10-Q 1 jcp-11022013x10q.htm 10-Q JCP-11.02.2013-10Q
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 November 2, 2013
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)
(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  ¨
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. 304,622,962 shares of Common Stock of 50 cents par value, as of December 2, 2013.



J. C. PENNEY COMPANY, INC.
FORM 10-Q
For the Quarterly Period Ended November 2, 2013
INDEX
 
 
 
Page
 
 
 
 

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)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Total net sales
$
2,779

 
$
2,927

 
$
8,077

 
$
9,101

Cost of goods sold
1,960

 
1,975

 
5,659

 
5,959

Gross margin
819

 
952

 
2,418

 
3,142

Operating expenses/(income):
 
 
 
 
 
 
 
Selling, general and administrative (SG&A)
1,006

 
1,087

 
3,110

 
3,297

Pension
34

 
51

 
102

 
167

Depreciation and amortization
161

 
133

 
440

 
386

Real estate and other, net
(27
)
 
(197
)
 
(117
)
 
(412
)
Restructuring and management transition
46

 
34

 
165

 
269

Total operating expenses
1,220

 
1,108

 
3,700

 
3,707

Operating income/(loss)
(401
)
 
(156
)
 
(1,282
)
 
(565
)
Loss on extinguishment of debt

 

 
114

 

Net interest expense
99

 
55

 
255

 
169

Income/(loss) before income taxes
(500
)
 
(211
)
 
(1,651
)
 
(734
)
Income tax expense/(benefit)
(11
)
 
(88
)
 
(228
)
 
(301
)
Net income/(loss)
$
(489
)
 
$
(123
)
 
$
(1,423
)
 
$
(433
)
Earnings/(loss) per share:
 
 
 
 
 
 
 
Basic
$
(1.94
)
 
$
(0.56
)
 
$
(6.17
)
 
$
(1.98
)
Diluted
$
(1.94
)
 
$
(0.56
)
 
$
(6.17
)
 
$
(1.98
)
Weighted average shares – basic
251.8

 
219.4

 
230.8

 
219.1

Weighted average shares – diluted
251.8

 
219.4

 
230.8

 
219.1

See the accompanying notes to the 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)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Net income/(loss)
$
(489
)
 
$
(123
)
 
$
(1,423
)
 
$
(433
)
Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Real estate investment trusts (REITs)
 
 
 
 
 
 
 
Unrealized gain/(loss)

 
1

 

 
34

Reclassification adjustment for realized (gain)/loss

 
(10
)
 

 
(184
)
Retirement benefit plans
 
 
 
 
 
 
 
Net actuarial gain/(loss) arising during the period

 
(75
)
 

 
(75
)
Reclassification of net prior service (credit)/cost from a curtailment

 
(3
)
 

 
(3
)
Reclassification for amortization of net actuarial (gain)/loss
26

 
37

 
81

 
114

Reclassification for amortization of prior service (credit)/cost

 
(2
)
 
(1
)
 
(6
)
Total other comprehensive income/(loss), net of tax
26

 
(52
)
 
80

 
(120
)
Total comprehensive income/(loss), net of tax
$
(463
)
 
$
(175
)
 
$
(1,343
)
 
$
(553
)
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

3


J. C. PENNEY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
 
November 2,
2013
 
October 27,
2012
 
February 2,
2013
(In millions, except per share data)
(Unaudited)
 
(Unaudited)
 
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash in banks and in transit
$
151

 
$
141

 
$
121

Cash short-term investments
1,076

 
384

 
809

Cash and cash equivalents
1,227

 
525

 
930

Merchandise inventory
3,747

 
3,362

 
2,341

Income tax receivable

 
69

 
57

Deferred taxes
119

 
409

 
106

Prepaid expenses and other
249

 
265

 
249

Total current assets
5,342

 
4,630

 
3,683

Property and equipment (net of accumulated depreciation of $3,178, $3,070 and $2,880)
5,753

 
5,493

 
5,353

Prepaid pension
36

 

 

Other assets
744

 
767

 
745

Total Assets
$
11,875

 
$
10,890

 
$
9,781

Liabilities and Stockholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Merchandise accounts payable
$
1,409

 
$
1,408

 
$
1,162

Other accounts payable and accrued expenses
1,269

 
1,344

 
1,380

Short-term borrowings
650

 

 

Current portion of capital leases and note payable
27

 
22

 
26

Current maturities of long-term debt
23

 

 

Total current liabilities
3,378

 
2,774

 
2,568

Long-term capital leases and note payable
67

 
75

 
88

Long-term debt
4,845

 
2,868

 
2,868

Deferred taxes
250

 
786

 
388

Other liabilities
688

 
885

 
698

Total Liabilities
9,228

 
7,388

 
6,610

Stockholders’ Equity
 
 
 
 
 
Common stock(1)
153

 
110

 
110

Additional paid-in capital
4,575

 
3,789

 
3,799

Reinvested earnings/(accumulated deficit)
(1,043
)
 
932

 
380

Accumulated other comprehensive income/(loss)
(1,038
)
 
(1,329
)
 
(1,118
)
Total Stockholders’ Equity
2,647

 
3,502

 
3,171

Total Liabilities and Stockholders’ Equity
$
11,875

 
$
10,890

 
$
9,781

(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 304.6 million, 219.2 million and 219.3 million as of November 2, 2013October 27, 2012 and February 2, 2013, respectively.
See the accompanying notes to the 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)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Cash flows from operating activities
 
 
 
 
 
 
 
Net income/(loss)
$
(489
)
 
$
(123
)
 
$
(1,423
)
 
$
(433
)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
 
 
 
 
 
 
 
Restructuring and management transition
48

 
12

 
109

 
102

Asset impairments and other charges
3

 
6

 
12

 
10

Net gain on sale or redemption of non-operating assets
(24
)
 
(197
)
 
(86
)
 
(397
)
Net gain on sale of operating assets

 

 
(18
)
 

Loss on extinguishment of debt

 

 
114

 

Depreciation and amortization
161

 
133

 
440

 
386

Benefit plans
16

 
31

 
57

 
110

Stock-based compensation
6

 
12

 
22

 
38

Excess tax benefits from stock-based compensation

 
6

 

 
(17
)
Deferred taxes
(14
)
 
(27
)
 
(203
)
 
(224
)
Change in cash from:
 
 
 
 
 
 
 
Inventory
(592
)
 
(369
)
 
(1,406
)
 
(446
)
Prepaid expenses and other assets
(30
)
 
(26
)
 
11

 
(41
)
Merchandise accounts payable
133

 
393

 
247

 
386

Current income taxes
2

 
74

 
62

 
108

Accrued expenses and other
43

 
27

 
(135
)
 
(237
)
Net cash provided by/(used in) operating activities
(737
)
 
(48
)
 
(2,197
)
 
(655
)
Cash flows from investing activities
 
 
 
 
 
 
 
Capital expenditures
(161
)
 
(341
)
 
(814
)
 
(580
)
Net proceeds from sale or redemption of non-operating assets
33

 
279

 
88

 
525

Acquisition

 

 

 
(9
)
Net proceeds from sale of operating assets

 

 
19

 

Net cash provided by/(used in) investing activities
(128
)
 
(62
)
 
(707
)
 
(64
)
Cash flows from financing activities
 
 
 
 
 
 
 
Proceeds from short-term borrowings

 

 
850

 

Payment on short-term borrowings
(200
)
 

 
(200
)
 

Net proceeds from issuance of long-term debt

 

 
2,180

 

Premium on early retirement of debt

 

 
(110
)
 

Payments of capital leases and note payable
(5
)
 
(13
)
 
(24
)
 
(13
)
Payments of long-term debt
(5
)
 
(230
)
 
(250
)
 
(230
)
Financing costs
(18
)
 

 
(30
)
 
(4
)
Net proceeds from common stock issued
786

 

 
786

 

Dividends paid, common

 

 

 
(86
)
Proceeds from stock options exercised

 
1

 
7

 
70

Excess tax benefits from stock-based compensation

 
(6
)
 

 
17

Tax withholding payments for vested restricted stock
(1
)
 
(5
)
 
(8
)
 
(17
)
Net cash provided by/(used in) financing activities
557

 
(253
)
 
3,201

 
(263
)
Net increase/(decrease) in cash and cash equivalents
(308
)
 
(363
)
 
297

 
(982
)
Cash and cash equivalents at beginning of period
1,535

 
888

 
930

 
1,507

Cash and cash equivalents at end of period
$
1,227

 
$
525

 
$
1,227

 
$
525

Supplemental cash flow information
 
 
 
 
 
 
 
Income taxes received/(paid), net
(1
)
 
134

 
87

 
185

Interest received/(paid), net
(125
)
 
(92
)
 
(361
)
 
(205
)
Supplemental non-cash investing and financing activity
 
 
 
 
 
 
 
Increase/(decrease) in other accounts payable related to purchases of property and equipment
(53
)
 
(24
)
 
49

 
139

Financing costs withheld from proceeds of long-term debt

 

 
70

 

Purchase of property and equipment and software through capital leases and a note payable
1

 
57

 
4

 
106

Issuance costs withheld from proceeds of common stock issued
24

 

 
24

 

Return of shares of Martha Stewart Living Omnimedia Inc. previously acquired by the Company
36

 

 
36

 

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

5


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 February 2, 2013 (2012 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 2012 Form 10-K. The February 2, 2013 financial information was derived from the audited Consolidated Financial Statements, with related footnotes, included in the 2012 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 November 2, 2013” and “three months ended October 27, 2012” refer to the 13-week periods ended November 2, 2013 and October 27, 2012, respectively. “Nine months ended November 2, 2013” and “nine months ended October 27, 2012,” refer to the 39-week periods ended November 2, 2013 and October 27, 2012, respectively. Fiscal year 2013 contains 52 weeks and fiscal year 2012 contained 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 and indefinite-lived intangible assets for impairments; estimation of reserves and valuation allowances specifically related to closed stores, insurance, income taxes, litigation and environmental contingencies and pension accounting. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.

6


2. 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)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Earnings/(loss)
 
 
 
 
 
 
 
Net income/(loss)
$
(489
)
 
$
(123
)
 
$
(1,423
)
 
$
(433
)
Shares
 
 
 
 
 
 
 
Weighted average common shares outstanding (basic shares)
251.8

(1) 
219.4

 
230.8

(1) 
219.1

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

 

 

 

Weighted average shares assuming dilution (diluted shares)
251.8

 
219.4

 
230.8

 
219.1

EPS
 
 
 
 
 
 
 
Basic
$
(1.94
)
 
$
(0.56
)
 
$
(6.17
)
 
$
(1.98
)
Diluted
$
(1.94
)
 
$
(0.56
)
 
$
(6.17
)
 
$
(1.98
)
(1) On October 1, 2013, we issued 84 million shares of common stock with a par value of $0.50 per share.
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)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Stock options, restricted stock awards and warrant
23.9

 
25.0

 
24.6

 
25.3

3. Credit Facility
On February 8, 2013, J. C. Penney Company, Inc., JCP and J. C. Penney Purchasing Corporation (Purchasing) entered into an amended and restated revolving credit agreement in the amount up to $1,850 million (2013 Credit Facility), which replaced the Company’s prior credit agreement entered into in January 2012, with largely the same syndicate of lenders under the previous agreement, with JPMorgan Chase Bank, N.A., as administrative agent. The 2013 Credit Facility matures on April 29, 2016, increases the letter of credit sublimit to $750 million and provides an accordion feature that could potentially increase the size of the facility by an additional amount not to exceed $400 million.
The 2013 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 2013 Credit Facility is available for general corporate purposes, including the issuance of letters of credit. Pricing under the 2013 Credit Facility is tiered based on JCP’s senior unsecured long-term credit ratings issued by Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services. JCP’s obligations under the 2013 Credit Facility are guaranteed by J. C. Penney Company, Inc.
Availability under the 2013 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 2013 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.

7


On April 12, 2013, we borrowed $850 million under the 2013 Credit Facility of which $200 million was repaid during the third quarter of 2013. As of the end of the third quarter of 2013, $650 million of the borrowing remains outstanding. The borrowing bears interest at a rate of LIBOR plus 3.0%. As of the end of the third quarter of 2013, we had $534 million in standby and import letters of credit outstanding under the 2013 Credit Facility, the majority of which are standby letters of credit that support our merchandise initiatives and workers’ compensation. None of the standby or import letters of credit have been drawn on. 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 2013 Credit Facility. As of the end of the third quarter of 2013, we had $666 million available for future borrowing, of which $481 million is currently accessible due to the limitation of the fixed charge coverage ratio.
4. Long-Term Debt
Tender Offer
On April 30, 2013 we announced the commencement of a cash tender offer (Tender Offer) and consent solicitation for our 7.125% Debentures Due 2023 (Notes) for total consideration consisting of an amount equal to $1,350 per $1,000 principal amount of Notes, including a consent payment in the amount equal to $50 per $1,000 principal amount of Notes. We solicited consents to effect certain proposed amendments to the indenture, as amended and supplemented, governing the Notes (the Indenture) that would eliminate most of the restrictive covenants and certain events of default and other provisions in the Indenture (Proposed Amendments).
On May 14, 2013, we announced that we had amended our previously announced Tender Offer (Amended Tender Offer) and related solicitation of consents to extend the expiration date of the consent solicitation and to increase the tender consideration. The Amended Tender Offer increased the total consideration from $1,350 to $1,450 per $1,000 principal amount of the Notes (Amended Tender Offer Consideration); extended the expiration date of the consent solicitation from May 13, 2013 to May 20, 2013 (Consent Expiration) and extended the expiration of the tender offer from May 28, 2013 to June 4, 2013 (Expiration Time).
Holders that validly tendered their Notes prior to the Consent Expiration, as extended, received the Amended Tender Offer Consideration. Holders that validly tendered their Notes after the Consent Expiration, as extended, but prior to the Expiration Time, as extended, received only the tender offer consideration of $1,400 per $1,000 principal amount of the Notes (Tender Offer Consideration). Holders whose Notes were accepted for purchase in the Amended Tender Offer also received accrued and unpaid interest to, but not including, the applicable payment date for the Notes. On May 22, 2013, we accepted for purchase $243 million in aggregate principal amount of the Notes, representing 95.41% of the outstanding principal amount, for aggregate Amended Tender Offer Consideration of $352 million. On June 5, 2013, we accepted for purchase an additional $2 million in aggregate principal amount of the Notes, for aggregate Tender Offer Consideration of $3 million. The Tender Offer resulted in a loss on the extinguishment of debt of $114 million which includes the premium paid over face value of the Notes of $110 million, reacquisition costs of $2 million and the write-off of unamortized debt issue costs of $2 million. As a result of receiving the requisite consent of the Holders of at least 66 2/3% of aggregate principal amount of Notes outstanding, the Proposed Amendments were approved and became operative.
Term Loan Facility
On May 22, 2013, we entered into a $2.25 billion five-year senior secured term loan facility (2013 Term Loan Facility). The 2013 Term Loan Facility is guaranteed by J. C. Penney Company, Inc. and certain subsidiaries of JCP, and is secured by mortgages on certain real estate of JCP and the guarantors, in addition to substantially all other assets of JCP and the guarantors. Proceeds of the 2013 Term Loan Facility were used to fund the Amended Tender Offer and will be used to fund ongoing working capital requirements and general corporate purposes. We are required to make quarterly repayments in a principal amount equal to $5.625 million during the five-year term of the 2013 Term Loan Facility, beginning September 30, 2013, subject to certain reductions for mandatory and optional prepayments. As of the end of the third quarter of 2013, the balance of the 2013 Term Loan Facility is $2.24 billion.
5. 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.

8


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 Sheets. We determined the fair value of our investments in REITs using quoted market prices. There were no transfers in or out of any levels during any period presented. Our REIT assets measured at fair value on a recurring basis are as follows:
 
 
 
 
REIT Assets at Fair Value
($ in millions)
Cost
Basis
 
Quoted Prices in Active
Markets of Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
November 2, 2013
$
7

 
$
32

 
$

 
$

October 27, 2012
9

 
32

 

 

February 2, 2013
7

 
33

 

 


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:
 
 
November 2, 2013
 
October 27, 2012
 
February 2, 2013
($ in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt, including current maturities
$
4,868

 
$
4,252

 
$
2,868

 
$
2,706

 
$
2,868

 
$
2,456

Cost investment (Note 9)

 

 
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 was for equity securities that were not registered and freely tradable shares and their fair values were not readily determinable; however, we believe the carrying value approximates or was less than the fair value as of October 27, 2012 and February 2, 2013.
As of November 2, 2013October 27, 2012 and February 2, 2013, 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 short-term borrowings, 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.

9


6. Stockholders’ Equity
The following table shows the change in the components of stockholders’ equity for the nine months ended November 2, 2013:
 
(in millions)
Number
of
Common
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Reinvested
Earnings/
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Total
Stockholders’
Equity
February 2, 2013
219.3

 
$
110

 
$
3,799

 
$
380

 
$
(1,118
)
 
$
3,171

Net income/(loss)

 

 

 
$
(1,423
)
 

 
$
(1,423
)
Other comprehensive income/(loss)

 

 

 

 
80

 
$
80

Common stock issued
84.0

 
42

 
744

 

 

 
786

Stock-based compensation
1.3

 
1

 
32

 

 

 
33

November 2, 2013
304.6

 
$
153

 
$
4,575

 
$
(1,043
)
 
$
(1,038
)
 
$
2,647


Comprehensive Income
The tax effects allocated to each component of other comprehensive income/(loss) are as follows:
 
 
Three Months Ended
 
November 2, 2013
 
October 27, 2012
($ in millions)
Gross
Amount
 
Income
Tax
(Expense)/
Benefit
 
Net
Amount
 
Gross
Amount
 
Income
Tax
(Expense)/
Benefit
 
Net
Amount
REITs
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain/(loss)
$
(1
)
 
$
1

 
$

 
$
1

  
$

 
$
1

Reclassification adjustment for realized (gain)/loss

 

 

 
(15
)
 
5

 
(10
)
Retirement benefit plans
 
 
 
 
 
 
 
 
 
 
 
Net actuarial gain/(loss) arising during the period

 

 

 
(125
)
 
50

 
(75
)
Reclassification of net prior service (credit)/cost from a curtailment

 

 

 
(5
)
 
2

 
(3
)
Reclassification for amortization of net actuarial loss/(gain)
43

 
(17
)
 
26

 
61

  
(24
)
 
37

Reclassification for amortization of prior service cost/(credit)
(1
)
 
1

 

 
(4
)
 
2

 
(2
)
Total
$
41

 
$
(15
)
 
$
26

 
$
(87
)
 
$
35

 
$
(52
)
 

10


 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
($ in millions)
Gross
Amount
 
Income
Tax
(Expense)/
Benefit
 
Net
Amount
 
Gross
Amount
 
Income
Tax
(Expense)/
Benefit
 
Net
Amount
REITs
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain/(loss)
$
(1
)
 
$
1

 
$

 
$
52

  
$
(18
)
 
$
34

Reclassification adjustment for realized (gain)/loss

 

 

 
(285
)
(1)  
101

 
(184
)
Retirement benefit plans
 
 
 
 
 
 
 
 
 
 
 
Net actuarial gain/(loss) arising during the period

 

 

 
(125
)
 
50

 
(75
)
Reclassification of net prior service (credit)/cost from a curtailment

 

 

 
(5
)
 
2

 
(3
)
Reclassification for amortization of net actuarial loss/(gain)
131

 
(50
)
 
81

 
188

 
(74
)
 
114

Reclassification for amortization of prior service cost/(credit)
(2
)
 
1

 
(1
)
 
(11
)
 
5

 
(6
)
Total
$
128

 
$
(48
)
 
$
80

 
$
(186
)
 
$
66

 
$
(120
)
(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 10).
The following table shows the changes in accumulated other comprehensive income/(loss) balances for the nine months ended November 2, 2013:
 
($ in millions)
Unrealized
Gain/(Loss)
on REITs
 
Net Actuarial
Gain/(Loss)
 
Prior Service
Credit/(Cost)
 
Accumulated
Other
Comprehensive
Income/(Loss)
February 2, 2013
$
17

 
$
(1,121
)
 
$
(14
)
 
$
(1,118
)
Other comprehensive income/(loss) before reclassifications

 

 

 

Amounts reclassified from accumulated other comprehensive income

 
81

 
(1
)
 
80

Net current-period other comprehensive income

 
81

 
(1
)
 
80

November 2, 2013
$
17

 
$
(1,040
)
 
$
(15
)
 
$
(1,038
)

11


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)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
 
Realized (gain)/loss on REITs
 
 
 
 
 
 
 
 
 
Redemption of SPG REIT units
$

 
$

 
$

 
$
(270
)
 
Real estate and other, net
Sale of CBL REIT shares

 
(15
)
 

 
(15
)
 
Real estate and other, net
Tax (expense)/benefit

 
5

 

 
101

 
Income tax expense/(benefit)
Total, net of tax

 
(10
)
 

 
(184
)
 
 
Amortization of retirement benefit plans
 
 
 
 
 
 
 
 
 
Actuarial loss/(gain)(1)
44

 
61

 
132

 
188

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

 

 
4

 

 
Pension
Actuarial loss/(gain)(1)
(1
)
 

 
(1
)
 

 
SG&A
Prior service cost/(credit)(1)
(2
)
 
(4
)
 
(6
)
 
(11
)
 
SG&A
Prior service (credit)/cost from a curtailment

 
(5
)
 

 
(5
)
 
Restructuring and management transition
Tax (expense)/benefit
(16
)
 
(20
)
 
(49
)
 
(67
)
 
Income tax expense/(benefit)
Total, net of tax
26

 
32

 
80

 
105

 
 
Total reclassifications
$
26

 
$
22

 
$
80

 
$
(79
)
 
 
(1)
These accumulated other comprehensive components are included in the computation of net periodic benefits expense/(income). See Note 8 for additional details.

Issuance of Common Stock
On October 1, 2013, we issued 84 million shares of common stock with a par value of $0.50 per share for $9.65 per share for total net proceeds of $786 million after $24 million of fees.
Stockholders' Rights Agreement
As authorized by our Company’s Board of Directors, the Company adopted a Rights Agreement, dated as of August 22, 2013 (Rights Agreement), by and between the Company and Computershare Inc., as Rights Agent. Pursuant to the terms of the Rights Agreement that expires on August 20, 2014, one preferred stock purchase right (a Right) was attached to each outstanding share of Common Stock of $0.50 par value of the Company (Common Stock) held by holders of record as of the close of business on September 3, 2013. Additionally, the Company will issue one Right with each new share of Common Stock issued. The Rights, registered on August 23, 2013, will initially trade with and be inseparable from our Common Stock and will not be evidenced by separate certificates unless they become exercisable.
Each Right entitles its holder to purchase from the Company 1/1000th of a share of a newly authorized series of participating preferred stock at an exercise price of $55.00, subject to adjustment in accordance with the terms of the Rights Agreement, once the Rights become exercisable. In general terms, under the Rights Agreement, the Rights become exercisable if any person or group acquires 10% or more of the Common Stock or, in the case of any person or group that owned 10% or more of the Common Stock as of August 22, 2013, upon the acquisition of any additional shares by such person or group. In addition, the Company, its subsidiaries, employee benefit plans of the Company or any of its subsidiaries, and any entity holding Common Stock for or pursuant to the terms of any such plan, are excepted. Upon exercise of the Right in accordance with the Rights Agreement, the holder would be able to purchase a number of shares of Common Stock from the Company having an aggregate market value (as defined in the Rights Agreement) equal to twice the then-current exercise price for an amount in cash equal to the then-current exercise price. The Rights will not prevent a takeover of our Company, but may cause substantial dilution to a person that acquires 10% or more of our Common Stock.


12


7. 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 canceled 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 November 2, 2013, there were approximately 4.6 million shares of stock available for future grant under the 2012 Plan.
On March 4, 2013, we granted awards to employees consisting of approximately 70,000 stock options at an option price of $16.74 and a fair value of $7.88 per option and approximately 94,000 time-based restricted stock units (RSU’s) with a fair value of $16.74 per RSU award.
On April 3, 2013, we made an annual grant to employees consisting of approximately 3.3 million stock options at an option price of $14.43 and a fair value of $7.07 per option, approximately 621,000 time-based RSU’s with a fair value of $14.43 per RSU award and approximately 998,000 performance-based restricted stock units (PBRSU’s) with a fair value of $14.43 per PBRSU award. The number of PBRSU’s that ultimately vest is dependent on the achievement of a 2013 internal profitability target (performance condition).
During the second quarter of 2013, we granted approximately 74,000 stock options to employees at an option price of $18.98 and a fair value of $9.35 per option. Additionally, we granted approximately 77,000 time-based RSU's to employees with a fair value of $18.98 per RSU award as well as approximately 64,000 time-based RSU's to directors with a fair value of $18.72 per RSU award.
During the third quarter of 2013, we granted approximately 65,000 time-based RSU's to employees with a fair value of $13.20 per RSU award and approximately 9,000 time-based RSUs to directors with a fair value of $13.83 per RSU award.
The following table presents total stock-based compensation costs by line item in the unaudited Interim Consolidated Statements of Operations:
 
 
Three Months Ended
 
Nine Months Ended
($ in millions)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
SG&A
$
5

 
$
11

 
$
19

 
$
34

Cost of goods sold
1

 
1

 
3

 
4

Restructuring and management transition (Note 9)
1

 

 
17

 
9

Total stock-based compensation
$
7

 
$
12

 
$
39

 
$
47


13


8. 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:
 
 
Three Months Ended
 
Nine Months Ended
($ in millions)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Primary Pension Plan
 
 
 
Service cost
$
20

 
$
21

 
$
59

 
$
67

Interest cost
51

 
61

 
153

 
185

Expected return on plan assets
(85
)
 
(95
)
 
(255
)
 
(284
)
Amortization of actuarial loss/(gain)
38

 
55

 
114

 
171

Amortization of prior service cost/(credit)
1

 

 
4

 

Net periodic benefit expense/(income)
$
25

 
$
42

 
$
75

 
$
139

 
 
 
 
 
 
 
 
Supplemental Pension Plans
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$
1

Interest cost
3

 
3

 
9

 
10

Amortization of actuarial loss/(gain)
6

 
6

 
18

 
17

Amortization of prior service cost/(credit)

 

 

 

Net periodic benefit expense/(income)
$
9

 
$
9

 
$
27

 
$
28

 
 
 
 
 
 
 
 
Primary and Supplemental Pension Plans Total
 
 
 
 
 
 
 
Service cost
$
20

 
$
21

 
$
59

 
$
68

Interest cost
54

 
64

 
162

 
195

Expected return on plan assets
(85
)
 
(95
)
 
(255
)
 
(284
)
Amortization of actuarial loss/(gain)
44

 
61

 
132

 
188

Amortization of prior service cost/(credit)
1

 

 
4

 

Net periodic benefit expense/(income)
$
34

 
$
51

 
$
102

 
$
167

 
 
 
 
 
 
 
 
Postretirement Health and Welfare Plan
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost
1

 

 
1

 
1

Amortization of actuarial loss/(gain)
(1
)
 

 
(1
)
 

Amortization of prior service cost/(credit)
(2
)
 
(4
)
 
(6
)
 
(11
)
Net periodic benefit expense/(income)
$
(2
)
 
$
(4
)
 
$
(6
)
 
$
(10
)
 
 
 
 
 
 
 
 
Retirement Benefit Plans Total
 
 
 
 
 
 
 
Service cost
$
20

 
$
21

 
$
59

 
$
68

Interest cost
55

 
64

 
163

 
196

Expected return on plan assets
(85
)
 
(95
)
 
(255
)
 
(284
)
Amortization of actuarial loss/(gain)
43

 
61

 
131

 
188

Amortization of prior service cost/(credit)
(1
)
 
(4
)
 
(2
)
 
(11
)
Net periodic benefit expense/(income)
$
32

 
$
47

 
$
96

 
$
157

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

14


Curtailments
During the first half of 2012, we took actions to reduce our work force. During the third quarter of 2012, when substantially all employee exits were completed, we recorded a net curtailment gain of $7 million due to the reduction in the expected years of future service related to our retirement benefit plans. The net curtailment gain is included in the line item Restructuring and management transition in the unaudited Interim Consolidated Statements of Operations (see Note 9).
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 2013 and 2012 was $12 million and $13 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 2013 and 2012 was $38 million and $43 million, respectively.
9. Restructuring and Management Transition
The composition of restructuring and management transition charges was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
Cumulative
Amount Through
November 2, 2013
($ in millions)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
 
Supply chain
$

 
$
3

 
$

 
$
19

 
$
60

Home office and stores
(6
)
 
4

 
26

 
105

 
180

Software and systems

 

 

 
36

 
36

Store fixtures
10

 
18

 
55

 
60

 
133

Management transition
3

 
6

 
32

 
36

 
203

Other
39

 
3

 
52

 
13

 
100

Total
$
46

 
$
34

 
$
165

 
$
269

 
$
712

Supply chain
As a result of consolidating and streamlining our supply chain organization as part of a restructuring program that began in 2011, during the three and nine months ended October 27, 2012 we recorded charges of $3 million and $19 million, respectively, related to increased depreciation, termination benefits and unit closing costs. This restructuring activity was completed during the third quarter of 2012.
Home office and stores
During the three months ended November 2, 2013 and October 27, 2012, we recorded a $6 million credit and $4 million of net charges, respectively, associated with employee termination benefits for actions to reduce our store and home office expenses. The $6 million credit for the third quarter of 2013 resulted from termination benefits paid that were lower than expected primarily because employees found other positions within the Company and revisions were made to the restructuring plan. During the third quarter of 2012, when substantially all employee exits were completed, we recorded a net curtailment gain of $7 million (see Note 8). The net curtailment gain was more than offset by charges associated with employee termination benefits of $11 million. During the nine months ended November 2, 2013 and October 27, 2012, we recorded net charges of $26 million and $105 million, respectively, related to store and home office employee termination benefits.
Software and systems
During the nine months ended October 27, 2012, we recorded a charge of $36 million related to the disposal of software and systems that based on our evaluation no longer supported our then current strategy.  Included in this amount is $3 million of consulting fees related to that evaluation.
Store fixtures
During the three months ended November 2, 2013, we recorded $2 million for the impairment of certain store fixtures related to our former shops strategy that were used in our prototype department store and $8 million of increased depreciation as a result of shortening the useful lives of fixtures in our department stores that were replaced during the first nine months of 2013. During the nine months ended November 2, 2013, we recorded $7 million of charges for the write-off of store fixtures related to the renovations in our home department and $37 million of increased depreciation as a result of shortening the useful lives of

15


fixtures in our department stores that were replaced during the first nine months of 2013. In addition, during the nine months ended November 2, 2013, we recorded $11 million of charges for the impairment of certain store fixtures related to our former shops strategy that were used in our prototype department store.
During the three months ended October 27, 2012, we recorded $11 million of charges related to the removal of store fixtures in our department stores. In addition, we recorded $7 million of increased depreciation as a result of shortening the useful lives of fixtures in our department stores that were replaced throughout 2013 with the build out of additional attractions. During the nine months ended October 27, 2012, we recorded charges of $60 million related to the write-off and increased depreciation for store fixtures that were replaced with new store attraction fixtures.
Management transition
During the three months ended November 2, 2013 and October 27, 2012, we implemented several changes within our management leadership team that resulted in management transition costs of $3 million and $6 million, respectively, for both incoming and outgoing members of management. During the nine months ended November 2, 2013 and October 27, 2012, we recorded management transition charges of $32 million and $36 million, respectively.
Other
During the three months ended November 2, 2013 and October 27, 2012, we recorded $39 million and $3 million, respectively, of miscellaneous restructuring charges. During the nine months ended November 2, 2013 and October 27, 2012, we recorded $52 million and $13 million, respectively, of miscellaneous restructuring charges. The charges during 2013 were primarily related to contract termination costs and other costs associated with our previous marketing and shops strategy, including a non-cash charge of $36 million during the third quarter relating to the return of shares of Martha Stewart Living Omnimedia Inc. previously acquired by the Company, which was accounted for as a cost investment (Note 5). The charges in the first quarter of 2012 were primarily related to the exit of our specialty websites CLAD and Gifting Grace™, and the charges in the second quarter of 2012 were primarily related to costs associated with the closing of our Pittsburgh, Pennsylvania customer call center.

Activity for the restructuring and management transition liability for the nine months ended November 2, 2013 was as follows:
 
($ in millions)
Supply
Chain
 
Home Office
and Stores
 
Store
Fixtures
 
Management
Transition
 
Other
 
Total
February 2, 2013
$
2

 
$
4

 
$

 
$

 
$
12

 
$
18

Charges

 
26

(1) 
55

 
32

 
52

 
165

Cash payments
(2
)
 
(27
)
 

 
(16
)
 
(15
)
 
(60
)
Non-cash

 
(2
)
 
(55
)
 
(16
)
 
(36
)
 
(109
)
November 2, 2013
$

 
$
1

 
$

 
$

 
$
13

 
$
14

(1) Includes the $6 million credit in the third quarter of 2013 resulting from termination benefits paid that were lower than expected primarily because employees found other positions within the Company and revisions were made to the restructuring plan.
Non-cash amounts represent charges that do not result in cash expenditures including increased depreciation, write-off of store fixtures and a cost investment and stock-based compensation expense for accelerated vesting related to terminations.

16


10. Real Estate and Other, Net
Real estate and other consists of ongoing operating income from our real estate subsidiaries whose investments are in REITs, as well as investments in joint ventures that own regional mall properties. Real estate and other also includes net gains from the sale of facilities and equipment that are no longer used in operations, asset impairments and other non-operating charges and credits. The composition of real estate and other, net was as follows:
 
 
Three Months Ended
 
Nine Months Ended
($ in millions)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Gain on sale or redemption of non-operating assets, net:
 
 
 
 
 
 
 
Redemption of SPG REIT units
$

 
$

 
$

 
$
(200
)
Sale of CBL & Associates Properties, Inc. (CBL) REIT shares

 
(15
)
 

 
(15
)
Sale of leveraged leases

 
(28
)
 

 
(28
)
Sale of investment in joint ventures
(23
)
 
(151
)
 
(85
)
 
(151
)
Sale of other non-operating assets
(1
)
 
(3
)
 
(1
)
 
(3
)
Net gain on sale or redemption of non-operating assets
(24
)
 
(197
)
 
(86
)
 
(397
)
Dividend income from REITs

 
(1
)
 

 
(6
)
Investment income from joint ventures
(1
)
 
(3
)
 
(5
)
 
(9
)
Gain on sale of operating assets

 

 
(18
)
 

Other
(2
)
 
4

 
(8
)
 

Real estate and other (income)/expense, net
$
(27
)
 
$
(197
)
 
$
(117
)
 
$
(412
)
REIT Assets
On July 20, 2012, SPG redeemed two million of our REIT units at a price of $124.00 per unit for a total redemption price of $246 million, net of fees. As of the market close on July 19, 2012, the SPG REIT units had a fair market value of $158.13 per unit. In connection with the redemption, we realized a net gain of $200 million determined using the first-in-first-out method for determining the cost of REIT units sold. Following the transaction, we continue to hold approximately 205,000 REIT units in SPG.

On October 23, 2012, we sold all of our CBL REIT shares at a price of $21.35 per share for a total price of $40 million, net of fees. In connection with the sale, we realized a net gain of $15 million.

Leveraged Leases
During the third quarter of 2012, we sold all of our leveraged lease assets for $146 million, net of fees. The investments in the leveraged lease assets as of the dates of the sales were $118 million and we recorded a net gain of $28 million.
Joint Venture
During the third quarter of 2013, we sold our investment in three joint ventures for $32 million, resulting in a net gain of $23 million. During the second quarter of 2013, we sold our investment in a joint venture for $55 million, resulting in a net gain of $62 million. The gain exceeded the cash proceeds as a result of distributions of cash related to refinancing transactions in prior periods that were recorded as net reductions in the carrying amount of the investment. The net book value of the joint venture investment was a negative $7 million and was included in Other liabilities in the unaudited Interim Consolidated Balance Sheets.

During the third quarter of 2012, we sold our investments in four joint ventures for $90 million, resulting in net gains totaling $151 million. The gain exceeded the cash proceeds as a result of distributions of cash related to refinancing transactions in prior periods that were recorded as net reductions in the carrying amount of the investments. The cumulative net book value of the joint venture investments was a negative $61 million.




17


Other Non-Operating Assets
During the third quarter of 2013, we sold approximately 10 acres of excess land for net proceeds and gain of $1 million. During the third quarter of 2012, we sold a building used in our former drugstore operations for net proceeds and a gain of $3 million.
Operating Assets
During the first quarter of 2013, we sold our leasehold interest of a former department store location with a net book value of $2 million for net proceeds of $18 million, realizing a gain of $16 million. During the second quarter of 2013, we sold two properties, realizing a gain of $2 million.
11. Income Taxes
The income tax benefit for the three months ended November 2, 2013 was $11 million as compared to $88 million for the three months ended October 27, 2012. The effective tax rate for the three months ended November 2, 2013 was (2.2)% as compared to (41.7)% for the three months ended October 27, 2012. The income tax benefit for the nine months ended November 2, 2013 was $228 million compared to $301 million for the nine months ended October 27, 2012. The effective tax rate for the nine months ended November 2, 2013 was (13.8)% compared to (41.0)% for the nine months ended October 27, 2012. Our effective tax rate for the three and nine months ended November 2, 2013 was negatively impacted by increases to the tax valuation allowance for deferred tax assets of $184 million and $416 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 2013, 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 carryforwards. A valuation allowance of $482 million has been recorded against our deferred tax assets as of November 2, 2013. This resulted in an increase to the valuation allowance during the quarter ended November 2, 2013 of $184 million, of which $154 million relates to the increase in the deferred tax assets created for federal net operating loss carryforwards and $30 million relates to deferred tax assets created for state net operating loss carryforwards.
As a result of the valuation allowance, for the three months ended November 2, 2013, we recorded a net tax benefit of only $11 million. The net tax benefit consists of a $16 million non-cash benefit relating to other comprehensive income, offset by state and foreign tax expenses of $3 million and $2 million of tax expense on the amortization of certain indefinite-lived intangible assets that were not available to offset existing deferred taxes. 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 a non-cash income tax benefit of $16 million in operating results, offset by a $16 million charge to other comprehensive income for the quarter.
As of November 2, 2013, we have approximately $2.5 billion of net operating losses available for U.S. federal income tax purposes which expire in 2032 and 2033 for which a net deferred tax asset of $527 million has been recorded, net of a valuation allowance of $337 million. A net deferred tax asset of $50 million, net of a valuation allowance of $145 million, has been recorded for state net operating losses that expire at various dates through 2033.
12. 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 J. C. Penney Corporation, Inc. 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 seek primarily to prevent the Company from implementing our partnership agreement with MSLO as it relates 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 March 7, 2013, the judge adjourned the trial until April 8, 2013, and ordered the parties into mediation. The parties did not reach a settlement, and the trial continued on April 8, 2013. The parties concluded their presentations of evidence on April 26, 2013, and completed post-trial briefs in late May, 2013. The court held closing arguments on August 1, 2013. The court has not yet issued a final decision in the case. 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. While

18


no assurance can be given as to the ultimate outcome of this matter, we currently 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.
Other Legal Proceedings
We are subject to various legal and governmental proceedings involving routine litigation incidental to our business. Reserves have been established based on our best estimates of our potential liability in certain of these matters. These estimates have been developed in consultation with in-house and outside counsel. While no assurance can be given as to the ultimate outcome of these matters, management currently believes 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 November 2, 2013, we estimated our total potential environmental liabilities to range from $17 million to $24 million and recorded our best estimate of $18 million in 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
As of November 2, 2013, we had a guarantee totaling $20 million for the maximum exposure on insurance reserves established by a former subsidiary included in the sale of our Direct Marketing Services business. In connection with the sale of the operations of our outlet stores, we assigned leases on 7 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 each landlord of the 7 assigned leases. The purchaser’s obligations under the leases are guaranteed to us by certain principals and affiliates of the purchaser. However, the purchaser has elected to exit the outlet business and is expected to terminate the leases with the landlords.  Consequently, we expect that our continuing obligations under each lease will be extinguished in connection with each termination.  As of November 2, 2013, our maximum liability in connection with the assigned leases is $9 million.
In connection with the redemption of two million of our SPG REIT units, we agreed to make future capital contributions to SPG under certain circumstances. Capital contributions would be required only if (i) one or more unsecured senior notes or term loans of SPG are in default and (ii) the aggregate amount received and/or realized by the lenders with respect to such notes or loans upon the exhaustion of all other remedies available to them is less than the maximum amount of all capital contribution commitments of the Company and other parties with similar commitments. Our contribution obligation is subject to a maximum aggregate amount of $360 million, and is proportionate to our share of all similar commitments provided by the Company and other parties. Under certain circumstances, including the disposition of its remaining SPG REIT units, the Company can terminate its obligation. On November 19, 2013, our SPG REIT units were converted to shares and, as a result, the capital contribution obligation will terminate 90 days from that date. The possibility that we would be required to make a contribution is considered remote, and as such, no amount has been recorded in the unaudited Interim Consolidated Financial Statements.
13. Recently Issued Accounting Pronouncement
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward or Tax Credit Carryforward Exists. This update provides that an entity’s unrecognized tax benefit, or a portion of its unrecognized tax benefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with one exception. That exception states that, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This update applies prospectively to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. Retrospective application is also permitted. This update is effective for annual periods, and interim periods within those years, beginning after December 15, 2013. We do not anticipate the adoption to have a material impact on our consolidated results operations, cash flows or financial position.

19


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 February 2, 2013, 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 February 2, 2013 (2012 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
 
For the third quarter of 2013, sales were $2,779 million, a decrease of 5.1% as compared to the corresponding quarter in 2012. Comparable store sales decreased 4.8% for the third quarter of 2013. Sales through jcp.com increased 24.5%, to $266 million.

For the third quarter of 2013, gross margin as a percentage of sales was 29.5% compared to 32.5% in the same period last year. The decrease in gross margin as a percentage of sales was primarily due to a change in the merchandise sales mix, which includes the impact of higher levels of clearance units sold at lower margins, including additional markdowns taken to sell through inventory associated with our previous strategy, as well as our transition back to a promotional pricing strategy as compared to last year’s strategy.

Selling, general and administrative (SG&A) expenses decreased $81 million, or 7.5%, for the third quarter of 2013 as compared to the corresponding quarter in 2012 as we continue to realize the benefits from our cost savings initiatives.

In the third quarter of 2013, we recognized a tax benefit of $11 million,  reflecting a significant reduction in tax benefits typically recognized from federal and state loss carryforwards due to the recognition of a tax valuation allowance of $184 million during the quarter. This resulted in an effective tax rate of only (2.2)% for the third quarter compared to (41.7)% in the third quarter of 2012 and negatively impacted EPS by $0.73.

For the third quarter of 2013, our net loss was $489 million, or $1.94 per share, compared to a net loss of $123 million, or $0.56 per share, for the corresponding prior year quarter. Results for this quarter included $46 million, or $0.18 per share, of restructuring and management transition charges, $25 million, or $0.04 per share, for the impact of our qualified defined benefit pension plan (Primary Pension Plan) expense and $24 million, or $0.09 per share, for the net gain on the sale of non-operating assets.

On October 1, 2013, we issued 84 million shares of common stock with a par value of $0.50 per share for $9.65 per share for total net proceeds of $786 million.

20


Results of Operations
 
Three Months Ended
 
Nine Months Ended
($ in millions, except EPS)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Total net sales
$
2,779

 
$
2,927

 
$
8,077

 
$
9,101

Percent increase/(decrease) from prior year
(5.1
)%
 
(26.6
)%
 
(11.3
)%
 
(23.1
)%
Comparable store sales increase/(decrease)(1)
(4.8
)%
 
(26.1
)%
 
(11.2
)%
 
(22.3
)%
Gross margin
819

 
952

 
2,418

 
3,142

Operating expenses/(income):
 
 
 
 
 
 
 
Selling, general and administrative
1,006

 
1,087

 
3,110

 
3,297

Primary pension plan
25

 
42

 
75

 
139

Supplemental pension plans
9

 
9

 
27

 
28

Total pension
34

 
51

 
102

 
167

Depreciation and amortization
161

 
133

 
440

 
386

Real estate and other, net
(27
)
 
(197
)
 
(117
)
 
(412
)
Restructuring and management transition
46

 
34

 
165

 
269

Total operating expenses
1,220

 
1,108

 
3,700

 
3,707

Operating income/(loss)
(401
)
 
(156
)
 
(1,282
)
 
(565
)
Adjusted operating income/(loss) (non-GAAP)(2)
(354
)
 
(277
)
 
(1,128
)
 
(399
)
Loss on extinguishment of debt

 

 
114

 

Net interest expense
99

 
55

 
255

 
169

Income/(loss) before income taxes
(500
)
 
(211
)
 
(1,651
)
 
(734
)
Income tax expense/(benefit)
(11
)
 
(88
)
 
(228
)
 
(301
)
Net income/(loss)
$
(489
)
 
$
(123
)
 
$
(1,423
)
 
$
(433
)
Adjusted net income/(loss) (non-GAAP)(2)
$
(457
)
 
$
(203
)
 
$
(1,223
)
 
$
(339
)
Diluted EPS
$
(1.94
)
 
$
(0.56
)
 
$
(6.17
)
 
$
(1.98
)
Adjusted diluted EPS (non-GAAP)(2)
$
(1.81
)
 
$
(0.93
)
 
$
(5.30
)
 
$
(1.55
)
Ratios as a percent of sales:
 
 
 
 
 
 
 
Gross margin
29.5
 %
 
32.5
 %
 
29.9
 %
 
34.5
 %
SG&A
36.2
 %
 
37.1
 %
 
38.5
 %
 
36.2
 %
Total operating expenses
43.9
 %
 
37.8
 %
 
45.8
 %
 
40.7
 %
Operating income/(loss)
(14.4
)%
 
(5.3
)%
 
(15.9
)%
 
(6.2
)%
Adjusted operating income/(loss) (non-GAAP)(2)
(12.7
)%
 
(9.5
)%
 
(14.0
)%
 
(4.4
)%
(1)
Comparable store sales include sales from all stores that have been opened for 12 consecutive full fiscal months and Internet sales through jcp.com. Stores closed for an extended period are not included in comparable store sales calculations, while stores remodeled and minor expansions not requiring store closures remain in the calculations.
(2)
See “Non-GAAP Financial Measures” below for a discussion of this non-GAAP measure and reconciliation to its most directly comparable GAAP financial measure and further information on its uses and limitations.
Non-GAAP Financial Measures
We report our financial information in accordance with generally accepted accounting principles in the United States (GAAP). However, we present certain financial measures and ratios identified as non-GAAP under the rules of the Securities and Exchange Commission (SEC) to assess our results. We believe the presentation of these non-GAAP financial measures and ratios is useful in order to better understand our financial performance as well as to facilitate the comparison of our results to the results of our peer companies. In addition, management uses these non-GAAP financial measures and ratios to assess the results of our operations. It is important to view non-GAAP financial measures in addition to, rather than as a substitute for, those measures and ratios prepared in accordance with GAAP. We have provided reconciliations of the most directly comparable GAAP measures to our non-GAAP financial measures presented.

21


The following non-GAAP financial measures are adjusted to exclude the impact of markdowns related to the alignment of inventory with our 2012 strategy, restructuring and management transition charges, the impact of our Primary Pension Plan expense, the loss on extinguishment of debt and the net gain on the sale or redemption of non-operating assets. Unlike other operating expenses, markdowns related to the alignment of inventory with our 2012 strategy, restructuring and management transition charges, loss on extinguishment of debt and the net gain on the sale or redemption of non-operating assets are not directly related to our ongoing core business operations. Primary Pension Plan expense is determined using numerous complex assumptions about changes in pension assets and liabilities that are subject to factors beyond our control, such as market volatility. Accordingly, we eliminate our Primary Pension Plan expense in its entirety as we view all components of net periodic benefit expense as a single, net amount, consistent with its presentation in our unaudited Interim Consolidated Financial Statements. We believe it is useful for investors to understand the impact of markdowns related to the alignment of inventory with our 2012 strategy, restructuring and management transition charges, the impact of our Primary Pension Plan expense, the loss on extinguishment of debt and the net gain on the sale or redemption of non-operating assets on our financial results and therefore are presenting the following non-GAAP financial measures: (1) adjusted operating income/(loss); (2) adjusted net income/(loss); and (3) adjusted diluted EPS.
Adjusted Operating Income/(Loss). The following table reconciles operating income/(loss), the most directly comparable GAAP financial measure, to adjusted operating income/(loss), a non-GAAP financial measure:
 
 
Three Months Ended
 
Nine Months Ended
($ in millions)
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Operating income/(loss) (GAAP)
$
(401
)
 
$
(156
)
 
$
(1,282
)