JCPenney 2002 Annual Report Download - page 39

J. C. Penney Company, Inc. 2002 annual report36
Notes to the Consolidated Financial Statements
impairments, severance and other exit costs. Store assets consist
primarily of furniture and fixtures, and buildings and improvements.
Asset impairment charges were determined in accordance with
SFAS No. 121 and represented the excess of the carrying value of
the assets over their estimated fair value. The store closing plans
anticipated that the Company would remain liable for all future
lease payments. The PVOL was calculated, net of assumed sublease
income, using discount rates ranging from 5.2% to 7.0%. A reserve
was established for PVOL based on an average of three to six years
of lease payments or a negotiated termination fee.
During 2000, the Company evaluated its investments in long-
lived assets to be held and used in operations on an individual
store basis, and determined that, based on historical operating
results and updated operating projections, asset carrying values on
13 stores were not supported by projected undiscounted cash
flows. Accordingly, an impairment charge was recorded to write
down the carrying value of store assets to their estimated fair value,
which was determined based on projected discounted cash flows.
Other restructuring costs in 2000 included costs related to the
termination of Eckerd’s contract with its primary third party infor-
mation technology service provider and the remaining lease pay-
ments associated with the termination of a computer hardware
contract, headcount reductions, an asset impairment on Eckerd’s
web site development initiative and the gain on the sale of a note
receivable associated with the divestiture of certain drugstore loca-
tions pursuant to a Federal Trade Commission agreement.
ACT (Accelerating Change Together) was a fundamental
rebuilding of the department store process and organization, cre-
ating a centralized buying organization. ACT required process and
organizational restructuring throughout the company’s corporate
and field structure for department stores. Incremental ACT costs
over the two-year transition period (2000-2001) totaled $91 mil-
lion. Including $20 million of capitalized hardware and software
costs, total ACT expenditures were $111 million. Beginning in
2002, costs associated with centralized merchandising resulting
from the ACT initiative are included in segment operating results
for Department Stores and Catalog.
Gains in 2001 of $57 million were recorded primarily on the sale
of two real estate partnership interests.
Real estate activities include operating income for the
Company’s real estate subsidiary and gains or losses on the sale of
facilities that are no longer used in Company operations.
The Company incurred operating losses related to third party
fulfillment operations that were discontinued in 2002.
Losses and expenses related to receivables sold as part of the
Eckerd receivables securitization are recorded in other unallocat-
ed. See Note 5 for more information about the securitization of
Eckerd receivables.
17 ROLLFORWARD OF RESTRUCTURING RESERVES
The following table presents the 2002 activity and balances of
the reserves established in connection with the Company’s
restructuring initiatives:
Balance Cash Other Balance
($ in millions) 1/26/02 Payments Adjustments 1/25/03
PVOL $ 164 $ (58) $ 5 $ 111
Severance 1(1) — —
Contract
cancellations 9(5) (2) 2
Tot al $ 174 $ (64) $ 3 $ 113
The current portion of the reserve is $37 million and $55 mil-
lion for 2002 and 2001, respectively, and is included in accounts
payable and accrued expenses. Costs are being charged against
the reserves as incurred. Imputed interest expense associated
with the discounting of these lease obligations is included in
other unallocated. Reserves are reviewed for adequacy on a peri-
odic basis and are adjusted as appropriate. The balance of the
reserves relates principally to the future lease obligations for both
department stores and drugstores closed as part of restructuring
programs in prior years. Most of the remaining cash payments
are expected to be made by the end of 2005.
18 TAXES
Deferred tax assets and liabilities reflected in the Company’s con-
solidated balance sheet as of January 25, 2003 were measured using
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered
or settled. The major components of deferred tax assets/(liabilities)
as of January 25, 2003 and January 26, 2002 were as follows:
($ in millions) 2002 2001
Deferred tax assets
Pension and other retiree obligations $ 248 $ 248
Workers’ compensation/general liability 136 127
Accrued vacation pay 68 65
Closed unit reserves 42 44
State taxes and net operating losses 210 190
Other(1) 115 160
Total deferred tax assets 819 834
Less valuation allowance (97) (85)
Net deferred tax assets $ 722 $ 749
Deferred tax liability
Depreciation and amortization (1,135) (1,067)
Prepaid pension (446) (340)
Leveraged leases (287) (297)
Inventories (154) (151)
Other(2) (171) (224)
Total deferred tax (liabilities) (2,193) (2,079)
Net deferred tax (liabilities) $ (1,471) $ (1,330)
(1) Includes certain accrued items not deductible for tax purposes until paid, such as
deferred compensation and severance benefits. Also includes certain deferred income
items currently recognized for tax purposes.
(2) Includes deferred tax items related to prepaid expenses, property taxes and origi-
nal issue discount.