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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 August 1, 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-20200801_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

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. 322,663,112 shares of Common Stock of 50 cents par value, as of September 4, 2020.


J. C. PENNEY COMPANY, INC.
(Debtor-in-Possession)
FORM 10-Q
For the Quarterly Period Ended August 1, 2020
INDEX

  Page
1
2
3
4
5
6
7










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


J. C. PENNEY COMPANY, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
  Three Months Ended Six Months Ended
(In millions) August 1,
2020
August 3,
2019
August 1,
2020
August 3,
2019
Total net sales $ 1,390  $ 2,509  $ 2,472  $ 4,948 
Credit income and other 69  110  183  226 
Total revenues 1,459  2,619  2,655  5,174 
Costs and expenses/(income):
Cost of goods sold (exclusive of depreciation and amortization shown separately below) 919  1,585  1,732  3,215 
Selling, general and administrative (SG&A) 470  870  1,042  1,726 
Depreciation and amortization 161  137  296  284 
Real estate and other, net (5) 3  (7) (2)
Restructuring and management transition 67  7  222  27 
Total costs and expenses 1,612  2,602  3,285  5,250 
Operating income/(loss) (153) 17  (630) (76)
Other components of net periodic pension cost/(income) 77  (13) 54  (26)
(Gain)/loss on extinguishment of debt   (1)   (1)
Net interest expense 67  74  142  147 
Loss due to discontinuance of hedge accounting     77   
Reorganization items, net
108    108   
Income/(loss) before income taxes (405) (43) (1,011) (196)
Income tax expense/(benefit) (7) 5  (67) 6 
Net income/(loss) $ (398) $ (48) $ (944) $ (202)
Earnings/(loss) per share:
Basic $ (1.23) $ (0.15) $ (2.91) $ (0.63)
Diluted $ (1.23) $ (0.15) $ (2.91) $ (0.63)
Weighted average shares – basic 324.6  319.4  324.2  318.6 
Weighted average shares – diluted 324.6  319.4  324.2  318.6 
See the accompanying notes to the unaudited interim Consolidated Financial Statements.


1

Table of Contents
J. C. PENNEY COMPANY, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
  Three Months Ended Six Months Ended
(In millions) August 1,
2020
August 3,
2019
August 1,
2020
August 3,
2019
Net income/(loss) $ (398) $ (48) $ (944) $ (202)
Other comprehensive income/(loss), net of tax:
Currency translations (1)
    (1)  
Cash flow hedges (2)
  (30)   (43)
Net actuarial gain/(loss) arising during the period (3)
(41)   (41)  
Prior service credit/(cost) arising during the period (4)
4  4 
Amortization of pension prior service (credit)/cost (5)
2  2  3  4 
Total other comprehensive income/(loss), net of tax (35) (28) (35) (39)
Total comprehensive income/(loss), net of tax $ (433) $ (76) $ (979) $ (241)

(1)Net of $0 million of tax in the six months ended August 1, 2020.
(2)Net of $0 million in tax in the three and six months ended August 3, 2019.
(3)Net of $0 million of tax in the three and six months ended August 1, 2020.
(4)Net of $0 million 0f tax in the three and six months ended August 1, 2020.
(5)Net of $0 million of tax in each of the three and six months ended August 1, 2020, and August 3, 2019. Pre-tax amounts of $2 million and $2 million in the three months ended August 1, 2020, and August 3, 2019, respectively, were recognized in Other components of net periodic pension cost/(income) in the unaudited interim Consolidated Statements of Operations. Additionally, pre-tax amounts of $3 million and $4 million in the six months ended August 1, 2020, and August 3, 2019, 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.
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
August 1,
2020
August 3,
2019
February 1,
2020
(In millions, except per share data) (Unaudited) (Unaudited)  
Assets
Current assets:
Cash in banks and in transit $ 205  $ 163  $ 108 
Cash short-term investments 826  12  278 
Restricted cash 452     
Cash, cash equivalents and restricted cash 1,483  175  386 
Merchandise inventory 1,891  2,471  2,166 
Prepaid expenses and other 464  275  174 
Total current assets 3,838  2,921  2,726 
Property and equipment (net of accumulated depreciation of $3,622, $3,167 and $3,095)
3,169  3,591  3,488 
Operating lease assets 772  925  998 
Prepaid pension 27  166  120 
Other assets 597  657  657 
Total Assets $ 8,403  $ 8,260  $ 7,989 
Liabilities and Stockholders’ Equity
Current liabilities:
Merchandise accounts payable $ 236  $ 878  $ 786 
Other accounts payable and accrued expenses 812  970  931 
Current operating lease liabilities   84  68 
Debtor-in-possession financing
900     
Current portion of long-term debt 1,204  197  147 
Total current liabilities 3,152  2,129  1,932 
Noncurrent operating lease liabilities   1,090  1,108 
Long-term debt   3,589  3,574 
Deferred taxes 39  121  116 
Other liabilities 251  368  430 
Total liabilities not subject to compromise 3,442  7,297  7,160 
Liabilities subject to compromise 5,050     
Stockholders’ (Deficit) Equity
Common stock (1)
161  159  160 
Additional paid-in capital 4,721  4,719  4,723 
Reinvested earnings/(accumulated deficit) (4,613) (3,601) (3,667)
Accumulated other comprehensive income/(loss) (358) (314) (387)
Total Stockholders’ (Deficit) Equity (89) 963  829 
Total Liabilities and Stockholders’ (Deficit) Equity $ 8,403  $ 8,260  $ 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 322.4 million, 317.7 million and 320.5 million as of August 1, 2020, August 3, 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.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) 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' (Deficit) 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  1  2  (2)   1 
May 2, 2020 321.9  161  4,725  (4,215) (323) 348 
Net income/(loss)       (398)   (398)
Other comprehensive income/(loss)         (35) (35)
Stock-based compensation and other 0.5    (4)     (4)
August 1, 2020 322.4  $ 161  $ 4,721  $ (4,613) $ (358) $ (89)

(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  2      2 
May 4, 2019 316.8  158  4,715  (3,553) (286) 1,034 
Net income/(loss)       (48)   (48)
Other comprehensive income/(loss)         (28) (28)
Stock-based compensation and other 0.9  1  4      5 
August 3, 2019 317.7  $ 159  $ 4,719  $ (3,601) $ (314) $ 963 
(1)Represents the cumulative-effect adjustments

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

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J. C. PENNEY COMPANY, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  Six Months Ended
($ in millions) August 1,
2020
August 3,
2019
Cash flows from operating activities
Net income/(loss) $ (944) $ (202)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Restructuring and management transition 162  17 
Reorganization items, net 17   
Net (gain)/loss on sale of non-operating assets   (1)
Net (gain)/loss on sale of operating assets   3 
(Gain)/loss on extinguishment of debt   (1)
Discontinuance of hedge accounting 77   
Depreciation and amortization 296  284 
Benefit plans 63  (29)
Stock-based compensation (2) 6 
Deferred taxes (69)  
Change in cash from:
Inventory 275  (34)
Prepaid expenses and other (286) (82)
Merchandise accounts payable (48) 31 
Income taxes    
Accrued expenses and other 14  9 
Net cash provided by/(used in) operating activities (445) 1 
Cash flows from investing activities
Capital expenditures (43) (146)
Net proceeds from sale of non-operating assets   1 
Net proceeds from sale of operating assets 1  12 
Net cash provided by/(used in) investing activities (42) (133)
Cash flows from financing activities
Proceeds from debtor-in-possession financing 450   
Proceeds from borrowings under the credit facility 2,675  946 
Payments of borrowings under the credit facility (1,471) (946)
Payments of finance leases and note payable (1) (1)
Payments of long-term debt (19) (26)
Debtor-in-possession financing fees (50)  
Proceeds from stock issued under stock plans   1 
Net cash provided by/(used in) financing activities 1,584  (26)
Net increase/(decrease) in cash, cash equivalents and restricted cash 1,097  (158)
Cash and cash equivalents at beginning of period 386  333 
Cash, cash equivalents and restricted cash at end of period $ 1,483  $ 175 
Supplemental cash flow information
Income taxes received/(paid), net $ (2) $ (6)
Interest received/(paid), net (164) (139)
Supplemental non-cash investing and financing activity
Increase/(decrease) in other accounts payable related to purchases of property and equipment and software 2  (15)
Remeasurement of leased assets and lease obligations (107) 52 

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.
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J. C. PENNEY COMPANY, INC.
(Debtor-In-Possession)
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.

As discussed further in Note 2, 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 Company considered impacts related to the Chapter 11 Cases and the COVID-19 pandemic (see Note 3) to its use of any estimates, as appropriate, within its unaudited interim Consolidated Financial Statements. 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 August 1, 2020” and “second quarter of 2020” refer to the 13-week period ended August 1, 2020, and “three months ended August 3, 2019” and “second quarter of 2019” refer to the 13-week period ended August 3, 2019. "Six months ended August 1,
2020" and "six months ended August 3, 2019" refer to the 26-week periods ended August 1, 2020 and August 3, 2019, respectively. Fiscal years 2020 and 2019 contain 52 weeks.
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.
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 August 1, 2020. In addition, the COVID-19 pandemic (see Note 3) has, and continues to have, a material impact on the Company’s business operations, financial position, liquidity, capital resources and results of operations. The risks and uncertainties surrounding the Chapter 11 Cases and the COVID-19 pandemic, the defaults under our debt agreements
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(see Note 9), 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.
Bankruptcy Accounting
The unaudited interim Consolidated Financial Statements included herein have been prepared as if we are a going concern and in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic No. 852 – Reorganizations (ASC 852). As a result, we have segregated liabilities and obligations whose treatment and satisfaction are dependent on the outcome of the Chapter 11 Cases and have classified these items as Liabilities Subject to Compromise on our unaudited interim Consolidated Balance Sheets. In addition, we have classified all income, expenses, gains or losses that were incurred or realized as a direct result of the Chapter 11 Cases since filing as Reorganization items in our unaudited interim Consolidated Statement of Operations.

Certain subsidiary entities are not debtors under the Chapter 11 Cases. However, condensed combined financial statements of the Debtors are not presented in the notes to the unaudited interim Consolidated Financial Statements as the assets and liabilities, operating results and cash flows of the non-debtor entities included in the unaudited interim Consolidated Financial Statements are insignificant and, therefore, the unaudited interim Consolidated Financial Statements presented herein materially represent the condensed combined financial statements of the debtor entities for all periods presented. As of August 1, 2020, total assets, total liabilities and net income of the non-debtor entities represents 0.6%, 0.2%, and (0.8)% of total consolidated assets, liabilities and net income, respectively. As of August 1, 2020, the non-debtor entities have intercompany receivables and intercompany payables from/to the debtor entities of $17.6 million and $0.0 million, respectively.

Restricted Cash
Amounts included in restricted cash represent those required to be set aside by a contractual agreement or requirements of the Bankruptcy Court. Amounts included in restricted cash include:

(In Millions) August 1, 2020
DIP financing funded to escrow pending resolution of contingencies (see Note 9) $ 225 
Cash collateral in escrow under the requirements of the 2017 Revolving Credit Facility 156 
Cash deposited into escrow to pay bankruptcy professional fees upon emergence
52 
Other 19 
Total restricted cash
$ 452 
2. Chapter 11 Cases

Voluntary Petition for Reorganization
On the Petition Date, the Debtors filed voluntary petitions in the Bankruptcy Court seeking relief under the Bankruptcy Code. 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.

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 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.

The Debtors 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
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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 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. On September 10, 2020, the Company entered into a non-binding letter-of-intent (“LOI”) with the Ad Hoc Group, Simon Property Group and Brookfield Property Group that is generally consistent with the framework of the restructuring process contemplated in the RSA. Because the LOI is non-binding, and subject to definitive documentation that must be agreed upon by all parties and subsequently approved by the Bankruptcy Court, there is no assurance that the existing LOI will ultimately result in a final, approved sale or plan of reorganization.

Financing During the Chapter 11 Cases
See Note 9 for discussion of the DIP Credit Agreement, which provides up to $450 million in senior secured, super-priority new money financing, subject to the terms, conditions, and priorities set forth in the applicable definitive documentation and orders of the Bankruptcy Court.

Liabilities Subject to Compromise
As a result of the Chapter 11 Cases, the payment of pre-petition liabilities is generally subject to compromise pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ business and assets. Among other things, the Bankruptcy Court authorized, but did not require, the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes, critical vendors and debt.

Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or other events.

The following table presents liabilities subject to compromise as reported in the unaudited interim Consolidated Balance Sheet at August 1, 2020:

(In millions) August 1, 2020
Debt (1)
$ 3,289 
Operating leases 942 
Merchandise accounts payable 503 
Other accounts payable and accrued expenses 167 
Other liabilities 115 
Accrued interest 34 
Total liabilities subject to compromise
$ 5,050 
(1) Please see Note 9 for details of the pre-petition debt reported as liabilities subject to compromise.

Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code the Debtors may assume, assign or reject executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and fulfillment of other applicable conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such contract and, subject to certain exceptions, relieves the Debtors from performing future obligations under such contract but entitles the counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Alternatively, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease, if any, and provide adequate assurance of future performance. Accordingly, any description of an executory
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contract or unexpired lease with the Debtors in this report, including where applicable quantification of the Company’s obligations under such executory or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code.


Reorganization Items, Net
Reorganization items, net represent amounts incurred after the Petition Date as a direct result of the Chapter 11 Cases and are comprised of the following for the quarter ended August 1, 2020:
Three Months 
Ended
(In millions) August 1, 2020
Advisor fees $ 64 
Debtor-in-possession financing fees 50 
Write-off of pre-petition unamortized debt issuance costs 33 
Employee retention 21 
Gains on lease termination (66)
Other 6 
Total reorganization items, net (1)
$ 108 
(1) Cash paid for reorganization items, net for the three months ended August 1, 2020, was $79 million, which includes $2 million in prepaid expenses and the $50 million for DIP financing fees.

Store Asset Related Charges/Gains
In conjunction with our restructuring process that began toward the end of the first quarter of 2020 and continued into the second quarter with the bankruptcy proceedings, the Company has identified certain properties to be considered, and designated, for closing. Additionally, the filing of the Chapter 11 Cases and other restructuring considerations have resulted in various impairment analyses, the reassessment and remeasurement of certain reasonably certain lease terms and the reconsideration of the amortization periods for leasehold improvements and related fixed assets. The effects of these actions, both in the first and second quarters of 2020, resulted in multiple adjustments to store-related and other assets, including right-of-use lease assets and lease liabilities for the three-month and six-month periods ended August 1, 2020. These adjustments included impairments of long-lived assets, impairments of operating lease assets, remeasurement of certain operating lease assets and liabilities based on a reassessment of the reasonably certain lease term, and the rejection of certain leases through the Bankruptcy Court. Since these accounting write offs are primarily related to the eventual closure of stores and other properties, the Company has summarized the impact on the unaudited interim Consolidated Statement of Operations in the table below for the three-month and six-month periods ended August 1, 2020, including the caption in which each item is recorded in the unaudited interim Consolidated Statement of Operations.

Three Months Ended Six Months Ended
(In millions) August 1, 2020 August 1, 2020 Statement of Operations Line Item
Impairments of long-lived assets (see note 13) $ 26  $ 75  Restructuring and management transition
Impairments of operating lease assets (see note 13) 2  50  Restructuring and management transition
Write off of closed store assets 1  1  Restructuring and management transition
Accelerated amortization of operating lease assets (see note 11) 11  11  SG&A
Accelerated depreciation of long-lived assets (1)
28  28  Depreciation and amortization
Gain on remeasurement of operating lease assets and operating lease liabilities (see notes 11 and 13) (20) (20) Restructuring and management transition
Gain on store lease terminations from rejection of leases (see note 11) (61) (61) Reorganization items, net
Gain on sale of closing store fixtures (1) (1) Restructuring and management transition
  Total $ (14) $ 83 
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(1) Represents the incremental depreciation expense recorded during the respective period due to the reduced estimated useful life of the underlying long-lived assets

The accounting standards applicable to these adjustments to long-lived assets and operating lease assets and liabilities are based on various facts and circumstances over the period from a decision to close a store (as an indicator of impairment) to the cease use date and lease rejection approval from the Bankruptcy Court. These events drive the timing of recognition and the presentation location in the unaudited interim Consolidated Statement of Operations. At the point that an operating lease for a closing store is rejected and the Company ceases use of the property, all the store’s related long-lived assets will be written-off to their residual value and the store’s operating lease assets and liabilities will be written down to zero. However, under the applicable accounting standards, the write down of these assets and liabilities occurs at different points in time as these stores are eventually closed and the related store leases progress toward rejection. As of August 1, the Company has additional net long-lived assets of $50 million and net operating lease liabilities of $79 million, recorded on the unaudited interim Consolidated Balance Sheet, all related to stores that are currently scheduled for closing. These amounts are expected to be recorded as charges/gains to the statement of operations in future periods through the cease use date and Bankruptcy Court approval of the rejection of the lease, which is currently scheduled for October and November 2020.

3.  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. Additionally, subsequent to temporarily closing all stores, the Company furloughed approximately 80,000 associates, including store and supply chain associates, as well as some corporate office associates

In late April 2020, the Company began re-opening stores with limited operating hours and staffing. 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. The majority of our stores continue to operate with limited hours and staffing. As of August 1, the Company has completed the closing of 7 stores and is in the process of closing 146 stores, has commenced going out of business sales in most of these stores and expects the majority of the total 153 stores to close by the end of October, with the remaining stores closing in November. As of August 31, 2020, approximately 18,000 associates remain on furlough.

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. 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.

4. 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,
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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.

5. 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 Six Months Ended
(In millions, except per share data) August 1,
2020
August 3,
2019
August 1,
2020
August 3,
2019
Earnings/(loss)
Net income/(loss) $ (398) $ (48) $ (944) $ (202)
Shares
Weighted average common shares outstanding (basic shares) 324.6 

319.4  324.2  318.6 
Adjustment for assumed dilution:
Stock options and restricted stock awards        
Weighted average shares assuming dilution (diluted shares) 324.6  319.4  324.2  318.6 
EPS
Basic $ (1.23) $ (0.15) $ (2.91) $ (0.63)
Diluted $ (1.23) $ (0.15) $ (2.91) $ (0.63)
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 Six Months Ended
(Shares in millions) August 1,
2020
August 3,
2019
August 1,
2020
August 3,
2019
Stock options and restricted stock awards 9.9  24.7  15.1  23.6 
6. 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.

The following table provides the components of Net sales for the three and six months ended August 1, 2020 and August 3, 2019:
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Three Months Ended Six Months Ended
($ in millions) August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019
Women’s apparel $ 271  19  % $ 558  22  % $ 487  19  % $ 1,073  21  %
Men’s apparel and accessories 289  21  % 537  21  % 502 20  % 1,015  21  %
Women’s accessories, including Sephora 219  16  % 401  16  % 389 16  % 778  16  %
Home 172  12  % 246  10  % 317 13  % 551  11  %
Footwear and handbags 147  11  % 272  11  % 264 11  % 528  11  %
Kid’s, including toys 108  8  % 216  9  % 193 8  % 416  8  %
Jewelry 90  6  % 124  5  % 165 7  % 262  5  %
Services and other 94  7  % 155  6  % 155 6  % 325  7  %
Total net sales $ 1,390  100  % $ 2,509  100  % $ 2,472  100  % $ 4,948  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) August 1, 2020 August 3, 2019 February 1, 2020
Gift cards $ 109  $ 114  $ 136 
Loyalty rewards 62  63  58 
Total contract liability $ 171  $ 177  $ 194 

A rollforward of the amounts included in contract liability for the first six 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 73  173 
Net sales from amounts included in contract liability opening balances (42) (56)
Net sales from current period usage (54) (140)
Ending balance $ 171  $ 177 
7. 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 8) 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 10), 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 2) was deemed to be more likely than not as of May 2, 2020, the end of the Company’s fiscal first quarter. Accordingly, the Company determined that it was probable that the forecasted transactions would not occur and, therefore, the hedges were no longer effective. As a result, during 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. As of May 7, 2020, the fair value of the interest swaps was $77 million. The interest rate swaps liability is secured by the collateral of the 2017 Credit Facility (see Note 9) and is not subject to compromise. The interest rate swaps are no longer subject to fair value changes after May 7, 2020.

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
August 1,
 2020 (1)
August 3,
2019 (1)
February 1,
2020 (1)
Balance Sheet Location
August 1,
2020 (1)
 August 3,
2019 (1)
February 1,
2020 (1)
Interest rate swaps Prepaid expenses and other $   $ 1  $   Other accounts payable and accrued expenses $ 77  $   $  
Interest rate swaps Other assets       Other liabilities   48  58 
Total derivatives $   $ 1  $   $ 77  $ 48  $ 58 
(1) Derivatives as of August 1, 2020, were not designated as hedging instruments; derivatives as of August 3, 2019, and February 1, 2020, were designated as hedging instruments.
8. Fair Value Disclosures

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

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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, prior to their cancellation, was 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 13, during second quarter of 2020, long-lived assets held and used with carrying value of $68 million were written down to their fair value of $42 million, and right-of-use assets with carrying value of $12 million were written down to a fair value of $10 million , resulting in asset impairment charges of $26 million and $2 million, respectively, totaling $28 million. During 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, during first quarter of 2020, 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. 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: 
  August 1, 2020 August 3, 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 $ 5,393  $ 2,721  $ 3,829  $ 2,373  $ 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 August 1, 2020, August 3, 2019, and February 1, 2020, the fair values of cash, cash equivalents and restricted cash, accounts payable, the DIP Credit Agreement and the 2017 Credit Facility 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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9. Debt and Debt Subject to Compromise
($ in millions) August 1, 2020 August 3, 2019 February 1, 2020
DIP Credit Agreement due November 2020 $ 900  $   $  
Pre-petition debt - classified as a current liability
     2017 Credit Facility (Matures 2022) 1,204     
Pre-petition debt subject to compromise (1)
     8.125% Senior Notes Due 2019
  50   
     5.65% Senior Notes Due 2020
105  105  105 
     2016 Term Loan Facility (Matures in 2023) 1,102  1,561  1,540 
     5.875% Senior Secured Notes Due 2023
469  500  500 
     7.125% Debentures Due 2023
10  10  10 
     8.625% Senior Secured Second Priority Notes Due 2025
400  400  400 
     6.9% Notes Due 2026
2  2  2 
     6.375% Senior Notes Due 2036
388  388  388 
     7.4% Debentures Due 2037
313  313  313 
     7.625% Notes Due 2097
500  500  500 
Total debt subject to compromise 3,289     
Total debt $ 5,393  3,829  3,758 
Less: unamortized debt issuance costs (43) (37)
Less: current portion (197) (147)
Total long-term debt $ 3,589  $ 3,574 
(1) Liabilities subject to compromise must be reported at the amounts expected to be allowed claims by the Bankruptcy Court. The carrying value of the debt will be adjusted as claims are approved. As of August 1, 2020, we have written off unamortized debt issuances costs of $33 million to present the debt at the face value outstanding. The expense related to this write off is recorded within Reorganization items, net in the unaudited interim Consolidated Statement of Operations.

The commencement of the Chapter 11 Cases constitutes an event of default or termination event under all pre-petition debt of the Company. With the exception of the 2017 Credit Facility, all pre-petition debt is classified as liabilities subject to compromise. As a result of the default under the agreements comprising the 2017 Credit Facility agreements, the Company has classified the 2017 Credit Facility as a current liability. 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.

Effective as of the Petition Date, the Company ceased recording interest expense on all debt subject to compromise, with the exception of the 2016 Term Loan Facility and the Senior Secured Notes. On June 5, 2020, and July 20, 2020, the Bankruptcy Court issued orders allowing the Debtors to make adequate protection payments for the 2017 Credit Facility, the 2016 Term Loan Facility and the Senior Secured Notes. The adequate protection payments represent interest otherwise due under the terms of those debt agreements and the Company continues to accrue and expense that interest. Contractual interest expense represents amounts due under the contractual terms of outstanding pre-petition debt subject to compromise and not otherwise paid under adequate payments. For the second quarter 2020, contractual interest expense of $26 million has not been recorded in the financial statements.
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 5, 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.

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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 pre-petition 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). Of the total $450 million of pre-petition debt rolled into the DIP Credit Agreement, $419 million of the 2016 Term Loan and $31 million of the Senior Secured Notes were rolled into the DIP Credit Agreement. The pre-petition debt rolled into the DIP Credit Agreement was accounted for as a debt modification. Fees of $50 million, consisting of $45 million paid to the lenders and $5 million paid to the Company's advisors, were paid in connection with the signing of the DIP Credit Agreement, were all expensed during the second quarter of 2020 and are included in Reorganization items, net in the unaudited interim Consolidated Statement of Operations.

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 pre-petition 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. As of August 1, 2020, the interest rate on the DIP Credit Agreement was 13%. In addition, a 3% repayment fee due to the DIP lenders upon repayment of the DIP Credit Agreement will be accreted as interest expense over the DIP Credit Agreement term.

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.

As previously reported, the Supermajority Lenders agreed to extend certain milestones under the DIP Credit Agreement to enable the Company and the Supermajority Lenders to continue discussions, including with respect to negotiating the sale to a third-party of all or substantially all of the assets of the Credit Parties comprising the operating company, pursuant to section 363 of the Bankruptcy Code. On September 10, 2020, the Company entered into a non-binding letter-of-intent (“LOI”) with the Ad Hoc Group, Simon Property Group and Brookfield Property Group that is generally consistent with the framework of the restructuring process contemplated in the RSA. Because the LOI is non-binding, and subject to definitive documentation that must be agreed upon by all parties and subsequently approved by the Bankruptcy Court, there is no assurance that the existing LOI will ultimately result in a final, approved sale or plan of reorganization.

Pre-Petition Debt
As of August 1, 2020, there was $1,204 million in outstanding borrowings under the Company's pre-petition 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 interest rate on the borrowings as of August 1, 2020, was 6.50%. The proceeds from the 2017 Credit Facility may be used for working capital needs or general corporate purposes. The Company’s option to elect which rate applies to the amounts outstanding under the 2017 Credit Facility requires the Company to designate each borrowing as either a base rate or LIBOR borrowing. The designation may be changed subsequent to the initial borrowing and are presented as proceeds and payments which offset in the unaudited interim Consolidated Statement of Cash Flows. During the first half of 2020, approximately $1.4 billion changed designation, which has zero net impact on the amounts that are outstanding under the 2017 Credit Facility. Following the commencement of the Chapter 11 Cases, we do not have access to additional cash borrowings under the revolving credit facility.
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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 non-default interest and fees, in respect of the obligations under the outstanding 2016 Term Loan Facility and the Senior Secured Notes Due 2023. In respect of obligations under the 2017 Credit Facility, an additional 2% in default interest will be included in the adequate protection payments. All other interest payments on pre-petition outstanding debt have been suspended. Amounts incurred for adequate protection payments, representing interest on the 2017 Credit Facility, the 2016 Term Loan Facility, and the Senior Secured Notes, totaled $38 million for the second quarter of 2020. As noted above as provided for in the DIP Credit Agreement, $419 million of the 2016 Term Loan and $31 million of the Senior Secured Notes were rolled into the DIP Credit Agreement.
10. Accumulated Other Comprehensive Income/(Loss)

The following tables show the changes in accumulated other comprehensive income/(loss) balances for the six months ended August 1, 2020, and August 3, 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 
Other comprehensive income/(loss) before reclassifications (41) 4      (37)
Amounts reclassified from accumulated other comprehensive income/(loss)   3  (1)   2 
August 1, 2020 $ (351) $ (5) $ (2) $   $ (358)
(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, both recorded during the first quarter of 2020.
(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  3    4  53 
Other comprehensive income/(loss) before reclassifications       (39) (39)
Amounts reclassified from accumulated other comprehensive income/(loss)   4    (4)  
August 3, 2019 $ (244) $ (15) $ (1) $ (54) $ (314)
11. Leases

ASC 842 Leases, requires the remeasurement of the lease term upon the occurrence of a significant event or a change in circumstances that is within the control of the lessee that directly affects whether the lessee is reasonably certain to exercise or not to exercise an option to extend or terminate a lease. Following the filing of the Chapter 11 Cases on May 15, 2020, the Company remeasured certain leases based on a change in their reasonably certain lease term. The weighted average discount rate used for remeasuring the leases was 22.3%. As a result of the remeasurements, the Company reduced its operating lease assets by $95 million and its operating lease liabilities by $115 million, recording a gain of $20 million, which is included in Restructuring and management transition, net (see Note 13) in the unaudited interim Consolidated Statement of Operations.

During the second quarter of 2020, the Bankruptcy Court approved the rejection of certain leases that were primarily related to leases associated with stores closed prior to the commencement of the Chapter 11 Cases. In connection with the rejection of these leases, the Company reduced its operating lease assets by $46 million and its operating lease liabilities by $112 million, recording a gain of $66 million, which is included in Reorganization items, net (see Note 2) in the unaudited interim Consolidated Statement of Operations.
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Additionally, in connection with scheduled store closures, during the second quarter, the Company accelerated the amortization of store operating lease assets of $11 million, which was recorded to SG&A expenses in the unaudited interim Consolidated Statement of Operations.
12. Retirement Benefit Plans
The components of net periodic pension expense/(income) for our non-contributory qualified defined benefit pension plan and supplemental pension plans were as follows:
  Three Months Ended Six Months Ended
($ in millions) August 1,
2020
August 3,
2019
August 1,
2020
August 3,
2019
Service cost $ 8  $ 7  $ 16  $ 14 
Other components of net periodic pension cost/(income):
Interest cost 26  33  52  66 
Expected return on plan assets (51) (48) (101) (96)
Amortization of prior service cost 2  2  3  4 
Amortization of net loss 1    1   
Curtailment loss recognized 5    5   
Special termination benefit cost recognized 94    94   
77  (13) 54  (26)
Net periodic pension expense/(income) $ 85  $ (6) $ 70  $ (12)

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 4,300 eligible associates. Eligibility for the VERP included home office, stores and supply chain personnel who met certain criteria related to age and years of service as of October 23, 2019. The consideration period for eligible associates to accept the VERP ended on May 29, 2020. Based on the approximately 2,600 associates who elected to accept the VERP, we incurred a total charge of $94 million for enhanced retirement benefits. The enhanced retirement benefits increased the projected benefit obligation (PBO) of the Primary Pension Plan and the Supplemental Pension Plans by $85 million and $9 million, respectively. In addition, we incurred curtailment charges of $4 million related to our Primary Pension Plan and $1 million related to Supplemental Pension Plans as a result of the reduction in the expected years of future service related to these plans. As a result of these curtailments, the assets and the liabilities for our Primary Pension Plan and the liabilities of certain Supplemental Pension Plans were remeasured as of July 31, 2020. The discount rate used for the remeasurements was 2.64% compared to the fiscal year 2019 discount rate of 3.08%. The remeasurement and curtailment resulted in the PBO of our Primary Pension Plan increasing by $117 million and the related assets increasing by $74 million, and the PBO of our Supplemental Pension Plans decreasing by $0.4 million. As of July 31, 2020, the funded status of the Primary Pension Plan was 101% and is not impacted by the Chapter 11 Cases.

Other Unfunded Benefit Plans
The Company also sponsors other supplemental retirement plans, primarily the Supplemental Retirement Program, the Benefit Restoration Plan and the Mirror Savings Plan, that were unfunded as of the Petition Date. Liabilities for those plans total $165 million and have been classified as Liabilities subject to compromise in the unaudited interim Consolidated Balance Sheets.
13. Restructuring and Management Transition, Net

During the second quarter of 2020, the Company accrued severance costs related to store associates at announced closing stores and a reduction in workforce for home office, field management and international associates. Severance costs for the approximately 7,700 associates impacted totaled $28 million.

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In connection with the anticipated commencement of the Chapter 11 Cases, the Company identified in the first quarter of 2020 certain leased stores it considered more likely than not would be permanently closed significantly before the end of their respective estimated useful lives. During the second quarter of 2020, the stores identified for permanent closure continued to evolve through the Chapter 11 Cases. The potential closing of stores is considered an indicator of impairment in accordance with ASC 360 Property, Plant and Equipment; accordingly, 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 test for impairment during both first quarter 2020 and second quarter 2020, the Company recorded impairment charges of $97 million during first quarter of 2020, consisting of $49 million related to long-lived assets and $48 million related to right-of-use lease assets and the Company recorded impairment charges of $28 million during second quarter of 2020, consisting of $26 million related to long-lived assets and $2 million related to right-of-use lease assets.

In connection with store and other facility closures, during the second quarter of 2020, the Company wrote-off certain supply chain and field office lease related long-lived assets resulting in a charge of $16 million.

Similarly, during first quarter 2020, 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 first quarter of 2020.

The Company also incurred expenses related to pre-petition debt restructuring advisory fees in the amount of $16 million and $8 million in the first and second quarters of 2020, respectively. The Company also recognized a gain of $20 million related to the remeasurement of certain operating lease assets and liabilities (see Note 11).

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 $1 million severance charge for the expected displacement of store associates.
The components of Restructuring and management transition include:
Home office and stores — charges for actions to reduce our store and home office expenses including impairments, employee termination benefits, store lease terminations and other restructuring/reorganization advisory costs;
Management transition — charges related to implementing changes within our management leadership team for both incoming and outgoing members of management; and
Other — charges related primarily to costs related to the closure of certain supply chain locations.
The composition of restructuring and management transition charges was as follows: 
  Three Months Ended Six Months Ended Cumulative
Amount From Program Inception Through
August 1, 2020
($ in millions) August 1,
2020
August 3,
2019
August 1,
2020
August 3,
2019
Home office and stores $ 67  $ 4  $ 222  $ 23  $ 751 
Management transition   3    4  269 
Other         186 
Total $ 67  $ 7  $ 222  $ 27  $ 1,206 

Activity for the restructuring and management transition liability for the six months ended August 1, 2020 was as follows:
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($ in millions) Home Office
and Stores
Management
Transition
Total
February 1, 2020 $ 6  $ 2  $ 8 
Charges 59    59 
Cash payments (34) (1) (35)
Move to liabilities subject to compromise (2)   (2)
August 1, 2020 $ 29  $ 1  $ 30 
14. 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 six months ended August 1, 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 $7 million for the three months ended August 1, 2020, consisted of federal, state and foreign tax expense of $1 million, $1 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, and a $9 million benefit due to the release of valuation allowance.

The net tax benefit of $67 million for the six months ended August 1, 2020, consisted of federal, state and foreign tax benefit of $1 million, $2 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 statutory audit settlements and a $65 million benefit from the release of valuation allowance, primarily due to the generation of post-tax reform NOLs that do not expire.
As of August 1, 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 $383 million of the NOLs do not expire; $389 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 $786 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 $268 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 August 1, 2020, the valuation allowance net increase of $112 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.
15. 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 2 for more information about the
Chapter 11 Cases.

Legal Proceedings
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We are subject to various 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 August 1, 2020, we have an estimated accrual of $20 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.
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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, 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.


Business Update

During March 2020, the World Health 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. In response to the COVID-19 pandemic, 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. As a result, the Company closed all of its stores beginning March 19, 2020, and furloughed approximately 80,000 associates. Although a majority of these restrictions have been lifted in various states, regions and municipalities throughout the U.S., 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.

In late April 2020, the Company began reopening stores and by the end of the second quarter of 2020, most stores had been reopened with limited operating hours and staffing levels. Additionally, the Company has completed the closure of 7 stores and is in the process of closing 149 stores, including 3 stores approved by the Bankruptcy Court on September 1, 2020. The Company has commenced closing sales in the majority of these locations and expects the majority of the 153 stores to close by the end of October 2020, with the remaining stores closing in November 2020. As of August 31, 2020, approximately 18,000 associates remain on furlough.

On May 15, 2020 (the Petition Date), as described in Note 2 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 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 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.

The Company and its lenders are engaged in continuing discussions regarding the restructuring process, including with respect to negotiating the sale to a third-party of all or substantially all of the assets of the Debtors comprising the operating company, pursuant to section 363 of the Bankruptcy Code. On September 10, 2020, the Company entered into a non-binding letter-of-intent (“LOI”) with certain lenders, Simon Property Group and Brookfield Property Group that is generally consistent with the
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framework of the restructuring process contemplated in the restructuring support agreement among the Debtors and certain lenders (see Note 2 to the unaudited interim Consolidated Financial Statements). Because the LOI is non-binding, and subject to definitive documentation that must be agreed upon by all parties and subsequently approved by the Bankruptcy Court, there is no assurance that the existing LOI will ultimately result in a final, approved sale or plan of reorganization.

As discussed in Note 1 to the unaudited interim Consolidated Financial Statements, the risks and uncertainties surrounding the COVID-19 pandemic and 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. As a result of these risks and uncertainties, the amount and composition of our assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of our operations, properties, liquidity and capital resources included in this quarterly report may not accurately reflect our operations, properties, liquidity and capital resources following the Chapter 11 Cases.

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