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Macy's & JC Penney - Questions 1. Using the guidelines provided below, compute financial ratios for fiscal years 2009, 2010, and 2011 (ending on January 30, 2010, January 30, 2011, and January 2012, respectively). 2. Based on past profitability ratios, which firm is likely to be more profitable in the future and why? Discuss in detail. Use the component ratios of return on equity to explain the reasons for the difference in profitability across the two firms. In other words, is profit margin, asset turnover, and/or financial leverage responsible for the difference in profitability? 3. Based on the risk ratios, which firm is likely to be more risky in the future and why? 4. Based on the information contained in the Statement of Cash Flows, which firm faces greater liquidity risk? Discuss in detail by considering separately cash flows from operations, investment and financing activities, and the major components contained within each of these activities. 5. Use the information in notes 17 and 20 of the 2011 fiscal year financial statements of JC Penney for evaluating its risk. 6. As a potential investor, what other information you would be useful to you, and where is it available? Guidelines to compute ratios for JC Penney & Macy's Return on Equity = Net income/Avg. Total Equity Profit Margin = Net income/Sales Gross Margin = (Net sales - Cost of Sales)/Net Sales Total Asset Turnover = Net sales/Avg. Total Assets Accounts Receivable Turnover = Sales/Avg. Accounts Receivable Inventory Turnover Ratio = Cost of Goods Sold/Avg. Inventory Debt to Equity Ratio = Total Liabilities/Total Equity Total Liabilities = Total Assets Total Equity Current Ratio = Current Assets/Current Liabilities Quick Ratio = (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities Times Interest Earned = Income before Interest and Taxes/Interest Expense Note: JC Penney does not provide a separate amount for Accounts Receivables (it is included in Cash in banks and in transit). You may just indicate missing data for Accounts Receivable Turnover ratio. = Details of Macy's Financial Ratios Financial Ratio Year 2011 Return on Equity 2010 2009 2011 Profit Margin 2010 2009 2011 Gross Margin 2010 2009 2011 Asset Turnover = 2010 2009 2011 2010 2009 A/R Turnover Macy's (Ticker: M) 0.219 = 1256/(0.5*(5933+5530)) 0.166 = 847/(0.5*(5530+4653)) 0.070 = 329/(0.5*(4701+4646)) 0.048 = 1256/26405 0.034 = 847/25003 0.014 = 329/23489 0.404 = (26405-15738)/26405 0.407 = (25003-14824)/25003 0.405 = (23489-13973)/23489 1.236 = 26405/(0.5* (22095+20631)) 1.193 = 25003/(0.5*(20631+21300)) 1.081 = 23489/(0.5*(21300+22145)) 74.802 = 26405/(0.5*(368+338)) 66.675 = 25003/(0.5*(392+358)) 65.429 = 23489/(0.5* (358+360)). 3.187 = 15738/(0.5*(5117+4758)) 3.163 = 14824/(0.5*(4758+4615)) 2.978 = 13973/(0.5*(4615+4769)) 2.724 = (22095-5933)/5933 2.731 = (20631-5530)/5530 3.531 = (21300-4701)/4701 1.401 =8777/6263 1.362 = 6899/5065 1.545 = 6882/4454 0.510 = (2827+368)/6263 0.366 = (1464+392)/5065 0.459 = (1686+358)/4454 5.403 = (1256+712+447)/447 3.280 = (847+473+579)/579 1.902 = (329+178+562)/562 Inventory Turnover 2011 2010 2009 Debt-Equity Ratio 2011 2010 2009 2011 2010 Current Ratio 2009 2011 2010 Quick Ratio 2009 2011 Times Interest Earned 2010 2009 Table of Contents MACY'S, INC. CONSOLDATED BALANCE SHEETS (millions) January 29, 2011 January 30, 2010 $ $ 1,464 392 4,758 285 6,899 8,813 3,743 637 539 20,631 1,686 358 4,615 223 6,882 9,507 3,743 678 490 21,300 $ $ $ $ ASSETS Current Assets: Cash and cash equivalents Receivables Merchandise inventories Prepaid expenses and other current assets Total Current Assets Property and Equipment -- net Goodwill Other Intangible Assets - net Other Assets Total Assets LIABLITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt Merchandise accounts payable Accounts payable and accrued liabilities Income taxes Deferred income taxes Total Current Liabilities Long-Term Debt Deferred Income Taxes Other Liabilities Shareholders' Equity: Common stock (423.3 and 420.8 shares outstanding) Additional paid-in capital Accumulated equity Treasury stock Accumulated other comprehensive loss Total Shareholders' Equity Total Liabilities and Shareholders' Equity 454 1,421 2,644 182 364 5,065 6,971 1,245 1,820 242 1,312 2,626 68 214 4,462 8,456 1,132 2,597 5 5,696 2,990 (2,431) (730) 5,530 20,631 5 5,689 2,227 (2,515) (753) 4,653 21,300 $ MACY'S, INC. CONSOLIDATED BALANCE SHEETS (millions) January 30, 2010 January 31, 2009 $ $ 1,686 358 4,615 223 6,882 9,507 3,743 1,385 360 4,769 226 6,740 10,442 3,743 678 719 490 21,300 501 22,145 $ $ S $ ASSETS Current Assets: Cash and cash equivalents Receivables Merchandise inventories Supplies and prepaid expenses Total Current Assets Property and Equipment-net Goodwill Other Intangible Assets - net Other Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt Merchandise accounts payable Accounts payable and accrued liabilities Income taxes Deferred income taxes Total Current Liabilities Long-Term Debt Deferred Income Taxes Other Liabilities Shareholders' Equity: Common stock (420.8 and 420.1 shares outstanding) Additional paid-in capital Accumulated equity Treasury stock Accumulated other comprehensive loss Total Shareholders' Equity Total Liabilities and Shareholders' Equity 242 1,312 2,626 68 206 4,454 8,456 1,068 2,621 966 1,282 2,628 28 222 5,126 8,733 1,119 2,521 5 5,689 2,274 (2,514) (753) 4,701 21,300 5 5,663 2,008 (2,544) (486) 4,646 22,145 $ S The accompanying notes are an integral part of these Consolidated Financial Statements. F-5 MACY'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (millions) 2011 2010 2009 $ 1,256 $ 847 $ 329 25 (25) 1,085 391 1,210 1,150 70 66 76 (15) (25) (23) 7 (37) (359) (99) (51) (143) (10) 154 3 (16) 8 2 143 91 29 109 (201) 40 188 153 (45) 115 241 (757) ( 123 (372) (384) 2,093 1,506 1,750 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of properties, impairments, store closing costs and division consolidation costs Depreciation and amortization Stock-based compensation expense Amortization of financing costs and premium on acquired debt Changes in assets and liabilities: (Increase) decrease in receivables (Increase) decrease in merchandise inventories (Increase) decrease in prepaid expenses and other current assets (Increase) decrease in other assets not separately identified Increase in merchandise accounts payable Increase (decrease) in accounts payable and accrued liabilities not separately identified Increase in current income taxes Increase in deferred income taxes Decrease in other liabilitics not separately identified Net cash provided by operating activities Cash flows from investing activities: Purchase of property and equipment Capitalized software Disposition of property and equipment Proceeds from insurance claims Other, net Net cash used by investing activities Cash flows from financing activities: Debt issued Financing costs Debt repaid Dividends paid Increase (decrease) in outstanding checks Acquisition of treasury stock Issuance of common stock Net cash used by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents beginning of period Cash and cash equivalents end of period Supplemental cash flow information: (339) (555) (209) (166) (355) (105) 60 114 74 6 6 26 27 (40) (465) (3) (377) (617) 800 (1,245) (84) (966) (84) (29) (1) 24 (1) (20) (454) (148) 49 (502) 162 (113) 1,363 1,464 2,827 $ 43 8 (1,263) (222) 1,686 1,464 $ (1,072) 301 1,385 1,686 $ https://www.sec.gov/Archives/edgar/data/794367/000079436712000096/m-01282012x 10k.htm 68/133 M-01.28.2012-10K 5/10/2016 Table of Contents "Macy's Item 6. Selected Financial Data. The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and the other information contained elsewhere in this report, 2011 2009* 2007 2010 2008* (millions, except per share data) $ $ $ $ $ 26,405 (15,738) 25,003 (14,824) 23,489 (13,973) 9,516 24,892 (15,009) 9,883 26,313 (15,677) 10,636 10,667 10,179 (8,281) (8,260) (8,062) (8,481) (8,584) 25 (25) (391) (398) (5,382) (219) 1,894 1,063 1,863 2,411 (447) (4,378) (588) (579) (562) (579) 4 5 6 28 36 1,968 1,320 507 (4,938) 1,320 (712) (178) 163 (411) (473) 847 1,256 329 (4,775) 909 (16) $ 1,256 $ 847 $ 329 $ (4,775) $ 893 Consolidated Statement of Operations Data: Net sales Cost of sales Gross margin Selling, general and administrative expenses Gain on sale of properties, impairments, store closing costs and division consolidation costs Geodwill impairment charges May integration costs Operating income (Joss) Interest expense (a) Interest income Income (loss) from continuing operations before income taxes Federal, state and local income tax benefit (expense) Income (loss) from continuing operations Discontinued operations, net of income taxes (b) Net itxcome (loss) Basic earnings (loss) per share: Income (loss) from continuing operations Net income (loss) Diluted earnings (loss) per share: Income (loss) from continuing operations Net income (loss) Average number of shares outstanding Cash dividends paid per share Depreciation and amortization Capital expenditures Balance Sheet Data (at year end): Cash and cash equivalents Total assets Short-term debt Long-term debt Shareholders' equity $ 2.96 $ 2.00 $ 0.78 $ 2.04 (11.34) $ (11,34) 2.96 2.00 0.78 2.00 $ 2.92 $ 1.98 $ 0.78 $ 2.01 2.92 1.98 0.78 (11.34) $ (11.34) 420,0 1.97 423.5 422,2 445.6 420,4 2000 $ .3500 $ .2000 $ S 5275 $ .5175 $ 1,210 $ 1,278 $ 1,085 $ 764 $ 1,150 $ 505 $ 1,304 1,105 $ 460 $ 897 $ $ 2,827 $ 1,464 $ 1,686 $ 1,385 $ 676 22,095 20,631 21,300 22,145 27.789 1,103 454 242 966 666 6,655 8,456 8,733 9,087 6,971 5,530 5,933 4,653 4,620 9,907 The Company changed its methodology for recording deferred state income taxes from a blended rate basis to a separate entity basis, and has reflected the effects of such change retroactively to fiscal 2008. Even though the Company considers the change to have had only an immaterial impact on its financial condition, results of operations and cash flows, the financial condition, results of operations and cash flows for the prior periods as previously renorted have been adinted to reflect the change M-01.28.2012-10K 5/7012016 Table of Contents MACY'S, INC. CONSOLIDATED BALANCE SHEETS (millions) January 28, 2012 January 29, 2011 $ $ 1,464 338 4,758 339 2,827 368 5,117 465 8,777 8,420 3,743 598 6,899 8,813 3,743 637 539 20.631 557 $ 22,095 $ $ ASSETS Current Assets: Cash and cash equivalents Receivables Merchandise inventories Prepaid expenses and other current assets Total Current Assets Property and Equipment-net Goodwill Other Intangible Assets - net Other Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt Merchandise accounts payable Accounts payable and accrued liabilities Income taxes Deferred income taxes Total Current Liabilities Long-Term Debt Deferred Income Taxes Other Liabilities Shareholders' Equity: Common stock (414.2 and 423.3 shares outstanding) Additional paid-in capital Accumulated equity Treasury stock Accumulated other comprehensive loss Total Shareholders' Equity Total Liabilities and Shareholders' Equity 1,103 $ 1,593 2,788 371 454 1,421 2,525 182 408 409 6,263 6,655 1,141 2,103 4,991 6,971 1,200 1,939 5 5 5,408 4,015 (2,434) (1,061) 5,933 22,095 5,696 2,990 (2,431) (730) 5,530 20,631 $ $ The accompanying notes are an integral part of these Consolidated Financial Statements. F-5 Table of Contents Jcpenney CONSOLIDATED STATEMENTS OF OPERATIONS 2011 $ 17,260 11,042 6,218 2010 $ 17,759 10,799 6,960 2009 $ 17,556 10,646 6,910 5,410 337 495 5 5,109 121 518 21 451 6,220 (2) 227 5,358 255 511 (28) 32 6,128 832 231 20 6,247 663 260 581 ($ in millions, except per share data) Total net sales Cost of goods sold Gross margin Operating expenses/(income): Selling, general and administrative (SG&A) Pension Depreciation and amortization Real estate and other, net Restructuring and management transition Total operating expenses Operating (loss/income Net interest expense Bond premiums and unamortized costs (Loss)/income from continuing operations before income taxes Income tax (benefity/expense (Loss)/income from continuing operations Income from discontinued operations, net of income tax expense of $- $4 and $1, respectively Net (Loss)/income Basic (loss)/earnings per share: Continuing operations Discontinued operations Net (loss)/income Diluted (loss/earnings per share: Continuing operations Discontinued operations Net (loss)/income Weighted average shares--basic Weighted average shares-diluted (229) (77) (152) 203 403 154 249 378 ***** 1101 11 389 2 251 $ (152) $ $ (0.70) $ 1.60 0.04 1.64 1.07 0.01 1.08 $ (0.70) $ $ (0.70) $ 1.59 0.04 $ 1.63 $ (0.70) 217.4 217.4 1.07 0.01 1.08 232.0 233.1 236.4 238.0 Table of Contents Jcpenney CONSOLIDATED BALANCE SHEETS 2011 $ . 175 1,332 1,507 2,916 413 245 5,081 5,176 ($ in millions, except per share data) Assets Current assets Cash in banks and in transit Cash short-term investments Cash and cash equivalents Merchandise inventory Income taxes Prepaid expenses and other Total current assets Property and equipment, net Prepaid pension Other assets Total Assets Liabilities and Stockholders' Equity Current liabilities Merchandise accounts payable Other accounts payable and accrued expenses Current maturities of long-terin debt, including capital leases Total current liabilities Long-terin debt Deferred taxes Other liabilities Total Liabilities 1,167 $ 11,424 2:59********.1 39 38890 $ 1,022 1,503 231 2,756 2,871 888 899 7,414 Stockholders' Equity Common stock(1) Additional paid-in capital Reinvested earnings Accumulated other comprehensive (loss) Total Stockholders' Equity Total Liabilities and Stockholders' Equity 108 3,699 1,412 (1,209) 4,010 $ 11,424 (1) Common stock has a par value of $0.50 per share; 1,250 million shares are authorized. At January 28, 2012, 215.9 million shares were issued and outstanding. At January 29, 2011, 236.7 million shares were issued and outstanding, Table of Contents JaPenney CONSOLIDATED BALANCE SHEETS 2010 2009 169 $ 163 2,848 3,011 3,024 395 ($ in millions, except per share data) Assets Current assets Cash in banks and in transit Cash short-term investments Cash and cash equivalents Merchandise inventory Income taxes receivable Prepaid expenses and other Total current assets Property and equipment, net Prepaid pension Other assets Total Assets Liabilities and Stockholders' Equity Current liabilities Merchandise accounts payable Other accounts payable and accrued expenses Current maturities of long-term debt Total current liabilities Long-term debt De ferred taxes Other liabilities Total Liabilities $ 2,453 2,622 3,213 334 201 6,370 5,231 763 678 $ 13,042 222 6,652 5,357 572 $ 12,581 $ $ 1,133 1,514 2,647 3,099 1,192 644 7,582 1,226 1,630 393 3,249 2,999 817 738 7,803 Stockholders' Equity Common stock (1) Additional paid-in capital Reinvested earnings Accumulated other comprehensive (loss) Total Stockholders' Equity Total Liabilities and Stockholders' Equity 118 3,925 2,222 (805) 5,460 $ 13,042 118 3,867 2,023 (1,230) 4,778 $ 12,581 (1) Common stock has a par value of $0.50 per share; 1,250 million shares are authorized. At January 29, 2011, 237 million shares were issued and outstanding. At January 30, 2010, 236 million shares were issued and outstanding. Table of Contents Je Penney CONSOLIDATED BALANCE SHEETS 2009 2008 ($ in millions, except per share data) Assets Current assets Cash in banks and in transit Cash short-term investments Cash and cash equivalents Merchandise inventory Income taxes receivable Prepaid expenses and other Total current assets Property and equipment, net Other assets Total Assets Liabilities and Stockholders' Equity Current liabilities Merchandise accounts payable Other accounts payable and accrued expenses Current maturities of long-term debt Total current liabilities Long-term debt Deferred taxes Other liabilities Total Liabilities $ 163 2,848 3,011 3,024 395 222 6,652 5,357 572 $ 12,581 $ 167 2,185 2,352 3,259 352 257 6,220 5,367 424 $ 12,011 $ $ 1.226 1,630 393 1,194 1,600 399184 2,794 3,505 3,249 2,999 817 738 7,803 7,856 Stockholders' Equity Common stock(1) Additional paid-in capital Reinvested earings Accumulated other comprehensive (loss) Total Stockholders' Equity Total Liabilities and Stockholders' Equity 1*** *92373 118 3,867 2,023 (1,230) 4,778 $ 12,581 3,499 1,959 (1,414) 4,155 $ 12,011 (1) Common stock has a par value of $0.50 per share; 1,250 million shares are authorized. At January 30, 2010, 236 million shares were issued and outstanding. At January 31, 2009, 222 million shares were issued and outstanding. Table of Contents Jcpenney CONSOLIDATED STATEMENTS OF CASH FLOWS 2011 2010 2009 $ (152) $ 389 (11) S 251 (2) 48 495 (2) 276 40 **3&sga s garai 76 235 36 32 (54) 142 1,573 (499) 14 (600) 13 ( in millions) Cash flows from operating activities: Net (loss income (Income) from discontinued operations Adjustinents to reconcile net (loss)'income to net cash provided by operating activities: Restructuring and management transition Asset impaiments and other charges Depreciation and amortization Net (gains) on sale of assets Benefit plans expense Pension contribution Stock-based compensation Excess tax benefits from stock-based compensation Deferred taxes Change in cash from: Inventory Prepaid expenses and other assets Merchandise accounts payable Current income taxes payable Accrued expenses and other Net cash provided by operating activities Cash flows from investing activities: Capital expenditures Proceeds from sale of assets Proceeds from joint venture distribution Acquisition Cost investment, net Net cash (used in) investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt Payments of long-term debt Financing costs Dividends paid, common Proceeds from issuance of stock warrant Stock repurchase program Proceeds from stock options exercised Excess tax benefits from stock-based compensation Tax withholding payments reimbursed by restricted stock Net cash (used in) financing activities Net (decrease increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental cash flow information: Income taxes paid interest paid Interest received Significant non-cash transactions: https://www.sec.gov/Archives/edgar/data/1168126/000119312512135077|d298119d10x.htm 207** $898218| - *390 39*@** 99350*** (485) (587) 392 (693) (14) (189) (113) (32) (183) 8 2 (496) (389) (3 (327) 659 2,352 $ 3,011 3,011 99871*** $ 2,622 $ 130 264 5 65/116 5/10/2016 Form 10-K Table of Contents Jcpenney Note 17 The following table reconciles the activity for the restructuring and management transition liability for 2011 and 2010: Catalog and Supply Chain Catalog Outlet Stores Employment Termination Benefits VERP $ Management Transition $ Other $ $ Total $ 32 21 4 (7)(1) ($ in millions) January 30, 2010 Charges Cash payments Non-cash January 29, 2011 Charges Cash payments Non-cash January 28, 2012 4 (171) 4 34 (12) (262) 41 (10) (281) 3 41 (17) 179 (2) (1773) 130 (41) (79)(4) 10 26 (3) (40) $ 19 (24) 8 451 (85) (314) $ 60 $ $ 28 (1) Amounts represent increased depreciation as a result of shortening the useful lives of assets associated with our catalog outlet stores and our supply chain and custom decorating operations. (2) Amount includes the loss on the sale of the catalog outlet stores. (3) Amount includes $133 million that reduced the prepaid status of our primary plan and $44 million that increased the unfunded status of our Supplemental Retirement Program and Benefit Restoration Plan on October 15, 2011, (4) Amount represents stock-based compensation expense related to management transitions, 18) Real Estate and Other, Net 2011 2010 2009 $ $ $ ($ in millions) Real estate activities Impairments (Note 9) Net gains from sale of real estate Other Total expense/income) (38) 58 (6) 7 21 (34) 3 (8) 11 (28 (34) 42 (2) (1) 5 $ $ Real estate and other, net consists mainly of ongoing operating income from our real estate subsidiaries whose primary investments are in REITs, as well as investments in 13 joint ventures that own regional mall properties, five as general partner and eight as limited partner. Real estate and other also includes net gains from the sale of facilities and equipment that are no longer used in Company operations, asset impairments and other non-operating corporate charges and credits. In 2011, 2010 and 2009, we received dividend income from our REITs totaling $10 million, $8 million and $8 million, respectively. In 2011, 2010 and 2009, we recorded investment income for our proportional share of earnings from our joint ventures totaling $13 million, $ 15 million and $15 million, respectively. F-40 5/10/2016 Form 10-K Table of Contents Je Penney Note 17 The expense for these plans, which was predominantly included in SG&A expenses on the Consolidated Statements of Operations, was as follows: ($ in millions) Savings Plan - 401(k) Savings Plan - retirement account Mirror Savings Plan Total 2011 $ 52 11 4 $ 67 2010 $ 41 12 3 $ 56 2009 S 55 8 2 S 65 17) Restructuring and Management Transition Charges In 2011 and 2010, we incurred $451 million and $32 million, respectively, of restructuring and management transition charges. Restructuring and management transition charges include costs related to activities to streamline our supply chain operations, exit our catalog and catalog outlet businesses, cost savings initiatives to reduce store and home office expenses, the VERP, management transition charges related to the hiring and departure of certain members of management and other miscellaneous restructuring costs including the exit of our two specialty websites, CLADTM and Gifting GraceTM Supply chain As a result of consolidating and streamlining our supply chain organization as part of a restructuring program during 2011, we recorded $28 million of increased depreciation, $8 million of costs to close and consolidate facilities and $5 million of employee severance. Increased depreciation resulted from shortening the useful lives of assets related to the closing and consolidating of selected facilities. We are expecting to incur a total of approximately $55 million in expense related to this restructuring activity, with $41 million incurred in 2011 and the remainder to be incurred in 2012. Catalog and catalog outlet stores In the fourth quarter of 2010, we announced our plan to exit the catalog outlet stores and wind down our catalog business. As result, in 2010 we recorded $17 million of increased depreciation and $4 million of employee severance. Increased depreciation resulted from shortening the useful lives of assets associated with our catalog and catalog outlet stores. On October 16, 2011, we completed an asset purchase agreement to sell the assets related to the operations of our catalog outlet stores. We sold fixed assets and inventory with combined net book values of approximately $31 million, for a total purchase price of $7 million, which resulted in a loss of $24 million. In 2011, we also recorded an additional $10 million of severance and other costs related to the sale of our catalog outlet stores. In total for 2011 and 2010, we recorded $55 million related to the exit of our catalog and catalog outlet stores. We do not expect to incur any additional costs related to this program, as the catalog outlet stores were sold during 2011 and the catalog operations were discontinued at the end of 2010. Employment termination benefits In 2011 and 2010, we recorded $41 million and $4 million, respectively, of employee termination benefits for actions to reduce our store and home office expenses. We are expecting to incur additional charges in 2012 related to this restructuring activity. VERP As a part of several restructuring and cost-savings initiatives designed to reduce salary and related costs across the Company, in August of 2011 we announced a VERP which was offered to F-38 5/10/2016 Form 10-K Table of Contents Jcpenney Note 17 approximately 8,000 eligible associates. In the third quarter of 2011, we recorded a total charge of $179 million related to the VERP. Charges included $176 million related to enhanced retirement benefits for the approximately 4,000 associates who accepted the VERP, $1 million related to curtailment charges for our Supplemental Retirement Program and Benefit Restoration Plan as a result of the reduction in the expected years of future service related to these plans, and an additional $2 million of costs associated with administering the VERP. This program was completed in 2011 and we do not expect to incur any additional costs related to the enhanced benefits associated with the VERP. Management transition During 2011, we announced and implemented several changes within our management leadership team which resulted in management transition costs of $130 million during the year. Ronald B. Johnson became Chief Executive Officer on November 1, 2011, succeeding Myron E. Ullman, III, Mr. Ullman was Executive Chairman of the Board of Directors until January 27, 2012, at which time he retired from the Company. During 2011, we incurred transition charges of $53 million and $29 million related to Mr. Johnson and Mr. Ullman, respectively. In October 2011, Michael R. Francis was appointed President and as part of his employment package, he was awarded a one-time sign-on bonus of $12 million. In November 2011, Michael W. Kramer and Daniel E. Walker were appointed Chief Operating Officer and Chief Talent Officer, respectively, and as part of their respective employment packages, they were awarded one-time sign-on bonuses of $4 million and $8 million, respectively. We also recorded $24 million of management transition charges primarily related to other members of management in 2011. Other In 2011, we recorded $26 million of charges primarily related to the restructuring activities associated with streamlining our custom decorating operations and the exit of our specialty websites CLAD and Gifting Grace. In 2010 we recorded $7 million of charges primarily related to the restructuring activities associated with streamlining our custom decorating operations. In 2011 and 2010, we recorded $4 million and $3 million, respectively, of charges primarily related to increased depreciation as a result of closing and consolidating facilities related to our custom decorating operations. In the fourth quarter of 2011, we recorded $8 million related to the exit of our specialty websites primarily related to termination benefits and contract termination costs. In 2011 and 2010, we incurred $14 million and $4 million, respectively, of additional miscellaneous restructuring costs. We expect to incur an additional $2 million of costs associated with the exit of our specialty websites in 2012 related to lease termination costs. We do not expect to incur any additional costs associated with any of the other miscellaneous restructuring programs that were initiated in 2010 and 2011. F-39 5/10/2016 Form 10-K Table of Contents JC Penney Note 20 20) Litigation, Other Contingencies and Guarantees We are subject to various legal and governmental proceedings involving routine litigation incidental to our business. Reserves have been established based on our best estimates of our potential liability in certain of these matters. These estimates have been developed in consultation with in-house and outside counsel. While no assurance can be given as to the ultimate outcome of these matters, we currently believe that the final resolution of these actions, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources. As of January 28, 2012, we estimated our total potential environmental liabilities to range from S21 million to $27 million and recorded our best estimate of $21 million in other liabilities in the Consolidated Balance Sheet as of that date. This estimate covered potential liabilities primarily related to underground storage tanks, remediation of environmental conditions involving our former drugstore locations and asbestos removal in connection with approved plans to renovate or dispose of our facilities. We continue to assess required remediation and the adequacy of environmental reserves as new information becomes available and known conditions are further delineated. If we were to incur losses at the upper end of the estimated range, we do not believe that such losses would have a material effect on our financial condition, results of operations or liquidity. As part of the 2001 asset sale of J. C. Penney Direct Marketing Services, Inc., JCP signed a guarantee agreement with a maximum exposure of $20 million. Any potential claims or losses are first recovered from established reserves, then from the purchaser and finally from any state insurance guarantee fund before JCP's guarantee would be invoked. As a result, we do not believe that any potential exposure would have a material effect on our consolidated financial statements. In connection with the sale of the operations of our catalog outlet stores (see Note 17), we assigned leases on 10 catalog outlet store locations to the purchaser. As part of the assignment agreements, we became third guarantor for all 10 of the assigned lease agreements. In the event of lease default by the purchaser, our maximum obligation under the lease guarantees, as of January 28, 2012, is $25 million, assuming acceleration of all lease payments. The 10 leases have expiration dates beginning in June 2014 with the last lease expiring in November 2020. 21) Quarterly Results of Operations (Unaudited) The following is a summary of our quarterly unaudited consolidated results of operations for 2011 and 2010: 2011 First Quarter 3,943 1,595 1,281 Second Quarter $ 3,906 1,497 1,243 Third Quarter 3,986 1,489 1,242 Fourth Quarter $ 5,425 1,63700) 1,343 ($ in millions, except EPS) Total net sales Gross margin SG&A expenses Restructuring and management transition(2) Income/(loss) from continuing operations Net income/loss) Diluted earnings/(loss) per share(8) 9(3) 23(0) 265(5) 1546) 64 14 14 (143) (143) (877) (87) 64 $ $ $ $ 0.28 $ 0.07 $ (0.67) $ (0.41) F-43 more Compare: Entet ticker here Add Dow Jones S&P 500 HBAYF JCP SHLD KSS BLKIA JWN BONT Zoom: 18 5d im 3m 6m YTD 1y sy 10y All Dec 31, 2004 - Dec 31, 2015 JCP 83.34% OM-36.67% 19 100% 80% 609 Je penney 40% 20% 09 arm whinmay Enzy my -20% Lahat Macy's -40% Any , hen -60% -80% -100% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Macy's & JC Penney - Questions 1. Using the guidelines provided below, compute financial ratios for fiscal years 2009, 2010, and 2011 (ending on January 30, 2010, January 30, 2011, and January 2012, respectively). 2. Based on past profitability ratios, which firm is likely to be more profitable in the future and why? Discuss in detail. Use the component ratios of return on equity to explain the reasons for the difference in profitability across the two firms. In other words, is profit margin, asset turnover, and/or financial leverage responsible for the difference in profitability? 3. Based on the risk ratios, which firm is likely to be more risky in the future and why? 4. Based on the information contained in the Statement of Cash Flows, which firm faces greater liquidity risk? Discuss in detail by considering separately cash flows from operations, investment and financing activities, and the major components contained within each of these activities. 5. Use the information in notes 17 and 20 of the 2011 fiscal year financial statements of JC Penney for evaluating its risk. 6. As a potential investor, what other information you would be useful to you, and where is it available? Guidelines to compute ratios for JC Penney & Macy's Return on Equity = Net income/Avg. Total Equity Profit Margin = Net income/Sales Gross Margin = (Net sales - Cost of Sales)/Net Sales Total Asset Turnover = Net sales/Avg. Total Assets Accounts Receivable Turnover = Sales/Avg. Accounts Receivable Inventory Turnover Ratio = Cost of Goods Sold/Avg. Inventory Debt to Equity Ratio = Total Liabilities/Total Equity Total Liabilities = Total Assets Total Equity Current Ratio = Current Assets/Current Liabilities Quick Ratio = (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities Times Interest Earned = Income before Interest and Taxes/Interest Expense Note: JC Penney does not provide a separate amount for Accounts Receivables (it is included in Cash in banks and in transit). You may just indicate missing data for Accounts Receivable Turnover ratio. = Details of Macy's Financial Ratios Financial Ratio Year 2011 Return on Equity 2010 2009 2011 Profit Margin 2010 2009 2011 Gross Margin 2010 2009 2011 Asset Turnover = 2010 2009 2011 2010 2009 A/R Turnover Macy's (Ticker: M) 0.219 = 1256/(0.5*(5933+5530)) 0.166 = 847/(0.5*(5530+4653)) 0.070 = 329/(0.5*(4701+4646)) 0.048 = 1256/26405 0.034 = 847/25003 0.014 = 329/23489 0.404 = (26405-15738)/26405 0.407 = (25003-14824)/25003 0.405 = (23489-13973)/23489 1.236 = 26405/(0.5* (22095+20631)) 1.193 = 25003/(0.5*(20631+21300)) 1.081 = 23489/(0.5*(21300+22145)) 74.802 = 26405/(0.5*(368+338)) 66.675 = 25003/(0.5*(392+358)) 65.429 = 23489/(0.5* (358+360)). 3.187 = 15738/(0.5*(5117+4758)) 3.163 = 14824/(0.5*(4758+4615)) 2.978 = 13973/(0.5*(4615+4769)) 2.724 = (22095-5933)/5933 2.731 = (20631-5530)/5530 3.531 = (21300-4701)/4701 1.401 =8777/6263 1.362 = 6899/5065 1.545 = 6882/4454 0.510 = (2827+368)/6263 0.366 = (1464+392)/5065 0.459 = (1686+358)/4454 5.403 = (1256+712+447)/447 3.280 = (847+473+579)/579 1.902 = (329+178+562)/562 Inventory Turnover 2011 2010 2009 Debt-Equity Ratio 2011 2010 2009 2011 2010 Current Ratio 2009 2011 2010 Quick Ratio 2009 2011 Times Interest Earned 2010 2009 Table of Contents MACY'S, INC. CONSOLDATED BALANCE SHEETS (millions) January 29, 2011 January 30, 2010 $ $ 1,464 392 4,758 285 6,899 8,813 3,743 637 539 20,631 1,686 358 4,615 223 6,882 9,507 3,743 678 490 21,300 $ $ $ $ ASSETS Current Assets: Cash and cash equivalents Receivables Merchandise inventories Prepaid expenses and other current assets Total Current Assets Property and Equipment -- net Goodwill Other Intangible Assets - net Other Assets Total Assets LIABLITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt Merchandise accounts payable Accounts payable and accrued liabilities Income taxes Deferred income taxes Total Current Liabilities Long-Term Debt Deferred Income Taxes Other Liabilities Shareholders' Equity: Common stock (423.3 and 420.8 shares outstanding) Additional paid-in capital Accumulated equity Treasury stock Accumulated other comprehensive loss Total Shareholders' Equity Total Liabilities and Shareholders' Equity 454 1,421 2,644 182 364 5,065 6,971 1,245 1,820 242 1,312 2,626 68 214 4,462 8,456 1,132 2,597 5 5,696 2,990 (2,431) (730) 5,530 20,631 5 5,689 2,227 (2,515) (753) 4,653 21,300 $ MACY'S, INC. CONSOLIDATED BALANCE SHEETS (millions) January 30, 2010 January 31, 2009 $ $ 1,686 358 4,615 223 6,882 9,507 3,743 1,385 360 4,769 226 6,740 10,442 3,743 678 719 490 21,300 501 22,145 $ $ S $ ASSETS Current Assets: Cash and cash equivalents Receivables Merchandise inventories Supplies and prepaid expenses Total Current Assets Property and Equipment-net Goodwill Other Intangible Assets - net Other Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt Merchandise accounts payable Accounts payable and accrued liabilities Income taxes Deferred income taxes Total Current Liabilities Long-Term Debt Deferred Income Taxes Other Liabilities Shareholders' Equity: Common stock (420.8 and 420.1 shares outstanding) Additional paid-in capital Accumulated equity Treasury stock Accumulated other comprehensive loss Total Shareholders' Equity Total Liabilities and Shareholders' Equity 242 1,312 2,626 68 206 4,454 8,456 1,068 2,621 966 1,282 2,628 28 222 5,126 8,733 1,119 2,521 5 5,689 2,274 (2,514) (753) 4,701 21,300 5 5,663 2,008 (2,544) (486) 4,646 22,145 $ S The accompanying notes are an integral part of these Consolidated Financial Statements. F-5 MACY'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (millions) 2011 2010 2009 $ 1,256 $ 847 $ 329 25 (25) 1,085 391 1,210 1,150 70 66 76 (15) (25) (23) 7 (37) (359) (99) (51) (143) (10) 154 3 (16) 8 2 143 91 29 109 (201) 40 188 153 (45) 115 241 (757) ( 123 (372) (384) 2,093 1,506 1,750 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of properties, impairments, store closing costs and division consolidation costs Depreciation and amortization Stock-based compensation expense Amortization of financing costs and premium on acquired debt Changes in assets and liabilities: (Increase) decrease in receivables (Increase) decrease in merchandise inventories (Increase) decrease in prepaid expenses and other current assets (Increase) decrease in other assets not separately identified Increase in merchandise accounts payable Increase (decrease) in accounts payable and accrued liabilities not separately identified Increase in current income taxes Increase in deferred income taxes Decrease in other liabilitics not separately identified Net cash provided by operating activities Cash flows from investing activities: Purchase of property and equipment Capitalized software Disposition of property and equipment Proceeds from insurance claims Other, net Net cash used by investing activities Cash flows from financing activities: Debt issued Financing costs Debt repaid Dividends paid Increase (decrease) in outstanding checks Acquisition of treasury stock Issuance of common stock Net cash used by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents beginning of period Cash and cash equivalents end of period Supplemental cash flow information: (339) (555) (209) (166) (355) (105) 60 114 74 6 6 26 27 (40) (465) (3) (377) (617) 800 (1,245) (84) (966) (84) (29) (1) 24 (1) (20) (454) (148) 49 (502) 162 (113) 1,363 1,464 2,827 $ 43 8 (1,263) (222) 1,686 1,464 $ (1,072) 301 1,385 1,686 $ https://www.sec.gov/Archives/edgar/data/794367/000079436712000096/m-01282012x 10k.htm 68/133 M-01.28.2012-10K 5/10/2016 Table of Contents "Macy's Item 6. Selected Financial Data. The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and the other information contained elsewhere in this report, 2011 2009* 2007 2010 2008* (millions, except per share data) $ $ $ $ $ 26,405 (15,738) 25,003 (14,824) 23,489 (13,973) 9,516 24,892 (15,009) 9,883 26,313 (15,677) 10,636 10,667 10,179 (8,281) (8,260) (8,062) (8,481) (8,584) 25 (25) (391) (398) (5,382) (219) 1,894 1,063 1,863 2,411 (447) (4,378) (588) (579) (562) (579) 4 5 6 28 36 1,968 1,320 507 (4,938) 1,320 (712) (178) 163 (411) (473) 847 1,256 329 (4,775) 909 (16) $ 1,256 $ 847 $ 329 $ (4,775) $ 893 Consolidated Statement of Operations Data: Net sales Cost of sales Gross margin Selling, general and administrative expenses Gain on sale of properties, impairments, store closing costs and division consolidation costs Geodwill impairment charges May integration costs Operating income (Joss) Interest expense (a) Interest income Income (loss) from continuing operations before income taxes Federal, state and local income tax benefit (expense) Income (loss) from continuing operations Discontinued operations, net of income taxes (b) Net itxcome (loss) Basic earnings (loss) per share: Income (loss) from continuing operations Net income (loss) Diluted earnings (loss) per share: Income (loss) from continuing operations Net income (loss) Average number of shares outstanding Cash dividends paid per share Depreciation and amortization Capital expenditures Balance Sheet Data (at year end): Cash and cash equivalents Total assets Short-term debt Long-term debt Shareholders' equity $ 2.96 $ 2.00 $ 0.78 $ 2.04 (11.34) $ (11,34) 2.96 2.00 0.78 2.00 $ 2.92 $ 1.98 $ 0.78 $ 2.01 2.92 1.98 0.78 (11.34) $ (11.34) 420,0 1.97 423.5 422,2 445.6 420,4 2000 $ .3500 $ .2000 $ S 5275 $ .5175 $ 1,210 $ 1,278 $ 1,085 $ 764 $ 1,150 $ 505 $ 1,304 1,105 $ 460 $ 897 $ $ 2,827 $ 1,464 $ 1,686 $ 1,385 $ 676 22,095 20,631 21,300 22,145 27.789 1,103 454 242 966 666 6,655 8,456 8,733 9,087 6,971 5,530 5,933 4,653 4,620 9,907 The Company changed its methodology for recording deferred state income taxes from a blended rate basis to a separate entity basis, and has reflected the effects of such change retroactively to fiscal 2008. Even though the Company considers the change to have had only an immaterial impact on its financial condition, results of operations and cash flows, the financial condition, results of operations and cash flows for the prior periods as previously renorted have been adinted to reflect the change M-01.28.2012-10K 5/7012016 Table of Contents MACY'S, INC. CONSOLIDATED BALANCE SHEETS (millions) January 28, 2012 January 29, 2011 $ $ 1,464 338 4,758 339 2,827 368 5,117 465 8,777 8,420 3,743 598 6,899 8,813 3,743 637 539 20.631 557 $ 22,095 $ $ ASSETS Current Assets: Cash and cash equivalents Receivables Merchandise inventories Prepaid expenses and other current assets Total Current Assets Property and Equipment-net Goodwill Other Intangible Assets - net Other Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt Merchandise accounts payable Accounts payable and accrued liabilities Income taxes Deferred income taxes Total Current Liabilities Long-Term Debt Deferred Income Taxes Other Liabilities Shareholders' Equity: Common stock (414.2 and 423.3 shares outstanding) Additional paid-in capital Accumulated equity Treasury stock Accumulated other comprehensive loss Total Shareholders' Equity Total Liabilities and Shareholders' Equity 1,103 $ 1,593 2,788 371 454 1,421 2,525 182 408 409 6,263 6,655 1,141 2,103 4,991 6,971 1,200 1,939 5 5 5,408 4,015 (2,434) (1,061) 5,933 22,095 5,696 2,990 (2,431) (730) 5,530 20,631 $ $ The accompanying notes are an integral part of these Consolidated Financial Statements. F-5 Table of Contents Jcpenney CONSOLIDATED STATEMENTS OF OPERATIONS 2011 $ 17,260 11,042 6,218 2010 $ 17,759 10,799 6,960 2009 $ 17,556 10,646 6,910 5,410 337 495 5 5,109 121 518 21 451 6,220 (2) 227 5,358 255 511 (28) 32 6,128 832 231 20 6,247 663 260 581 ($ in millions, except per share data) Total net sales Cost of goods sold Gross margin Operating expenses/(income): Selling, general and administrative (SG&A) Pension Depreciation and amortization Real estate and other, net Restructuring and management transition Total operating expenses Operating (loss/income Net interest expense Bond premiums and unamortized costs (Loss)/income from continuing operations before income taxes Income tax (benefity/expense (Loss)/income from continuing operations Income from discontinued operations, net of income tax expense of $- $4 and $1, respectively Net (Loss)/income Basic (loss)/earnings per share: Continuing operations Discontinued operations Net (loss)/income Diluted (loss/earnings per share: Continuing operations Discontinued operations Net (loss)/income Weighted average shares--basic Weighted average shares-diluted (229) (77) (152) 203 403 154 249 378 ***** 1101 11 389 2 251 $ (152) $ $ (0.70) $ 1.60 0.04 1.64 1.07 0.01 1.08 $ (0.70) $ $ (0.70) $ 1.59 0.04 $ 1.63 $ (0.70) 217.4 217.4 1.07 0.01 1.08 232.0 233.1 236.4 238.0 Table of Contents Jcpenney CONSOLIDATED BALANCE SHEETS 2011 $ . 175 1,332 1,507 2,916 413 245 5,081 5,176 ($ in millions, except per share data) Assets Current assets Cash in banks and in transit Cash short-term investments Cash and cash equivalents Merchandise inventory Income taxes Prepaid expenses and other Total current assets Property and equipment, net Prepaid pension Other assets Total Assets Liabilities and Stockholders' Equity Current liabilities Merchandise accounts payable Other accounts payable and accrued expenses Current maturities of long-terin debt, including capital leases Total current liabilities Long-terin debt Deferred taxes Other liabilities Total Liabilities 1,167 $ 11,424 2:59********.1 39 38890 $ 1,022 1,503 231 2,756 2,871 888 899 7,414 Stockholders' Equity Common stock(1) Additional paid-in capital Reinvested earnings Accumulated other comprehensive (loss) Total Stockholders' Equity Total Liabilities and Stockholders' Equity 108 3,699 1,412 (1,209) 4,010 $ 11,424 (1) Common stock has a par value of $0.50 per share; 1,250 million shares are authorized. At January 28, 2012, 215.9 million shares were issued and outstanding. At January 29, 2011, 236.7 million shares were issued and outstanding, Table of Contents JaPenney CONSOLIDATED BALANCE SHEETS 2010 2009 169 $ 163 2,848 3,011 3,024 395 ($ in millions, except per share data) Assets Current assets Cash in banks and in transit Cash short-term investments Cash and cash equivalents Merchandise inventory Income taxes receivable Prepaid expenses and other Total current assets Property and equipment, net Prepaid pension Other assets Total Assets Liabilities and Stockholders' Equity Current liabilities Merchandise accounts payable Other accounts payable and accrued expenses Current maturities of long-term debt Total current liabilities Long-term debt De ferred taxes Other liabilities Total Liabilities $ 2,453 2,622 3,213 334 201 6,370 5,231 763 678 $ 13,042 222 6,652 5,357 572 $ 12,581 $ $ 1,133 1,514 2,647 3,099 1,192 644 7,582 1,226 1,630 393 3,249 2,999 817 738 7,803 Stockholders' Equity Common stock (1) Additional paid-in capital Reinvested earnings Accumulated other comprehensive (loss) Total Stockholders' Equity Total Liabilities and Stockholders' Equity 118 3,925 2,222 (805) 5,460 $ 13,042 118 3,867 2,023 (1,230) 4,778 $ 12,581 (1) Common stock has a par value of $0.50 per share; 1,250 million shares are authorized. At January 29, 2011, 237 million shares were issued and outstanding. At January 30, 2010, 236 million shares were issued and outstanding. Table of Contents Je Penney CONSOLIDATED BALANCE SHEETS 2009 2008 ($ in millions, except per share data) Assets Current assets Cash in banks and in transit Cash short-term investments Cash and cash equivalents Merchandise inventory Income taxes receivable Prepaid expenses and other Total current assets Property and equipment, net Other assets Total Assets Liabilities and Stockholders' Equity Current liabilities Merchandise accounts payable Other accounts payable and accrued expenses Current maturities of long-term debt Total current liabilities Long-term debt Deferred taxes Other liabilities Total Liabilities $ 163 2,848 3,011 3,024 395 222 6,652 5,357 572 $ 12,581 $ 167 2,185 2,352 3,259 352 257 6,220 5,367 424 $ 12,011 $ $ 1.226 1,630 393 1,194 1,600 399184 2,794 3,505 3,249 2,999 817 738 7,803 7,856 Stockholders' Equity Common stock(1) Additional paid-in capital Reinvested earings Accumulated other comprehensive (loss) Total Stockholders' Equity Total Liabilities and Stockholders' Equity 1*** *92373 118 3,867 2,023 (1,230) 4,778 $ 12,581 3,499 1,959 (1,414) 4,155 $ 12,011 (1) Common stock has a par value of $0.50 per share; 1,250 million shares are authorized. At January 30, 2010, 236 million shares were issued and outstanding. At January 31, 2009, 222 million shares were issued and outstanding. Table of Contents Jcpenney CONSOLIDATED STATEMENTS OF CASH FLOWS 2011 2010 2009 $ (152) $ 389 (11) S 251 (2) 48 495 (2) 276 40 **3&sga s garai 76 235 36 32 (54) 142 1,573 (499) 14 (600) 13 ( in millions) Cash flows from operating activities: Net (loss income (Income) from discontinued operations Adjustinents to reconcile net (loss)'income to net cash provided by operating activities: Restructuring and management transition Asset impaiments and other charges Depreciation and amortization Net (gains) on sale of assets Benefit plans expense Pension contribution Stock-based compensation Excess tax benefits from stock-based compensation Deferred taxes Change in cash from: Inventory Prepaid expenses and other assets Merchandise accounts payable Current income taxes payable Accrued expenses and other Net cash provided by operating activities Cash flows from investing activities: Capital expenditures Proceeds from sale of assets Proceeds from joint venture distribution Acquisition Cost investment, net Net cash (used in) investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt Payments of long-term debt Financing costs Dividends paid, common Proceeds from issuance of stock warrant Stock repurchase program Proceeds from stock options exercised Excess tax benefits from stock-based compensation Tax withholding payments reimbursed by restricted stock Net cash (used in) financing activities Net (decrease increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental cash flow information: Income taxes paid interest paid Interest received Significant non-cash transactions: https://www.sec.gov/Archives/edgar/data/1168126/000119312512135077|d298119d10x.htm 207** $898218| - *390 39*@** 99350*** (485) (587) 392 (693) (14) (189) (113) (32) (183) 8 2 (496) (389) (3 (327) 659 2,352 $ 3,011 3,011 99871*** $ 2,622 $ 130 264 5 65/116 5/10/2016 Form 10-K Table of Contents Jcpenney Note 17 The following table reconciles the activity for the restructuring and management transition liability for 2011 and 2010: Catalog and Supply Chain Catalog Outlet Stores Employment Termination Benefits VERP $ Management Transition $ Other $ $ Total $ 32 21 4 (7)(1) ($ in millions) January 30, 2010 Charges Cash payments Non-cash January 29, 2011 Charges Cash payments Non-cash January 28, 2012 4 (171) 4 34 (12) (262) 41 (10) (281) 3 41 (17) 179 (2) (1773) 130 (41) (79)(4) 10 26 (3) (40) $ 19 (24) 8 451 (85) (314) $ 60 $ $ 28 (1) Amounts represent increased depreciation as a result of shortening the useful lives of assets associated with our catalog outlet stores and our supply chain and custom decorating operations. (2) Amount includes the loss on the sale of the catalog outlet stores. (3) Amount includes $133 million that reduced the prepaid status of our primary plan and $44 million that increased the unfunded status of our Supplemental Retirement Program and Benefit Restoration Plan on October 15, 2011, (4) Amount represents stock-based compensation expense related to management transitions, 18) Real Estate and Other, Net 2011 2010 2009 $ $ $ ($ in millions) Real estate activities Impairments (Note 9) Net gains from sale of real estate Other Total expense/income) (38) 58 (6) 7 21 (34) 3 (8) 11 (28 (34) 42 (2) (1) 5 $ $ Real estate and other, net consists mainly of ongoing operating income from our real estate subsidiaries whose primary investments are in REITs, as well as investments in 13 joint ventures that own regional mall properties, five as general partner and eight as limited partner. Real estate and other also includes net gains from the sale of facilities and equipment that are no longer used in Company operations, asset impairments and other non-operating corporate charges and credits. In 2011, 2010 and 2009, we received dividend income from our REITs totaling $10 million, $8 million and $8 million, respectively. In 2011, 2010 and 2009, we recorded investment income for our proportional share of earnings from our joint ventures totaling $13 million, $ 15 million and $15 million, respectively. F-40 5/10/2016 Form 10-K Table of Contents Je Penney Note 17 The expense for these plans, which was predominantly included in SG&A expenses on the Consolidated Statements of Operations, was as follows: ($ in millions) Savings Plan - 401(k) Savings Plan - retirement account Mirror Savings Plan Total 2011 $ 52 11 4 $ 67 2010 $ 41 12 3 $ 56 2009 S 55 8 2 S 65 17) Restructuring and Management Transition Charges In 2011 and 2010, we incurred $451 million and $32 million, respectively, of restructuring and management transition charges. Restructuring and management transition charges include costs related to activities to streamline our supply chain operations, exit our catalog and catalog outlet businesses, cost savings initiatives to reduce store and home office expenses, the VERP, management transition charges related to the hiring and departure of certain members of management and other miscellaneous restructuring costs including the exit of our two specialty websites, CLADTM and Gifting GraceTM Supply chain As a result of consolidating and streamlining our supply chain organization as part of a restructuring program during 2011, we recorded $28 million of increased depreciation, $8 million of costs to close and consolidate facilities and $5 million of employee severance. Increased depreciation resulted from shortening the useful lives of assets related to the closing and consolidating of selected facilities. We are expecting to incur a total of approximately $55 million in expense related to this restructuring activity, with $41 million incurred in 2011 and the remainder to be incurred in 2012. Catalog and catalog outlet stores In the fourth quarter of 2010, we announced our plan to exit the catalog outlet stores and wind down our catalog business. As result, in 2010 we recorded $17 million of increased depreciation and $4 million of employee severance. Increased depreciation resulted from shortening the useful lives of assets associated with our catalog and catalog outlet stores. On October 16, 2011, we completed an asset purchase agreement to sell the assets related to the operations of our catalog outlet stores. We sold fixed assets and inventory with combined net book values of approximately $31 million, for a total purchase price of $7 million, which resulted in a loss of $24 million. In 2011, we also recorded an additional $10 million of severance and other costs related to the sale of our catalog outlet stores. In total for 2011 and 2010, we recorded $55 million related to the exit of our catalog and catalog outlet stores. We do not expect to incur any additional costs related to this program, as the catalog outlet stores were sold during 2011 and the catalog operations were discontinued at the end of 2010. Employment termination benefits In 2011 and 2010, we recorded $41 million and $4 million, respectively, of employee termination benefits for actions to reduce our store and home office expenses. We are expecting to incur additional charges in 2012 related to this restructuring activity. VERP As a part of several restructuring and cost-savings initiatives designed to reduce salary and related costs across the Company, in August of 2011 we announced a VERP which was offered to F-38 5/10/2016 Form 10-K Table of Contents Jcpenney Note 17 approximately 8,000 eligible associates. In the third quarter of 2011, we recorded a total charge of $179 million related to the VERP. Charges included $176 million related to enhanced retirement benefits for the approximately 4,000 associates who accepted the VERP, $1 million related to curtailment charges for our Supplemental Retirement Program and Benefit Restoration Plan as a result of the reduction in the expected years of future service related to these plans, and an additional $2 million of costs associated with administering the VERP. This program was completed in 2011 and we do not expect to incur any additional costs related to the enhanced benefits associated with the VERP. Management transition During 2011, we announced and implemented several changes within our management leadership team which resulted in management transition costs of $130 million during the year. Ronald B. Johnson became Chief Executive Officer on November 1, 2011, succeeding Myron E. Ullman, III, Mr. Ullman was Executive Chairman of the Board of Directors until January 27, 2012, at which time he retired from the Company. During 2011, we incurred transition charges of $53 million and $29 million related to Mr. Johnson and Mr. Ullman, respectively. In October 2011, Michael R. Francis was appointed President and as part of his employment package, he was awarded a one-time sign-on bonus of $12 million. In November 2011, Michael W. Kramer and Daniel E. Walker were appointed Chief Operating Officer and Chief Talent Officer, respectively, and as part of their respective employment packages, they were awarded one-time sign-on bonuses of $4 million and $8 million, respectively. We also recorded $24 million of management transition charges primarily related to other members of management in 2011. Other In 2011, we recorded $26 million of charges primarily related to the restructuring activities associated with streamlining our custom decorating operations and the exit of our specialty websites CLAD and Gifting Grace. In 2010 we recorded $7 million of charges primarily related to the restructuring activities associated with streamlining our custom decorating operations. In 2011 and 2010, we recorded $4 million and $3 million, respectively, of charges primarily related to increased depreciation as a result of closing and consolidating facilities related to our custom decorating operations. In the fourth quarter of 2011, we recorded $8 million related to the exit of our specialty websites primarily related to termination benefits and contract termination costs. In 2011 and 2010, we incurred $14 million and $4 million, respectively, of additional miscellaneous restructuring costs. We expect to incur an additional $2 million of costs associated with the exit of our specialty websites in 2012 related to lease termination costs. We do not expect to incur any additional costs associated with any of the other miscellaneous restructuring programs that were initiated in 2010 and 2011. F-39 5/10/2016 Form 10-K Table of Contents JC Penney Note 20 20) Litigation, Other Contingencies and Guarantees We are subject to various legal and governmental proceedings involving routine litigation incidental to our business. Reserves have been established based on our best estimates of our potential liability in certain of these matters. These estimates have been developed in consultation with in-house and outside counsel. While no assurance can be given as to the ultimate outcome of these matters, we currently believe that the final resolution of these actions, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources. As of January 28, 2012, we estimated our total potential environmental liabilities to range from S21 million to $27 million and recorded our best estimate of $21 million in other liabilities in the Consolidated Balance Sheet as of that date. This estimate covered potential liabilities primarily related to underground storage tanks, remediation of environmental conditions involving our former drugstore locations and asbestos removal in connection with approved plans to renovate or dispose of our facilities. We continue to assess required remediation and the adequacy of environmental reserves as new information becomes available and known conditions are further delineated. If we were to incur losses at the upper end of the estimated range, we do not believe that such losses would have a material effect on our financial condition, results of operations or liquidity. As part of the 2001 asset sale of J. C. Penney Direct Marketing Services, Inc., JCP signed a guarantee agreement with a maximum exposure of $20 million. Any potential claims or losses are first recovered from established reserves, then from the purchaser and finally from any state insurance guarantee fund before JCP's guarantee would be invoked. As a result, we do not believe that any potential exposure would have a material effect on our consolidated financial statements. In connection with the sale of the operations of our catalog outlet stores (see Note 17), we assigned leases on 10 catalog outlet store locations to the purchaser. As part of the assignment agreements, we became third guarantor for all 10 of the assigned lease agreements. In the event of lease default by the purchaser, our maximum obligation under the lease guarantees, as of January 28, 2012, is $25 million, assuming acceleration of all lease payments. The 10 leases have expiration dates beginning in June 2014 with the last lease expiring in November 2020. 21) Quarterly Results of Operations (Unaudited) The following is a summary of our quarterly unaudited consolidated results of operations for 2011 and 2010: 2011 First Quarter 3,943 1,595 1,281 Second Quarter $ 3,906 1,497 1,243 Third Quarter 3,986 1,489 1,242 Fourth Quarter $ 5,425 1,63700) 1,343 ($ in millions, except EPS) Total net sales Gross margin SG&A expenses Restructuring and management transition(2) Income/(loss) from continuing operations Net income/loss) Diluted earnings/(loss) per share(8) 9(3) 23(0) 265(5) 1546) 64 14 14 (143) (143) (877) (87) 64 $ $ $ $ 0.28 $ 0.07 $ (0.67) $ (0.41) F-43 more Compare: Entet ticker here Add Dow Jones S&P 500 HBAYF JCP SHLD KSS BLKIA JWN BONT Zoom: 18 5d im 3m 6m YTD 1y sy 10y All Dec 31, 2004 - Dec 31, 2015 JCP 83.34% OM-36.67% 19 100% 80% 609 Je penney 40% 20% 09 arm whinmay Enzy my -20% Lahat Macy's -40% Any , hen -60% -80% -100% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015