JCPenney 2003 Annual Report Download - page 43

J. C. Penney Company, Inc. 41
Notes to the Consolidated Financial Statements
17 RESTRUCTURING RESERVES
The following table presents the 2003 activity and balances of
the reserves established principally in 2000 in connection with
the Company’s formal restructuring initiatives:
Balance Cash Other Balance
($ in millions) 1/25/03 Payments Adjustments 1/31/04
PVOL $26$(14) $ 3 $ 15
Contract
cancellations 2(2) — —
Tot al $28$(16) $ 3 $ 15
The current portion of the reserve is $7 million and $17 million
for 2003 and 2002, respectively, and is included in accounts
payable and accrued expenses. Costs are being charged against
the reserves as incurred. Imputed interest expense associated
with the discounting of these lease obligations is included in Real
Estate and Other (Income)/Expense. Reserves are reviewed for
adequacy on a periodic basis and are adjusted as appropriate.
The balance of the reserves relates principally to future lease obli-
gations for department stores closed as part of restructuring pro-
grams in prior years, and does not include future lease obliga-
tions for department stores closed outside the formal plan. Most
of the remaining obligations should be paid by the end of 2005
when the majority of the leases will have terminated.
18 INCOME TAXES
Deferred tax assets and liabilities reflected in the accompany-
ing Consolidated Balance Sheets were measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. Deferred tax assets and liabilities from continuing
operations as of January 31, 2004 and January 25, 2003 were
comprised of the following:
($ in millions) 2003 2002
Deferred tax assets
Pension and other retiree obligations $267 $248
Workers’ compensation/general liability 83 85
Accrued vacation pay 51 49
Closed unit reserves 19 28
State taxes and net operating losses 164 133
Other(1) 81 74
Tot al defer red tax assets 665 617
Less valuation allowance (108) (80)
Net deferred tax assets $557 $537
Deferred tax liability
Depreciation and amortization $886 $853
Prepaid pension 539 470
Leveraged leases 280 287
Inventories 102 26
Discontinued operations–Eckerd
fair value over tax basis 875 —
Other(2) 35 49
Tot al defer red tax liabilities 2,717 1,685
Net deferred tax (liabilities) $(2,160) $(1,148)(3)
(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.
(3) A current deferred tax asset of $11 million is included in Receivables.
At the end of 2003, the Company established an estimated
current deferred tax liability of $875 million based on the pend-
ing sale of Eckerd. In accordance with SFAS No. 109, a tax liability
for the excess of financial reporting basis over the outside tax
basis of an investment in a subsidiary shall be recognized when it
is apparent that the temporary difference will reverse in the fore-
seeable future. This criteria was met as of year-end 2003 with
Eckerd classified as a discontinued operation.
Deferred tax assets are evaluated for recoverability based on
estimated future taxable income. The character and nature of
future taxable income may not allow the Company to realize cer-
tain tax benefits of state net operating losses (NOLs) within the
prescribed carryforward period. Accordingly, a valuation
allowance has been established for the amount of deferred tax
assets generated by state NOLs which may not be realized.
Deferred tax liabilities are evaluated and adjusted as appropri-
ate considering the progress of audits of various taxing jurisdic-
tions. Management does not expect the outcome of tax audits
to have a material adverse effect on the Company’s financial con-
dition, results of operations or cash flow. Many years of data
have been incorporated into the determination of tax reserves
and the Company’s estimates have been reasonable.
U.S. income and foreign withholding taxes were not provided
on certain unremitted earnings of international affiliates that the
Company considers to be permanent investments.
Income tax expense for continuing operations is as follows:
Income Tax Expense for Continuing Operations
($ in millions) 2003 2002 2001
Current
Federal and foreign $40$22$70
State and local 513 3
45 35 73
Deferred
Federal and foreign 126 90 11
State and local 11 58
137 95 19
Tot al $182 $130 $ 92