JCPenney 2004 Annual Report Download - page 9

J.C. PENNEY COMPANY, INC.2 004 ANNUAL REPORT
Management’s Discussion and Analysis of Financial Condition and Results of Operations
7
Closed on the Sale of Eckerd —On July 31, 2004, the Company
closed on the sale of its Eckerd drugstore operations and received
approximately $4.7 billion in gross cash proceeds. Net cash proceeds
after income taxes, fees and transaction costs and estimated post-
closing adjustments are expected to total approximately $3.5 billion.
Implemented a Capital Structure Repositioning Program —
Using the net cash proceeds from the sale of Eckerd and approxi-
mately $1.1 billion of existing cash, the Company implemented a
major repositioning of its capital structure. This program, which is
expected to be completed in the first half of 2005, included $3.0 bil-
lion of common stock repurchases, $2.3 billion reduction of out-
standing debt and the redemption of convertible preferred stock to
JCPenney common stock. During 2004, common stock repurchas-
es under this program were $2.0 billion, and total debt reductions
were $1.7 billion.
Strengthened Liquidity — The Company ended 2004 with
approximately $4.7 billion of Cash and Short-Term Investments,
which will allow continued execution of planned common stock
repurchases and debt retirements, along with satisfying operational
needs, planned capital expenditures and dividends.
DISCONTINUED OPERATIONS
Eckerd Drugstores
During the fourth quarter of 2003, the Company’s Board of
Directors authorized management to sell the Eckerd Drugstore oper-
ations. Having met the criteria of Statement of Financial Accounting
Standards (SFAS) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” Eckerd’s net assets were classified
as “held for sale” and its results of operations and financial position
presented as a discontinued operation as of year-end 2003, with
prior periods reclassified accordingly.
On July 31, 2004, the Company closed on the sale of Eckerd for a
total of approximately $4.7 billion in gross cash proceeds that includ-
ed a $209 million adjustment for the estimated increase in Eckerd’s
working capital from January 31, 2004 to July 31, 2004. After
deducting taxes, fees and other transaction costs, and estimated
post-closing adjustments, the ultimate net cash proceeds from the
sale are expected to total approximately $3.5 billion. The Jean Coutu
Group (PJC) Inc. (Coutu) acquired Eckerd drugstores and support
facilities located in 13 Northeast and Mid-Atlantic states, as well as
the Eckerd Home Office located in Florida. CVS Corporation and
CVS Pharmacy, Inc. (collectively, CVS) acquired Eckerd drugstores
and support facilities located in the remaining Southern states, prin-
cipally Florida and Texas, as well as Eckerd’s pharmacy benefits
management, mail order and specialty pharmacy businesses.
Proceeds from the sale are being used for debt reduction and com-
mon stock repurchases, as announced in August 2004 and more
fully discussed on page 12.
The loss on the sale was $713 million pre-tax, or $1,433 million on
an after-tax basis. The relatively high tax cost is a result of the tax
basis of Eckerd being lower than its book basis because the
Company’s previous drugstore acquisitions were largely tax-free
transactions. Of the total after-tax loss on the sale, $1,325 million
was recorded in 2003 to reflect Eckerd at its estimated fair value less
costs to sell, and during 2004 the remaining $108 million was record-
ed to reflect revised estimates of certain post-closing adjustments
and resulting sales proceeds.
Additionally, $3.4 billion of the present value of operating lease
obligations (PVOL), which was an off-balance sheet obligation under
GAAP, was eliminated with the transfer of these leases to Coutu and
CVS upon the closing of the sale.
The Company established reserves at July 31, 2004 for estimated
transaction costs and post-closing adjustments. Certain of these
reserves involved significant judgment and actual costs incurred
over time could vary from these estimates. The more significant esti-
mates relate to the estimated working capital adjustment, the costs
to exit the Colorado and New Mexico markets, severance payments
to former Eckerd associates, assumption of the Eckerd Pension Plan
and various post-employment benefit obligations and environmental
indemnifications. Management reviewed and updated the reserves
in the fourth quarter of 2004. While adjustments were made to indi-
vidual reserves, management believes that, in total, the reserves
remain adequate at year-end 2004. Cash payments for the Eckerd
related reserves are included in the Company’s Consolidated
Statements of Cash Flows as Cash Paid to Discontinued Operations.
Management is currently negotiating with both CVS and Coutu
regarding the working capital adjustment as required in the sale
agreements, which could take several months to finalize. The two
sale agreements provide for an arbitration process between the
respective parties in the event that agreement cannot be reached
regarding the proper amount of adjustments.
At the closing of the sale of Eckerd on July 31, 2004, the Company
assumed sponsorship of the Eckerd Pension Plan, the Eckerd
Contingent Separation Pay Programs and various other terminated
non-qualified retirement plans and programs. The Company further
assumed all severance and post-employment health and welfare
benefit obligations under various Eckerd plans, employment and
other specific agreements. The Company is evaluating its options
with respect to these assumed liabilities, including, but not limited to,
termination of the agreements, plans or programs and/or settlement
of the underlying benefit obligations.
The Company is providing to the purchasers certain information
systems, accounting, banking, vendor contracting, tax and other
transition services as set forth in the Company’s Transition Services
Agreements (Transition Agreements) with CVS and Coutu for a peri-
od of 12 months from the closing date, unless terminated earlier by
the purchasers. One Transition Agreement with Pharmacare
Management Services, Inc., a subsidiary of CVS, involves the provi-
sion of information and data management services for a period of up
to 15 months from the closing date. Under the Transition
Agreements, the Company receives monthly service fees, which are
designed to recover the estimated costs of providing the specified
services. To the extent actual costs to provide such services exceed
the estimates, any additional costs incurred are reflected in discon-
tinued operations.
Mexico Department Stores
In November 2003, the Company closed on the sale of its six
Mexico department stores to Grupo Sanborns S.A. de C.V. of Mexico
City and recorded a loss of $14 million, net of a $27 million tax ben-
efit. In 2004, the Company recognized a gain of $4 million related to
additional tax benefits realized.
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. subsidiary of AEGON,
N.V. The DMS sale generated net cash proceeds of $1.1 billion and
a recorded loss of $273 million. In 2000, a $296 million loss was rec-