
Feb. 01, 2014
Share-based Compensation [Abstract]  
Stock-Based Compensation
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 the end of 2013, there were approximately 7.3 million shares of stock available for future grant under the 2012 Plan.
 
Employee stock options and time-based and performance-based restricted stock awards typically vest over periods ranging from one to three years. The number of performance-based restricted stock awards that ultimately vest is dependent on the achievement of an internal profitability target. The exercise price of stock options and the market value of time-based and performance-based restricted stock awards are determined based on the closing market price of our common stock on the date of grant. The 2012 Plan does not permit awarding stock options below grant-date market value nor does it allow any repricing subsequent to the date of grant.  Employee stock options have a maximum term of 10 years.

In February 2012, the Company approved an equity inducement award plan for 900,000 shares. No shares have been issued from the inducement award plan as of February 1, 2014.

Our stock option and restricted stock award grants have averaged about 2.5% of outstanding stock over the past three years. We issue new shares upon the exercise of stock options, granting of restricted shares and vesting of restricted stock units.
 
Stock-based Compensation Cost
The components of total stock-based compensation costs are as follows:
($ in millions)
2013
 
2012
 
2011
Stock awards
$
14

 
$
33

 
$
22

Stock options
14

 
17

 
24

Total stock-based compensation(1)
$
28

 
$
50

 
$
46

 
 
 
 
 
 
Total income tax benefit recognized for stock-based compensation arrangements
$

 
$
19

 
$
18


(1)
Excludes $18 million, $11 million and $79 million for 2013, 2012 and 2011, respectively, of stock-based compensation costs reported in restructuring and management transition charges (see Note 16).


Stock Options  
The following table summarizes stock option activity during the year ended February 1, 2014:  
 
 
 
Shares (in thousands)
 
Weighted - Average Exercise Price Per Share
 
Weighted - Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value ($ in millions)(1) 
Outstanding at February 2, 2013
 
13,593

 
$
40

 
 
 
 
Granted
 
3,448

 
15

 
 
 
 
Exercised
 
(397
)
 
16

 
 
 
 
Forfeited/canceled
 
(2,615
)
 
30

 
 
 
 
Outstanding at February 1, 2014
 
14,029

 
36

 
4.4
 
$

Exercisable at February 1, 2014
 
10,617

 
41

 
3.0
 
$

 
(1)
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option at year end. As of February 1, 2014, all outstanding stock options had an exercise price above the closing price of JCPenney common stock of $5.92.
     
If all outstanding options were exercised, common stock outstanding would increase by 4.6%.  

Cash proceeds, tax benefits and intrinsic value related to total stock options exercised are provided in the following table:
 
($ in millions)
 
2013
 
2012
 
2011
Proceeds from stock options exercised
 
$
7

 
$
71

 
$
18

Intrinsic value of stock options exercised
 
2

 
38

 
28

Tax benefit related to stock-based compensation
 

 
15

 
11

Excess tax benefits realized on stock-based compensation
 

 
12

 
10


 
As of February 1, 2014, we had $18 million of unrecognized and unearned compensation expense, net of estimated forfeitures, for stock options not yet vested, which will be recognized as expense over the remaining weighted-average vesting period of approximately two years.
 
Stock Option Valuation 

Valuation Method. We estimate the fair value of stock option awards on the date of grant using primarily the binomial lattice model. We believe that the binomial lattice model is a more accurate model for valuing employee stock options since it better reflects the impact of stock price changes on option exercise behavior.
 
Expected Term. Our expected option term represents the average period that we expect stock options to be outstanding and is determined based on our historical experience, giving consideration to contractual terms, vesting schedules, anticipated stock prices and expected future behavior of option holders.
 
Expected Volatility. Our expected volatility is based on a blend of the historical volatility of JCPenney stock combined with an estimate of the implied volatility derived from exchange traded options.
 
Risk-Free Interest Rate. Our risk-free interest rate is based on zero-coupon U.S. Treasury yields in effect at the date of grant with the same period as the expected option life.

Expected Dividend Yield. The dividend assumption is based on our current expectations about our dividend policy.




Our weighted-average fair value of stock options at grant date was $7.15 in 2013, $11.49 in 2012 and $11.37 in 2011 using the binomial lattice valuation model and the following assumptions:
   
 
 
2013
 
2012
 
2011
Weighted-average expected option term
 
4.4 years
 
4.9 years
 
4.5 years
Weighted-average expected volatility
 
62.00%
 
45.30%
 
41.20%
Weighted-average risk-free interest rate
 
0.64%
 
0.87%
 
1.75%
Weighted-average expected dividend yield
 
—%
 
1.40%
 
2.20%
Expected dividend yield range
 
—%
 
2.0% – 2.1%
 
1.8% – 2.2%

 
Stock Awards
The following table summarizes our non-vested stock awards activity during the year ended February 1, 2014:  
 
Time-Based Stock Awards
 
Performance-Based Stock Awards
(shares in thousands)
Number of Units
 
Weighted- Date Fair Value
 
Number of Units
 
Weighted- Date Fair Value
Non-vested at February 2, 2013
3,418

 
$
31

 
44

 
$
31

Granted
971

 
15

 
1,082

 
14

Vested
(1,344
)
 
29

 
(155
)
 
19

Forfeited/canceled
(1,688
)
 
29

 
(898
)
 
14

Non-vested at February 1, 2014
1,357

 
23

 
73

 
7


 
As of February 1, 2014, we had $18 million of unrecognized compensation expense related to unearned employee stock awards, which will be recognized over the remaining weighted-average vesting period of approximately two years. The aggregate market value of shares vested during 2013, 2012 and 2011 was $25 million, $26 million and $145 million, respectively, compared to an aggregate grant date fair value of $42 million, $29 million and $111 million, respectively.