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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-15274
  JCP-20200502_G1.JPG
J. C. PENNEY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 26-0037077
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
6501 Legacy Drive Plano Texas 75024 - 3698
(Address of principal executive offices) (Zip Code)
(972) 431-1000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered *
Common Stock of 50 cents par value * NYSE
Preferred Stock Purchase Rights * NYSE
* On May 20, 2020, NYSE Regulation, Inc. filed a Form 25 with the Securities and Exchange Commission (the “SEC”) to delist J. C. Penney Company, Inc.’s common stock (the “common stock”) from the New York Stock Exchange. The deregistration of the common stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), will be effective 90 days, or such shorter period as the SEC may determine, after filing of the Form 25. Upon deregistration of the common stock under Section 12(b) of the Exchange Act, the common stock will remain registered under Section 12(g) of the Exchange Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 322,382,095 shares of Common Stock of 50 cents par value, as of July 17, 2020.

EXPLANATORY NOTE
J. C. Penney Company, Inc. is filing this quarterly report on Form 10-Q after the June 11, 2020 (the “Original Due Date”) deadline applicable to it for the filing of a Form 10-Q for the quarter ended May 2, 2020 (the “Quarterly Report”) in reliance on the 45-day extension provided by an order issued by the SEC under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No. 34-88465) (the "Order").

On June 10, 2020, J. C. Penney Company, Inc. filed a Current Report on Form 8-K to indicate its intention to rely on the Order for such extension. Consistent with its statements made in the Current Report on Form 8-K, J. C. Penney Company, Inc. was unable to file the Quarterly Report by the Original Due Date, and therefore relied on the Order. The Quarterly Report is hereby filed before the extended due date permitted under the Order, i.e., 45 days after the Original Due Date, or July 27, 2020.




J. C. PENNEY COMPANY, INC.
FORM 10-Q
For the Quarterly Period Ended May 2, 2020
INDEX

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Table of Contents
Part I. Financial Information
Item 1. Unaudited Interim Consolidated Financial Statements

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
  Three Months Ended
(In millions) May 2,
2020
May 4,
2019
Total net sales $ 1,082    $ 2,439   
Credit income and other 114    116   
Total revenues 1,196    2,555   
Costs and expenses/(income):
Cost of goods sold (exclusive of depreciation and amortization shown separately below) 813    1,630   
Selling, general and administrative (SG&A) 572    856   
Depreciation and amortization 135    147   
Real estate and other, net (2)   (5)  
Restructuring and management transition 155    20   
Total costs and expenses 1,673    2,648   
Operating income/(loss) (477)   (93)  
Other components of net periodic pension cost/(income) (23)   (13)  
Net interest expense 75    73   
Loss due to discontinuance of hedge accounting 77    —   
Income/(loss) before income taxes (606)   (153)  
Income tax expense/(benefit) (60)    
Net income/(loss) $ (546)   $ (154)  
Earnings/(loss) per share:
Basic $ (1.69)   $ (0.48)  
Diluted $ (1.69)   $ (0.48)  
Weighted average shares – basic 323.7    317.7   
Weighted average shares – diluted 323.7    317.7   
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.


1

Table of Contents
J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
  Three Months Ended
(In millions) May 2,
2020
May 4,
2019
Net income/(loss) $ (546)   $ (154)  
Other comprehensive income/(loss), net of tax:
Currency translations (1)
(1)   —   
Cash flow hedges (2)
—    (13)  
Amortization of pension prior service (credit)/cost (3)
   
Total other comprehensive income/(loss), net of tax —    (11)  
Total comprehensive income/(loss), net of tax $ (546)   $ (165)  

(1)Net of $0 million of tax in the three months ended May 2, 2020..
(2)Net of $0 million in tax in the three months ended May 4, 2019. Pre-tax amount of $(2) million for the three months ended May 4, 2019, was recognized in Net interest expense in the unaudited Interim Consolidated Statements of Operations.
(3)Net of $0 million of tax in each of the three months ended May 2, 2020, and May 4, 2019. Pre-tax amounts of $1 million and $2 million in the three months ended May 2, 2020, and May 4, 2019, respectively, were recognized in Other components of net periodic pension cost/(income) in the unaudited Interim Consolidated Statements of Operations.

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

2

Table of Contents
J. C. PENNEY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
May 2,
2020
May 4,
2019
February 1,
2020
(In millions, except per share data) (Unaudited) (Unaudited)  
Assets
Current assets:
Cash in banks and in transit $ 62    $ 160    $ 108   
Cash short-term investments 636    11    278   
Cash and cash equivalents 698    171    386   
Merchandise inventory 2,221    2,477    2,166   
Prepaid expenses and other 272    287    174   
Total current assets 3,191    2,935    2,726   
Property and equipment (net of accumulated depreciation of $3,639, $3,339 and $3,095) 3,344    3,669    3,488   
Operating lease assets 934    917    998   
Prepaid pension 138    156    120   
Other assets 616    665    657   
Total Assets $ 8,223    $ 8,342    $ 7,989   
Liabilities and Stockholders’ Equity
Current liabilities:
Merchandise accounts payable $ 579    $ 842    $ 786   
Other accounts payable and accrued expenses 829    925    931   
Current operating lease liabilities 84    84    67   
Current portion of finance leases and note payable —       
Current portion of long-term debt 4,884    92    147   
Total current liabilities 6,376    1,945    1,932   
Noncurrent operating lease liabilities 1,086    1,082    1,108   
Long-term debt —    3,826    3,574   
Deferred taxes 48    119    116   
Other liabilities 365    336    430   
Total Liabilities 7,875    7,308    7,160   
Stockholders’ Equity
Common stock (1)
161    158    160   
Additional paid-in capital 4,725    4,715    4,723   
Reinvested earnings/(accumulated deficit) (4,215)   (3,553)   (3,667)  
Accumulated other comprehensive income/(loss) (323)   (286)   (387)  
Total Stockholders’ Equity 348    1,034    829   
Total Liabilities and Stockholders’ Equity $ 8,223    $ 8,342    $ 7,989   

(1)1.25 billion shares of common stock are authorized with a par value of $0.50 per share. The total shares issued and outstanding were 321.9 million, 316.8 million and 320.5 million as of May 2, 2020, May 4, 2019, and February 1, 2020, respectively.
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

3

Table of Contents
J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In millions) Number of Common Shares Common Stock Additional Paid-in Capital Reinvested Earnings/(Accumulated Deficit) Accumulated Other Comprehensive Income/(Loss) Total Stockholders' Equity
February 1, 2020 320.5    $ 160    $ 4,723    $ (3,667)   $ (387)   $ 829   
Net income/(loss) —    —    —    (546)   —    (546)  
Discontinuance of hedge accounting —    —    —    64    64   
Stock-based compensation and other 1.4        (2)   —     
May 2, 2020 321.9    $ 161    $ 4,725    $ (4,215)   $ (323)   $ 348   

(In millions) Number of Common Shares Common Stock Additional Paid-in Capital Reinvested Earnings/(Accumulated Deficit) Accumulated Other Comprehensive Income/(Loss) Total Stockholders' Equity
February 2, 2019 316.1    $ 158    $ 4,713    $ (3,373)   $ (328)   $ 1,170   
ASC 842 (Leases) and ASU 2018-02 (Stranded Taxes) adoption (1)
—    —    —    (26)   53    27   
Net income/(loss) —    —    —    (154)   —    (154)  
Other comprehensive income/(loss) —    —    —    —    (11)   (11)  
Stock-based compensation and other 0.7    —      —    —     
May 4, 2019 316.8    $ 158    $ 4,715    $ (3,553)   $ (286)   $ 1,034   
(1)Represents the cumulative-effect adjustments

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

4

Table of Contents
J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  Three Months Ended
($ in millions) May 2,
2020
May 4,
2019
Cash flows from operating activities
Net income/(loss) $ (546)   $ (154)  
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Restructuring and management transition 139    15   
Net gain on sale of operating assets —    (4)  
Discontinuance of hedge accounting 77    —   
Depreciation and amortization 135    147   
Benefit plans (22)   (14)  
Stock-based compensation    
Deferred taxes (60)   (3)  
Change in cash from:
Inventory (55)   (40)  
Prepaid expenses and other (98)   (98)  
Merchandise accounts payable (207)   (5)  
Income taxes (1)    
Accrued expenses and other (178)   (54)  
Net cash provided by/(used in) operating activities (814)   (205)  
Cash flows from investing activities
Capital expenditures (33)   (71)  
Net proceeds from sale of operating assets —     
Net cash provided by/(used in) investing activities (33)   (63)  
Cash flows from financing activities
Proceeds from borrowings under the credit facility 1,950    408   
Payments of borrowings under the credit facility (771)   (290)  
Payments of finance leases and note payable (1)   (1)  
Payments of long-term debt (19)   (11)  
Net cash provided by/(used in) financing activities 1,159    106   
Net increase/(decrease) in cash and cash equivalents 312    (162)  
Cash and cash equivalents at beginning of period 386    333   
Cash and cash equivalents at end of period $ 698    $ 171   
Supplemental cash flow information
Income taxes received/(paid), net $ —    $ (2)  
Interest received/(paid), net (76)   (91)  
Supplemental non-cash investing and financing activity
Increase/(decrease) in other accounts payable related to purchases of property and equipment and software   (18)  
Remeasurement of leased assets and lease obligations   28   

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.
5

Table of Contents
J. C. PENNEY COMPANY, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Consolidation
Basis of Presentation
J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in Delaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations, and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as “we,” “us,” “our,” “ourselves” or the “Company,” unless otherwise indicated.
J. C. Penney Company, Inc. is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee of certain of JCP’s outstanding debt securities by J. C. Penney Company, Inc. is full and unconditional.
These unaudited Interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The accompanying unaudited Interim Consolidated Financial Statements, in our opinion, include all material adjustments necessary for a fair presentation and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (2019 Form 10-K). We follow the same accounting policies to prepare quarterly financial statements as are followed in preparing annual financial statements. A description of such significant accounting policies is included in the 2019 Form 10-K. The February 1, 2020, financial information was derived from the audited Consolidated Financial Statements, with related footnotes, included in the 2019 Form 10-K. Because of the seasonal nature of the retail business, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The Company considered the COVID-19 pandemic (see Note 2) and the Chapter 11 Cases (see below under "Voluntary Petition for Reorganization") related impacts to its estimates, as appropriate, within its unaudited Interim Consolidated Financial Statements and there may be changes to those estimates in future periods. The Company believes that the accounting estimates are appropriate after giving consideration to the increased uncertainties surrounding the severity and duration of the COVID-19 pandemic and the Chapter 11 Cases. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.

Fiscal Year
Our fiscal year ends on the Saturday closest to January 31. As used herein, “three months ended May 2, 2020” and “first quarter of 2020” refer to the 13-week period ended May 2, 2020, and “three months ended May 4, 2019” and “first quarter of 2019” refer to the 13-week period ended May 4, 2019.
Basis of Consolidation
All significant inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications were made to prior period amounts to conform to the current period presentation.

Voluntary Petition for Reorganization

As discussed further in Note 14, on May 15, 2020 (the “Petition Date”), the Company and certain of its subsidiaries (collectively, the “Debtors”) commenced voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The commencement of the Chapter 11 Cases constitutes an event of default or termination event under all debt agreements of the Company. Accordingly, the Company has classified all of its outstanding debt as a current liability on its unaudited Interim Consolidated Balance Sheets as of May 2, 2020.

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors' property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors' Chapter 11 Cases also automatically stayed the filing of most legal proceedings and other actions against or on behalf of the Debtors or their property
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to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors' bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.

Additionally, as the Chapter 11 Cases commenced on May 15, 2020, during the Company's second quarter, the current financial statements have not been prepared on the basis of ASC Subtopic 852-10, Reorganizations.

Ability to Continue as a Going Concern

The unaudited Interim Consolidated Financial Statements included in this Quarterly Report on Form 10-Q have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as a debtor-in-possession pursuant to the Bankruptcy Code, we may sell, or otherwise dispose of or liquidate, assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying unaudited Interim Consolidated Financial Statements. Further, a Chapter 11 plan of reorganization is likely to materially change the amounts and classifications of assets and liabilities reported in our unaudited Interim Consolidated Balance Sheet as of May 2, 2020. In addition, the COVID-19 pandemic has, and continues to have, a material impact on the Company’s business operations, financial position, liquidity, capital resources and results of operations (see Note 2). The risks and uncertainties surrounding the Chapter 11 Cases, the defaults under our debt agreements (see Note 8), and our financial condition, raise substantial doubt as to the Company’s ability to continue as a going concern. Our future plans, including those in connection with the Chapter 11 Cases, are not yet finalized, fully executed or approved by the Bankruptcy Court, and therefore cannot be deemed probable of mitigating this substantial doubt within 12 months of the date of issuance of these financial statements. Our consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

2.  Global COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared a global pandemic related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The COVID-19 pandemic has significantly impacted the economic conditions in the U.S. and globally. The Company announced the temporary closing of all stores effective March 19, 2020, along with most of its supply chain facilities; however, we continued to operate jcp.com and fulfill orders via three eCommerce fulfillment centers.

In response to the COVID-19 pandemic, the Company has taken many additional measures to mitigate the COVID-19 pandemic’s financial impact and increase financial flexibility, including, but not limited to:

Borrowed $1.25 billion from the 2017 Credit Facility;
Furloughed substantially all store associates and substantial numbers of distribution and home office associates;
Suspended all new hiring except for eCommerce fulfillment centers;
Suspended all 2020 merit pay increases and 2020 incentive cash bonus programs;
Suspended capital spending;
Extended payment terms with merchandise and non-merchandise suppliers for up to 60 days; and,
Suspended non-essential discretionary SG&A spending.

The COVID-19 pandemic has, and continues to have, a material impact on the Company’s business operations, financial position, liquidity, capital resources and results of operations, including the Company’s filing of the Chapter 11 Cases on May 15, 2020 (see Notes 1 and 14). Because it is impossible to predict the effect and ultimate impact of the COVID-19 pandemic, or the outcome of the Chapter 11 Cases, current financial information may not be indicative of future operating results.

In late April 2020, the Company began re-opening stores with limited operating hours. The Company re-opened 11 stores in fiscal April, 464 stores in fiscal May and 366 stores in fiscal June. All open stores and facilities have implemented enhanced safety procedures and enhanced cleaning protocols to protect the health of our customers and associates. In June, the Company announced that it would be permanently closing up to 167 stores, of which 152 stores have currently been identified for closure in 2020. The Company has commenced closing sales in the majority of these locations and expects all 152 stores to close by the end of September 2020.

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3. Effect of New Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting,” which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. ASU No. 2020-04 is effective as of March 12, 2020, through December 31, 2022, and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020. We do not anticipate a material impact from the adoption of this new standard.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This standard will be effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020; however, early adoption is permitted. We have adopted this new standard beginning February 2, 2020, and the adoption did not have a material impact on the unaudited Interim Consolidated Financial Statements.
4. Earnings/(Loss) per Share
Net income/(loss) and shares used to compute basic and diluted earnings/(loss) per share (EPS) are reconciled below:
  Three Months Ended
(In millions, except per share data) May 2,
2020
May 4,
2019
Earnings/(loss)
Net income/(loss) $ (546)   $ (154)  
Shares
Weighted average common shares outstanding (basic shares) 323.7    317.7   
Adjustment for assumed dilution:
Stock options and restricted stock awards —    —   
Weighted average shares assuming dilution (diluted shares) 323.7    317.7   
EPS
Basic $ (1.69)   $ (0.48)  
Diluted $ (1.69)   $ (0.48)  
The following average potential shares of common stock were excluded from the diluted EPS calculation because their effect would have been anti-dilutive: 
  Three Months Ended
(Shares in millions) May 2,
2020
May 4,
2019
Stock options and restricted stock awards 20.1    22.5   

5. Revenue

Our contracts with customers primarily consist of sales of merchandise and services at the point of sale, sales of gift cards to a customer for a future purchase, customer loyalty rewards that provide discount rewards to customers based on purchase activity, and certain licensing and profit-sharing arrangements involving the use of our intellectual property by others.
Revenue includes Total net sales and Credit income and other. Net sales are categorized by merchandise and service sale groupings as we believe it best depicts the nature, amount, timing and uncertainty of revenue and cash flow.

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The following table provides the components of Net sales for the three months ended May 2, 2020 and May 4, 2019:
Three Months Ended
($ in millions) May 2, 2020 May 4, 2019
Women’s apparel $ 216    20  % $ 515    21  %
Men’s apparel and accessories 213 19  % 478    20  %
Women’s accessories, including Sephora 170 16  % 377    15  %
Home 145 13  % 305    13  %
Footwear and handbags 117 11  % 256    10  %
Kid’s, including toys 85 % 200    %
Jewelry 75 % 138    %
Services and other 61 % 170    %
Total net sales $ 1,082    100  % $ 2,439    100  %
Credit income and other encompasses the revenue earned from the agreement with Synchrony Financial (Synchrony) associated with our private label credit card and co-branded MasterCard® programs.
The Company has contract liabilities associated with the sales of gift cards and our customer loyalty program. These liabilities include consideration received for gift card and loyalty related performance obligations which have not been satisfied as of a given date. The liabilities are included in Other accounts payable and accrued expenses in the unaudited Interim Consolidated Balance Sheets and were as follows:
(in millions) May 2, 2020 May 4, 2019 February 1, 2020
Gift cards $ 123    $ 121    $ 136   
Loyalty rewards 60    61    58   
Total contract liability $ 183    $ 182    $ 194   

A rollforward of the amounts included in contract liability for the first three months of 2020 and 2019 are as follows:
(in millions) 2020 2019
Beginning balance $ 194    $ 200   
Current period gift cards sold and loyalty reward points earned 37    78   
Net sales from amounts included in contract liability opening balances (23)   (36)  
Net sales from current period usage (25)   (60)  
Ending balance $ 183    $ 182   

6. Derivative Financial Instruments

We use derivative financial instruments for hedging and non-trading purposes to manage our exposure to changes in interest rates. Use of derivative financial instruments in hedging programs subjects us to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative instrument will change. In a hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of our derivative financial instruments is used to measure interest to be paid or received and does not represent our exposure due to credit risk. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) from the counterparty when appropriate.

When we use derivative financial instruments for the purpose of hedging our exposure to interest rates, the contract terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative
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instrument is a hedge, depending on the nature of the hedge, changes in the fair value of the instrument will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or be recognized in Accumulated other comprehensive income/(loss) (AOCI) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings during the period. Instruments that do not meet the criteria for hedge accounting, or contracts for which we have not elected to apply hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of change.

We are party to interest rate swap agreements dated May 7, 2015, with notional amounts totaling $1,250 million to fix a portion of our variable LIBOR-based interest payments. The interest rate swap agreements have a weighted-average fixed rate of 2.04%, matured on May 7, 2020, and were designated as cash flow hedges at the inception of the contracts. On September 4, 2018, we entered into additional forward interest rate swap agreements with notional amounts totaling $750 million to fix a portion of our variable LIBOR-based interest payments. The forward interest rate swap agreements have a weighted-average fixed rate of 3.135%, have an effective date from May 7, 2020, to May 7, 2025, and were designated as cash flow hedges at the inception of the contracts.

The fair value of our interest rate swaps (see Note 7) are recorded in the unaudited Interim Consolidated Balance Sheets as an asset or a liability based upon its change in fair values from its effective date. For swaps designated as cash flow hedges, the effective portion of the interest rate swaps' changes in fair values is reported in AOCI (see Note 9), and the ineffective portion is reported in net income/(loss). Amounts in AOCI are reclassified into net income/(loss) when the related interest payments affect earnings.

Quarterly, the Company evaluates the effectiveness of each hedging relationship. To continue to qualify for hedge accounting, the hedging instrument must continue to be highly effective and, for cash flow hedges, the forecasted transactions must continue to be probable of occurring. The Company's commencement of the Chapter 11 Cases (see Note 14) was deemed to be more likely than not as of May 2, 2020, the end of the Company’s fiscal quarter. Accordingly, the Company determined that it was probable that the forecasted transactions will not occur and, therefore, the hedges were no longer effective. As a result, during the first quarter of 2020, the Company recorded a charge of $77 million for discontinuance of hedge accounting, which included $58 million reclassified from AOCI.

On May 7, 2020, the Company did not make a scheduled interest payment on the aforementioned swap agreements and the agreements were cancelled.

Information regarding the gross amounts of our derivative instruments in the unaudited Interim Consolidated Balance Sheets is as follows:
Asset Derivatives at Fair Value Liability Derivatives at Fair Value
($ in millions) Balance Sheet Location
May 2,
 2020 (1)
May 4,
2019 (1)
February 1,
2020 (1)
Balance Sheet Location
May 2,
2020 (1)
May 4,
2019 (1)
February 1,
2020 (1)
Interest rate swaps Prepaid expenses and other $ —    $   $ —    Other accounts payable and accrued expenses $ 77    $ —    $ —   
Interest rate swaps Other assets —      —    Other liabilities —    25    58   
Total derivatives $ —    $   $ —    $ 77    $ 25    $ 58   
(1) Derivatives as of May 2, 2020, were not designated as hedging instruments; derivatives as of May 4, 2019, and February 1, 2020, were designated as hedging instruments.








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7. Fair Value Disclosures
In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value, as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.

Interest Rate Swaps Measured on a Recurring Basis
The fair value of our interest rate swap agreements is valued in the market using discounted cash flow techniques, which use quoted market interest rates in discounted cash flow calculations that consider the instrument's term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation for interest rate swaps are observable in the active markets and are classified as Level 2 in the fair value measurement hierarchy.

Other Non-Financial Assets Measured on a Non-Recurring Basis
As further discussed in Note 11, in the first quarter of 2020, long-lived assets held and used with a carrying value of $162 million were written down to their fair value of $113 million, and right-of-use lease assets with a carrying value of $140 million were written down to a fair value of $92 million, resulting in asset impairment charges of $49 million and $48 million, respectively, totaling $97 million. The fair value was determined based on a discounted cash flow approach. The significant inputs and assumptions used in the discounted cash flow approach included estimated market rentals for the related leases and a real estate based discount rate and are classified as Level 3 in the fair value measurement hierarchy.

Also as a result of the Company’s plans to reduce its store footprint during bankruptcy, indefinite-lived intangible assets with a carrying value of $275 million were written down to their fair value of $233 million, resulting in an asset impairment of $42 million in first quarter 2020. We evaluated the recoverability of our indefinite-lived intangible assets utilizing the relief from royalty method to determine the estimated fair value. The relief from royalty method estimates our theoretical royalty savings from ownership of the intangible assets. Key assumptions in determining relief from royalty include, among other things, discount rates, royalty rates, growth rates, sales projections and terminal value rates. The Company applied a weighted-average approach, which considered multiple scenarios with varying sales projections to estimate fair value. The fair value determined utilizing the relief from royalty method and the significant inputs related to valuing the intangible assets are classified as Level 3 in the fair value measurement hierarchy.

In connection with the Company announcing its plan to close underperforming stores in 2019, long-lived assets held and used with a carrying value of $22 million were written down to their fair value of $8 million, resulting in asset impairment charges of $14 million in the first quarter of 2019. Additionally, in connection with the adoption of the new lease accounting standard, right-of-use assets of $58 million were written down to their fair value of $19 million. The fair value was determined based on comparable market values of similar properties or on a rental income approach and the significant inputs related to valuing the store related assets are classified as Level 3 in the fair value measurement hierarchy.

Other Financial Instruments
Carrying values and fair values of financial instruments that are not carried at fair value in the unaudited Interim Consolidated Balance Sheets are as follows: 
  May 2, 2020 May 4, 2019 February 1, 2020
($ in millions) Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Total debt, excluding unamortized debt issuance costs, finance leases and note payable $ 4,918    $ 2,151    $ 3,963    $ 2,833    $ 3,758    $ 2,464   
The fair value of total debt was estimated by obtaining quotes from brokers or was based on current rates offered for similar debt. As of May 2, 2020, May 4, 2019, and February 1, 2020, the fair values of cash and cash equivalents and accounts payable approximated their carrying values due to the short-term nature of these instruments.
Concentrations of Credit Risk
We have no significant concentrations of credit risk.
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8. Debt
($ in millions) May 2, 2020 May 4, 2019 February 1, 2020
Issue:      
8.125% Senior Notes Due 2019 $ —    $ 50    $ —   
5.65% Senior Notes Due 2020 (1)
105    110    105   
2017 Credit Facility (Matures in 2022) 1,179    118    —   
2016 Term Loan Facility (Matures in 2023) 1,521    1,572    1,540   
5.875% Senior Secured Notes Due 2023 (1)
500    500    500   
7.125% Debentures Due 2023 10    10    10   
8.625% Senior Secured Second Priority Notes Due 2025 (1)
400    400    400   
6.9% Notes Due 2026      
6.375% Senior Notes Due 2036 (1)
388    388    388   
7.4% Debentures Due 2037 313    313    313   
7.625% Notes Due 2097 500    500    500   
Total debt 4,918    3,963    3,758   
Unamortized debt issuance costs (34)   (45)   (37)  
Less: current portion (4,884)   (92)   (147)  
Total long-term debt $ —    $ 3,826    $ 3,574   

(1)These debt issuances contain a change of control provision that would obligate us, at the holders’ option, to repurchase the debt at a price of 101%.

On March 16 and March 19, 2020, the Company borrowed $800 million and $450 million, respectively, from the senior secured asset-based revolving credit facility (the 2017 Credit Facility). Borrowings under the 2017 Credit Facility bear interest, at the Company’s option, at a base rate or LIBOR, plus an applicable interest rate margin varying depending on the Company’s utilization of the 2017 Credit Facility. The rates on the borrowings as of May 2, 2020, range from 2.75% to 4.25%. The proceeds from the 2017 Credit Facility may be used for working capital needs or general corporate purposes.
As of May 2, 2020, there were $1,179 million in outstanding borrowings under the 2017 Credit Facility. Following the commencement of the Chapter 11 Cases, we do not have access to a revolving credit facility.

The commencement of the Chapter 11 Cases constitutes an event of default or termination event under all debt agreements of the Company. As a result, the Company has classified all of its outstanding debt as a current liability as of May 2, 2020.
Any efforts to enforce payment obligations related to the Company’s outstanding debt have been automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors’ rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. See Note 14 for more information on the Chapter 11 Cases.

In April 2020, the Company did not make its scheduled payment of interest related to the 6.375% Senior Secured Notes Due 2036 and did not cure that default prior to commencement of the Chapter 11 Cases. During the period of the Chapter 11 Cases, the Company will make adequate protection payments, consisting of interest and fees, in respect of the obligations under the outstanding Senior Secured Notes Due 2023, the 2017 Credit Facility, and the 2016 Term Loan Facility. All other interest payments on pre-petition outstanding debt have been suspended.

For further information on the Company's debt structure in conjunction with the Chapter 11 Cases, see Note 14.




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9. Accumulated Other Comprehensive Income/(Loss)

The following tables show the changes in accumulated other comprehensive income/(loss) balances for the three months ended May 2, 2020, and May 4, 2019:
(In millions) Net  Actuarial
Gain/(Loss)
Prior Service
Credit/(Cost)
Foreign Currency Translation Gain/(Loss) on Cash Flow Hedges Accumulated
Other
Comprehensive
Income/(Loss)
February 1, 2020 $ (310)   $ (12)   $ (1)   $ (64)   $ (387)  
Discontinuance of hedge accounting (1)
—    —    —    64    64   
Amounts reclassified from accumulated other comprehensive income —      (1)   —    —   
May 2, 2020 $ (310)   $ (11)   $ (2)   $ —    $ (323)  
(1) Includes a $58 million charge reclassified to earnings and included in Discontinuance of hedge accounting and a $6 million charge reclassified to Income tax expense.
(In millions) Net  Actuarial
Gain/(Loss)
Prior Service
Credit/(Cost)
Foreign Currency Translation Gain/(Loss) on Cash Flow Hedges Accumulated
Other
Comprehensive
Income/(Loss)
February 2, 2019 $ (290)   $ (22)   $ (1)   $ (15)   $ (328)  
ASU 2018-02 (Stranded Taxes) adoption 46      —      53   
Other comprehensive income/(loss) before reclassifications —    —    —    (11)   (11)  
Amounts reclassified from accumulated other comprehensive income —      —    (2)   —   
May 4, 2019 $ (244)   $ (17)   $ (1)   $ (24)   $ (286)  


10. Retirement Benefit Plans
The components of net periodic pension expense/(income) for our non-contributory qualified defined benefit pension plan and supplemental pension plans were as follows:
  Three Months Ended
($ in millions) May 2,
2020
May 4,
2019
Service cost $   $  
Other components of net periodic pension cost/(income):
Interest cost 26    33   
Expected return on plan assets (50)   (48)  
Amortization of prior service cost/(credit)    
(23)   (13)  
Net periodic pension expense/(income) $ (15)   $ (6)  

Service cost is included in SG&A in the unaudited Interim Consolidated Statements of Operations.


Primary Pension Plan Lump-Sum Payment Offer and VERP
In April 2020, the Company initiated a Voluntary Early Retirement Program (VERP) for approximately 4,500 eligible associates. Eligibility for the VERP included home office, stores and supply chain personnel who met certain criteria related to
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age and years of service as of October 23, 2019. Approximately 2,500 eligible associates elected to accept the VERP during the consideration period, which ended on May 29, 2020. Charges related to the VERP and the impact of the VERP on the Primary Pension Plan liabilities and Net periodic pension expense/(income) will be evaluated during the second quarter of 2020.

11. Restructuring and Management Transition

As of May 2, 2020, in connection with the anticipated commencement of the Chapter 11 Cases (see Note 14), the Company identified certain leased stores it considered more likely than not would be permanently closed significantly before the end of their respective estimated useful lives. Consequently, the potential closing of these stores was considered an indicator of impairment. In accordance with ASC 360, long-lived assets, including right-of-use lease assets, with indicators of impairment, are evaluated for recoverability. Assets that are not determined to be recoverable are assessed for impairment based on their current fair values. As a result of this evaluation, the Company recorded impairment charges of $97 million during the first quarter of 2020, consisting of $49 million related to long-lived assets and $48 million related to right-of-use lease assets.

Similarly, the Company determined that the combination of the macro economic impact of the COVID-19 pandemic, the contemplation of bankruptcy, and the expectations of permanent store closures represented an indicator of impairment related to the Company’s indefinite-lived intangible assets primarily associated with the Liz Claiborne family of trademarks and related intellectual property. As a result, the Company recorded an impairment of the intangible assets of $42 million during the first quarter of 2020.

In the first quarter of 2020, the Company also incurred expenses related to reorganization advisory fees in the amount of $16 million.

In the first quarter of 2019, the Company finalized plans to close 18 full-line stores and 9 ancillary home and furniture stores, further aligning the Company's brick-and-mortar presence with its omnichannel network and enabling capital resources to be reallocated to locations and initiatives that offer the greatest long-term value potential. The planned store closures resulted in a $14 million asset impairment charge for store assets with limited future use and a $1 million severance charge for the expected displacement of store associates.
The components of Restructuring and management transition include:
Home office and stores — charges for actions to reduce our store and home office expenses including impairments, employee termination benefits, store lease terminations and other restructuring/reorganization advisory costs;
Management transition — charges related to implementing changes within our management leadership team for both incoming and outgoing members of management; and
Other — charges related primarily to costs related to the closure of certain supply chain locations.

The composition of Restructuring and management transition charges was as follows: 
  Three Months Ended Cumulative
Amount From Program Inception Through
May 2, 2020
($ in millions) May 2,
2020
May 4,
2019
Home office and stores $ 155    $ 19    $ 684   
Management transition —      269   
Other —    —    186   
Total $ 155    $ 20    $ 1,139   






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Activity for the Restructuring and management transition liability for the three months ended May 2, 2020 was as follows:
($ in millions) Home Office
and Stores
Management
Transition
Total
February 1, 2020 $   $   $  
Charges 16    —    16   
Cash payments (13)   (1)   (14)  
May 2, 2020 $   $   $ 10   
12. Income Taxes

On March 27, 2020, the U.S. federal government passed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act contains many tax provisions including, but not limited to, accelerated alternative minimum tax ("AMT") refunds, payroll tax payment deferrals, employee retention credits, enhanced net operating loss ("NOL") carryback rules and an increase to the interest deduction limitation. The Company has considered the income tax provisions of the CARES Act in the tax benefit calculation for the three months ended May 2, 2020. The Company continues to monitor and analyze the CARES Act along with global legislation issued in response to the COVID-19 pandemic.

The net tax benefit of $60 million for the three months ended May 2, 2020, consisted of federal, state and foreign tax benefit of $2 million, $1 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, net tax benefit of $3 million resulting from state audit settlements and a $56 million benefit from the release of valuation allowance, primarily due to the generation of post-tax reform NOLs that do not expire.
As of May 2, 2020, we have approximately $2.5 billion of NOLs available for U.S. federal income tax purposes, which largely expire in 2032 through 2034, though about $350 million of the NOLs do not expire; $316 million of federal unused interest deductions that do not expire; and $76 million of tax credit carryforwards that expire at various dates through 2039. Additionally, we have state NOLs that are subject to various limitations and expiration dates beginning in 2020 through 2041 and are offset fully by valuation allowances. A valuation allowance of $683 million fully offsets the federal deferred tax assets resulting from the NOLs, unused interest deductions and tax credit carryforwards that expire at various dates through 2039. A valuation allowance of $259 million fully offsets the deferred tax assets resulting from the state NOL carryforwards that expire at various dates through 2041. In assessing the need for the valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our periodic assessment, our estimate of the realization of deferred tax assets is solely based on the future reversals of existing taxable temporary differences and tax planning strategies that we would make use of to accelerate taxable income to utilize expiring NOL and tax credit carryforwards. Accordingly, in the three months ended May 2, 2020, the valuation allowance net increase of $73 million consisted of net deferred tax assets created in the quarter primarily due to the increase in NOL carryforwards. Our ability to use our NOLs may become subject to limitation or may be reduced or eliminated in connection with the Chapter 11 Cases.
13. Litigation and Other Contingencies
Litigation

Chapter 11 Proceedings

On May 15, 2020, the Debtors filed the Chapter 11 Cases seeking relief under the Bankruptcy Code. The Company expects to
continue operations in the normal course for the duration of the Chapter 11 Cases. In addition, subject to certain exceptions
under the Bankruptcy Code, the filing of the Debtors' Chapter 11 Cases also automatically stayed the filing of most legal
proceedings and other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim
arising prior to the Petition Date or to exercise control over property of the Debtors' bankruptcy estates, unless and until the
Bankruptcy Court modifies or lifts the automatic stay as to any such claim. See Note 14 for more information about the
Chapter 11 Cases.

Shareholder Derivative Litigation and Demand

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On October 19, 2018, a shareholder of the Company, Juan Rojas, filed a shareholder derivative action against certain present and former members of the Company’s Board of Directors in the Delaware Court of Chancery. The Company was named as a nominal defendant. The lawsuit asserted claims for breaches of fiduciary duties based on alleged failures to prevent the Company from engaging in allegedly unlawful promotional pricing practices. On July 29, 2019, the Court granted defendants' motion to dismiss and dismissed plaintiff’s complaint with prejudice.

On October 21, 2019, the Company’s Board of Directors received a demand from Rojas to conduct an investigation of alleged breaches of fiduciary duties similar to those made in the dismissed derivative action regarding alleged failures to prevent the Company from engaging in allegedly unlawful promotional pricing practices. The Board of Directors appointed a committee of independent directors (the "Demand Review Committee") to review the demand and make a recommendation to the Board of Directors regarding a response to the demand. In May 2020, the Demand Review Committee completed its review and recommended that the demand be denied, which recommendation was adopted by the Board of Directors.

While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Other Legal Proceedings

We are subject to various other legal and governmental proceedings involving routine litigation incidental to our business. Accruals have been established based on our best estimates of our potential liability in certain of these matters, which we believe aggregate to an amount that is not material to the unaudited Interim Consolidated Financial Statements. These estimates were 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.
Contingencies

As of May 2, 2020, we have an estimated accrual of $19 million related to potential environmental liabilities that is recorded in Other accounts payable and accrued expenses and Other liabilities in the unaudited Interim Consolidated Balance Sheet. This estimate covered potential liabilities primarily related to underground storage tanks and remediation of environmental conditions involving our former drugstore locations. 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 estimated amount, we do not believe that such losses would have a material effect on our financial condition, results of operations, liquidity or capital resources.

14.  Subsequent Events

The Company has evaluated subsequent events through July 21, 2020, which is the date the unaudited Interim Consolidated Financial Statements were issued.

Voluntary Petition for Reorganization

Pursuant to order of the Bankruptcy Court, the Chapter 11 Cases are being jointly administered under the caption In re: J. C. Penney Company, Inc. et al., Case No. 20-20182 (DRJ) Documents. Documents filed on the docket of and other information related to the Chapter 11 Cases are available free of charge online at https://cases.primeclerk.com/JCPenney.

The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. Following the Petition Date, the Bankruptcy Court entered certain interim and final orders facilitating the Debtors’ operational transition into Chapter 11. These orders authorized the Debtors to, among other things, access cash collateral, pay employee wages and benefits, honor customer programs and pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date. These orders are significant because they allow us to operate our businesses in the normal course.

Prior to the commencement of the Chapter 11 Cases, on May 15, 2020, the Debtors entered into a Restructuring Support Agreement (together with all exhibits and schedules thereto, the “RSA”) with members of an ad hoc group of lenders and noteholders (the “Ad Hoc Group”) that held approximately 70 percent of the Debtors’ first lien debt as of such date. On or about June 7, 2020, additional lenders and noteholders (collectively, and together with the Ad Hoc Group, the “Consenting
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Stakeholders”) executed the RSA. As of such date, the Consenting Stakeholders held approximately 93 percent of the Debtors’ prepetition first lien debt. The RSA contemplates a restructuring process that will establish both a financially sustainable operating company and a real estate investment trust.

Debtor-in-Possession Financing

Pursuant to the RSA, certain of the Consenting Stakeholders and/or their affiliates agreed to provide, on a committed basis, debtor-in-possession financing on the terms set forth therein. Following entry by the Bankruptcy Court of a final order on June 8, 2020, JCP, as borrower, and J. C. Penney and certain of its subsidiaries, as guarantors (together with JCP, the “Credit Parties”), entered into a Superpriority Senior Secured Debtor-In-Possession Credit and Guaranty Agreement (the “DIP Credit Agreement”) with the financial institutions identified therein as lenders (the “Lenders”), GLAS USA LLC, as administrative agent (the “Administrative Agent”), and GLAS Americas LLC, as collateral agent. The obligations under the DIP Credit Agreement are secured by substantially all of the real and personal property of the Credit Parties, subject to certain exceptions.

The DIP Credit Agreement provides for a superpriority secured debtor-in-possession credit facility comprised of term loans in an aggregate amount of up to $900 million of which (i) up to $450 million consists of “new money” loans that will be made available to JCP ($225 million of which was provided to JCP on June 8, 2020, and $225 million was funded to an escrow account on July 9, 2020), and (ii) up to $450 million consists of certain prepetition term loan and/or first lien notes obligations that are “rolled” into the DIP Credit Agreement ($225 million of which were rolled into the DIP Facility on June 8, 2020, and $225 million of which were rolled into the DIP Credit Agreement on July 9, 2020).

The DIP Credit Agreement matures on November 16, 2020, subject to earlier termination upon the occurrence of certain events specified in the DIP Credit Agreement. The proceeds of the DIP Credit Agreement will be used, in part, to provide incremental liquidity for working capital, to pay administrative costs, premiums, fees and expenses in connection with the DIP Credit Agreement and the administration of the Chapter 11 Cases, to make court approved payments in respect of prepetition obligations and for other purposes consistent with the DIP Credit Agreement.

Loans under the DIP Credit Agreement bear interest at (i) if a Base Rate Loan, at the Base Rate (which is subject to a floor of 2.25%) plus 10.75% per annum or (ii) if a Eurodollar Rate Loan, at the Adjusted Eurodollar Rate (which is subject to a floor of 1.25%) plus 11.75% per annum.

The DIP Credit Agreement includes customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting the Credit Parties’ and their subsidiaries’ ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans or advances, engage in mergers, consolidations, sales of assets and acquisitions, pay dividends and distributions and make payments in respect of junior or pre-petition indebtedness, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type. The DIP Credit Agreement also includes conditions precedent, representations and warranties, mandatory prepayments, affirmative covenants and events of default customary for financings of this type. Certain bankruptcy-related events are also events of default, including, but not limited to, the dismissal by the Bankruptcy Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under chapter 7 of title 11 of the United States Code, the appointment of a trustee pursuant to chapter 11 of title 11 of the United States Code, and certain other events related to the impairment of the Lenders’ rights or liens granted under the DIP Credit Agreement.

In addition, pursuant to the DIP Credit Agreement, upon the occurrence of a “Toggle Event,” the Credit Parties shall immediately cease pursuing a Plan of Reorganization and instead pursue the consummation of a sale of all or substantially all of the assets of the Credit Parties pursuant to section 363 of the Bankruptcy Code and shall immediately seek approval of any relief required from the Bankruptcy Court in order to undertake such sale on an expedited basis. Also, upon the occurrence of a “Toggle Event,” JCP must repay amounts funded on July 9, 2020, in excess of $50 million. A “Toggle Event” occurs upon either (i) the failure of the Supermajority Lenders to approve the Business Plan by July 31, 2020, or (ii) the failure by the Credit Parties to obtain binding commitments for third-party financing (on terms and conditions satisfactory to Administrative Agent) necessary to finance the Business Plan approved by the Supermajority Lenders by August 30, 2020.

Delisting from the NYSE

On May 18, 2020, the NYSE suspended trading in our common stock at the market opening and we received written notice from the NYSE that it had determined to commence proceedings to delist our common stock because we are no longer suitable for listing pursuant to Listed Company Manual Section 802.01D following the filing of the Chapter 11 Cases. In reaching its delisting determination, the NYSE noted the uncertainty as to the timing and outcome of the bankruptcy process, as well as the uncertainty as to the ultimate effect of this process on the value of our common stock.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in Delaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as “we,” “us,” “our,” “ourselves” or the “Company,” unless otherwise indicated.
The holding company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee of certain of JCP’s outstanding debt securities by the holding company is full and unconditional.
This discussion is intended to provide information that will assist the reader in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, how operating results affect the financial condition and results of operations of our Company as a whole, as well as how certain accounting principles affect the financial statements. It should be read in conjunction with our consolidated financial statements as of February 1, 2020, and for the year then ended, and related Notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), all contained in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (2019 Form 10-K). Unless otherwise indicated, all references to earnings/(loss) per share (EPS) are on a diluted basis and all references to years relate to fiscal years rather than to calendar years.


Recent Developments

During March 2020, the World Heath Organization declared a global pandemic related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19), which continues to spread throughout the United States. As a result, federal state and local governments in the U.S. reacted to the public health crisis by, among other things, issuing stay at home orders, implementing travel restrictions and mandating the closure of non-essential businesses. The COVID-19 pandemic has had a significant and negative impact to the economic conditions in the U.S. and globally, significantly affecting the Company's fiscal year 2020 operations and operating results through the date of this filing.

The following summarizes the actions taken during the first quarter of 2020 as a result of the COVID-19 pandemic and certain impacts on the operating results of the first quarter ended May 2, 2020:

Borrowed $1.25 billion from its 2017 Credit Facility;
Temporarily closed all stores beginning March 19, 2020; the Company continued to offer merchandise through jcp.com and, on a limited basis, through store contact-free curb-side pickup;
Furloughed approximately 80,000 associates, including store and supply chain associates, as well as some corporate office associates;
Suspended all new hiring except for eCommerce fulfillment centers;
Cancelled 2020 merit pay increases and the 2020 incentive cash bonus programs;
Delayed merchandise shipments from suppliers;
Extended payment terms with merchandise and non-merchandise suppliers up to 60 days;
Decreased planned capital expenditures by over $200 million;
Significantly reduced SG&A expenses, including payroll and payroll related costs along with advertising;
During the first quarter of 2020, the Company incurred non-cash impairment charges related to long-lived assets, right-of-use lease assets, and indefinite-lived intangible assets totaling $139 million; and,
Discontinued hedge accounting for the Company’s interest rate swaps, resulting in total charges of $83 million.

On May 15, 2020 (the Petition Date), as described in Note 14 to the unaudited Interim Consolidated Financial Statements, the Company and certain of its subsidiaries (the Debtors) commenced voluntary cases under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court has granted a motion seeking joint administration of the Chapter 11 Cases. The Debtors will continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provision of the Bankruptcy Code and the orders of the Bankruptcy Court. Following the Petition Date, the
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Bankruptcy Court entered certain interim and final orders facilitating the Debtors’ operational transition into Chapter 11. These orders authorized the Debtors to, among other things, access cash collateral, pay employee wages and benefits, honor customer programs and pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date.

In late April 2020, the Company began reopening stores with limited operating hours. The Company re-opened 11 stores in fiscal April, 464 stores in fiscal May and 366 stores in fiscal June. Additionally, the Company announced in June that it would be permanently closing up to 167 stores, of which 152 stores have currently been identified for closure in 2020. The Company has commenced closing sales in the majority of these locations and expects all 152 to close by the end of September 2020. As of July 13, 2020, approximately 27,000 associates remain on furlough.

In connection with the Chapter 11 Cases, the Credit Parties entered into the DIP Credit Agreement as described in Note 14 to the unaudited Interim Consolidated Financial Statements, of which $225 million was funded to the Company on June 8, 2020, and $225 million was funded to an escrow account on July 9, 2020. Amounts in escrow will be released upon (i) Supermajority Lenders approval of the Business Plan by July 31, 2020, and (ii) Credit Parties obtaining binding commitments for third-party financing (on terms satisfactory to the Administrative Agent) necessary to finance the Business Plan by August 30, 2020.

The COVID-19 pandemic continues to have a material impact on the Company’s business operations, financial position, liquidity, capital resources and results of operations. The scope and duration of the COVID-19 pandemic and the related disruption to our business and financial impacts cannot be reasonably estimated at this time. As discussed in Note 1 to the unaudited Interim Consolidated Financial Statements, the risks and uncertainties surrounding the Chapter 11 Cases, the defaults under our debt agreements, and our current financial condition, raise substantial doubt as to the Company’s ability to continue as a going concern. Future plans, including those in connection with the Chapter 11 Cases, are not yet finalized, fully executed or approved by the Bankruptcy Court, and therefore cannot be deemed probable of mitigating this substantial doubt within 12 months of the date of issuance of these financial statements.

Plan for Renewal

On November 15, 2019, the Company announced its Plan for Renewal to return JCPenney to its rightful place in the retail industry. Coupled with our deep understanding of the customer, these five components of our Plan for Renewal guide everything we do:

Offer Compelling Merchandise through a maximized value proposition;
Drive Traffic by refreshing and increasing the relevance of the JCPenney brand through innovation:
Deliver an Engaging Experience through operational excellence;
Fuel Growth by optimizing our cost and capital structure; and,
Build a Results-Minded Culture committed and connected to achievements larger than the individual.

The Company remains focused on its Plan for Renewal as we continue to believe it will drive a return to sustainable, profitable growth and a financially sound business for the long term. We are making thoughtful strategic choices to guide our transformation, and we will continue to evolve those choices as the macro conditions change. While the Company is managing through the challenges of the COVID-19 pandemic, as well as the process of navigating the Chapter 11 Cases, our planned emergence from the COVID-19 pandemic and the Chapter 11 Cases is built upon the components of, and we remain focused on executing, our Plan for Renewal.

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Results of Operations
  Three Months Ended
($ in millions, except EPS) May 2,
2020
May 4,
2019
Total net sales $ 1,082    $ 2,439   
Credit income and other 114    116   
Total revenues 1,196    2,555   
Total net sales increase/(decrease) from prior year (55.6) % (5.6) %
Costs and expenses/(income):
Cost of goods sold (exclusive of depreciation and amortization shown separately below) 813    1,630   
Selling, general and administrative 572    856   
Depreciation and amortization 135    147   
Real estate and other, net (2)   (5)  
Restructuring and management transition 155    20   
Total costs and expenses 1,673    2,648   
Operating income/(loss) (477)   (93)  
Other components of net periodic pension cost/(income) (23)   (13)  
Net interest expense 75    73   
Loss due to discontinuance of hedge accounting 77    —   
Income/(loss) before income taxes (606)   (153)  
Income tax expense/(benefit) (60)    
Net income/(loss) $ (546)   $ (154)  
Adjusted EBITDA (non-GAAP) (1)
$ (181)   $ 74   
Adjusted net income/(loss) (non-GAAP) (1)
$ (331)   $ (147)  
Diluted EPS $ (1.69)   $ (0.48)  
Adjusted diluted EPS (non-GAAP) (1)
$ (1.02)   $ (0.46)  
Ratios as a percentage of total net sales:
Cost of goods sold 75.1  % 66.8  %
SG&A 52.9  % 35.1  %
Operating income/(loss) (44.1) % (3.8) %

(1)See “Non-GAAP Financial Measures” for a discussion of this non-GAAP measure and reconciliation to its most directly comparable GAAP financial measure and further information on its uses and limitations.








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Total Net Sales
  Three Months Ended
($ in millions) May 2,
2020
May 4,
2019
Total net sales $ 1,082    $ 2,439   
Sales percent increase/(decrease):
Total net sales (55.6) % (5.6) %

Total net sales for the first quarter of 2020 declined 55.6% compared to the first quarter of fiscal 2019. The decrease in net sales was primarily due to the temporary closure of all our stores beginning on March 19, 2020, in response to the COVID-19 pandemic.

Given our stores were closed for approximately half of the quarter due to the COVID-19 pandemic, we are not presenting, or including a discussion on, comparable store sales for the first quarter of 2020 as we believe the conditions leading up to the closure of our stores do not accurately reflect the comparable store sales trends for the period or are indicative of future operating results.

Store Count
The following table compares the number of stores for the three months ended May 2, 2020, and May 4, 2019: 
  Three Months Ended
  May 2,
2020
May 4,
2019
JCPenney department stores
Beginning of period 846    864   
New stores opened —    —   
Permanently closed stores —    (3)  
End of period (1) (2)
846    861   
(1)Gross selling space, including selling space allocated to services and licensed departments, was 93 million square feet as of May 2, 2020, and 95 million square feet as of May 4, 2019.
(2)All stores were temporarily closed beginning March 19,2020, and the majority remained closed as of May 2, 2020.

Credit Income and Other
Our private label credit card and co-branded MasterCard® programs are owned and serviced by Synchrony Financial (Synchrony).  Under our agreement, we receive cash payments from Synchrony based upon the performance of the credit card portfolios.  We participate in the programs by providing marketing promotions designed to increase the use of each card, including enhanced marketing offers for cardholders. Additionally, we accept payments in our stores from cardholders who prefer to pay in person when they are shopping in our locations. For the first three months of 2020 and 2019, we recognized income of $114 million and $116 million, respectively. Credit income was stronger than expected in the first three months of fiscal 2020 due to a stronger than expected performance of the credit card portfolio and a lagging impact from the COVID-19 pandemic.

Cost of Goods Sold
Cost of goods sold, exclusive of depreciation and amortization, for the three months ended May 2, 2020, was $813 million, a decrease of $817 million compared to $1,630 million for the three months ended May 4, 2019. Cost of goods sold as a percentage of total net sales was 75.1% for the three months ended May 2, 2020, compared to 66.8% for the three months ended May 4, 2019, an increase of 830 basis points. The increase in cost of goods sold as a percentage of net sales increased due to lower allowances from suppliers and increased markdowns during the period.

SG&A Expenses
For the three months ended May 2, 2020, SG&A expenses were $572 million compared to $856 million in the corresponding period of 2019. SG&A expenses as a percentage of total net sales for the first three months of 2020 increased to 52.9% compared to 35.1% in the first three months of 2019. The year-over-year decrease in SG&A dollars for the first quarter resulted primarily from the actions taken by the Company to mitigate the impact of temporarily closing its stores beginning March 19, 2020. Year-over-year savings include payroll and payroll related savings of more than $140 million due to associate
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furloughs, approximately $70 million from reduced advertising, along with reductions in incentive compensation and other miscellaneous expenses.

Depreciation and Amortization Expense
Depreciation and amortization expense was $135 million and $147 million for the three months ended May 2, 2020 and May 4, 2019, respectively.
Restructuring and Management Transition
The composition of restructuring and management transition charges were as follows: 
  Three Months Ended
($ in millions) May 2,
2020
May 4,
2019
Home office and stores $ 155    $ 19   
Management transition —     
Total $ 155    $ 20   

During the three months ended May 2, 2020, and May 4, 2019, we recorded $155 million and $19 million, respectively, of costs related to our store and home office expenses. Costs during the first three months of 2020 include an impairment of long-lived assets of $97 million and an impairment of indefinite-lived intangible assets of $42 million. The Company also incurred $16 million of expenses related to reorganization advisory fees. See Notes 7 and 11 to the Interim Consolidated Financial Statements.

Costs during the first three months of 2019 include store impairments related to announced store closures of $14 million, employee termination benefits of $4 million and store related closing costs of $1 million.

Operating Income/(Loss)
For the first three months of 2020, we reported an operating loss of $477 million compared to an operating loss of $93 million in the first three months of 2019.
Other Components of Net Periodic Pension Cost/(Income)
Other components of net periodic pension cost/(income) was $(23) million and $(13) million for the three months ended May 2, 2020, and May 4, 2019, respectively.

Net Interest Expense
Net interest expense for the first three months of 2020 was $75 million compared to $73 million in the first three months of 2019.
Income Taxes
The net tax benefit of $60 million for the three months ended May 2, 2020, consisted of federal, state and foreign tax benefits of $2 million, $1 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, net tax benefit of $3 million resulting from state audit settlements and a $56 million benefit due to the release of valuation allowance.
Non-GAAP Financial Measures
We report our financial information in accordance with GAAP. However, we present certain financial measures identified as non-GAAP under the rules of the Securities and Exchange Commission (SEC) to assess our results. We believe the presentation of these non-GAAP financial measures is useful in order to better understand our financial performance as well as to facilitate the comparison of our results to the results of our peer companies. In addition, management uses these non-GAAP financial measures to assess the results of our operations. It is important to view non-GAAP financial measures in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. We have provided reconciliations of the most directly comparable GAAP measures to our non-GAAP financial measures presented.

The following non-GAAP financial measures are adjusted to exclude restructuring and management transition charges, other components of net periodic pension cost/(income), the loss due to discontinuance of hedge accounting, the net (gain)/loss on the sale of non-operating assets and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps. Unlike other operating expenses, restructuring and management transition charges, other components of net periodic pension cost/(income), the loss due to discontinuance of hedge accounting, the net (gain)/loss
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on the sale of non-operating assets and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps are not directly related to our ongoing core business operations, which consist of selling merchandise and services to consumers through our department stores and our website at jcp.com. Further, our non-GAAP adjustments are for non-operating associated activities such as store impairments included in restructuring and management transition charges. Additionally, other components of net periodic pension cost/(income) is determined using numerous complex assumptions about changes in pension assets and liabilities that are subject to factors beyond our control, such as market volatility.  We believe it is useful for investors to understand the impact of restructuring and management transition charges, other components of net periodic pension cost/(income), the loss due to discontinuance of hedge accounting, the net (gain)/loss on the sale of non-operating assets and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps on our financial results and therefore are presenting the following non-GAAP financial measures: (1) adjusted EBITDA; (2) adjusted net income/(loss); and (3) adjusted earnings/(loss) per share-diluted.

Adjusted EBITDA. The following table reconciles net income/(loss), the most directly comparable GAAP measure, to adjusted EBITDA, which is a non-GAAP financial measure:
  Three Months Ended
($ in millions) May 2, 2020 May 4, 2019
Net income/(loss) $ (546)   $ (154)  
Add: Net interest expense 75    73   
Add: Loss due to discontinuance of hedge accounting 77    —   
Add: Income tax expense/(benefit) (60)    
Add: Depreciation and amortization 135    147   
Add: Restructuring and management transition charges 155    20   
Add: Other components of net periodic pension cost/(income) (23)   (13)  
Adjusted EBITDA (non-GAAP) $ (187)   $ 74   
Adjusted Net Income/(Loss) and Adjusted Diluted EPS. The following table reconciles net income/(loss) and diluted EPS, the most directly comparable GAAP financial measures, to adjusted net income/(loss) and adjusted diluted EPS, which are non-GAAP financial measures:
    Three Months Ended
($ in millions, except per share data) May 2,
2020
  May 4,
2019
Net income/(loss) $ (546)   $ (154)  
Diluted EPS $ (1.69)   $ (0.48)  
Add: Restructuring and management transition charges (1)
155    20   
Add: Other components of net periodic pension cost/(income) (1)
(23)   (13)  
Add: Loss due to discontinuance of hedge accounting (2)
83    —   
Adjusted net income/(loss) (non-GAAP) $ (331)   $ (147)  
Adjusted diluted EPS (non-GAAP) $ (1.02)   $ (0.46)  
(1) Adjustments reflect no tax effect due to the impact of the Company's tax valuation allowance.
(2) Adjustment reflects $6 million reclassified to income tax expense from accumulated other comprehensive income.



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Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from operations, available cash and cash equivalents and, prior to the commencement of the Chapter 11 Cases, access to our revolving credit facility. Our cash flows may be impacted by many factors including the economic environment, consumer confidence, competitive conditions in the retail industry, the success of our strategies and the continued uncertainties of the COVID-19 pandemic on the Company’s operations. We ended the first quarter of 2020 with $698 million of cash and cash equivalents. As of the end of the first quarter of 2020, based on our borrowing base, our current borrowings, amounts reserved for outstanding letters of credit, and prior to commencement of the Chapter 11 Cases, we had $46 million available for future borrowings under our revolving credit facility, providing total available liquidity of $744 million compared to $1,727 million as of the end of the first quarter of 2019. Following the commencement of the Chapter 11 Cases, we do not have access to a revolving credit facility.
The following table provides a summary of our key components and ratios of financial condition and liquidity:
  Three Months Ended
($ in millions) May 2,
2020
May 4,
2019
Cash and cash equivalents $ 698    $ 171   
Merchandise inventory 2,221    2,477   
Property and equipment, net 3,344    3,669   
Total debt (1)
4,884    3,918   
Stockholders’ equity 348    1,034   
Total capital 5,232    4,952   
Maximum capacity under our 2017 Credit Facility 2,350    2,350   
Cash flow from operating activities (814)   (205)  
Free cash flow (non-GAAP) (2)
(847)   (268)  
Capital expenditures (3)
33    71   
Ratios:
Total debt-to-total capital (4)
93  % 79  %
Cash-to-total debt (5)
14  % %
(1)Includes debt, net of unamortized debt issuance costs, including any borrowings under our revolving credit facility.
(2)See “Free Cash Flow” below for a reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure and further information on its uses and limitations.
(3)As of the end of the first quarters of 2020 and 2019, we had accrued capital expenditures of $16 million and $25 million, respectively.
(4)Total debt and other financing obligations divided by total capital.
(5)Cash and cash equivalents divided by total debt.

During June and July 2020, the Company borrowed $450 million in new money under the DIP Credit Agreement. See Note 14 for further information regarding the DIP Credit Agreement. $225 million of the $450 million borrowed was placed in escrow and will be released upon (i) Supermajority Lenders approval of the Business Plan by July 31, 2020, and (ii) Credit Parties obtaining binding commitments for third-party financing (on terms satisfactory to the Administrative Agent) necessary to finance the Business Plan by August 30, 2020.

Free Cash Flow (Non-GAAP)
Free cash flow is a key financial measure of our ability to generate additional cash from operating our business and in evaluating our financial performance. We define free cash flow as cash flow from operating activities, less capital expenditures plus the proceeds from the sale of operating assets. Free cash flow is a relevant indicator of our ability to repay maturing debt, revise our dividend policy or fund other uses of capital that we believe will enhance stockholder value. Free cash flow is considered a non-GAAP financial measure under the rules of the SEC. Free cash flow is limited and does not represent remaining cash flow available for discretionary expenditures due to the fact that the measure does not deduct payments required for debt maturities, payments made for business acquisitions or required pension contributions, if any. Therefore, it is important to view free cash flow in addition to, rather than as a substitute for, our entire statement of cash flows and those measures prepared in accordance with GAAP.

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Table of Contents
The following table sets forth a reconciliation of net cash provided by/(used in) operating activities, the most directly comparable GAAP financial measure, to free cash flow, a non-GAAP financial measure, as well as information regarding net cash provided by/(used in) investing activities and net cash provided by/(used in) financing activities:
 
  Three Months Ended
($ in millions) May 2,
2020
May 4,
2019
Net cash provided by/(used in) operating activities (GAAP) $ (814)   $ (205)  
Add:
Proceeds from sale of operating assets —     
Less:
Capital expenditures (1)
(33)   (71)  
Free cash flow (non-GAAP) $ (847)   $ (268)  
Net cash provided by/(used in) investing activities (2)
$ (33)   $ (63)  
Net cash provided by/(used in) financing activities $ 1,159    $ 106   

(1)As of the end of the first quarters of 2020 and 2019, we had accrued capital expenditures of