10-Q 1 jcp-20121027x10q.htm 10-Q a200112df25a469

 

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 27, 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.

219,244,826 shares of Common Stock of 50 cents par value, as of November 30, 2012 

 

 


 

 

 

J. C. PENNEY COMPANY, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended October 27, 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.  Fair Value Disclosures    

8

 

 

 

7.  Stockholders’ Equity

9

 

 

 

8.  Stock-Based Compensation 

11

 

 

 

9.  Retirement Benefit Plans 

13

 

 

 

10.  Restructuring and Management Transition

14

 

 

 

11.  Real Estate and Other, Net

16

 

 

 

12.  Income Taxes 

16

 

 

 

13.  Litigation, Other Contingencies and Guarantees

17

 

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

18

 

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

39

SIGNATURES 

40

 

 

 

 

 

 

 

 

 

 

 

 

1

 


 

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 27,

 

 

October 29,

 

 

October 27,

 

 

October 29,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Total net sales

$

2,927 

 

$

3,986 

 

$

9,101 

 

$

11,835 

Cost of goods sold

 

1,975 

 

 

2,497 

 

 

5,959 

 

 

7,254 

Gross margin

 

952 

 

 

1,489 

 

 

3,142 

 

 

4,581 

Operating expenses/(income):

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative (SG&A)

 

1,087 

 

 

1,242 

 

 

3,297 

 

 

3,766 

Pension

 

51 

 

 

31 

 

 

167 

 

 

88 

Depreciation and amortization

 

133 

 

 

127 

 

 

386 

 

 

383 

Real estate and other, net

 

(197)

 

 

(5)

 

 

(412)

 

 

(24)

Restructuring and management transition

 

34 

 

 

265 

 

 

269 

 

 

297 

Total operating expenses

 

1,108 

 

 

1,660 

 

 

3,707 

 

 

4,510 

Operating income/(loss)

 

(156)

 

 

(171)

 

 

(565)

 

 

71 

Net interest expense

 

55 

 

 

55 

 

 

169 

 

 

170 

Income/(loss) before income taxes

 

(211)

 

 

(226)

 

 

(734)

 

 

(99)

Income tax expense/(benefit)

 

(88)

 

 

(83)

 

 

(301)

 

 

(34)

Net income/(loss)

$

(123)

 

$

(143)

 

$

(433)

 

$

(65)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.56)

 

$

(0.67)

 

$

(1.98)

 

$

(0.30)

Diluted

$

(0.56)

 

$

(0.67)

 

$

(1.98)

 

$

(0.30)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares – basic

 

219.4 

 

 

213.3 

 

 

219.1 

 

 

218.6 

Weighted average shares – diluted

 

219.4 

 

 

213.3 

 

 

219.1 

 

 

218.6 

 

 

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

2

 


 

J. C. PENNEY COMPANY, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

 (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

($ in millions)

 

October 27,

 

 

October 29,

 

 

October 27,

 

 

October 29,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Net income/(loss)

$

(123)

 

$

(143)

 

$

(433)

 

$

(65)

Other comprehensive income/(loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

Real estate investment trusts (REITs)

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on REITs

 

 

 

10 

 

 

34 

 

 

40 

Reclassification adjustment for (gain)/loss on REITs included in net income/(loss)

 

(10)

 

 

 -

 

 

(184)

 

 

 -

Retirement benefit plans

 

 

 

 

 

 

 

 

 

 

 

Net actuarial gain/(loss) arising during the period

 

(75)

 

 

(37)

 

 

(75)

 

 

(37)

Prior service credit/(cost) arising during the period

 

 -

 

 

(2)

 

 

 -

 

 

(2)

Reclassification of net prior service (credit)/cost recognized in net income/(loss) from a curtailment

 

(3)

 

 

 

 

(3)

 

 

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

 

37 

 

 

24 

 

 

114 

 

 

70 

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

 

(2)

 

 

(4)

 

 

(6)

 

 

(12)

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

 

(52)

 

 

(8)

 

 

(120)

 

 

60 

Total comprehensive income/(loss), net of tax

$

(175)

 

$

(151)

 

$

(553)

 

$

(5)

 

 

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

 

3

 


 

J. C. PENNEY COMPANY, INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

(In millions, except per share data)

 

October 27,

 

 

October 29,

 

 

January 28,

 

 

2012

 

 

2011

 

 

2012

Assets

 

(Unaudited)

 

 

(Unaudited)

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash in banks and in transit

$

141 

 

$

205 

 

$

175 

Cash short-term investments

 

384 

 

 

880 

 

 

1,332 

    Cash and cash equivalents

 

525 

 

 

1,085 

 

 

1,507 

Merchandise inventory

 

3,362 

 

 

4,376 

 

 

2,916 

Income tax receivable

 

69 

 

 

175 

 

 

168 

Deferred taxes

 

409 

 

 

189 

 

 

245 

Prepaid expenses and other

 

265 

 

 

285 

 

 

245 

Total current assets

 

4,630 

 

 

6,110 

 

 

5,081 

Property and equipment (net of accumulated depreciation of $3,070, $3,035 and $2,965)

 

5,493 

 

 

5,242 

 

 

5,176 

Prepaid pension

 

 -

 

 

668 

 

 

 -

Other assets

 

767 

 

 

807 

 

 

1,167 

Total Assets

$

10,890 

 

$

12,827 

 

$

11,424 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Merchandise accounts payable

$

1,408 

 

$

1,831 

 

$

1,022 

Other accounts payable and accrued expenses

 

1,344 

 

 

1,404 

 

 

1,503 

Current portion of capital leases and note payable

 

22 

 

 

 

 

Current maturities of long-term debt

 

 -

 

 

230 

 

 

230 

Total current liabilities

 

2,774 

 

 

3,466 

 

 

2,756 

Long-term capital leases and note payable

 

75 

 

 

 

 

Long-term debt

 

2,868 

 

 

2,868 

 

 

2,868 

Deferred taxes

 

786 

 

 

1,152 

 

 

888 

Other liabilities

 

885 

 

 

816 

 

 

899 

Total Liabilities

 

7,388 

 

 

8,305 

 

 

7,414 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock(1)

 

110 

 

 

107 

 

 

108 

Additional paid-in capital

 

3,789 

 

 

3,619 

 

 

3,699 

Reinvested earnings

 

932 

 

 

1,541 

 

 

1,412 

Accumulated other comprehensive income/(loss)

 

(1,329)

 

 

(745)

 

 

(1,209)

Total Stockholders’ Equity

 

3,502 

 

 

4,522 

 

 

4,010 

Total Liabilities and Stockholders’ Equity

$

10,890 

 

$

12,827 

 

$

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 219.2 million, 213.4 million and 215.9 million as of October 27, 2012, October 29, 2011 and January 28, 2012, respectively.

 

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

4

 


 

J. C. PENNEY COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

($ in millions)

 

October 27,

 

 

October 29,

 

 

October 27,

 

 

October 29,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

$

(123)

 

$

(143)

 

$

(433)

 

$

(65)

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

 

 

 

 

 

 

 

 

 

 

 

Restructuring and management transition

 

12 

 

 

216 

 

 

102 

 

 

230 

Asset impairments and other charges

 

 

 

 

 

10 

 

 

Net gain on sale or redemption of non-operating assets

 

(197)

 

 

 -

 

 

(397)

 

 

 -

Depreciation and amortization

 

133 

 

 

127 

 

 

386 

 

 

383 

Benefit plans

 

31 

 

 

18 

 

 

110 

 

 

46 

Stock-based compensation

 

12 

 

 

 

 

38 

 

 

33 

Excess tax benefits from stock-based compensation

 

 

 

(1)

 

 

(17)

 

 

(5)

Deferred taxes

 

(27)

 

 

 

 

(224)

 

 

(96)

Change in cash from:

 

 

 

 

 

 

 

 

 

 

 

Inventory

 

(369)

 

 

(804)

 

 

(446)

 

 

(1,163)

Prepaid expenses and other assets

 

(26)

 

 

(89)

 

 

(41)

 

 

(86)

Merchandise accounts payable

 

393 

 

 

445 

 

 

386 

 

 

698 

Current income taxes

 

74 

 

 

(108)

 

 

108 

 

 

(34)

Accrued expenses and other

 

27 

 

 

12 

 

 

(237)

 

 

(82)

Net cash provided by/(used in) operating activities

 

(48)

 

 

(305)

 

 

(655)

 

 

(133)

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(341)

 

 

(174)

 

 

(580)

 

 

(469)

Proceeds from sale or redemption of non-operating assets

 

279 

 

 

 -

 

 

525 

 

 

 -

Acquisition

 

 -

 

 

 -

 

 

(9)

 

 

 -

Proceeds from sale of operating assets

 

 -

 

 

 

 

 -

 

 

Proceeds from joint venture cash distribution

 

 -

 

 

53 

 

 

 -

 

 

53 

Net cash provided by/(used in) investing activities

 

(62)

 

 

(120)

 

 

(64)

 

 

(415)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

Payments of capital leases and note payable

 

(13)

 

 

 -

 

 

(13)

 

 

 -

Payment of long-term debt

 

(230)

 

 

 -

 

 

(230)

 

 

 -

Financing costs

 

 -

 

 

 -

 

 

(4)

 

 

(15)

Dividends paid, common

 

 -

 

 

(43)

 

 

(86)

 

 

(135)

Stock repurchase program

 

 -

 

 

 -

 

 

 -

 

 

(900)

Proceeds from issuance of stock warrant

 

 -

 

 

 -

 

 

 -

 

 

50 

Proceeds from stock options exercised

 

 

 

 

 

70 

 

 

12 

Excess tax benefits from stock-based compensation

 

(6)

 

 

 

 

17 

 

 

Tax withholding payments for vested restricted stock

 

(5)

 

 

 -

 

 

(17)

 

 

(6)

Net cash provided by/(used in) financing activities

 

(253)

 

 

(41)

 

 

(263)

 

 

(989)

Net increase/(decrease) in cash and cash equivalents

 

(363)

 

 

(466)

 

 

(982)

 

 

(1,537)

Cash and cash equivalents at beginning of period

 

888 

 

 

1,551 

 

 

1,507 

 

 

2,622 

Cash and cash equivalents at end of period

$

525 

 

$

1,085 

 

$

525 

 

$

1,085 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

 

 

 

Income taxes received/(paid), net

 

134 

 

 

(15)

 

 

185 

 

 

(96)

Interest received/(paid), net

 

(92)

 

 

(90)

 

 

(205)

 

 

(202)

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental non-cash investing and financing activity

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in other accounts payable related to purchases of property and equipment

 

(24)

 

 

(7)

 

 

139 

 

 

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

 

57 

 

 

 

 

106 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

5

 


 

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 October 27, 2012” and “three months ended October 29, 2011” refer to the 13-week periods ended October 27, 2012 and October 29, 2011, respectively.  “Nine months ended October 27, 2012,” and “nine months ended October 29, 2011,” refer to the 39-week periods ended October 27, 2012 and October 29, 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 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 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.

 

6

 


 

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 2012.  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

 

Nine Months Ended

(in millions, except per share data)

 

 

October 27,

 

 

October 29,

 

 

October 27,

 

 

October 29,

 

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Earnings/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

(123)

 

$

(143)

 

$

(433)

 

$

(65)

Shares

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic shares)

 

 

219.4 

 

 

213.3 

 

 

219.1 

 

 

218.6 

Adjustment for assumed dilution:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options, restricted stock awards and warrant

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Weighted average shares assuming dilution (diluted shares)

 

 

219.4 

 

 

213.3 

 

 

219.1 

 

 

218.6 

EPS

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.56)

 

$

(0.67)

 

$

(1.98)

 

$

(0.30)

Diluted

 

$

(0.56)

 

$

(0.67)

 

$

(1.98)

 

$

(0.30)

   

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 27,

 

 

October 29,

 

 

October 27,

 

 

October 29,

 

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Stock options, restricted stock awards and warrant

 

 

26 

 

 

19 

 

 

25 

 

 

18 

 

 

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.  The 2012 Credit Facility also includes an accordion feature which enables us to potentially increase the size of our 2012 Credit Facility up to $1,750 million.

  

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

7

 


 

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 $214 million as of October 27, 2012, have been made under the 2012 Credit Facility.  As of October 27, 2012, the applicable rate for standby and import letters of credit was 3.00% and 1.50%, respectively, while the required commitment fee was 0.50% for the unused portion of the 2012 Credit Facility.  As of October 27, 2012, we had $1,286 million available for borrowing under the 2012 Credit Facility.

 

 

5.  Long-Term Debt, Capital Leases and Note Payable 

 

In August 2012, we repaid $230 million of 9.0% Notes at maturity.  During the nine months ended October 27, 2012, we made capital expenditures totaling $106 million that were financed through either capital lease commitments or a note payable.    

   

During the nine months ended October 29, 2011, there were no issuances of debt and no scheduled debt maturities.

 

 

6.  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.

 

REIT Assets Measured on a Recurring Basis

The market value of our investment in public REIT assets are accounted for as available-for-sale securities and are carried at fair value on an ongoing basis in Other assets in the unaudited Interim Consolidated Balance SheetsWe 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

($ in millions) 

 

Cost

 

 

Markets of Identical Assets

 

 

Observable Inputs

 

 

Unobservable Inputs

 

 

Basis

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

October 27, 2012

$

 

$

32 

 

$

 -

 

$

 -

October 29, 2011

 

80 

 

 

316 

 

 

 -

 

 

 -

January 28, 2012

 

80 

 

 

336 

 

 

 -

 

 

 -

 

8

 


 

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:

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 27, 2012

 

October 29, 2011

 

January 28, 2012

($ in millions)

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

 

Amount

 

 

Value

Long-term debt, including current maturities

$

2,868 

 

$

2,706 

 

$

3,098 

 

$

2,988 

 

$

3,098 

 

$

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 October 27, 2012, October 29, 2011 and January 28, 2012, the fair values of cash and cash equivalents and accounts payable approximate their carrying values due to the short-term nature of these instruments. In addition, the fair values of the capital lease commitments and the note payable approximate their carrying values.  These items have been excluded from the table above.  

 

Concentrations of Credit Risk

We have no significant concentrations of credit risk.

 

 

7.  Stockholders’ Equity

 

 

The following table shows the change in the components of stockholders’ equity for the nine months ended October 27, 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)

 -

 

 

 -

 

 

 -

 

 

(433)

 

 

 -

 

 

(433)

Other comprehensive income/(loss)

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(120)

 

 

(120)

Dividends declared, common

 -

 

 

 -

 

 

 -

 

 

(47)

 

 

 -

 

 

(47)

Stock-based compensation

3.3 

 

 

 

 

90 

 

 

 -

 

 

 -

 

 

92 

October 27, 2012

219.2 

 

$

110 

 

$

3,789 

 

$

932 

 

$

(1,329)

 

$

3,502 

 

9

 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

October 27, 2012

 

 

October 29, 2011

 

 

 

 

Income

 

 

 

 

 

 

 

Income

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

Tax

 

 

 

($ in millions)

Gross

 

(Expense)/

 

Net

 

Gross

 

(Expense)/

 

Net

 

Amount

 

Benefit

 

Amount

 

Amount

 

Benefit

 

Amount

REITs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on REITs

$

 

$

 -

 

$

 

$

15 

 

$

(5)

 

$

10 

Reclassification adjustment for (gain)/loss on REITs included in net income/(loss)

 

(15)

 

 

 

 

(10)

 

 

 -

 

 

 -

 

 

 -

Retirement benefit plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial gain/(loss) arising during the period

 

(125)

 

 

50 

 

 

(75)

 

 

(58)

 

 

21 

 

 

(37)

Prior service credit/(cost) arising during the period

 

 -

 

 

 -

 

 

 -

 

 

(4)

 

 

 

 

(2)

Reclassification of net prior service (credit)/cost recognized in net income/(loss) from a curtailment

 

(5)

 

 

 

 

(3)

 

 

 

 

 -

 

 

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

 

61 

 

 

(24)

 

 

37 

 

 

40 

 

 

(16)

 

 

24 

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

 

(4)

 

 

 

 

(2)

 

 

(6)

 

 

 

 

(4)

Total

$

(87)

 

$

35 

 

$

(52)

 

$

(12)

 

$

 

$

(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

October 27, 2012

 

 

October 29, 2011

 

 

 

 

Income

 

 

 

 

 

 

 

Income

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

Tax

 

 

 

($ in millions)

Gross

 

(Expense)/

 

Net

 

Gross

 

(Expense)/

 

Net

 

Amount

 

Benefit

 

Amount

 

Amount

 

Benefit

 

Amount

REITs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on REITs

$

52 

 

$

(18)

 

$

34 

 

$

62 

 

$

(22)

 

$

40 

Reclassification adjustment for (gain)/loss on REITs included in net income/(loss)

 

(285)

(1)

 

101 

 

 

(184)

 

 

 -

 

 

 -

 

 

 -

Retirement benefit plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial gain/(loss) arising during the period

 

(125)

 

 

50 

 

 

(75)

 

 

(58)

 

 

21 

 

 

(37)

Prior service credit/(cost) arising during the period

 

 -

 

 

 -

 

 

 -

 

 

(4)

 

 

 

 

(2)

Reclassification of net prior service (credit)/cost recognized in net income/(loss) from a curtailment

 

(5)

 

 

 

 

(3)

 

 

 

 

 -

 

 

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

 

188 

 

 

(74)

 

 

114 

 

 

115 

 

 

(45)

 

 

70 

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

 

(11)

 

 

 

 

(6)

 

 

(19)

 

 

 

 

(12)

Total

$

(186)

 

$

66 

 

$

(120)

 

$

97 

 

$

(37)

 

$

60 

 

(1) During the second quarter of 2012, the reclassification adjustment for the Simon Property Group, L.P. (SPG) units of $270 million was calculated by using the closing fair market value per SPG 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 11).    

 

The following table shows the changes in accumulated other comprehensive income/(loss) balances for the nine months ended October 27, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Accumulated Other

($ in millions)

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

 

(150)

 

 

39 

 

 

(9)

 

 

(120)

October 27, 2012

$

15 

 

$

(1,358)

 

$

14 

 

$

(1,329)

 

 

8.  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 October 27, 2012, there were approximately 6 million shares of stock available for future grant under the 2012 Plan.

11

 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

($ in millions)

 

October 27,

 

 

October 29,

 

 

October 27,

 

 

October 29,

 

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

Stock awards (shares and units)

$

 

$

 

$

26 

 

$

14 

 

Stock options

 

 

 

 

 

12 

 

 

19 

 

Total stock-based compensation

$

12 

 

$

(1)

$

38 

(2)

$

33 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Excludes $6 million of stock-based compensation costs reported in restructuring and management transition charges (see Note 10).

(2) Excludes $9 million of stock-based compensation costs reported in restructuring and management transition charges (see Note 10).

 

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 which includes 640,000 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.

   

During the third quarter of 2012, we granted employees approximately 80,000 stock options at an option price of $22.98 and a fair value of $10.11 per option and approximately 390,000 time-based RSUs with a fair value of $22.98.

12

 


 

9.  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 are as follows: