MIME-Version: 1.0 X-Document-Type: Workbook Content-Type: multipart/related; boundary="----=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5" This document is a Single File Web Page, also known as a Web Archive file. If you are seeing this message, your browser or editor doesn't support Web Archive files. Please download a browser that supports Web Archive, such as Microsoft Internet Explorer. ------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Workbook.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"

This page should be opened with Microsoft Excel XP or newer.

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet01.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Document and Entity Information (USD $)
12 Months Ended
Feb. 02, 2013
Jul. 28, 2012
Document and Entity Information [Abstract]
Document Type 10-K
Amendment Flag false
Document Period End Date Feb 2, 2013
Document Fiscal Year Focus 2012
Document Fiscal Period Focus FY
Entity Registrant Name J C PENNEY CO INC
Entity Central Index Key 0001166126
Current Fiscal Year End Date --02-02
Entity Well-known Seasoned Issuer Yes
Entity Voluntary Filers No
Entity Current Reporting Status Yes
Entity Filer Category Large Accelerated Filer
Entity Public Float $ 3,570,280,064
Entity Common Stock, Shares Outstanding 219,754,016
Trading Symbol jcp
------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet02.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Feb. 02, 2013
Jan. 28, 2012
Jan. 29, 2011
Consolidated Statements of Operations [Abstract]
Total net sales $ 12,985 $ 17,260 $ 17,759
Cost of goods sold 8,919 11,042 10,799
Gross margin 4,066 6,218 6,960
Operating expenses/(income):
Selling, general and administrative (SG&A) 4,506 5,109 5,358
Pension 353 121 255
Depreciation and amortization 543 518 511
Real estate and other, net (324) 21 (28)
Restructuring and management transition 298 451 32
Total operating expenses 5,376 6,220 6,128
Operating income/(loss) (1,310) (2) 832
Net interest expense 226 227 231
Bond premiums and amortized costs 20
Income/(loss) from continuing operations before income taxes (1,536) (229) 581
Income tax expense/(benefit) (551) (77) 203
Income/(loss) from continuing operations (985) (152) 378
Income from discontinued operations, net of income tax expense of $-, $- and $4, respectively 11
Net income/(loss) $ (985) $ (152) $ 389
Basic earnings/(loss) per share:
Continuing operations $ (4.49) $ (0.7) $ 1.6
Discontinued operations $ 0.04
Net income/(loss) $ (4.49) $ (0.7) $ 1.64
Diluted earnings/(loss) per share:
Continuing operations $ (4.49) $ (0.7) $ 1.59
Discontinued operations $ 0.04
Net income/(loss) $ (4.49) $ (0.7) $ 1.63
Weighted average shares - basic 219.2 217.4 236.4
Weighted average shares - diluted 219.2 217.4 238
------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet03.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Jan. 29, 2011
Consolidated Statements of Operations [Abstract]
Income tax expense-discontinued operations $ 4
------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet04.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Feb. 02, 2013
Jan. 28, 2012
Jan. 29, 2011
Consolidated Statements of Comprehensive Income/(Loss) [Abstract]
Net income/(loss) $ (985) $ (152) $ 389
Other comprehensive income/(loss), net of tax
Unrealized gain/(loss) on REITs 36 53 49
Reclassification adjustment for (gain)/loss on REITs included in net income/(loss) (184)
Net actuarial gain/(loss) arising during the period 37 (534) 236
Prior service credit/(cost) arising during the period (26) (3)
Reclassification of net prior service (credit)/cost recognized in net income/(loss) from a curtailment (3) 1
Reclassification of net actuarial (gain)/loss recognized in net periodic benefit expense/(income) from a settlement 91
Reclassification for amortization of net actuarial (gain)/loss included in net periodic benefit expense/(income) 148 94 155
Reclassification for amortization of prior service (credit)/cost included in net periodic benefit expense/(income) (8) (15) (15)
Total other comprehensive income/(loss), net of tax 91 (404) 425
Total comprehensive income/(loss), net of tax $ (894) $ (556) $ 814
------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet05.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Feb. 02, 2013
Jan. 28, 2012
Current assets:
Cash in banks and in transit $ 121 $ 175
Cash short-term investments 809 1,332
Cash and cash equivalents 930 1,507
Merchandise inventory 2,341 2,916
Income tax receivable 57 168
Deferred taxes 106 245
Prepaid expenses and other 249 245
Total current assets 3,683 5,081
Property and equipment 5,353 5,176
Other assets 745 1,167
Total Assets 9,781 11,424
Current liabilities:
Merchandise accounts payable 1,162 1,022
Other accounts payable and accrued expenses 1,395 1,503
Current portion of capital leases and note payable 26 1
Current maturities of long-term debt 230
Total current liabilities 2,583 2,756
Long-term capital leases and note payable 88 3
Long-term debt 2,868 2,868
Deferred taxes 388 888
Other liabilities 683 899
Total Liabilities 6,610 7,414
Stockholders' Equity
Common stock(1) 110 [1] 108 [1]
Additional paid-in capital 3,799 3,699
Reinvested earnings 380 1,412
Accumulated other comprehensive income/(loss) (1,118) (1,209)
Total Stockholders' Equity 3,171 4,010
Total Liabilities and Stockholders' Equity $ 9,781 $ 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 219.3 million and 215.9 million as of February 2, 2013 and January 28, 2012, respectively.
------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet06.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Per Share data, unless otherwise specified
Feb. 02, 2013
Jan. 28, 2012
Consolidated Balance Sheets [Abstract]
Common stock, authorized 1,250 1,250
Common stock, par value per share $ 0.5 $ 0.5
Common stock, issued and outstanding 219.3 215.9
------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet07.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Millions
Common Stock [Member]
Additional Paid-in Capital [Member]
Reinvested Earnings/(Loss) [Member]
Accumulated Other Comprehensive Income/(Loss) [Member]
Total
Balance as of the beginning of the period at Jan. 30, 2010 $ 118 $ 3,867 $ 2,023 $ (1,230) $ 4,778
Shares balance as of the beginning of the period at Jan. 30, 2010 236
Net income/(loss) 389 389
Other comprehensive income/(loss) 425 425
Dividends declared, common (190) (190)
Stock-based compensation 58 58
Stock-based compensation, shares 0.7
Balance as of the end of the period at Jan. 29, 2011 118 3,925 2,222 (805) 5,460
Shares balance as of the end of the period at Jan. 29, 2011 236.7
Net income/(loss) (152) (152)
Other comprehensive income/(loss) (404) (404)
Dividends declared, common (174) (174)
Stock warrant issued 50 50
Common stock repurchased and retired (12) (404) (484) (900)
Common stock repurchased and retired, shares (24.4) (24)
Stock-based compensation 2 128 130
Stock-based compensation, shares 3.6
Balance as of the end of the period at Jan. 28, 2012 108 3,699 1,412 (1,209) 4,010
Shares balance as of the end of the period at Jan. 28, 2012 215.9
Net income/(loss) (985) (985)
Other comprehensive income/(loss) 91 91
Dividends declared, common (47) (47)
Stock-based compensation 2 100 102
Stock-based compensation, shares 3.4
Balance as of the end of the period at Feb. 02, 2013 $ 110 $ 3,799 $ 380 $ (1,118) $ 3,171
Shares balance as of the end of the period at Feb. 02, 2013 219.3
------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet08.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Feb. 02, 2013
Jan. 28, 2012
Jan. 29, 2011
Cash flows from operating activities
Net income/(loss) $ (985) $ (152) $ 389
(Income) from discontinued operations (11)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Restructuring and management transition 121 314 24
Asset impairments and other charges 117 67 8
Net gain on sale or redemption of non-operating assets (397) (6) (8)
Depreciation and amortization 543 518 511
Benefit plans 272 55 197
Pension contribution (392)
Stock-based compensation 50 [1] 46 [2] 53
Excess tax benefits from stock-based compensation (12) (10) (2)
Deferred taxes (467) (153) 126
Change in cash from:
Inventory 575 297 (189)
Prepaid expenses and other assets (5) (67) 27
Merchandise accounts payable 140 (111) (93)
Current income taxes 117 (15) 33
Accrued expenses and other (79) 37 (81)
Net cash provided by/(used in) operating activities (10) 820 592
Cash flows from investing activities
Capital expenditures (810) (634) (499)
Proceeds from sale or redemption of non-operating assets 526
Acquisition (9) (268)
Proceeds from sale of operating assets 15 14
Cost investment, net (36)
Proceeds from joint venture cash distribution 53
Net cash provided by/(used in) investing activities (293) (870) (485)
Cash flows from financing activities
Proceeds from issuance of long-term debt 392
Payments of capital leases and note payable (20)
Payments of long-term debt (230) (693)
Financing costs (4) (20) (14)
Dividends paid, common (86) (178) (189)
Stock repurchase program (900)
Proceeds from issuance of stock warrant 50
Proceeds from stock options exercised 71 18 8
Excess tax benefits from stock-based compensation 12 10 2
Tax withholding payments for vested restricted stock (17) (45) (2)
Net cash provided by/(used in) financing activities (274) (1,065) (496)
Net increase/(decrease) in cash and cash equivalents (577) (1,115) (389)
Cash and cash equivalents at beginning of period 1,507 2,622 3,011
Cash and cash equivalents at end of period $ 930 $ 1,507 $ 2,622
[1] Excludes $11 million of stock-based compensation costs reported in restructuring and management transition charges (see Note 16).
[2] Excludes $79 million of stock-based compensation costs reported in restructuring and management transition charges (see Note 16).
------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet09.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Basis of Presentation and Consolidation
12 Months Ended
Feb. 02, 2013
Basis of Presentation and Consolidation [Abstract]
Basis of Presentation and Consolidation

1.  Basis of Presentation and Consolidation

 

Nature of Operations 

Our Company was founded by James Cash Penney in 1902 and has grown to be a major national retailer, operating 1,104 department stores in 49 states and Puerto Rico, as well as through our Internet website at jcp.com. We sell family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside jcpenney, and home furnishings. In addition, our department stores provide services, such as styling salon, optical, portrait photography and custom decorating, to customers.

 

Basis of Presentation and Consolidation

The consolidated financial statements present the results of J. C. Penney Company, Inc. and our subsidiaries (the Company or jcpenney). All significant intercompany transactions and balances have been eliminated in consolidation.

 

We are 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 direct subsidiaries other than JCP, and has no independent assets or operations. 

 

The Company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. We guarantee certain of JCP’s outstanding debt securities fully and unconditionally.

 

Fiscal Year

Our fiscal year ends on the Saturday closest to January 31. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years.

 

 

 

 

 

 

 

Fiscal Year

   

Ended

   

Weeks

2012

   

February 2, 2013

   

53

2011

   

January 28, 2012

   

52

2010

   

January 29, 2011

   

52

   

Use of Estimates and Assumptions

The preparation of financial statements, in conformity with generally accepted accounting principles in the United States of America (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, specifically permanent reductions to retail prices (markdowns) and adjustments for shortages (shrinkage); valuation of long-lived assets and indefinite-lived intangibles assets for impairments; valuation allowances and reserves for workers’ compensation and general liability, environmental contingencies, income taxes and litigation; and pension and other post retirement benefits accounting. While actual results could differ from these estimates, we do not expect the differences, if any, to have a material effect on the consolidated financial statements.

 

Reclassifications

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.    

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet10.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Significant Accounting Policies
12 Months Ended
Feb. 02, 2013
Significant Accounting Policies [Abstract]
Significant Accounting Policies

2.    Significant Accounting Policies 

 

Merchandise and Services Revenue Recognition 

Total net sales, which exclude sales taxes and are net of estimated returns, are recorded at the point of sale when payment is received and the customer takes possession of the merchandise in department stores, at the point of shipment of merchandise ordered through the Internet, or, in the case of services, at the time the customer receives the benefit of the service, such as salon, portrait, optical or custom decorating. Commissions earned on sales generated by licensed departments are included as a component of total net sales. Shipping and handling fees charged to customers are also included in total net sales with corresponding costs recorded as cost of goods sold. We provide for estimated future returns based primarily on historical return rates and sales levels.

 

Gift Card Revenue Recognition

At the time gift cards are sold, no revenue is recognized; rather, a liability is established for the face amount of the card. The liability remains recorded until the earlier of redemption, escheatment or 60 months. The liability is relieved and revenue is recognized when gift cards are redeemed for merchandise. We escheat a portion of unredeemed gift cards according to Delaware escheatment requirements that govern remittance of the cost of the merchandise portion of unredeemed gift cards over five years old. After reflecting the amount escheated, any remaining liability (referred to as breakage) is relieved and recognized as a reduction of SG&A expenses as an offset to the costs of administering the gift card program. Though our gift cards do not expire, it is our historical experience that the likelihood of redemption after 60 months is remote. The liability for gift cards is recorded in other accounts payable and accrued expenses on the Consolidated Balance Sheets.

 

Customer Loyalty Program

Customers who spend a certain amount with us using our private label card or registered third party credit cards receive JCP Rewards® certificates, which can be redeemed for goods or services in our stores the following month. We estimate the net cost of the rewards that will be issued and redeemed and record this cost as rewards points are accumulated. We record the cost of the loyalty program benefits for JCP Rewards in cost of sales given that we provide customers with products or services for these rewards. Other administrative costs of the loyalty program are recorded in SG&A expenses as incurred.

 

Cost of Goods Sold

Cost of goods sold includes all costs directly related to bringing merchandise to its final selling destination. These costs include the cost of the merchandise (net of discounts or allowances earned), sourcing and procurement costs, buying and brand development costs, including buyers’ salaries and related expenses, royalties and design fees, freight costs, warehouse operating expenses, merchandise examination, inspection and testing, store merchandise distribution center expenses, including rent, and shipping and handling costs incurred for sales via the Internet.

  

Vendor Allowances

We receive vendor support in the form of cash payments or allowances for a variety of reimbursements such as cooperative advertising, markdowns, vendor shipping and packaging compliance and defective merchandise. We have agreements in place with each vendor setting forth the specific conditions for each allowance or payment. Depending on the arrangement, we either recognize the allowance as a reduction of current costs or defer the payment over the period the related merchandise is sold. If the payment is a reimbursement for costs incurred, it is offset against those related costs; otherwise, it is treated as a reduction to the cost of merchandise.

 

Markdown reimbursements related to merchandise that has been sold are negotiated and documented by our buying teams and are credited directly to cost of goods sold in the period received. Vendor allowances received prior to merchandise being sold are deferred and recognized as a reduction of merchandise cost based on an inventory turnover rate.

 

Vendor compliance charges reimburse us for incremental merchandise handling expenses incurred due to a vendor’s failure to comply with our established shipping or merchandise preparation requirements. Vendor compliance charges are recorded as a reduction of merchandise handling costs.

 

Selling, General and Administrative Expenses

SG&A expenses include the following costs, except as related to merchandise buying, sourcing, warehousing or distribution activities: salaries, marketing costs, occupancy and rent expense, utilities and maintenance, pre-opening expenses, costs related to information technology, administrative costs related to our home office and district and regional operations, real and personal property and other taxes (excluding income taxes) and credit card fees.

  

Advertising

Advertising costs, which include newspaper, television, Internet search marketing, radio and other media advertising, are expensed either as incurred or the first time the advertisement occurs.  For cooperative advertising programs offered by national brands that require proof-of-advertising to be provided to the vendor to support the reimbursement of the incurred cost, we offset the allowances against the related advertising expense.  Programs that do not require proof-of-advertising are monitored to ensure that the allowance provided by each vendor is a reimbursement of costs incurred to advertise for that particular vendor’s label.    Total advertising costs, net of cooperative advertising vendor reimbursements of $2 million, $118 million and $142 million for 2012, 2011 and 2010, respectively, were $933 million, $1,039 million and $1,172 million.

 

Income Taxes

We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not such assets will be realized. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense on our Consolidated Statements of Operations. 

 

Earnings/(Loss) per Share

Basic earnings/(loss) per share (EPS) is computed by dividing net income/(loss) by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income/(loss) by the weighted-average number of common shares outstanding during the period increased to include the number of additional common shares that would have been outstanding if the potentially dilutive shares had been issued. Potentially dilutive shares include stock options, unvested restricted stock units and awards and a warrant outstanding during the period, using the treasury stock method. Potentially dilutive shares are excluded from the computations of diluted EPS if their effect would be anti-dilutive.

 

Cash and Cash Equivalents

Cash and cash equivalents include cash short-term investments that are highly liquid investments with original maturities of three months or less. Cash short-term investments consist primarily of short-term U.S. Treasury money market funds and a portfolio of highly rated bank deposits and are stated at cost, which approximates fair market value due to the short-term maturity. Cash in banks and in transit also include credit card sales transactions that are settled early in the following period.

 

Merchandise Inventory

Inventories are valued at the lower of cost (using the first-in, first-out or “FIFO” method) or market. For department stores, regional warehouses and store distribution centers, we value inventories using the retail method. Under the retail method, retail values are converted to a cost basis by applying specific average cost factors to groupings of merchandise. For Internet, we use standard cost, representing average vendor cost, to determine lower of cost or market.

 

Physical inventories are taken on a staggered basis at least once per year at all store and supply chain locations, inventory records are adjusted to reflect actual inventory counts and any resulting shortage (shrinkage) is recognized. Following inventory counts, shrinkage is estimated as a percent of sales, based on the most recent physical inventory, in combination with current events and historical experience. We have loss prevention programs and policies in place that are intended to mitigate shrinkage.

 

Property and Equipment, Net

  

 

 

 

 

 

 

 

 

 

 

Estimated

  

 

 

 

 

 

 

Useful Lives

 

 

 

 

 

 

($ in millions)

(Years)

 

2012

 

2011

Land

N/A

  

$

310 

 

$

312 

Buildings

50

  

 

4,641 

 

 

4,549 

Furniture and equipment

3-20

  

 

2,132 

 

 

2,209 

Leasehold improvements

 

  

 

1,150 

 

 

1,071 

Accumulated depreciation

 

  

 

(2,880)

 

 

(2,965)

Property and equipment, net

 

  

$

5,353 

 

$

5,176 

 

 

 

 

 

 

 

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed primarily by using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the improvements or the term of the lease, including renewals determined to be reasonably assured.

 

We expense routine maintenance and repairs when incurred. We capitalize major replacements and improvements. We remove the cost of assets sold or retired and the related accumulated depreciation or amortization from the accounts and include any resulting gain or loss in income from continuing operations.

 

We recognize a liability for the fair value of our conditional asset retirement obligations, which are primarily related to asbestos removal, when incurred if the liability’s fair value can be reasonably estimated.

 

Capitalized Software Costs

We capitalize costs associated with the acquisition or development of major software for internal use in other assets in our Consolidated Balance Sheets and amortize the asset over the expected useful life of the software, generally between three and seven years. We only capitalize subsequent additions, modifications or upgrades to internal-use software to the extent that such changes allow the software to perform a task it previously did not perform. We expense software maintenance and training costs as incurred.

 

 

Impairment of Long-Lived and Indefinite-Lived Assets

We evaluate long-lived assets such as store property and equipment and other corporate assets for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Factors considered important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results and significant changes in the manner of use of the assets or our overall business strategies. Potential impairment exists if the estimated undiscounted cash flows expected to result from the use of the asset plus any net proceeds expected from disposition of the asset are less than the carrying value of the asset. The amount of the impairment loss represents the excess of the carrying value of the asset over its fair value and is included in real estate and other, net on the Consolidated Statements of Operations. We estimate fair value based on either a projected discounted cash flow method using a discount rate that is considered commensurate with the risk inherent in our current business model or appraised value, as appropriate. We also take other factors into consideration in estimating the fair value of our stores, such as local market conditions, operating environment, mall performance and other trends.

 

We assess the recoverability of indefinite-lived intangible assets at least annually during the fourth quarter of our fiscal year or whenever events or changes in circumstances indicate that the carrying amount of the indefinite-lived intangible asset may not be fully recoverable. Examples of a change in events or circumstances include, but are not limited to, a decrease in the market price of the asset, a history of cash flow losses related to the use of the asset or a significant adverse change in the extent or manner in which an asset is being used. During the fourth quarter of 2012, we early adopted the Financial Accounting Standards Board’s (FASB) new guidance on impairment testing of indefinite-lived intangible assets.  Under the new guidance, we have the option to first perform a qualitative assessment in our evaluation of our indefinite-lived intangible assets in order to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired.  When a quantitative analysis is performed, we test our indefinite-lived intangible assets utilizing the relief from royalty method to determine the estimated fair value for each indefinite-lived intangible asset. The relief from royalty method estimates our theoretical royalty savings from ownership of the intangible asset. Key assumptions used in this model include discount rates, royalty rates, growth rates, sales projections and terminal value rates. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as they require significant management judgment.  Discount rates used are similar to the rates estimated by the weighted average cost of capital considering any differences in company-specific risk factors. Royalty rates are established by management based on comparable trademark licensing agreements in the market.  Operational management, considering industry and company-specific historical and projected data, develops growth rates and sales projections associated with each indefinite-lived intangible asset. Terminal value rate determination follows common methodology of capturing the present value of perpetual sales estimates beyond the last projected period assuming a constant weighted average cost of capital and low long-term growth rates.

    

Leases

We use a consistent lease term when calculating amortization of leasehold improvements, determining straight-line rent expense and determining classification of leases as either operating or capital. For purposes of recognizing incentives, premiums, rent holidays and minimum rental expenses on a straight-line basis over the terms of the leases, we use the date of initial possession to begin amortization, which is generally when we take control of the property. Renewal options determined to be reasonably assured are also included in the lease term. Some leases require additional payments based on sales and are recorded in rent expense when the contingent rent is probable.

 

Some of our lease agreements contain developer/tenant allowances. Upon receipt of such allowances, we record a deferred rent liability in other liabilities on the Consolidated Balance Sheets. The allowances are then amortized on a straight-line basis over the remaining terms of the corresponding leases as a reduction of rent expense.

 

Exit or Disposal Activity Costs

Costs associated with exit or disposal activities are recorded at their fair values when a liability has been incurred. Reserves are established at the time of closure for the present value of any remaining operating lease obligations (PVOL), net of estimated sublease income. For severance, a reserve is established when communication has occurred to the affected employees. Other exit costs are accrued either at the point of decision or the communication date, depending on the nature of the item.

 

Retirement-Related Benefits

We recognize the funded status – the difference between the fair value of plan assets and the plan’s benefit obligation – of our defined benefit pension and postretirement plans directly on the Consolidated Balance Sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. We adjust other comprehensive income/(loss) to reflect prior service cost or credits and actuarial gain or loss amounts arising during the period and reclassification adjustments for amounts being recognized as components of net periodic pension/postretirement cost, net of tax. Other comprehensive income/(loss) is amortized over the average remaining service period, a period of about seven years for the primary plan.

 

We measure the plan assets and obligations annually at the adopted measurement date of January 31 to determine pension expense for the subsequent year. The factors and assumptions affecting the measurement are the characteristics of the population and salary increases, with the most important being the expected return on plan assets and the discount rate for the pension obligation. We use actuarial calculations for the assumptions, which require significant judgment.  

    

Stock-Based Compensation

We record compensation expense for time-vested awards on a straight-line basis over the associates’ service period, to the earlier of the retirement eligibility date, if the grant contains provisions such that the award becomes fully vested upon retirement, or the stated vesting period (the non-substantive vesting period approach).

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet11.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Effect of New Accounting Standards
12 Months Ended
Feb. 02, 2013
Effect of New Accounting Standards [Abstract]
Effect of New Accounting Standards

3.  Effect of New Accounting Standards

 

In February 2013, the FASB issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, an amendment to FASB Accounting Standards Codification (ASC) Topic 220. The update requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU is effective prospectively for annual and interim periods beginning after December 15, 2012.  

 

In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” (ASU 2012-02), an amendment to FASB ASC Topic 350. 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 adopted 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.

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet12.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Acquisition
12 Months Ended
Feb. 02, 2013
Acquisition [Abstract]
Acquisition

4Acquisition 

 

On November 2, 2011, we completed an acquisition, pursuant to the asset purchase agreement dated October 12, 2011 (Purchase Agreement), to acquire the worldwide rights for the Liz Claiborne® family of trademarks and related intellectual property, as well as the U.S. and Puerto Rico rights for the monet® trademarks and related intellectual property.  On February 27, 2012, we acquired the right to source and sell Liz Claiborne branded shoes. We have been the primary exclusive licensee for all Liz Claiborne and Claiborne branded merchandise in the U.S. and Puerto Rico since August 2010 under an original 10-year license agreement dated October 5, 2009. As a result of these acquisitions, we permanently added a number of well-established trademarks to our private and exclusive brands. 

  

We allocated the purchase price of the acquisitions to identifiable intangible assets based on their estimated fair values. Intangible assets were valued using the relief from royalty and discounted cash flow methodologies which are considered Level 3 fair value measurements. The relief from royalty method estimates our theoretical royalty savings from ownership of the intangible assets. Key assumptions used in this model include discount rates, royalty rates, growth rates and sales projections. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as they require significant management judgment. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates and cash flow projections. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment.

 

The consideration paid for the brands was $277 million with the entire purchase price allocated to the calculated fair values of the acquired trade names and recorded as intangible assets with indefinite lives at the acquisition dates. We incurred an insignificant amount of direct transaction costs as a result of these acquisitions. Pro forma financial information has not been provided as the acquisitions did not have a material impact on our financial information.

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet13.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Earnings/(Loss) per Share
12 Months Ended
Feb. 02, 2013
Earnings Per Share Abstract
Earnings/(Loss) per Share

5.  Earnings/(Loss) per Share

   

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions, except per share data)

2012

 

2011

 

2010

Earnings/(loss)

 

 

 

 

 

 

 

 

Net income/(loss) from continuing operations

$

(985)

 

$

(152)

 

$

378 

Shares

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic shares)

 

219.2 

 

 

217.4 

 

 

236.4 

Adjustment for assumed dilution:

 

 

 

 

 

 

 

 

Stock options, restricted stock awards and warrant

 

 -

 

 

 -

 

 

1.6 

Weighted average shares assuming dilution (diluted shares)

 

219.2 

 

 

217.4 

 

 

238.0 

EPS from continuing operations

 

 

 

 

 

 

 

 

Basic

$

(4.49)

 

$

(0.70)

 

$

1.60 

Diluted

$

(4.49)

 

$

(0.70)

 

$

1.59 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Shares in millions)

2012

 

2011

 

2010

Stock options, restricted stock awards and warrant

 

25.0 

 

 

24.1 

 

 

10.8 

 

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet14.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Other Assets
12 Months Ended
Feb. 02, 2013
Other Assets [Abstract]
Other Assets

6.  Other Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

2012

  

2011

REITs

$

33 

  

$

336 

Capitalized software, net

 

310 

  

 

297 

Intangible assets (Note 4)

 

277 

  

 

268 

Leveraged lease investments (Note 17)

 

 -

  

 

128 

Cost investment (Note 9)

 

36 

  

 

36 

Debt issuance costs, net

 

20 

  

 

22 

Other

 

69 

  

 

80 

Total

$

745 

  

$

1,167 

 

 

 

 

 

 

In connection with our annual indefinite-lived intangible assets impairment tests performed during the fourth quarter of 2012, we did not record an impairment loss to indefinite-lived intangible assets as the estimated fair value for each of our indefinite-lived intangible assets exceeded the carrying value of the underlying asset.

 

The market value of our investment in public REITs are accounted for as available for sale securities and are carried at fair value on an ongoing basis. See Note 9 for the related fair value disclosures, Note 12 for the net unrealized gains and Note 17 for the net realized gains on our REITs.

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet15.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Other Accounts Payable and Accrued Expenses
12 Months Ended
Feb. 02, 2013
Other Accounts Payable and Accrued Expenses [Abstract]
Other Accounts Payable and Accrued Expenses

7.  Other Accounts Payable and Accrued Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

2012

 

2011

Accrued salaries, vacation and bonus

$

225 

  

$

324 

Customer gift cards

 

230 

  

 

238 

Taxes other than income taxes

 

78 

  

 

113 

Occupancy and rent-related

 

114 

  

 

111 

Interest

 

65 

  

 

74 

Advertising

 

68 

  

 

67 

Current portion of workers’ compensation and general liability insurance

 

58 

  

 

55 

Restructuring and management transition (Note 16)

 

10 

  

 

52 

Current portion of retirement plan liabilities (Note 15)

 

55 

  

 

48 

Common dividends

 

 -

  

 

43 

Capital expenditures

 

65 

  

 

42 

Unrecognized tax benefits (Note 18)

 

  

 

25 

Other

 

425 

  

 

311 

Total

$

1,395 

  

$

1,503 

 

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet16.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Other Liabilities
12 Months Ended
Feb. 02, 2013
Other Liabilities [Abstract]
Other Liabilities

8.    Other Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

2012

 

2011

Supplemental pension and other postretirement benefit plan liabilities (Note 15)

$

266 

  

$

285 

Long-term portion of workers’ compensation and general liability insurance

 

167 

  

 

168 

Deferred developer/tenant allowances

 

128 

  

 

135 

Primary pension plan (Note 15)

 

  

 

121 

Unrecognized tax benefits (Note 18)

 

74 

  

 

85 

Restructuring and management transition (Note 16)

 

  

 

Other

 

33 

  

 

97 

Total

$

683 

  

$

899 

 

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet17.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Fair Value Disclosures
12 Months Ended
Feb. 02, 2013
Fair Value Disclosures [Abstract]
Fair Value Disclosures

9.  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 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 - Fair Value Measurements Using

 

 

 

 

 

Quoted Prices in Active

 

 

Significant Other

 

 

Significant

 

 

Cost

 

 

Markets of Identical Assets

 

 

Observable Inputs

 

 

Unobservable Inputs

($ in millions) 

 

Basis

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

As of February 2, 2013

$

 

$

33 

 

$

 -

 

$

 -

As of January 28, 2012

 

80 

 

 

336 

 

 

 -

 

 

 -

 

Other Non-Financial Assets Measured on a non-Recurring Basis

In 2012, we wrote the assets of 13 underperforming department stores that continued to operate down to their fair value.  In 2011, we wrote the assets of eight underperforming department stores of which seven continued to operate down to their fair value.  Impairment charges are included in real estate and other, net in the Consolidated Statement of Operations (see Note 17). The inputs to determine fair values were primarily based on projected discounted cash flow as well as other market information obtained from brokers.

 

The following table presents fair values for those assets measured at fair values and gains or losses during 2012 and 2011 on a non-recurring basis, and remaining on our Consolidated Balance Sheet:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Store Assets - Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

Significant

 

 

 

 

 

 

 

in Active Markets

 

 

Other Observable

 

 

Unobservable

 

 

Total

 

 

Carrying

 

of Identical Assets

 

 

Inputs

 

 

Inputs

 

 

Gains

($ in millions) 

 

Value

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

(Losses)

February 2, 2013

$

34 

$

 -

 

$

 -

 

$

 

$

(26)

January 28, 2012

 

68 

 

 

 

 

 

 

 

10 

 

 

(58)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

   

 

 

 

 

 

 

 

 

 

 

 

 

 

As of February 2, 2013

 

As of January 28, 2012

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

($ in millions)

 

Amount

 

 

Value

 

 

Amount

 

 

Value

Long-term debt, including current maturities

$

2,868 

 

$

2,456 

 

$

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 February 2, 2013 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.

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet18.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Credit Facility
12 Months Ended
Feb. 02, 2013
Credit Facility [Abstract]
Credit Facility

10.  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 and on January 31, 2013, we increased our 2012 Credit Facility by an additional $250 million 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 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.

  

As of the end of 2012, we had $281 million in standby and import letters of credit outstanding under the 2012 Credit Facility, none which 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 2012 Credit Facility.  For the fiscal year ended 2012, we had $1,241 million available for borrowing under the 2012 Credit Facility.

 

On February 8, 2013, J. C. Penney Company, Inc., JCP and J. C. Penney Purchasing Corporation amended and restated the 2012 Credit Facility in the amount up to $1,850 million (2013 Credit Facility) with JPMorgan Chase Bank, N.A., as administrative agent.  The 2013 Credit Facility continues to be an asset-based facility, in which borrowing availability varies according to the levels of inventory and accounts receivable, and matures on April 29, 2016.  The 2013 Credit Facility increases the letter of credit sublimit to $750 million from $500 million and provides that the Company may at any time prior to the maturity date request that the aggregate size of the facility be increased by an additional amount not to exceed $400 million.

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet19.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Long-Term Debt
12 Months Ended
Feb. 02, 2013
Long-Term Debt [Abstract]
Long-Term Debt

11.  Long-Term Debt    

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

2012

 

2011

Issue:

 

 

 

 

 

5.65% Senior Notes Due 2020(1)

$

400 

  

$

400 

5.75% Senior Notes Due 2018(1)

 

300 

  

 

300 

6.375% Senior Notes Due 2036(1)

 

400 

  

 

400 

6.875% Medium-Term Notes Due 2015

 

200 

  

 

200 

6.9% Notes Due 2026

 

  

 

7.125% Debentures Due 2023

 

255 

  

 

255 

7.4% Debentures Due 2037

 

326 

  

 

326 

7.625% Notes Due 2097

 

500 

  

 

500 

7.65% Debentures Due 2016

 

200 

  

 

200 

7.95% Debentures Due 2017

 

285 

  

 

285 

9.0% Notes Due 2012

 

 -

  

 

230 

Total notes and debentures

 

2,868 

  

 

3,098 

Less: current maturities

 

 -

  

 

230 

Total long-term debt

$

2,868 

  

$

2,868 

 

 

 

 

 

 

Weighted-average interest rate at year end

 

6.9% 

 

 

7.1% 

Weighted-average maturity

 

24 years

  

 

 

 

(1) Our 2010 and 2007 debt issuances contain a change of control provision that would obligate us, at the holders’ option, to repurchase the debt at a price of 101%. These provisions trigger if there were a beneficial ownership change of 50% or more of our common stock and, for the 2010 issuance, if the debt is downgraded from the Company’s credit rating level at the time of issuance, for the 2007 issuances, if the debt was rated non-investment grade. 

 

In August 2012, we repaid $230 million of 9.0% Notes at maturity.  During 2011, there were no issuances of debt and no scheduled debt maturities.

 

Long-Term Debt Financial Covenants

We have an indenture covering approximately $255 million of long-term debt that contains a financial covenant requiring us to have a minimum of 200% net tangible assets to senior funded indebtedness (as defined in the indenture). This indenture permits our Company to issue additional long-term debt if we are in compliance with the covenant. At year-end 2012, our percentage of net tangible assets to senior funded indebtedness was 304%. 

 

 

Scheduled Annual Principal Payments on Long-Term Debt

 

 

 

 

($ in millions)

 

 

2013

$

 -

2014

 

 -

2015

 

200 

2016

 

200 

2017

 

285 

Thereafter

 

2,183 

Total

$

2,868 

 

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet20.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Stockholders' Equity
12 Months Ended
Feb. 02, 2013
Stockholders' Equity [Abstract]
Stockholders' Equity

12.  Stockholders’ Equity

 

Other Comprehensive Income/(Loss) 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

2011

 

 

2010

 

 

 

 

Income

 

 

 

 

 

 

 

Income

 

 

 

 

 

 

 

Income

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

Tax

 

 

 

 

Gross

 

(Expense)/

 

Net

 

Gross

 

(Expense)/

 

Net

 

Gross

 

(Expense)/

 

Net

($ in millions)

Amount

 

Benefit

 

Amount

 

Amount

 

Benefit

 

Amount

 

Amount

 

Benefit

 

Amount

REITs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on REITs

$

56 

 

$

(20)

 

$

36 

 

$

82 

 

$

(29)

 

$

53 

 

$

76 

 

$

(27)

 

$

49 

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

 

(286)

(1)

 

102 

 

 

(184)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Retirement benefit plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial gain/(loss) arising during the period

 

60 

 

 

(23)

 

 

37 

 

 

(872)

 

 

338 

 

 

(534)

 

 

386 

 

 

(150)

 

 

236 

Prior service credit/(cost) arising during the period

 

(42)

 

 

16 

 

 

(26)

 

 

(4)

 

 

 

 

(3)

 

 

 -

 

 

 -

 

 

 -

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

 

(5)

 

 

 

 

(3)

 

 

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

 -

Reclassification of net actuarial (gain)/loss recognized in net periodic benefit expense/(income) from a settlement

 

148 

 

 

(57)

 

 

91 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

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

 

242 

 

 

(94)

 

 

148 

 

 

154 

 

 

(60)

 

 

94 

 

 

254 

 

 

(99)

 

 

155 

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

 

(13)

 

 

 

 

(8)

 

 

(24)

 

 

 

 

(15)

 

 

(24)

 

 

 

 

(15)

Total

$

160 

 

$

(69)

 

$

91 

 

$

(663)

 

$

259 

 

$

(404)

 

$

692 

 

$

(267)

 

$

425 

 

(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 17). 

 

 

Accumulated  Other Comprehensive Income/(Loss)  

The following table shows the changes in accumulated other comprehensive income/(loss) balances for 2012 and 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Accumulated Other

 

Gain/(Loss)

 

Net Actuarial

 

Prior Service

 

Comprehensive

($ in millions)

on REITs

 

Gain/(Loss)

 

Credit/(Cost)

 

Income/(Loss)

January 29, 2011

$

112 

 

$

(957)

 

$

40 

 

$

(805)

Current period change

 

53 

 

 

(440)

 

 

(17)

 

 

(404)

January 28, 2012

$

165 

 

$

(1,397)

 

$

23 

 

$

(1,209)

Current period change

 

(148)

 

 

276 

 

 

(37)

 

 

91 

February 2, 2013

$

17 

 

$

(1,121)

 

$

(14)

 

$

(1,118)

 

Common Stock 

On a combined basis, our 401(k) savings plan, including our employee stock ownership plan (ESOP), held approximately 11 million shares, or approximately 5.0% of outstanding Company common stock, at February 2, 2013. For the years 2012, 2011 and 2010, we declared dividends of $0.20, $0.80 and $0.80 per share, respectively.

 

Preferred Stock 

We have authorized 25 million shares of preferred stock; no shares of preferred stock were issued and outstanding as of February 2, 2013 or January 28, 2012.  

 

Stock Warrant 

On June 13, 2011, prior to his employment, we entered into a warrant purchase agreement with Ronald B. Johnson pursuant to which Mr. Johnson made a personal investment in the Company by purchasing a warrant to acquire approximately 7.3 million shares of J. C. Penney Company, Inc. common stock for a purchase price of approximately $50 million at a mutually determined fair value of $6.89 per share. The warrant has an exercise price of $29.92 per share, subject to customary adjustments resulting from a stock split, reverse stock split, or other extraordinary distribution with respect to J. C. Penney Company, Inc. common stock. The warrant has a term of seven and one-half years and is exercisable after the sixth anniversary, or June 13, 2017, provided that the warrant is immediately exercisable upon a change in control of J. C. Penney Company, Inc. or, if applicable, upon the termination of Mr. Johnson’s employment with us. The warrant is also subject to transfer restrictions. The proceeds from the sale of the warrant have been recorded as additional paid-in capital and the dilutive effect of the warrant has been included in the EPS calculation from the date of issuance. The fair value of the warrant was determined on the date of the warrant purchase agreement using a Monte Carlo simulation methodology with the following assumptions:

 

 

 

 

Expected term

7.5 years

Expected volatility

37.00% 

Risk-free interest rate

2.47% 

Expected dividend yield

2.67% 

 

Valuation Method. The fair value of the stock warrant was determined on the date of the warrant purchase agreement using a Monte Carlo simulation method that reflected the impact of the key features of the warrant using different simulations and probability weighting.

 

Expected Term. The expected term was determined based on the maturity determined period that both parties expect the warrant to be outstanding.

 

Expected Volatility. The expected volatility was based on implied volatility.

 

Risk-free Interest Rate. The risk-free interest rate was based on zero-coupon U.S. Treasury yields in effect at the date of the agreement with the same maturity as the expected warrant term.

 

Expected Dividend Yield. The dividend assumption was based on expectations about the Company’s dividend policy.

 

Common Stock Repurchase Program 

In February 2011, our Board of Directors authorized a program to repurchase up to $900 million of Company common stock using existing cash and cash equivalents. In the first quarter of 2011, through open market transactions, we repurchased approximately 21 million shares for $787 million. In the second quarter of 2011, we purchased an additional three million shares for $113 million and completed the program on May 6, 2011. As a result of this repurchase program, approximately 24 million total shares were purchased for a total of $900 million at an average share price of $36.98, including commission. Repurchased shares were retired on the date of purchase, and the excess of the purchase price over par value was allocated between reinvested earnings and additional paid-in capital.

 

Stockholders Agreements 

On August 19, 2011, we entered into a stockholder agreement with Pershing Square that, among other things, prohibits Pershing Square from purchasing shares of our common stock and derivative securities whose value is derived from the value of our common stock in excess of 26.1% of the shares of our common stock outstanding and permits Pershing Square to designate one member of our Board of Directors. Pursuant to the August stockholder agreement, Pershing Square will be able to direct the vote of between 15%-16.5% of the shares of our common stock outstanding (depending on their ownership percentage of our common stock and related derivative securities) and will be required to vote the number of any excess shares of our common stock that they beneficially own to be present and voted at stockholder meetings either as recommended by our Board of Directors or in direct proportion to how all other stockholders vote.

 

On September 16, 2011, we entered into a stockholder agreement with Vornado that, among other things, prohibits Vornado from purchasing shares of our common stock and derivative securities whose value is derived from the value of our common stock in excess of 15.4% of the shares of our common stock outstanding and permits Vornado to designate one member of our Board of Directors. Pursuant to the stockholder agreement, Vornado may vote the number of shares that it owns up to a maximum of 9.9% of the shares of our common stock outstanding and is required to vote the number of any excess shares of our common stock that they beneficially own to be present and voted at stockholder meetings either as recommended by our Board of Directors or in direct proportion to how all other stockholders vote.

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet21.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Stock-Based Compensation
12 Months Ended
Feb. 02, 2013
Stock-Based Compensation [Abstract]
Stock-Based Compensation

13.  Stock-Based Compensation 

 

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

 

Employee stock options and restricted stock awards typically vest over periods ranging from one to three years. The exercise price of stock options and the market value of restricted stock awards are determined based on the closing market price of our common stock on the date of grant. The 2012 Plan does not permit awarding stock options below grant-date market value nor does it allow any repricing subsequent to the date of grant.  Employee stock options have a maximum term of 10 years.

 

In 2011, the Company approved equity inducement awards outside of the 2009 Plan (Inducement Awards) to our new Chief Executive Officer, President, Chief Operating Officer and Chief Talent Officer.

 

Our stock option and restricted stock award grants have averaged about 2.7% of outstanding stock over the past three years. We issue new shares upon the exercise of stock options, granting of restricted shares and vesting of restricted stock units.

 

Stock-based Compensation Cost

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

2012

 

 

2011

 

 

2010

Stock awards

$

17 

 

$

22 

 

$

25 

Stock options

 

33 

 

 

24 

 

 

28 

Total stock-based compensation

$

50 

(1)

$

46 

(2)

$

53 

 

 

 

 

 

 

 

 

 

Total income tax benefit recognized for stock-based compensation arrangements

$

19 

 

$

18 

 

$

21 

 

(1) Excludes $11 million of stock-based compensation costs reported in restructuring and management transition charges (see Note 16).

(2) Excludes $79 million of stock-based compensation costs reported in restructuring and management transition charges (see Note 16).

 

 

Stock Options  

The following table summarizes stock option activity during the year ended February 2, 2013:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Weighted-

  

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

Average

 

Remaining

 

Intrinsic

 

Shares (in

 

Exercise Price

 

Contractual

 

Value ($ in

 

thousands)

 

Per Share

 

Term (in years)

 

millions)(1) 

Outstanding at January 28, 2012

14,667 

 

$

38 

  

 

  

 

 

Granted

2,792 

 

 

34 

  

 

  

 

 

Exercised

(2,254)

 

 

22 

  

 

  

 

 

Forfeited/canceled

(1,612)

 

 

38 

  

 

  

 

 

Outstanding at February 2, 2013

13,593 

 

 

40 

  

4.7 

  

$

Exercisable at February 2, 2013

10,294 

 

 

42 

  

3.4 

  

$

 

(1) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option at year end.

 

If all outstanding options were exercised, common stock outstanding would increase by 6.2%.  Additional information regarding options outstanding as of February 2, 2013 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable

  

Total Outstanding

(Shares in thousands; price is weighted-average exercise price)

Shares

  

Price

  

Shares

  

Price

In-the-money

1,369 

  

$

16 

  

1,454 

  

$

16 

Out-of-the-money(1)

8,925 

  

 

46 

  

12,139 

  

 

43 

Total options outstanding

10,294 

  

 

42 

  

13,593 

  

 

40 

 

(1) Out-of-the-money options are those with an exercise price above the closing price of jcpenney common stock of $19.88 as of February 2, 2013.

   

Cash proceeds, tax benefits and intrinsic value related to total stock options exercised are provided in the following table:

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

2012

 

2011

 

2010

Proceeds from stock options exercised

$

71 

  

$

18 

  

$

Intrinsic value of stock options exercised

 

38 

  

 

28 

  

 

Tax benefit related to stock-based compensation

 

15 

  

 

11 

  

 

Excess tax benefits realized on stock-based compensation

 

12 

  

 

10 

  

 

 

As of February 2, 2013, we had $24 million of unrecognized and unearned compensation expense, net of estimated forfeitures, for stock options not yet vested, which will be recognized as expense over the remaining weighted-average vesting period of approximately one year.

 

Stock Option Valuation 

Valuation Method. We estimate the fair value of stock option awards on the date of grant using primarily the binomial lattice model. We believe that the binomial lattice model is a more accurate model for valuing employee stock options since it better reflects the impact of stock price changes on option exercise behavior.

 

Expected Term. Our expected option term represents the average period that we expect stock options to be outstanding and is determined based on our historical experience, giving consideration to contractual terms, vesting schedules, anticipated stock prices and expected future behavior of option holders.

 

Expected Volatility. Our expected volatility is based on a blend of the historical volatility of jcpenney stock combined with an estimate of the implied volatility derived from exchange traded options. Beginning in 2010, we increased the weighting of the implied volatility component of our expected volatility assumption due to implied volatility being a more appropriate indicator of future stock option volatility.

 

Risk-Free Interest Rate. Our risk-free interest rate is based on zero-coupon U.S. Treasury yields in effect at the date of grant with the same period as the expected option life.

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

 

Our weighted-average fair value of stock options at grant date was $11.49 in 2012, $11.37 in 2011 and $9.03 in 2010 using the binomial lattice valuation model and the following assumptions:

   

 

 

 

 

 

 

 

 

2012

  

2011

  

2010

Weighted-average expected option term

4.9 years

  

4.5 years

  

4.5 years

Weighted-average expected volatility

45.30%

  

41.20%

  

38.00%

Weighted-average risk-free interest rate

0.87%

  

1.75%

  

2.20%

Weighted-average expected dividend yield

1.40%

  

2.20%

  

2.20%

Expected dividend yield range

2.0% – 2.1%

  

1.8% – 2.2%

  

1.8% – 2.9%

 

Stock Awards

The following table summarizes our non-vested stock awards activity during the year ended February 2, 2013:  

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

Average Grant

(shares in thousands)

Stock Awards

 

Date Fair Value

Non-vested at January 28, 2012

3,688 

  

$

32 

Granted

1,891 

  

 

29 

Vested

(907)

 

 

32 

Forfeited/canceled

(1,210)

 

 

33 

Non-vested at February 2, 2013

3,462 

  

 

31 

 

As of February 2, 2013, we had $76 million of unrecognized compensation expense related to unearned employee stock awards, which will be recognized over the remaining weighted-average vesting period of approximately two years. The aggregate market value of shares vested during 2012, 2011 and 2010 was $26 million, $145 million and $8 million, respectively, compared to an aggregate grant date fair value of $29 million, $111 million and $12 million, respectively.

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet22.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Leases
12 Months Ended
Feb. 02, 2013
Leases [Abstract]
Leases

14.  Leases

 

We conduct the major part of our operations from leased premises that include retail stores, store distribution centers, warehouses, offices and other facilities. Almost all leases will expire during the next 20 years; however, most leases will be renewed, primarily through an option exercise, or replaced by leases on other premises. We also lease data processing equipment and other personal property under operating leases of primarily three to five years. Rent expense, net of sublease income, was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

2012

 

2011

 

2010

Real property base rent and straight-lined step rent expense

$

233 

  

$

243 

  

$

244 

Real property contingent rent expense (based on sales)

 

10 

  

 

16 

  

 

16 

Personal property rent expense

 

67 

  

 

64 

  

 

61 

Total rent expense

$

310 

  

$

323 

  

$

321 

Less: sublease income(1)

 

(16)

 

 

(18)

 

 

(17)

Net rent expense

$

294 

  

$

305 

  

$

304 

 

(1) Sublease income is reported in real estate and other, net. 

 

 

As of February 2, 2013, future minimum lease payments for non-cancelable operating leases, including lease renewals determined to be reasonably assured and capital leases were as follows:

 

 

 

 

 

 

 

($ in millions)

Operating Leases

2013

$

252 

2014

 

221 

2015

 

184 

2016

 

156 

2017

 

126 

Thereafter

 

1,937 

Less: sublease income

 

(130)

Total minimum lease payments

$

2,746 

 

 

 

 

 

 

 

 

 

($ in millions)

Capital Leases

2013

$

30 

2014

 

29 

2015

 

39 

2016

 

16 

2017

 

Thereafter

 

Less: sublease income

 

 -

Total minimum lease payments

 

124 

Less: amounts representing interest

 

(13)

Present value of net minimum lease obligations

$

111 

 

------=_NextPart_55abcd71_3ffe_46ef_8f5c_1bbf32e906c5 Content-Location: file:///C:/55abcd71_3ffe_46ef_8f5c_1bbf32e906c5/Worksheets/Sheet23.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Retirement Benefit Plans
12 Months Ended
Feb. 02, 2013
Retirement Benefit Plans [Abstract]
Retirement Benefit Plans

15.  Retirement Benefit Plans

 

We provide retirement pension benefits, postretirement health and welfare benefits, as well as 401(k) savings, profit-sharing and stock ownership plan benefits to various segments of our workforce. Retirement benefits are an important part of our total compensation and benefits program designed to retain and attract qualified, talented employees. Pension benefits are provided through defined benefit pension plans consisting of a non-contributory qualified pension plan (Primary Pension Plan) and, for certain management employees, non-contributory supplemental retirement plans, including a 1997 voluntary early retirement plan. Retirement and other benefits include:

 

 

 

Defined Benefit Pension Plans

Primary Pension Plan – funded

Supplemental retirement plans – unfunded

 

Other Benefit Plans

Postretirement benefits – medical and dental

Defined contribution plans:

401(k) savings, profit-sharing and stock ownership plan

Deferred compensation plan

 

Defined Benefit Pension Plans

Primary Pension Plan — Funded

The Primary Pension Plan is a funded non-contributory qualified pension plan, initiated in 1966 and closed to new entrants on January 1, 2007. The plan is funded by Company contributions to a trust fund, which are held for the sole benefit of participants and beneficiaries.

 

Supplemental Retirement Plans — Unfunded

We have unfunded supplemental retirement plans, which provide retirement benefits to certain management employees. We pay ongoing benefits from operating cash flow and cash investments. The plans are a Supplemental Retirement Program and a Benefit Restoration Plan. Participation in the Supplemental Retirement Program is limited to employees who were annual incentive-eligible management employees as of December 31, 1995. Benefits for these plans are based on length of service and final average compensation. The Benefit Restoration Plan is intended to make up benefits that could not be paid by the Primary Pension Plan due to governmental limits on the amount of benefits and the level of pay considered in the calculation of benefits. The Supplemental Retirement Program is a non-qualified plan that was designed to allow eligible management employees to retire at age 60 with retirement income comparable to the age 65 benefit provided under the Primary Pension Plan and Benefit Restoration Plan. In addition, the Supplemental Retirement Program offers participants who leave between ages 60 and 62 benefits equal to the estimated social security benefits payable at age 62. The Supplemental Retirement Program also continues Company-paid term life insurance at a declining rate until it is phased out at age 70. Employee-paid term life insurance through age 65 is continued under a separate plan (Supplemental Term Life Insurance Plan for Management Profit-Sharing Employees).

 

Voluntary Early Retirement Program (VERP)

In August 2011, we announced a VERP under which approximately 8,000 eligible employees had between September 1, 2011 and October 15, 2011 to elect to participate. For the approximately 4,000 employees who elected to accept the VERP, we incurred a total charge of $176 million for enhanced retirement benefits which was recorded in the line item restructuring and management transition in the Consolidated Statements of Operations (see Note 16). Enhanced retirement benefits of $133 million related to our Primary Pension Plan decreased our overfunded status of the plan. Enhanced retirement benefits of $36 million and $7 million related to our unfunded Supplemental Retirement Program and Benefit Restoration Plan, respectively, increased the projected benefit obligation (PBO) of these plans. In addition, we also incurred curtailment charges totaling $1 million related to our Supplemental Retirement Program and Benefit Restoration Plan as a result of the reduction in the expected years of future service related to these plans. These curtailment charges were recorded in the line item restructuring and management transition in the Consolidated Statements of Operations (see Note 16). As a result of these curtailments, the liabilities for our Supplemental Retirement Program and Benefit Restoration Plan were remeasured as of October 15, 2011. The discount rate used for the October 15 remeasurements was 5.06% as compared to the year-end 2010 discount rate of 5.65%. As of October 15, 2011, the PBOs of our Supplemental Retirement Program and Benefit Restoration Plan were increased by $71 million and $24 million, respectively.

     

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 Consolidated Statements of Operations (see Note 16).  The curtailments resulted in reductions in the PBOs of our Primary Pension Plan, non-qualified supplemental plans and the postretirement health and welfare plan of $80 million, $13 million and $2 million, respectively.  As a result of these curtailments, the liabilities for our retirement benefit plans were remeasured as of September 30, 2012 using a discount rate of 4.25% compared to the year-end 2011 discount rate of 4.82%.  As a result of the remeasurements, the PBOs of our Primary Pension Plan and the non-qualified supplemental plans were increased by $166 million and $55 million, respectively, which was offset by a decrease in our PBO for our post-retirement health and welfare plan by $5 million.  As of September 30, 2012, the PBO’s of our Primary Pension Plan, non-qualified supplemental plans and postretirement health and welfare plan were $5,550 million, $300 million and $18 million, respectively.

 

Primary Pension Plan Lump-Sum Payment Offer

In September 2012, as a result of a plan amendment, we offered approximately 35,000 participants in the Primary Pension Plan who separated from service and had a deferred vested benefit as of August 31, 2012 the option to receive a lump-sum settlement payment. These participants had until November 30, 2012 to elect to receive the lump-sum settlement payment with the payments to be made by the Company beginning on December 4, 2012 using assets from the Primary Pension Plan.  As a result of the approximately 25,000 participants who elected the lump-sum settlements, we made payments totaling $439 million from the Primary Pension Plan’s assets and recognized settlement expense of $148 million for unrecognized actuarial losses.  We also amended the Primary Pension Plan to allow for participants that separate from the Company on or after September 1, 2012 the option of a lump-sum settlement payment from the plan.  The amendment also provided for automatic lump-sum settlement payments for participants with vested balances less than $5,000. 

 

Pension Expense/(Income) for Defined Benefit Pension Plans

Pension expense is based upon the annual service cost of benefits (the actuarial cost of benefits attributed to a period) and the interest cost on plan liabilities, less the expected return on plan assets for the Primary Pension Plan. Differences in actual experience in relation to assumptions are not recognized immediately but are deferred and amortized over the average remaining service period of approximately eight years for the Primary Pension Plan, subject to a corridor as permitted under GAAP pension plan accounting. 

 

 

The components of net periodic benefit expense/(income) for our Primary Pension Plan and our non-contributory supplemental pension plans are as follows:

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

Primary Pension Plan

2012

 

2011

 

2010

Service cost

$

87 

 

$

88 

 

$

88 

Interest cost

 

242 

 

 

247 

 

 

248 

Expected return on plan assets

 

(382)

 

 

(385)

 

 

(352)

Amortization of actuarial loss/(gain)

 

220 

 

 

137 

 

 

237 

Settlement expense

 

148 

 

 

 -

 

 

 -

Net periodic benefit expense/(income)

$

315 

 

$

87 

 

$

221 

 

 

 

 

 

 

 

 

 

Supplemental Pension Plans

 

 

 

 

 

 

 

 

Service cost

$

 

$

 

$

Interest cost

 

13 

 

 

13 

 

 

14 

Amortization of actuarial loss/(gain)

 

23 

 

 

18 

 

 

18 

Amortization of prior service cost/(credit)

 

 

 

 

 

Net periodic benefit expense/(income)

$

38 

 

$

34 

 

$

34 

 

 

 

 

 

 

 

 

 

Primary and Supplemental Pension Plans Total

 

 

 

 

 

 

 

 

Service cost

$

88 

 

$

90 

 

$

89 

Interest cost

 

255 

 

 

260 

 

 

262 

Expected return on plan assets

 

(382)

 

 

(385)

 

 

(352)

Amortization of actuarial loss/(gain)

 

243 

 

 

155 

 

 

255 

Amortization of prior service cost/(credit)

 

 

 

 

 

Settlement charge

 

148 

 

 

 -

 

 

 -

Net periodic benefit expense/(income)

$

353 

 

$

121 

 

$

255 

 

The defined benefit plan pension expense shown in the above table is included as a separate line item on the Consolidated Statements of Operations.

  

Assumptions 

The weighted-average actuarial assumptions used to determine expense were as follows:

 

 

 

 

 

 

 

 

 

2012

 

2011

 

2010

Expected return on plan assets

7.5% 

 

7.5% 

 

8.4% 

Discount rate

4.82% 

(1) 

5.65% 

(2) 

5.90% 

Salary increase

4.7% 

 

4.7% 

 

4.7% 

 

(1) The discount rate used was revised to 4.25% on the remeasurement date of September 30, 2012 as a result of the curtailments. 

(2) The discount rate used for the Supplemental Retirement Program and Benefit Restoration Plan was revised to 5.06% on the remeasurement date of October 15, 2011 as a result of the VERP.

 

The expected return on plan assets is based on the plan’s long-term asset allocation policy, historical returns for plan assets and overall capital market returns, taking into account current and expected market conditions. In 2010 and 2009, the expected return on plan assets was 8.4%, which was reduced from the 2008 rate of 8.9% as a result of the negative returns in the capital markets and lowered expected future returns. For 2012 and 2011, we further reduced the expected rate of return assumption to 7.5% from 8.4% to align our expected rate of return with our new asset allocation targets. The expected return assumption for 2013 is further reduced from 7.5% to 7.0% given our new asset allocation targets and updated expected capital markets return assumptions.

  

The discount rate used to measure pension expense each year is the rate as of the beginning of the year (i.e., the prior measurement date). The discount rate used was based on an externally published yield curve determined by the plan’s actuary. The yield curve is a hypothetical AA yield curve represented by a series of bonds maturing from six months to 30 years, designed to match the corresponding pension benefit cash payments to retirees.   Beginning with the remeasurement on September 30, 2012, the discount rate used was based on a hypothetical AA yield curve represented by a series of bonds maturing over the next 30 years, designed to match the corresponding pension benefit cash payments to retirees.

 

The salary progression rate to measure pension expense was based on age ranges and projected forward.

   

Funded Status

As of the end of 2012, the funded status of the Primary Pension Plan was just under 100%. The PBO is the present value of benefits earned to date by plan participants, including the effect of assumed future salary increases. Under the Employee Retirement Income Security Act of 1974 (ERISA), the funded status of the plan exceeded 100% as of December 31, 2012 and 2011, the qualified pension plan’s year end.  The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the Primary Pension Plan and supplemental pension plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Primary Pension Plan

 

Supplemental Plans

 

($ in millions)

2012

 

2011

 

2012

 

2011

 

Change in PBO

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

5,297 

  

$

4,488 

  

$

309 

  

$

222 

  

Service cost

 

87 

  

 

88 

  

 

  

 

  

Interest cost

 

242 

  

 

247 

  

 

13 

  

 

13 

  

Special termination benefits

 

 -

  

 

133 

  

 

 -