JCPenney 2004 Annual Report Download - page 43

J.C. PENNEY COMPANY, INC.2 004 ANNUAL REPORT
Notes to the Consolidated Financial Statements
41
As of January 29, 2005, future minimum lease payments for non-
cancelable operating and capital leases were:
($ in millions) Operating Capital
2005 $ 226 $ 10
2006 185 17
2007 149 5
2008 130 3
2009 110 ––
Thereafter 397 ––
Total minimum lease payments $ 1,197 $ 35
Present value $ 711 $ 31
Weighted-average interest rate 9.0% 5.3%
In connection with recent guidance issued by the Securities and
Exchange Commission, the Company reviewed its lease account-
ing practices. As a result of this review, a cumulative pre-tax
expense adjustment of $8 million was recorded, $3 million of which
related to recognizing rent on a straight-line basis over the lease
term. The remaining $5 million was to synchronize depreciation
periods for fixed assets with the related lease terms. The impact
for prior years was not material. In addition, the Company record-
ed a $111 million balance sheet adjustment at January 29, 2005 to
increase Property and Equipment, Net and establish a deferred
rent liability, included in Other Liabilities in the Company’s
Consolidated Balance Sheet, for the unamortized balance of devel-
oper/tenant allowances.
17 RETIREMENT BENEFIT PLANS
The Company provides retirement and other postretirement ben-
efits to substantially all employees (associates). Associates hired
or rehired on or after January 1, 2002 are not eligible for retiree
medical or dental coverage. Retirement benefits are an important
part of the Company’s total compensation and benefits program
designed to attract and retain qualified and talented associates.
The Company’s retirement benefit plans consist of a non-contribu-
tory qualified pension plan (primary pension plan), non-contributo-
ry supplemental retirement and deferred compensation plans for
certain management associates, a 1997 voluntary early retirement
program, a contributory medical and dental plan and a 401(k) and
employee stock ownership plan. Total Company expense for all
retirement-related benefit plans was $167 million, $207 million and
$106 million in 2004, 2003 and 2002, respectively. These plans are
described in more detail below. See Management’s Discussion and
Analysis under Critical Accounting Policies on pages 19-21 for addi-
tional discussion of the Company’s defined benefit pension plan and
Note 1 on pages 30-31 for the Company’s accounting policies regard-
ing retirement-related benefits.
Defined Benefit Retirement Plans
Primary Pension Plan — Funded
The Company and certain of its subsidiaries provide a non-con-
tributory pension plan to associates who have completed at least
1,000 hours of service, generally in a 12-consecutive-month period
and have attained age 21. The plan is funded by Company contri-
butions to a trust fund, which is held for the sole benefit of partici-
pants and beneficiaries. Participants generally become 100%
vested in the plan after five years of employment or at age 65.
Pension benefits are calculated based on an associate’s average
final pay, an average of the social security wage base, and the
associate’s credited service (up to 35 years), as defined in the plan
document.
Supplemental Retirement Plans — Unfunded
The Company has unfunded supplemental retirement plans,
which provide retirement benefits to certain management associ-
ates and other key employees. The Company pays ongoing ben-
efits from operating cash flow and cash investments. The primary
plans are a Supplemental Retirement Plan, a Benefit Restoration
Plan and a Voluntary Early Retirement Plan. Benefits for the
Supplemental Retirement Plan and Benefits Restoration Plan 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 qualified pension plan due to governmental lim-
its on the amount of benefits and the level of pay considered in the
calculation of benefits. The Supplemental Retirement Plan also
offers participants who leave the Company between ages 60 and
62 benefits equal to the estimated social security benefits payable
at age 62. Participation in this plan is limited to associates who
were profit-sharing management associates at the end of 1995.
The Voluntary Early Retirement Program was offered in 1997 to
management associates who were at least age 55 with a minimum
of 10 years of service and who elected to take early retirement.
These plans were amended in December 2003 to provide partici-
pants a one-time irrevocable election to receive remaining unpaid
benefits over a five-year period in equal annual installments.
Several other smaller plans and agreements are also included.
Expense for Defined Benefit Retirement Plans — 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 lia-
bilities, less the expected return on plan assets for the primary pen-
sion plan. Differences in actual experience in relation to assump-
tions are not recognized immediately but are deferred and amor-
tized over the average remaining service period. The components
of net periodic pension expense were as follows:
Primary Pension Plan Expense
($ in millions) 2004 2003 2002
Service costs $ 87 $ 75 $ 71
Interest costs 203 195 187
Projected return on assets (305) (249) (274)
Net amortization 97 109 40
Net periodic pension
plan expense $ 82 $ 130 $ 24
Supplemental Plans Expense
($ in millions) 2004 2003 2002
Service costs $––$ 3$ 2
Interest costs 25 23 19
Net amortization 13 8 9
Curtailment loss 3 –– ––
Net supplemental
plans expense $ 41 $ 34 $ 30
Assumptions — The weighted-average actuarial assumptions used
to determine expense for 2004, 2003 and 2002 were as follows:
2004 2003 2002
Discount rate 6.35% 7.10% 7.25%
Expected return on plan
assets 8.9% 8.9% 9.5%
Salary increase 4.0% 4.0% 4.0%