JCPenney 2004 Annual Report Download - page 37

J.C. PENNEY COMPANY, INC.2 004 ANNUAL REPORT
Notes to the Consolidated Financial Statements
35
Direct Marketing Services
In 2001, JCP closed on the sale of its J. C. Penney Direct
Marketing Services, Inc. (DMS) assets, including its J. C. Penney
Life Insurance subsidiaries and related businesses, to a U.S. sub-
sidiary of AEGON, N.V. The DMS sale generated net cash pro-
ceeds of $1.1 billion and a recorded loss of $273 million. In 2000,
a$296 million loss was recognized when DMS assets were reflect-
ed as a discontinued operation and in 2001, a $16 million loss was
recognized upon completion of the sale. These losses were offset
by gains of $34 million, $4 million and $1 million recognized in
2002, 2003 and 2004, respectively, due to tax regulation changes
and a tax audit.
The Company’s financial statements have been presented to
reflect Eckerd, Mexico and DMS as discontinued operations for all
periods presented. Results of the discontinued operations are
summarized below:
Discontinued Operations
($ in millions) 2004 2003 2002
Eckerd
Net sales $7,254 $ 15,137 $ 14,643
Gross margin 1,676 3,487 3,419
Selling, general and
administrative expenses 1,635 3,196 3,007
Interest expense(1) 97 163 161
Acquisition amortization 5 40 42
Other 275
Fair value adjustment –– 450 —
(Loss)/income before
income taxes (63) (369) 204
Income tax (benefit)/expense (23) 906(2) 75
Eckerd (loss)/income
from operations (40) (1,275) 129
(Loss) on sale of Eckerd, net of
income tax (benefit) of $(155),
$- and $- (108) — —
Total Eckerd discontinued
operations (148) (1,275) 129
Total Mexico and DMS
discontinued operations
net of income tax (benefit)
of $(5), $(30) and $(26) 5 (17) (9)
Total discontinued operations $(143) $ (1,292) $ 120
(1) Eckerd interest expense consisted primarily of interest on the intercompany loan between Eckerd and
JCPenney. The loan balance was initially based on the allocation of JCPenney debt to the Eckerd busi-
ness to reflect a competitive capital structure within the drugstore industry. While outstanding, the loan
balance fluctuated based on Eckerd cash flow requirements. The loan balance, together with accrued
interest and other intercompany payables, was $— million, $1,212 million and $1,151 million at the end
of 2004, 2003 and 2002, respectively. The loan bore interest at JCPenney’s weighted-average interest rate
on its net debt (long-term debt net of short-term investments) calculated on a monthly basis. The weight-
ed-average interest rate was 15.76% for 2004, 13.76% for 2003 and 12.05% for 2002.
(2) Includes $875 million of deferred income tax expense for the book/tax basis difference.
With the closings of the Eckerd sale on July 31, 2004 and the Mexico
stores on November 30, 2003, there were no assets or liabilities of dis-
continued operations as of January 29, 2005. Assets and liabilities of
Eckerd discontinued operations as of January 31, 2004 were as follows:
($ in millions) 2003
Cash and short-term investments $7
Receivables 441
Merchandise inventory 1,986
Prepaid expenses 33
Total current assets 2,467
Property and equipment, net 1,468
Goodwill 2,269
Intangible assets 443
Other assets 157
Total assets $ 6,804
Accounts payable and accrued expenses $ 1,422
Current deferred taxes 87
Total current liabilities 1,509
Long-term deferred taxes 218
Other liabilities 259
Total liabilities $ 1,986
JCPenney’s net investment in Eckerd $ 4,818
Fair value adjustment (450)
Fair value of JCPenney’s investment in Eckerd $ 4,368
3CAPITAL STRUCTURE REPOSITIONING
In 2004, the Company initiated a major common stock repur-
chase and debt reduction program focused on enhancing stock-
holder value and strengthening the capital structure. The
Company is using the $3.5 billion in estimated net cash proceeds
from the sale of the Eckerd drugstore operations and $1.1 billion
of existing cash balances to fund the program, which is expected
to be completed by the end of the second quarter of 2005. The
2004 Capital Structure Repositioning program consists of the fol-
lowing:
Debt Reduction
The Company’s debt reduction program consisted of planned
debt retirements totaling $2.3 billion, including the now completed
conversion of $650 million of convertible debt and JCP’s $400 mil-
lion 7.4% Debentures Due 2037, which were subject to redemption
at the option of the holders. Upon expiration of the put option on
March 1, 2005, virtually all of the holders extended their deben-
tures to the stated 2037 maturity date.
During 2004, the Company reduced debt by approximately $1.7
billion, with the $650 million debt conversion mentioned above,
$822 million of cash payments and the termination of the $221 mil-
lion Eckerd securitized receivables program.
The 2004 debt reduction program will be completed upon the
payment of $193 million of long-term debt scheduled to mature in
May 2005. Accordingly, these notes are included in Current
Maturities of Long-Term Debt on the January 29, 2005
Consolidated Balance Sheet.
During 2004, the Company incurred pre-tax charges of $47 mil-
lion related to early debt retirements. These charges are reflected
in Bond Premiums and Unamortized Costs in the Consolidated
Statements of Operations.
For more details on 2004 debt reductions, see Note 11.