Table of Contents

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 October 31, 2015
or
¨
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
 
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)

(972) 431-1000
(Registrant’s telephone number, including area code)
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  ¨
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  ¨
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   ¨
Non-accelerated filer   ¨
Smaller reporting company  ¨
 
 
(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 ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 306,004,010 shares of Common Stock of 50 cents par value, as of December 4, 2015.



J. C. PENNEY COMPANY, INC.
FORM 10-Q
For the Quarterly Period Ended October 31, 2015
INDEX

 
 
 
Page
 
 
 
9. Stock-based Compensation
 

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
 
Nine Months Ended
(In millions, except per share data)
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Total net sales
$
2,897

 
$
2,764

 
$
8,629

 
$
8,364

Cost of goods sold
1,815

 
1,751

 
5,441

 
5,417

Gross margin
1,082

 
1,013

 
3,188

 
2,947

Operating expenses/(income):
 
 
 
 
 
 
 
Selling, general and administrative (SG&A)
947

 
988

 
2,813

 
2,961

Pension
12

 
1

 
35

 
4

Depreciation and amortization
152

 
156

 
459

 
474

Real estate and other, net
2

 
(90
)
 
(14
)
 
(160
)
Restructuring and management transition
14

 
12

 
53

 
39

Total operating expenses
1,127

 
1,067

 
3,346

 
3,318

Operating income/(loss)
(45
)
 
(54
)
 
(158
)
 
(371
)
Loss on extinguishment of debt

 
34

 

 
34

Net interest expense
102

 
103

 
303

 
306

Income/(loss) before income taxes
(147
)
 
(191
)
 
(461
)
 
(711
)
Income tax expense/(benefit)
(10
)
 
(3
)
 
(19
)
 
1

Net income/(loss)
$
(137
)
 
$
(188
)
 
$
(442
)
 
$
(712
)
Earnings/(loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.45
)
 
$
(0.62
)
 
$
(1.45
)
 
$
(2.33
)
Diluted
$
(0.45
)
 
$
(0.62
)
 
$
(1.45
)
 
$
(2.33
)
Weighted average shares – basic
306.0

 
305.3

 
305.8

 
305.1

Weighted average shares – diluted
306.0

 
305.3

 
305.8

 
305.1

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.



2

Table of Contents

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Net income/(loss)
$
(137
)
 
$
(188
)
 
$
(442
)
 
$
(712
)
Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Retirement benefit plans
 
 
 
 
 
 
 
Reclassification for amortization of net actuarial (gain)/loss
18

 
10

 
53

 
30

Reclassification for amortization of prior service (credit)/cost

 
(1
)
 

 
(1
)
Cash flow hedges
 
 
 
 
 
 
 
Net gain/(loss) on interest rate swaps
(6
)
 

 
(12
)
 

Total other comprehensive income/(loss), net of tax
12

 
9

 
41

 
29

Total comprehensive income/(loss), net of tax
$
(125
)
 
$
(179
)
 
$
(401
)
 
$
(683
)
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

3

Table of Contents

J. C. PENNEY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
 
October 31,
2015
 
November 1,
2014
 
January 31,
2015
(In millions, except per share data)
(Unaudited)
 
(Unaudited)
 
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash in banks and in transit
$
152

 
$
141

 
$
119

Cash short-term investments
486

 
543

 
1,199

Cash and cash equivalents
638

 
684

 
1,318

Merchandise inventory
3,669

 
3,358

 
2,652

Deferred taxes
208

 
175

 
172

Prepaid expenses and other
218

 
223

 
189

Total current assets
4,733

 
4,440

 
4,331

Property and equipment (net of accumulated depreciation of $3,686, $3,558 and $3,617)
4,905

 
5,312

 
5,148

Prepaid pension
289

 
695

 
220

Other assets
623

 
618

 
610

Total Assets
$
10,550

 
$
11,065

 
$
10,309

Liabilities and Stockholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Merchandise accounts payable
$
1,453

 
$
1,289

 
$
997

Other accounts payable and accrued expenses
1,246

 
1,079

 
1,103

Current portion of capital leases and note payable
26

 
30

 
28

Current maturities of long-term debt
106

 
28

 
28

Total current liabilities
2,831

 
2,426

 
2,156

Long-term capital leases and note payable
14

 
40

 
38

Long-term debt
5,147

 
5,229

 
5,227

Deferred taxes
395

 
357

 
363

Other liabilities
616

 
583

 
611

Total Liabilities
9,003

 
8,635

 
8,395

Stockholders’ Equity
 
 
 
 
 
Common stock(1)
153

 
152

 
152

Additional paid-in capital
4,639

 
4,597

 
4,606

Reinvested earnings/(accumulated deficit)
(2,221
)
 
(1,720
)
 
(1,779
)
Accumulated other comprehensive income/(loss)
(1,024
)
 
(599
)
 
(1,065
)
Total Stockholders’ Equity
1,547

 
2,430

 
1,914

Total Liabilities and Stockholders’ Equity
$
10,550

 
$
11,065

 
$
10,309


(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 305.5 million, 304.8 million and 304.9 million as of October 31, 2015November 1, 2014 and January 31, 2015, respectively.
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.


4

Table of Contents

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Cash flows from operating activities
 
 
 
 
 
 
 
Net income/(loss)
$
(137
)
 
$
(188
)
 
$
(442
)
 
$
(712
)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
 
 
 
 
 
 
 
Restructuring and management transition
(1
)
 
2

 
3

 
5

Asset impairments and other charges
4

 
5

 
6

 
9

Net gain on sale of non-operating assets
(1
)
 
(2
)
 
(9
)
 
(23
)
Net gain on sale of operating assets
(1
)
 
(90
)
 
(9
)
 
(91
)
Loss on extinguishment of debt

 
34

 

 
34

Depreciation and amortization
152

 
156

 
459

 
474

Benefit plans
4

 
(5
)
 
14

 
(18
)
Stock-based compensation
12

 
8

 
33

 
24

Deferred taxes
(15
)
 
(5
)
 
(32
)
 
(24
)
Change in cash from:
 
 
 
 
 
 
 
Inventory
(664
)
 
(510
)
 
(1,017
)
 
(423
)
Prepaid expenses and other assets
(22
)
 
(15
)
 
(33
)
 
(34
)
Merchandise accounts payable
331

 
305

 
456

 
341

Current income taxes
4

 
2

 
10

 
6

Accrued expenses and other
102

 
(17
)
 
145

 
(22
)
Net cash provided by/(used in) operating activities
(232
)
 
(320
)
 
(416
)
 
(454
)
Cash flows from investing activities
 
 
 
 
 
 
 
Capital expenditures
(93
)
 
(61
)
 
(234
)
 
(202
)
Net proceeds from sale of non-operating assets

 
2

 
13

 
28

Net proceeds from sale of operating assets
1

 
66

 
6

 
68

Joint venture return of investment

 

 

 
8

Net cash provided by/(used in) investing activities
(92
)
 
7

 
(215
)
 
(98
)
Cash flows from financing activities
 
 
 
 
 
 
 
Payments on short-term borrowings

 

 

 
(650
)
Net proceeds from issuance of long-term debt

 
393

 

 
893

Premium on early retirement of debt

 
(33
)
 

 
(33
)
Payments of capital leases and note payable
(4
)
 
(4
)
 
(27
)
 
(22
)
Payments of long-term debt
(7
)
 
(394
)
 
(20
)
 
(405
)
Financing costs

 
(1
)
 

 
(61
)
Tax withholding payments for vested restricted stock

 

 
(2
)
 
(1
)
Net cash provided by/(used in) financing activities
(11
)
 
(39
)
 
(49
)
 
(279
)
Net increase/(decrease) in cash and cash equivalents
(335
)
 
(352
)
 
(680
)
 
(831
)
Cash and cash equivalents at beginning of period
973

 
1,036

 
1,318

 
1,515

Cash and cash equivalents at end of period
$
638

 
$
684

 
$
638

 
$
684

 
 
 
 
 
 
 
 
Supplemental cash flow information
 
 
 
 
 
 
 
Income taxes received/(paid), net
$

 
$
(1
)
 
$
(2
)
 
$
(20
)
Interest received/(paid), net
(128
)
 
(160
)
 
(312
)
 
(343
)
Supplemental non-cash investing and financing activity
 
 
 
 
 
 
 
Property contributed to joint venture

 

 

 
30

Increase/(decrease) in other accounts payable related to purchases of property and equipment and software
(19
)
 
(2
)
 
10

 
(7
)
Financing costs withheld from proceeds of long-term debt

 
7

 

 
7

Purchase of property and equipment and software through capital leases and a note payable

 

 

 
3


See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

5

Table of Contents

J. C. PENNEY COMPANY, INC.
NOTES TO UNAUDITED 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 31, 2015 (2014 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 2014 Form 10-K. The January 31, 2015 financial information was derived from the audited Consolidated Financial Statements, with related footnotes, included in the 2014 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 October 31, 2015” and “three months ended November 1, 2014” refer to the 13-week periods ended October 31, 2015 and November 1, 2014, respectively. "Nine months ended October 31, 2015" and "nine months ended November 1, 2014" refer to the 39-week periods ended October 31, 2015 and November 1, 2014, respectively. Fiscal years 2015 and 2014 contain 52 weeks.
Basis of Consolidation
All significant inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications were made to prior period amounts to conform to the current period presentation. 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 the 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, specifically actual and expected permanent reductions to retail prices (markdowns and markdown accruals) and adjustments for shortages (shrinkage); valuation of long-lived assets and indefinite-lived intangible assets for impairments; fair value of interest rate swaps; reserves for closed stores, workers’ compensation and general liability (insurance), environmental contingencies, income taxes and litigation; and pension and other postretirement benefits accounting. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.

6

Table of Contents

2. Effect of New Accounting Standards

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. The amendments in this ASU are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. The Company early adopted ASU 2015-03 retrospectively in its second quarter ended August 1, 2015. As a result of the retrospective adoption, the Company reclassified unamortized debt issuance costs of $95 million and $100 million as of January 31, 2015 and November 1, 2014, respectively, from Other assets to a reduction in Long-term debt on the unaudited Interim Consolidated Balance Sheets. Adoption of this standard did not impact results of operations, retained earnings, or cash flows in the current or previous interim and annual reporting periods.
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
 
Nine Months Ended
(in millions, except per share data)
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Earnings/(loss)
 
 
 
 
 
 
 
Net income/(loss)
$
(137
)
 
$
(188
)
 
$
(442
)
 
$
(712
)
Shares
 
 
 
 
 
 
 
Weighted average common shares outstanding (basic shares)
306.0


305.3

 
305.8

 
305.1

Adjustment for assumed dilution:
 
 
 
 
 
 
 
Stock options, restricted stock awards and warrant

 

 

 

Weighted average shares assuming dilution (diluted shares)
306.0

 
305.3

 
305.8

 
305.1

EPS
 
 
 
 
 
 
 
Basic
$
(0.45
)
 
$
(0.62
)
 
$
(1.45
)
 
$
(2.33
)
Diluted
$
(0.45
)
 
$
(0.62
)
 
$
(1.45
)
 
$
(2.33
)
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
 
Nine Months Ended
(Shares in millions)
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Stock options, restricted stock awards and warrant
32.0

 
26.9

 
31.8

 
26.1

4. Credit Facility
The Company has a $2,350 million asset-based senior credit facility (2014 Credit Facility) that is comprised of a $1,850 million revolving line of credit (Revolving Facility) and a $500 million term loan (2014 Term Loan). As of the end of the third quarter of 2015, we had $494 million outstanding on the 2014 Term Loan and no borrowings outstanding under the Revolving Facility. In addition, as of the end of the third quarter of 2015, based on our borrowing base, we had $1,665 million available for borrowing, of which $294 million was reserved for outstanding standby and import letters of credit, none of which have been drawn on, leaving $1,371 million for future borrowings. The applicable rate for standby and import letters of credit was 2.50% and 1.25%, respectively, while the commitment fee was 0.375% for the unused portion of the Revolving Facility.
On November 16, 2015, the Company announced that it has received $500 million of incremental bank commitments to increase the size of the Revolving Facility under the 2014 Credit Facility to $2,350 million. In connection with upsizing the Revolving Facility, the Company also intends to prepay and retire the outstanding principal amount of the 2014 Term Loan.

7

Table of Contents

5. Long-term Debt
 
Outstanding Principal
 
Unamortized Debt Issuance Costs
 
Net Carrying Amount
($ in millions)
October 31, 2015
 
November 1, 2014
 
January 31, 2015
 
October 31, 2015
 
November 1, 2014
 
January 31, 2015
 
October 31, 2015
 
November 1, 2014
 
January 31, 2015
5.65% Senior Notes Due 2020(1)
$
400

 
$
400

 
$
400

 
$
4

 
$
5

 
$
5

 
$
396

 
$
395

 
$
395

5.75% Senior Notes Due 2018(1)
300

 
300

 
300

 
1

 
1

 
1

 
299

 
299

 
299

6.375% Senior Notes Due 2036(1)
400

 
400

 
400

 
6

 
7

 
7

 
394

 
393

 
393

6.9% Notes Due 2026
2

 
2

 
2

 

 

 

 
2

 
2

 
2

7.125% Debentures Due 2023
10

 
10

 
10

 

 

 

 
10

 
10

 
10

7.4% Debentures Due 2037
326

 
326

 
326

 
1

 
1

 
1

 
325

 
325

 
325

7.625% Notes Due 2097
500

 
500

 
500

 

 

 

 
500

 
500

 
500

7.65% Debentures Due 2016
78

 
78

 
78

 

 

 

 
78

 
78

 
78

7.95% Debentures Due 2017
220

 
220

 
220

 

 

 

 
220

 
220

 
220

8.125% Senior Notes Due 2019
400

 
400

 
400

 
8

 
10

 
10

 
392

 
390

 
390

2013 Term Loan Facility
2,199

 
2,222

 
2,216

 
45

 
62

 
58

 
2,154

 
2,160

 
2,158

2014 Term Loan
494

 
499

 
498

 
11

 
14

 
13

 
483

 
485

 
485

Total debt, excluding capital leases and note payable
$
5,329

 
$
5,357

 
$
5,350

 
$
76

 
$
100

 
$
95

 
$
5,253

 
$
5,257

 
$
5,255

Less: current maturities
 
 
 
 
 
 
 
 
 
 
 
 
106

 
28

 
28

Total long-term debt, excluding capital leases and note payable

 

 

 
 
 
 
 

 
$
5,147

 
$
5,229

 
$
5,227


(1) These debt issuances contain change of control provisions that would obligate us, at the holders’ option, to repurchase the debt at a price equal to 101% of the principal amount of the debt.
6. Derivative Financial Instruments

Effective May 7, 2015, we entered into interest rate swap agreements with notional amounts totaling $1,250 million to fix a portion of our variable LIBOR-based interest payments. The interest rate swap agreements have a weighted-average fixed rate of 2.04%, mature on May 7, 2020 and have been designated as cash flow hedges.

The fair value of our interest rate swaps are recorded on the unaudited Interim Consolidated Balance Sheets as an asset or a liability (see Note 7). The effective portion of the interest rate swaps' changes in fair values is reported in Accumulated other comprehensive income/(loss) (see Note 8), and the ineffective portion is reported in Net income/(loss). Amounts in Accumulated other comprehensive income/(loss) are reclassified into net income/(loss) when the related interest payments affect earnings. For the periods presented, all of the interest rate swaps were 100% effective.








8

Table of Contents

Information regarding the pre-tax changes in the fair value of our interest rate swaps is as follows:
 
Three Months Ended
 
Nine Months Ended
 
Line Item in the Unaudited Interim Financial Statements
($ in millions)
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
 
Gain/(loss) recognized in other comprehensive income/(loss)
$
(10
)
 
$

 
$
(19
)
 
$

 
Accumulated other comprehensive income
Gain/(loss) recognized in net income/(loss)

 

 
(2
)
 

 
Interest expense

Information regarding the gross amounts of our derivative instruments in the unaudited Interim Consolidated Balance Sheets is as follows:
 
Asset Derivatives at Fair Value
 
Liability Derivatives at Fair Value
($ in millions)
Balance Sheet Location
 
October 31, 2015
 
November 1, 2014
 
January 31, 2015
 
Balance Sheet Location
 
October 31, 2015
 
November 1, 2014
 
January 31, 2015
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
N/A
 
$

 
$

 
$

 
Other accounts payable and accrued expenses
 
$
2

 
$

 
$

Interest rate swaps
N/A
 

 

 

 
Other liabilities
 
19

 

 

Total derivatives designated as hedging instruments
 
 
$

 
$

 
$

 
 
 
$
21

 
$

 
$

7. Fair Value Disclosures
Cash Flow Hedges Measured on a Recurring Basis
Our cash flow hedges are valued in the market using discounted cash flow techniques which use quoted market interest rates in discounted cash flow calculations which consider the instrument's term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation for interest rate swaps are observable in the active markets and are classified as Level 2 in the fair value measurement hierarchy.

Our cash flow hedges measured at fair value are as follows:
 
Cash Flow Hedges at Fair Value
($ in millions)
Quoted Prices in Active Markets of Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
October 31, 2015
$

 
$
(21
)
 
$

November 1, 2014

 

 

January 31, 2015

 

 



9

Table of Contents

Other Financial Instruments
Carrying values and fair values of financial instruments that are not carried at fair value in the unaudited Interim Consolidated Balance Sheets are as follows:
 
 
October 31, 2015
 
November 1, 2014
 
January 31, 2015
($ in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt, excluding unamortized debt issuance costs, including current maturities
$
5,329

 
$
4,947

 
$
5,357

 
$
4,910

 
$
5,350

 
$
4,834

The fair value of long-term debt was estimated by obtaining quotes from brokers or was based on current rates offered for similar debt. As of October 31, 2015November 1, 2014 and January 31, 2015, the fair values of cash and cash equivalents and accounts payable approximated their carrying values due to the short-term nature of these instruments. In addition, the fair values of capital lease commitments and the note payable approximated their carrying values. These items have been excluded from the table above.
Concentrations of Credit Risk
We have no significant concentrations of credit risk.
8. Stockholders’ Equity
The following table shows the change in the components of stockholders’ equity for the nine months ended October 31, 2015:
 
(in millions)
Number
of
Common
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Reinvested
Earnings/
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Total
Stockholders’
Equity
January 31, 2015
304.9

 
$
152

 
$
4,606

 
$
(1,779
)
 
$
(1,065
)
 
$
1,914

Net income/(loss)

 

 

 
(442
)
 

 
(442
)
Other comprehensive income/(loss)

 

 

 

 
41

 
41

Stock-based compensation
0.6

 
1

 
33

 

 

 
34

October 31, 2015
305.5

 
$
153

 
$
4,639

 
$
(2,221
)
 
$
(1,024
)
 
$
1,547


Comprehensive Income
The tax effects allocated to each component of other comprehensive income/(loss) are as follows:
 
Three Months Ended
 
October 31, 2015
 
November 1, 2014
($ in millions)
Gross
Amount
 
Income
Tax
(Expense)/
Benefit
 
Net
Amount
 
Gross
Amount
 
Income
Tax
(Expense)/
Benefit
 
Net
Amount
Retirement benefit plans
 
 
 
 
 
 
 
 
 
 
 
Reclassification for amortization of net actuarial (gain)/loss
$
29

 
$
(11
)
 
$
18

 
$
16

 
$
(6
)
 
$
10

Reclassification for amortization of prior service (credit)/cost

 

 

 
(1
)
 

 
(1
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Net gain/(loss) on interest rate swaps
(10
)
 
4

 
(6
)
 

 

 

Total
$
19

 
$
(7
)
 
$
12

 
$
15

 
$
(6
)
 
$
9



10

Table of Contents

 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
($ in millions)
Gross
Amount
 
Income
Tax
(Expense)/
Benefit
 
Net
Amount
 
Gross
Amount
 
Income
Tax
(Expense)/
Benefit
 
Net
Amount
Retirement benefit plans
 
 
 
 
 
 
 
 
 
 
 
Reclassification for amortization of net actuarial (gain)/loss
$
87

 
$
(34
)
 
$
53

 
$
49

 
$
(19
)
 
$
30

Reclassification for amortization of prior service (credit)/cost

 

 

 
(1
)
 

 
(1
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Net gain/(loss) on interest rate swaps
(19
)
 
7

 
(12
)
 

 

 

Total
$
68

 
$
(27
)
 
$
41

 
$
48

 
$
(19
)
 
$
29

The following table shows the changes in accumulated other comprehensive income/(loss) balances for the nine months ended October 31, 2015:
 
($ in millions)
Net  Actuarial
Gain/(Loss)
 
Prior Service
Credit/(Cost)
 
Foreign Currency Translation
 
Gain/(Loss) on Cash Flow Hedges
 
Accumulated
Other
Comprehensive
Income/(Loss)
January 31, 2015
$
(1,023
)
 
$
(40
)
 
$
(2
)
 
$

 
$
(1,065
)
Other comprehensive income/(loss) before reclassifications

 

 

 
(14
)
 
(14
)
Amounts reclassified from accumulated other comprehensive income
53

 

 

 
2

 
55

October 31, 2015
$
(970
)
 
$
(40
)
 
$
(2
)
 
$
(12
)
 
$
(1,024
)

Reclassifications out of accumulated other comprehensive income/(loss) are as follows:
 
 
Amount Reclassified from Accumulated Other Comprehensive Income/(Loss)
 
Line Item in the
Unaudited Interim Consolidated
Statements of Operations
 
Three Months Ended
 
Nine Months Ended
 
($ in millions)
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
 
Amortization of retirement benefit plans
 
 
 
 
 
 
 
 
 
Actuarial loss/(gain)(1)
$
29

 
$
16

 
$
87

 
$
49

 
Pension
Prior service cost/(credit)(1)
2

 
1

 
6

 
5

 
Pension
Prior service cost/(credit)(1)
(2
)
 
(2
)
 
(6
)
 
(6
)
 
SG&A
Cash flow hedges
 
 
 
 
 
 
 
 
 
Realized loss/(gain)

 

 
2

 

 
Net interest expense
Tax (expense)/benefit
(10
)
 
(6
)
 
(34
)
 
(19
)
 
Income tax expense/(benefit)
Total, net of tax
19

 
9

 
55

 
29

 
 
Total reclassifications
$
19

 
$
9

 
$
55

 
$
29

 
 
(1)
These accumulated other comprehensive income/(loss) components are included in the computation of net periodic benefit expense/(income). See Note 10 for additional details.

11

Table of Contents


9. Stock-based Compensation
We grant stock-based compensation awards to employees and non-employee directors under the J. C. Penney Company, Inc. 2014 Long-Term Incentive Plan (2014 Plan). As of October 31, 2015, a maximum of 11.4 million shares of stock were available for future grant under the 2014 Plan.
Stock-based compensation expense for the three months ended October 31, 2015 and November 1, 2014 was $17 million and $10 million, respectively. Stock-based compensation expense for the nine months ended October 31, 2015 and November 1, 2014 was $47 million and $31 million, respectively. Through the first nine months of 2015, the Company granted the following stock-based compensation awards:
 
 
Restricted Stock Units (RSU)
 
Stock Options
Grant Date
 
Time-based
 
Performance-based
 
Time-based
 
Exercise Price
March 3, 2015
 
28,554

 

 

 
$

March 19, 2015
 
2,135,177

 
1,534,754

 
4,294,885

 
$
7.77

May 18, 2015
 
11,696

 

 

 
$

May 20, 2015
 
15,878

 
31,755

 
38,624

 
$
8.66

June 4, 2015
 
49,190

 
98,380

 
123,188

 
$
8.64

June 11, 2015(1)
 
31,437

 

 
78,358

 
$
8.35

August 7, 2015
 
303,398

 

 

 
$

August 18, 2015
 
211,161

 

 

 
$

October 6, 2015
 
112,359

 

 
269,608

 
$
9.79

Total
 
2,898,850

 
1,664,889

 
4,804,663

 
$
7.92

 
 
 
 
 
 
 
 
 
Weighted-average grant date fair value
 
$
7.99

 
$
7.44

 
$
3.48

 
 

(1) RSUs and options were granted under an equity inducement plan.

Performance-based awards that ultimately vest are dependent on market performance targets measured by the achievement of internal profitability targets for 2015 through 2017 (performance condition).

In addition to the grants above, on March 19, 2015, we granted approximately 2.5 million phantom units as part of our management incentive compensation plan, which are similar to RSUs in that the number of units granted was based on the price of our stock, but the units will be settled in cash based on the value of our stock on the vesting date, up to a maximum of $15.54 per phantom unit. The fair value of the awards is remeasured at each reporting period and was $9.17 per share as of October 31, 2015. Compensation expense, which is variable, is recognized over the vesting period with a corresponding liability, which is recorded in Other liabilities in our unaudited Interim Consolidated Balance Sheets. We also granted approximately 154,000 fully vested RSUs to directors during the second quarter of 2015 with a fair value of $8.64 per RSU award.

12

Table of Contents

10. Retirement Benefit Plans
The components of net periodic benefit expense/(income) for our non-contributory qualified defined benefit pension plan (Primary Pension Plan), non-contributory supplemental pension plans and contributory postretirement health and welfare plan were as follows:
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Primary Pension Plan
 
 
 
 
 
 
 
Service cost
$
17

 
$
15

 
$
52

 
$
46

Interest cost
49

 
53

 
147

 
158

Other cost
2

 

 
5

 

Expected return on plan assets
(89
)
 
(87
)
 
(267
)
 
(261
)
Amortization of actuarial loss/(gain)
26

 
13

 
77

 
38

Amortization of prior service cost/(credit)
2

 
1

 
6

 
5

Loss/(gain) on transfer of benefits

 
6

 

 
6

Net periodic benefit expense/(income)
$
7

 
$
1

 
$
20

 
$
(8
)
 
 
 
 
 
 
 
 
Supplemental Pension Plans
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost
2

 
3

 
5

 
7

Amortization of actuarial loss/(gain)
3

 
3

 
10

 
11

Amortization of prior service cost/(credit)

 

 

 

Loss/(gain) on transfer of benefits

 
(6
)
 

 
(6
)
Net periodic benefit expense/(income)
$
5

 
$

 
$
15

 
$
12

 
 
 
 
 
 
 
 
Primary and Supplemental Pension Plans Total
 
 
 
 
 
 
 
Service cost
$
17

 
$
15

 
$
52

 
$
46

Interest cost
51

 
56

 
152

 
165

Other cost
2

 

 
5

 

Expected return on plan assets
(89
)
 
(87
)
 
(267
)
 
(261
)
Amortization of actuarial loss/(gain)
29

 
16

 
87

 
49

Amortization of prior service cost/(credit)
2

 
1

 
6

 
5

Loss/(gain) on transfer of benefits

 

 

 

Net periodic benefit expense/(income)
$
12

 
$
1

 
$
35

 
$
4

 
 
 
 
 
 
 
 
Postretirement Health and Welfare Plan
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost

 

 

 

Amortization of actuarial loss/(gain)

 

 

 

Amortization of prior service cost/(credit)
(2
)
 
(2
)
 
(6
)
 
(6
)
Net periodic benefit expense/(income)
$
(2
)
 
$
(2
)
 
$
(6
)
 
$
(6
)
 
 
 
 
 
 
 
 
Retirement Benefit Plans Total
 
 
 
 
 
 
 
Service cost
$
17

 
$
15

 
$
52

 
$
46

Interest cost
51

 
56

 
152

 
165

Other cost
2

 

 
5

 

Expected return on plan assets
(89
)
 
(87
)
 
(267
)
 
(261
)
Amortization of actuarial loss/(gain)
29

 
16

 
87

 
49

Amortization of prior service cost/(credit)

 
(1
)
 

 
(1
)
Loss/(gain) on transfer of benefits


 

 

 

Net periodic benefit expense/(income)
$
10

 
$
(1
)
 
$
29

 
$
(2
)

13

Table of Contents

Net periodic benefit expense/(income) for our noncontributory postretirement health and welfare plan was predominantly included in SG&A expense in the unaudited Interim Consolidated Statements of Operations.
During the third quarter of 2014, we transferred $25 million of supplemental pension plan benefits, as allowed under the Employee Retirement Income Security Act of 1974, out of one of our supplemental pension plans and into our Primary Pension Plan. The transfer did not have a significant impact on our unaudited Interim Consolidated Financial Statements.
Primary Pension Plan Lump-Sum Payment Offer and Annuity Contract
In August 2015, as a result of a plan amendment, we offered approximately 31,000 retirees and beneficiaries in the Primary Pension Plan who commenced their benefit between January 1, 2000 and August 31, 2012 the option to receive a lump-sum settlement payment. In addition, we offered approximately 8,000 participants in the Primary Pension Plan who separated from service and had a deferred vested benefit as of August 31, 2012 the option to receive a lump-sum settlement payment.  Approximately 12,000 retirees and beneficiaries elected to receive voluntary lump-sum payments to settle the Primary Pension Plan's obligation to them. In addition, approximately 1,900 former employees having deferred vested benefits elected to receive lump-sums. The lump-sum settlement payments were made by the Company on November 5, 2015 using assets from the Primary Pension Plan.  Accordingly, the settlement expense related to the lump sum payments will be recognized in the fourth quarter of 2015.

The Company has also entered into a definitive agreement to purchase a group annuity contract from The Prudential Insurance Company of America (Prudential), under which Prudential will pay and administer future benefit payments to select retirees. The agreement provides for the Primary Pension Plan to transfer a portion of its obligations and assets to Prudential. The annuity transaction closed on December 7, 2015, and the Company has an option to transfer additional portions in 2016 if market conditions warrant.
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 third quarters of 2015 and 2014 was $16 million and $12 million, respectively, and was predominantly included in SG&A expenses in the unaudited Interim Consolidated Statements of Operations. Total expense for the first nine months of 2015 and 2014 was $43 million and $38 million, respectively.
11. Restructuring and Management Transition
The composition of restructuring and management transition charges was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
Cumulative
Amount From Program Inception Through
October 31, 2015
($ in millions)
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
 
Home office and stores
$
9

 
$
3

 
$
38

 
$
15

 
$
285

Management transition
3

 
7

 
10

 
15

 
234

Other
2

 
2

 
5

 
9

 
154

Total
$
14

 
$
12

 
$
53

 
$
39

 
$
673


Home Office and Stores
During the nine months ended October 31, 2015 and November 1, 2014, we recorded $38 million and $15 million, respectively, of charges for actions taken to reduce our home office and store expenses. In January 2015 and during the second quarter of 2015, we approved the closing of 41 department stores with closing dates all to occur during fiscal 2015. As a result of these approved closures, during the first nine months of 2015, we incurred charges of $24 million related to employee termination benefits and lease termination costs associated with the closure of those stores. Additionally, during the first nine months of 2015, we incurred $14 million related to employee termination benefits in connection with the elimination of approximately 300 positions in our home office.

In 2014 we also closed 33 stores as part of our turnaround efforts. During the first nine months of 2014, we incurred charges of $13 million for employee termination benefits and lease termination costs associated with the closure of those stores. Additionally, we incurred $2 million of other miscellaneous store restructuring costs.

14

Table of Contents

Management Transition
During the nine months ended October 31, 2015 and November 1, 2014, we implemented changes within our management leadership team that resulted in management transition costs of $10 million and $15 million, respectively, for both incoming and outgoing members of management.
Other
During the nine months ended October 31, 2015 and November 1, 2014, we recorded $5 million and $9 million, respectively, of miscellaneous restructuring charges. The 2015 charges were primarily related to costs associated with the closure of our Sumner, Washington store merchandise distribution center and contract termination costs associated with our previous shops strategy. The 2014 charges were primarily related to contract termination costs associated with our previous shops strategy.

Activity for the restructuring and management transition liability for the nine months ended October 31, 2015 was as follows:
 
($ in millions)
Home Office
and Stores
 
Management
Transition
 
Other
 
Total
January 31, 2015
$
9

 
$

 
$
17

 
$
26

Charges
38

 
10

 
5

 
53

Cash payments
(21
)
 
(7
)
 
(6
)
 
(34
)
Non-cash

 
(2
)
 
(1
)
 
(3
)
October 31, 2015
$
26

 
$
1

 
$
15

 
$
42

The non-cash amounts represent charges primarily for stock-based compensation expense in conjunction with accelerated vesting related to terminations and for the write-off of store merchandise distribution center fixtures.
12. Real Estate and Other, Net
Real estate and other consists of ongoing operating income from our real estate subsidiaries, net gains from the sale of facilities and equipment that are no longer used in operations, asset impairments, accruals for certain litigation and other non-operating charges and credits. In addition, during the first quarter of 2014, we entered into a joint venture in which we contributed approximately 220 acres of excess property adjacent to our home office facility in Plano, Texas (Home Office Land Joint Venture). The joint venture was formed to develop the contributed property and our proportional share of the joint venture's activities is recorded in Real estate and other, net. For the three months ended October 31, 2015 and November 1, 2014, Real estate and other, net was expense of $2 million and income of $90 million, respectively. For the nine months ended October 31, 2015 and November 1, 2014, Real estate and other, net was income of $14 million and $160 million, respectively.
Sale of Non-Operating Assets
During the first quarter of 2015, we sold two properties used in our former auto center operations and two former outlet store locations for net proceeds of $6 million, resulting in net gains totaling $2 million. During the second quarter of 2015, we sold two additional properties used in our former auto center operations for net proceeds of $7 million, resulting in net gains totaling $6 million. During the third quarter of 2015, we recognized a net gain of $1 million on the previous sale of 11 acres of land to the Home Office Land Joint Venture.

During the first quarter of 2014, we sold four properties used in our former auto center operations and excess property adjacent to our home office facility not contributed to the Home Office Land Joint Venture for net proceeds of $15 million, resulting in net gains totaling $12 million. During the second quarter of 2014, we sold four additional properties used in our former auto center operations for net proceeds of $11 million, resulting in net gains totaling $9 million. During the third quarter of 2014, we sold one closed store and one additional property used in our former auto center operations for net proceeds and a gain of $2 million.
Sale of Operating Assets
During the first quarter of 2015, we recognized a net gain of $8 million for the sale of a former furniture store location and for payments received from landlords to terminate two existing leases prior to the original expiration date. During the third quarter of 2015, we recognized a net gain of $1 million for the sale of excess property.

During the first quarter of 2014, we sold a former department store location with a net book value of $1 million for net proceeds of $2 million, realizing a gain of $1 million. During the third quarter of 2014, we sold three department store

15

Table of Contents

locations and recognized a net gain on a payment received from a landlord to terminate an existing lease prior to its original expiration date for total net proceeds of $66 million and a net gain of $90 million.

Investment Income from Joint Ventures
During the first quarter of 2015, the Company recorded $22 million for our proportional share of net income from the Home Office Land Joint Venture and received an aggregate cash distribution of $22 million. During the third quarter of 2015, the Company recorded $19 million for our proportional share of net income from the Home Office Land Joint Venture.

During the second quarter of 2014, the Company recorded $43 million for our proportional share of net income from the Home Office Land Joint Venture and received an aggregate cash distribution of $51 million.

Settlement of Class Action Lawsuit
During the third quarter of 2015, the Company accrued an additional $20 million under the proposed settlement related to the pricing class action litigation. This brings the total accrual to $50 million for the nine months ended October 31, 2015. Pursuant to the settlement, which is subject to court approval, class members will have the option of selecting a cash payment or store credit. The amount of the payment or credit will depend on the total amount of certain merchandise purchased by each class member during the class period.

Other
During the second quarter of 2015, we recognized a net gain of $3 million on a payment received from a landlord to terminate an existing lease prior to its original expiration date.
13. Income Taxes
Income taxes for the three months ended October 31, 2015 were a benefit of $10 million compared to a benefit of $3 million for the three months ended November 1, 2014. The effective tax rate for the three months ended October 31, 2015 was (6.8)% as compared to (1.6)% for the three months ended November 1, 2014. Income taxes for the nine months ended October 31, 2015 were a benefit of $19 million compared to an expense of $1 million for the nine months ended November 1, 2014. The effective tax rate for the nine months ended October 31, 2015 was (4.1)% as compared to 0.1% for the nine months ended November 1, 2014. Our effective tax rate for the three and nine months ended October 31, 2015 was impacted by a net increase to the tax valuation allowance for deferred tax assets of $41 million and $131 million, respectively.

In assessing the need for the valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our assessment, we concluded that, beginning in the second quarter of 2013, our estimate of the realization of deferred tax assets would be based solely on the future reversals of existing taxable temporary differences and tax planning strategies that we would make use of to accelerate taxable income to utilize expiring carryforwards. Accordingly, in the third quarter of 2015, the valuation allowance was increased to offset the net deferred tax assets created in the quarter relating primarily to the increase in net operating loss (NOL) carryforwards. A valuation allowance of $915 million has been recorded against our deferred tax assets as of October 31, 2015, which resulted in an increase to the valuation allowance during the nine months ended October 31, 2015 of $131 million.

The net tax benefit of $10 million for the three months ended October 31, 2015 consisted of state and foreign tax expenses of $1 million and $2 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, offset by a $6 million benefit to adjust the valuation allowance and a $7 million benefit relating to other comprehensive income. In accordance with accounting standards, we are required to allocate a portion of our tax provision between operating losses and accumulated other comprehensive income. Application of this guidance required the recognition of an income tax benefit of $7 million in operating results, offset by a $7 million charge to other comprehensive income for the quarter.

The net tax benefit of $19 million for the nine months ended October 31, 2015 consisted of state and foreign tax expenses of $8 million and $6 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, offset by a $6 million benefit to adjust the valuation allowance and a $27 million benefit relating to other comprehensive income. In accordance with accounting standards, we are required to allocate a portion of our tax provision between operating losses and accumulated other comprehensive income. Application of this guidance required the recognition of an income tax benefit of $27 million in operating results, offset by a $27 million charge to other comprehensive income for the quarter.
As of October 31, 2015, we have approximately $2.7 billion of net operating losses available for U.S. federal income tax purposes, which expire in 2032 through 2035 and $52 million of tax credit carryforwards that expire at various dates through

16

Table of Contents

2034. For these NOL and tax credit carryforwards a net deferred tax asset of $259 million has been recorded, net of a valuation allowance of $692 million. A valuation allowance of $223 million fully offsets the deferred tax assets resulting from the state NOL carryforwards that expire at various dates through 2035.
14. Litigation, Other Contingencies and Guarantees
Litigation
Macy’s Litigation
On August 16, 2012, Macy’s, Inc. and Macy’s Merchandising Group, Inc. (together the Plaintiffs) filed suit against JCP in the Supreme Court of the State of New York, County of New York, alleging that the Company tortiously interfered with, and engaged in unfair competition relating to, a 2006 agreement between Macy’s and Martha Stewart Living Omnimedia, Inc. (MSLO) by entering into a partnership agreement with MSLO in December 2011. The Plaintiffs sought primarily to prevent the Company from implementing our partnership agreement with MSLO as it related to products in the bedding, bath, kitchen and cookware categories. The suit was consolidated with an already-existing breach of contract lawsuit by the Plaintiffs against MSLO, and a bench trial commenced on February 20, 2013. On October 21, 2013, the Company and MSLO entered into an amendment of the partnership agreement, providing in part that the Company will not sell MSLO-designed merchandise in the bedding, bath, kitchen and cookware categories. On January 2, 2014, MSLO and Macy's announced that they had settled the case as to each other, and MSLO was subsequently dismissed as a defendant. On June 16, 2014, the court issued a ruling against the Company on the remaining claim of intentional interference, and held that Macy’s is not entitled to punitive damages. The court referred other issues related to damages to a Judicial Hearing Officer. On June 30, 2014, the Company appealed the court’s decision, and Macy’s cross-appealed a portion of the decision. On February 26, 2015, the appellate court affirmed the trial court's rulings concerning the claim of intentional interference and lack of punitive damages, and reinstated Macy's claims for intentional interference and unfair competition that had been dismissed during trial. On June 17, 2015, Macy’s appealed the court’s order that the Judicial Hearing Officer proceed with the damages phase of the proceedings on the tortious interference claim. The parties have briefed the issues and are awaiting oral argument. On October 6, 2015, the Judicial Hearing Officer conducted an evidentiary hearing on the damages attributable to Macy’s claim of tortious interference. The Judicial Hearing Officer has not yet issued a recommendation as to the amount of damages. While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Ozenne Derivative Lawsuit
On January 19, 2012, a purported shareholder of the Company, Everett Ozenne, filed a shareholder derivative lawsuit in the 193rd District Court of Dallas County, Texas, against certain of the Company’s Board of Directors and executives. The Company is a nominal defendant in the suit. The lawsuit alleged breaches of fiduciary duties, corporate waste and unjust enrichment involving decisions regarding executive compensation, specifically that compensation paid to certain executive officers from 2008 to 2011 was too high in light of the Company’s financial performance. The suit sought damages including unspecified compensatory damages, disgorgement by the former officers of allegedly excessive compensation, and equitable relief to reform the Company’s compensation practices. The Company and the named individuals filed an Answer and Special Exceptions to the lawsuit, arguing primarily that the plaintiff could not proceed with his suit because he failed to make demand on the Company’s Board of Directors, and that because demand on the Board would not be futile, demand was not excused. The trial court heard arguments on the Special Exceptions on June 25, 2012 and denied them. The Company and named individuals filed a mandamus proceeding in the Fifth District Court of Appeals challenging the trial court’s decision. The parties then settled the litigation and the appellate court stayed the appeal so that the trial court could review the proposed settlement. The trial court approved the settlement at a hearing on October 28, 2013 and, despite objection, awarded the plaintiff $3.1 million in attorneys’ fees and costs. Following the Company's appeal of the award of attorneys' fees and costs, the Fifth District Court of Appeals affirmed the award on December 19, 2014. The Company filed a Petition for Review with the Texas Supreme Court. The Texas Supreme Court has requested full briefing on the merits of this petition. We believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Class Action Securities Litigation
The Company, Myron E. Ullman, III and Kenneth H. Hannah are parties to the Marcus consolidated purported class action lawsuit in the U.S. District Court, Eastern District of Texas, Tyler Division. The Marcus consolidated complaint is purportedly brought on behalf of persons who acquired our common stock during the period from August 20, 2013 through September 26, 2013, and alleges claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiff claims that the defendants made false and misleading statements and/or omissions regarding the Company’s financial condition and business prospects that caused our common stock to trade at artificially inflated prices.  The consolidated complaint seeks class certification, unspecified compensatory damages, including interest, reasonable costs and expenses, and other relief as the court may deem just and proper. Defendants filed a motion to dismiss the consolidated

17

Table of Contents

complaint which was denied by the court on September 29, 2015. Defendants filed an answer to the consolidated complaint on November 12, 2015.

Also, on August 26, 2014, plaintiff Nathan Johnson filed a purported class action lawsuit against the Company, Myron E. Ullman, III and Kenneth H. Hannah in the U.S. District Court, Eastern District of Texas, Tyler Division. The suit is purportedly brought on behalf of persons who acquired our securities other than common stock during the period from August 20, 2013 through September 26, 2013, generally mirrors the allegations contained in the Marcus lawsuit discussed above, and seeks similar relief. On June 8, 2015, plaintiff in the Marcus lawsuit amended the consolidated complaint to include the members of the purported class in the Johnson lawsuit, and on June 10, 2015, the Johnson lawsuit was consolidated into the Marcus lawsuit.

We believe these lawsuits are without merit and we intend to vigorously defend them. While no assurance can be given as to the ultimate outcome of these matters, we believe that the final resolution of these actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Shareholder Derivative Litigation
In October, 2013, two purported shareholder derivative actions were filed against certain present and former members of the Company’s Board of Directors and executives by the following parties in the U.S. District Court, Eastern District of Texas, Sherman Division: Weitzman (filed October 2, 2013) and Zauderer (filed October 3, 2013). The Company is named as a nominal defendant in both suits. The lawsuits assert claims for breaches of fiduciary duties and unjust enrichment based upon alleged false and misleading statements and/or omissions regarding the Company’s financial condition. The lawsuits seek unspecified compensatory damages, restitution, disgorgement by the defendants of all profits, benefits and other compensation, equitable relief to reform the Company’s corporate governance and internal procedures, reasonable costs and expenses, and other relief as the court may deem just and proper. On October 28, 2013, the Court consolidated the two cases into the Weitzman lawsuit. On January 15, 2014, the Court entered an order staying the derivative suits pending certain events in the class action securities litigation described above. While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

ERISA Class Action Litigation
JCP and certain present and former members of JCP's Board of Directors have been sued in a purported class action complaint by plaintiffs Roberto Ramirez and Thomas Ihle, individually and on behalf of all others similarly situated, which was filed on July 8, 2014 in the U.S. District Court, Eastern District of Texas, Tyler Division. The suit alleges that the defendants violated Section 502 of the Employee Retirement Income Security Act (ERISA) by breaching fiduciary duties relating to the J. C. Penney Corporation, Inc. Savings, Profit-Sharing and Stock Ownership Plan (the Plan). The class period is alleged to be between November 1, 2011 and September 27, 2013. Plaintiffs allege that they and others who invested in or held Company stock in the Plan during this period were injured because defendants allegedly made false and misleading statements and/or omissions regarding the Company’s financial condition and business prospects that caused the Company’s common stock to trade at artificially inflated prices. The complaint seeks class certification, declaratory relief, a constructive trust, reimbursement of alleged losses to the Plan, actual damages, attorneys’ fees and costs, and other relief. Defendants filed a motion to dismiss the complaint which was granted in part and denied in part by the court on September 29, 2015. Defendants filed an answer to the complaint on November 6, 2015. We believe the lawsuit is without merit and we intend to vigorously defend it. While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Employment Class Action Litigation
JCP is a defendant in a class action proceeding entitled Tschudy v. JCPenney Corporation filed on April 15, 2011 in the U.S. District Court, Southern District of California. The lawsuit alleges that JCP violated the California Labor Code in connection with the alleged forfeiture of accrued and vested vacation time under its “My Time Off” policy. The class consists of all JCP employees who worked in California from April 5, 2007 to the present. Plaintiffs amended the complaint to assert additional claims under the Illinois Wage Payment and Collection Act on behalf of all JCP employees who worked in Illinois from January 1, 2004 to the present. After the court granted JCP’s motion to transfer the Illinois claims, those claims are now pending in a separate action in the U.S. District Court, Northern District of Illinois, entitled Garcia v. JCPenney Corporation. The lawsuits seek compensatory damages, penalties, interest, disgorgement, declaratory and injunctive relief, and attorney’s fees and costs. Plaintiffs in both lawsuits filed motions, which the Company opposed, to certify these actions on behalf of all employees in California and Illinois based on the specific claims at issue. On December 17, 2014, the California court granted plaintiffs’ request for class certification. The Company has filed a motion to decertify this class. The Illinois court denied without prejudice plaintiffs' motion for class certification pending the filing of an amended complaint. Plaintiffs filed their amended complaint in the Illinois lawsuit on April 14, 2015 and the Company has answered. On July 2, 2015, the Illinois plaintiffs renewed their motion for class certification, which the Company has opposed. We believe these lawsuits are without

18

Table of Contents

merit and we intend to continue to vigorously defend these lawsuits. While no assurance can be given as to the ultimate outcome of these matters, we believe that the final resolution of these actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Pricing Class Action Litigation
JCP is a defendant in a class action proceeding entitled Spann v. J. C. Penney Corporation, Inc. filed on February 8, 2012 in the U.S. District Court, Central District of California. The lawsuit alleges that JCP violated California’s Unfair Competition Law and related state statutes in connection with its advertising of sale prices for private label apparel and accessories. The lawsuit seeks restitution, damages, injunctive relief, and attorney’s fees and costs. On May 18, 2015, the court granted plaintiff's request for certification of a class consisting of all people who, between November 5, 2010 and January 31, 2012, made purchases in California of JCP private or exclusive label apparel or accessories advertised at a discount of at least 30% off the stated original or regular price (excluding those who only received such discount by using coupon(s)), and who have not received a refund or credit for their purchases. The parties have reached a settlement agreement, subject to court approval, and in accordance with the term of the settlement, we have established a $50 million reserve to settle class members' claims.

Other Legal Proceedings
On January 3, 2014, the Company received a demand for production of the Company's books and records pursuant to Section 220 of the Delaware General Corporation Law from the law firm Wolf Haldenstein Adler Freeman & Herz LLP on behalf of Bruce Murphy as Trustee of the Bruce G. Murphy Trust. The alleged purpose of the demand is to investigate potential mismanagement and breaches of fiduciary duties by the Company's senior officers and directors in connection with their oversight of the Company's operations and business prospects, including the Company's liquidity profile and capital requirements. The Company has exchanged correspondence with the law firm concerning the demand.

We are subject to various other legal and governmental proceedings involving routine litigation incidental to our business. Accruals have been established based on our best estimates of our potential liability in certain of these matters, including certain matters discussed above, all of which we believe aggregate to an amount that is not material to the unaudited Interim Consolidated Financial Statements. These estimates were developed in consultation with in-house and outside counsel. While no assurance can be given as to the ultimate outcome of these matters, we currently believe that the final resolution of these actions, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Contingencies
As of October 31, 2015, we estimated our total potential environmental liabilities to range from $19 million to $25 million and recorded our best estimate of $22 million in Other accounts payable and accrued expenses and Other liabilities in the unaudited Interim Consolidated Balance Sheet as of that date. This estimate covered potential liabilities primarily related to underground storage tanks, remediation of environmental conditions involving our former drugstore locations and asbestos removal in connection with approved plans to renovate or dispose of our facilities. We continue to assess required remediation and the adequacy of environmental reserves as new information becomes available and known conditions are further delineated. If we were to incur losses at the upper end of the estimated range, we do not believe that such losses would have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Guarantees
In connection with the sale of the operations of our outlet stores, we assigned leases on certain outlet store locations to the purchaser.  In the event that the purchaser fails to make the required lease payments, we continue for a period of time to be liable for lease payments to the landlords of several of the leased stores. The purchaser's obligations under the lease are guaranteed to us by certain principals and affiliates of the purchaser. However, the purchaser has elected to exit the outlet business and has successfully negotiated termination of all but two of the leases with the landlords. As of October 31, 2015, our maximum liability in connection with the assigned leases was $3 million.


19

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
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.
The holding company 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 the holding company is full and unconditional.
This discussion is intended to provide information that will assist the reader in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, how operating results affect the financial condition and results of operations of our Company as a whole, as well as how certain accounting principles affect the financial statements. It should be read in conjunction with our consolidated financial statements as of January 31, 2015, and for the year then ended, and related Notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), all contained in the Annual Report on Form 10-K for the fiscal year ended January 31, 2015 (2014 Form 10-K). Unless otherwise indicated, all references to earnings/(loss) per share (EPS) are on a diluted basis and all references to years relate to fiscal years rather than to calendar years.
Third Quarter Summary and Key Developments
 
Sales were $2,897 million with a comparable store sales increase of 6.4%.

Gross margin as a percentage of sales increased to 37.3% compared to 36.6% in the same period last year, driven by improvements in our clearance and promotional selling margins and supply chain productivity.

Selling, general and administrative (SG&A) expenses decreased $41 million, or 4.1%, for the third quarter of 2015 as compared to the same period last year. These savings were primarily driven by lower store controllable costs, more efficient advertising and improved private label credit card revenue.

Earnings before interest expense, income tax (benefit)/expense and depreciation and amortization (EBITDA) (non-GAAP) was $107 million, a $5 million improvement from the same period last year.

Our net loss was $137 million, or $0.45 per share, compared to a net loss of $188 million, or $0.62 per share, for the corresponding prior year quarter. Results for this quarter included the following amounts that are not directly related to our ongoing core business operations:

$14 million, or $0.04 per share, of restructuring and management transition charges;
$7 million, or $0.02 per share, of expense from our qualified defined benefit pension plan (Primary Pension Plan);
$1 million for the net gain on the sale of non-operating assets;
$19 million, or $0.06 per share, for our proportional share of net income from our joint venture formed to develop the excess property adjacent to our home office facility in Plano, Texas (Home Office Land Joint Venture); and
$7 million, or $0.02 per share, of tax benefit that resulted from our other comprehensive income allocation between our Operating loss and Accumulated other comprehensive income for the amortization of net actuarial losses and prior service credits related to the Primary Pension Plan and the tax effect for the loss on our interest rate swaps.

20

Table of Contents

Results of Operations
 
Three Months Ended
 
Nine Months Ended
($ in millions, except EPS)
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Total net sales
$
2,897

 
$
2,764

 
$
8,629

 
$
8,364

Percent increase/(decrease) from prior year
4.8
 %
 
(0.5
)%
 
3.2
 %
 
3.6
 %
Comparable store sales increase/(decrease)(1)
6.4
 %
 
0.0
 %
 
4.6
 %
 
4.3
 %
Gross margin
1,082

 
1,013

 
3,188

 
2,947

Operating expenses/(income):
 
 
 
 
 
 
 
Selling, general and administrative
947

 
988

 
2,813

 
2,961

Primary pension plan
7

 
1

 
20

 
(8
)
Supplemental pension plans
5

 

 
15

 
12

Total pension
12

 
1

 
35

 
4

Depreciation and amortization
152

 
156

 
459

 
474

Real estate and other, net
2

 
(90
)
 
(14
)
 
(160
)
Restructuring and management transition
14

 
12

 
53

 
39

Total operating expenses
1,127

 
1,067

 
3,346

 
3,318

Operating income/(loss)
(45
)
 
(54
)
 
(158
)
 
(371
)
Loss on extinguishment of debt

 
34

 

 
34

Net interest expense
102

 
103

 
303

 
306

Income/(loss) before income taxes
(147
)
 
(191
)
 
(461
)
 
(711
)
Income tax expense/(benefit)
(10
)
 
(3
)
 
(19
)
 
1

Net income/(loss)
$
(137
)
 
$
(188
)
 
$
(442
)
 
$
(712
)
EBITDA (non-GAAP)(2)
$
107

 
$
102

 
$
301

 
$
103

Adjusted EBITDA (non-GAAP)(2)
$