UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 14, 2008
¨ | 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: 1-00041
SAFEWAY INC.
(Exact name of registrant as specified in its charter)
Delaware | 94-3019135 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
5918 Stoneridge Mall Rd. Pleasanton, California |
94588-3229 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (925) 467-3000
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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. x Yes ¨ No.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No.
As of July 15, 2008, there were issued and outstanding 435.5 million shares of the registrants common stock.
Table of Contents
Page | ||||
PART IFINANCIAL INFORMATION (Unaudited) | ||||
Item 1. | Financial Statements | |||
Condensed Consolidated Statements of Income for the 12 and 24 weeks ended June 14, 2008 and June 16, 2007 | 3 | |||
Condensed Consolidated Balance Sheets as of June 14, 2008 and December 29, 2007 | 4 | |||
Condensed Consolidated Statements of Cash Flows for the 24 weeks ended June 14, 2008 and June 16, 2007 | 6 | |||
Notes to Condensed Consolidated Financial Statements | 7 | |||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 20 | ||
Item 4. | Controls and Procedures | 20 | ||
PART IIOTHER INFORMATION | ||||
Item 1. | Legal Proceedings | 21 | ||
Item 1A. | Risk Factors | 21 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 23 | ||
Item 6. | Exhibits | 24 |
2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
(Unaudited)
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June 14, 2008 |
June 16, 2007 |
June 14, 2008 |
June 16, 2007 |
|||||||||||||
Sales and other revenue |
$ | 10,120.0 | $ | 9,823.3 | $ | 20,118.8 | $ | 19,145.1 | ||||||||
Cost of goods sold |
(7,254.8 | ) | (7,022.2 | ) | (14,375.3 | ) | (13,613.4 | ) | ||||||||
Gross profit |
2,865.2 | 2,801.1 | 5,743.5 | 5,531.7 | ||||||||||||
Operating and administrative expense |
(2,413.6 | ) | (2,378.7 | ) | (4,890.0 | ) | (4,748.3 | ) | ||||||||
Operating profit |
451.6 | 422.4 | 853.5 | 783.4 | ||||||||||||
Interest expense |
(81.7 | ) | (89.7 | ) | (166.2 | ) | (179.3 | ) | ||||||||
Other income, net |
2.0 | 5.4 | 1.6 | 12.2 | ||||||||||||
Income before income taxes |
371.9 | 338.1 | 688.9 | 616.3 | ||||||||||||
Income tax expense |
(137.6 | ) | (119.9 | ) | (261.2 | ) | (223.7 | ) | ||||||||
Net income |
$ | 234.3 | $ | 218.2 | $ | 427.7 | $ | 392.6 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.54 | $ | 0.50 | $ | 0.98 | $ | 0.89 | ||||||||
Diluted |
$ | 0.53 | $ | 0.49 | $ | 0.97 | $ | 0.88 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
437.0 | 440.0 | 438.2 | 440.1 | ||||||||||||
Diluted |
440.3 | 446.2 | 441.6 | 446.3 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
June 14, 2008 |
December 29, 2007 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and equivalents |
$ | 326.1 | $ | 277.8 | ||||
Receivables |
469.8 | 577.9 | ||||||
Merchandise inventories |
2,656.7 | 2,797.8 | ||||||
Prepaid expenses and other current assets |
395.1 | 354.0 | ||||||
Total current assets |
3,847.7 | 4,007.5 | ||||||
Property |
19,540.7 | 19,424.2 | ||||||
Less accumulated depreciation and amortization |
(8,977.5 | ) | (8,802.2 | ) | ||||
Property, net |
10,563.2 | 10,622.0 | ||||||
Goodwill |
2,403.9 | 2,406.3 | ||||||
Prepaid pension costs |
59.4 | 73.2 | ||||||
Investment in unconsolidated affiliates |
212.0 | 216.0 | ||||||
Other assets |
322.6 | 326.0 | ||||||
Total assets |
$ | 17,408.8 | $ | 17,651.0 | ||||
(Continued)
4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In millions, except per-share amounts)
(Unaudited)
June 14, 2008 |
December 29, 2007 |
|||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of notes and debentures |
$ | 1,205.6 | $ | 954.9 | ||||
Current obligations under capital leases |
44.8 | 42.5 | ||||||
Accounts payable |
2,286.1 | 2,825.4 | ||||||
Accrued salaries and wages |
443.2 | 506.7 | ||||||
Deferred income taxes |
87.9 | 88.0 | ||||||
Other accrued liabilities |
664.8 | 718.9 | ||||||
Total current liabilities |
4,732.4 | 5,136.4 | ||||||
Long-term debt: |
||||||||
Notes and debentures |
4,058.3 | 4,093.5 | ||||||
Obligations under capital leases |
542.8 | 564.2 | ||||||
Total long-term debt |
4,601.1 | 4,657.7 | ||||||
Deferred income taxes |
267.1 | 254.7 | ||||||
Pension and postretirement benefit obligations |
224.8 | 236.7 | ||||||
Accrued claims and other liabilities |
668.1 | 663.7 | ||||||
Total liabilities |
10,493.5 | 10,949.2 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock: par value $0.01 per share; 1,500 shares authorized; 590.4 and 589.3 shares issued |
5.9 | 5.9 | ||||||
Additional paid-in capital |
4,094.7 | 4,038.2 | ||||||
Treasury stock at cost: 155.0 and 149.2 shares |
(4,593.1 | ) | (4,418.0 | ) | ||||
Accumulated other comprehensive income |
216.9 | 246.2 | ||||||
Retained earnings |
7,190.9 | 6,829.5 | ||||||
Total stockholders equity |
6,915.3 | 6,701.8 | ||||||
Total liabilities and stockholders equity |
$ | 17,408.8 | $ | 17,651.0 | ||||
See accompanying notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
24 Weeks Ended | ||||||||
June 14, 2008 |
June 16, 2007 |
|||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 427.7 | $ | 392.6 | ||||
Reconciliation to net cash flow from operating activities: |
||||||||
Depreciation and amortization |
512.1 | 478.9 | ||||||
Property impairment charges |
25.7 | 18.7 | ||||||
Stock-based employee compensation |
27.7 | 22.9 | ||||||
Excess tax benefit from exercise of stock options |
(1.3 | ) | (7.2 | ) | ||||
LIFO expense |
13.2 | 4.6 | ||||||
Equity in loss (earnings) of unconsolidated affiliates |
4.0 | (7.7 | ) | |||||
Net pension expense |
38.9 | 33.1 | ||||||
Contributions to pension plans |
(21.6 | ) | (18.2 | ) | ||||
Loss (gain) on property retirements and lease exit costs, net |
4.9 | (14.6 | ) | |||||
Increase in accrued claims and other liabilities |
16.6 | 14.4 | ||||||
Amortization of deferred finance costs |
2.3 | 2.6 | ||||||
Deferred income taxes |
6.4 | | ||||||
Other |
1.8 | 4.0 | ||||||
Change in working capital items: |
||||||||
Receivables |
5.0 | (31.0 | ) | |||||
Inventories at FIFO cost |
115.6 | 66.3 | ||||||
Prepaid expenses and other current assets |
(27.0 | ) | (54.7 | ) | ||||
Income taxes |
(12.0 | ) | 10.1 | |||||
Payables and accruals |
(245.0 | ) | (155.2 | ) | ||||
Payables related to third-party gift cards, net of receivables |
(182.1 | ) | (107.5 | ) | ||||
Net cash flow provided by operating activities |
712.9 | 652.1 | ||||||
INVESTING ACTIVITIES: |
||||||||
Cash paid for property additions |
(676.8 | ) | (753.1 | ) | ||||
Proceeds from sale of property |
43.5 | 87.9 | ||||||
Other |
(23.7 | ) | (27.6 | ) | ||||
Net cash flow used by investing activities |
(657.0 | ) | (692.8 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Additions to short-term borrowings, net |
5.0 | | ||||||
Additions to long-term borrowings |
449.5 | 433.4 | ||||||
Payments on long-term borrowings |
(247.1 | ) | (305.4 | ) | ||||
Purchase of treasury stock |
(174.7 | ) | (120.0 | ) | ||||
Dividends paid |
(60.6 | ) | (50.7 | ) | ||||
Net proceeds from exercise of stock options |
23.4 | 53.9 | ||||||
Excess tax benefit from exercise of stock options |
1.3 | 7.2 | ||||||
Income tax refund related to prior years debt financing |
2.8 | 6.3 | ||||||
Other |
(0.4 | ) | (1.3 | ) | ||||
Net cash flow (used) provided by financing activities |
(0.8 | ) | 23.4 | |||||
Effect of changes in exchange rates on cash |
(6.8 | ) | 3.6 | |||||
Increase (decrease) in cash and equivalents |
48.3 | (13.7 | ) | |||||
CASH AND EQUIVALENTS: |
||||||||
Beginning of period |
277.8 | 216.6 | ||||||
End of period |
$ | 326.1 | $ | 202.9 | ||||
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE ATHE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of Safeway Inc. and subsidiaries (Safeway or the Company) for the 12 and 24 weeks ended June 14, 2008 and June 16, 2007 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. These condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared on an accrual basis in accordance with generally accepted accounting principles in the United States have been condensed or omitted, pursuant to SEC regulations. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Companys 2007 Annual Report on Form 10-K. The results of operations for the 12 and 24 weeks ended June 14, 2008 are not necessarily indicative of the results expected for the full year.
Inventory
Net income reflects the LIFO method of valuing certain domestic inventories based upon estimated annual inflation. The LIFO method of inventory valuation can only be determined annually, when inflation rates and inventory levels are known; therefore, LIFO inventory costs for interim financial statements are estimated. Actual LIFO inflation indices for the year are calculated during the fourth quarter based upon a statistical sampling of inventories. Safeway recorded LIFO expense of $13.2 million during the first 24 weeks of 2008 and LIFO expense of $4.6 million during the first 24 weeks of 2007.
Vendor Allowances
Vendor allowances totaled $583.9 million for the second quarter of 2008 and $579.0 million for the second quarter of 2007. Vendor allowances totaled $1.2 billion for the first 24 weeks of 2008 and 2007. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances. All vendor allowances are classified as an element of cost of goods sold.
Promotional allowances make up nearly three-quarters of all allowances. With promotional allowances, vendors pay Safeway to promote their product. The promotion may be any combination of a temporary price reduction, a feature in print ads, a feature in a Safeway circular or a preferred location in the store. The promotions are typically one to two weeks long.
Slotting allowances are a small portion of total allowances, typically less than 5% of all allowances. With slotting allowances, the vendor reimburses Safeway for the cost of placing new product on the shelf. Safeway has no obligation or commitment to keep the product on the shelf for a minimum period.
Contract allowances make up the remainder of all allowances. Under the typical contract allowance, a vendor pays Safeway to keep product on the shelf for a minimum period of time or when volume thresholds are achieved.
Promotional and slotting allowances are accounted for as a reduction in the cost of purchased inventory and recognized when the related inventory is sold. Contract allowances are recognized as a reduction in the cost of goods sold as volume thresholds are achieved or through the passage of time.
7
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Comprehensive Income
For the first 24 weeks of 2008, total comprehensive income was $398.2 million, which primarily consists of net income of $427.7 million and pension amortization of $9.1 million from accumulated other comprehensive income to pension expense, partly offset by foreign currency translation adjustments of approximately $37.3 million.
For the first 24 weeks of 2007, total comprehensive income was $495.2 million, which primarily consists of net income of $392.6 million, pension amortization of $14.0 million from accumulated other comprehensive income to pension expense and foreign currency translation adjustments of approximately $87.7 million.
Fair Value Measurements
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, defines and establishes a framework for measuring fair value and expands related disclosures. This Statement does not require any new fair value measurements. SFAS No. 157 is effective for the Companys financial assets and financial liabilities beginning in fiscal 2008. In February 2008, FASB Staff Position 157-2, Effective Date of Statement 157, deferred the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.
SFAS No. 157 prioritizes the inputs used in measuring fair value into the following hierarchy:
Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities; | |
Level 2 | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; | |
Level 3 | Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. |
As of June 14, 2008, Safeway had interest rate swap agreements which converted $300.0 million of its 4.125% fixed-rate debt to floating-rate debt. These agreements are required to be measured at fair value on a recurring basis. The Company determined that these interest rate swap agreements are defined as Level 2 in the fair value hierarchy. As of June 14, 2008, the fair value of these interest rate swap agreements was an asset of $0.4 million.
NOTE BNEW ACCOUNTING STANDARDS
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effects of the derivative instruments on an entitys financial position, financial performance and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Safeway is currently assessing the potential impact of SFAS No. 161 on its financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R). SFAS No. 141R established principles and requirements for how an entity which obtains control of one or more businesses (1) recognizes and measures the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination and (3) determines what information to disclose regarding business combinations. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual report period beginning on or after December 15, 2008. The Company is currently assessing the potential impact of SFAS No. 141R on its financial statements.
8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, SFAS No. 160 requires expanded disclosures in the consolidated financial statements. SFAS No. 160 is effective for fiscal years and interim periods beginning on or after December 15, 2008. The Company is currently assessing the potential impact of SFAS No. 160 on its financial statements.
NOTE CSTOCK-BASED EMPLOYEE COMPENSATION
The Company recognized share-based compensation expense of $13.7 million ($0.02 per diluted share) and $11.8 million ($0.02 per diluted share) in the second quarter of 2008 and 2007, respectively, as a component of operating and administrative expense. The Company recognized share-based compensation expense of $27.7 million ($0.04 per diluted share) and $22.9 million ($0.03 per diluted share) for the first 24 weeks of 2008 and 2007, respectively, as a component of operating and administrative expense.
The Company determines fair value of such awards using the Black-Scholes option pricing model. The following weighted-average assumptions used to value Safeways grants through the second quarter, by year, are as follows:
2008 | 2007 | |||
Expected life (in years) |
4.5 | 4.5 | ||
Expected stock volatility |
32.0% - 32.6% | 26.4% - 27.5% | ||
Risk-free interest rate |
2.83 - 3.01% | 4.46% - 4.55% | ||
Expected dividend yield during the expected term |
0.8% | 0.7% - 0.8% |
In 2007, the expected term of the awards was determined using the simplified method outlined in SEC Staff Accounting Bulletin No. 107 that utilizes the following formula: ((vesting term + original contract term)/2). In 2008, the Company calculated the expected term based upon its historical data. Expected stock volatility was determined based upon a combination of historical volatility for the 4.5-year-period preceding the measurement date and estimates of implied volatility based on open interests in traded option contracts on Safeway common stock. The risk-free interest rate was based on the yield curve in effect at the time the options were granted, using U.S. constant maturities over the expected life of the option. Expected dividend yield is based on Safeways dividend policy at the time the options were granted.
9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE DEARNINGS PER SHARE
Basic earnings per share is calculated on the basis of weighted average outstanding common shares. Diluted earnings per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock awards and other dilutive securities.
The following tables provide reconciliations of net earnings and shares used in calculating earnings per basic common share to those used in calculating earnings per diluted common share (in millions, except per-share amounts):
12 Weeks Ended | ||||||||||||
June 14, 2008 | June 16, 2007 | |||||||||||
Diluted | Basic | Diluted | Basic | |||||||||
Net income |
$ | 234.3 | $ | 234.3 | $ | 218.2 | $ | 218.2 | ||||
Weighted average common shares outstanding |
437.0 | 437.0 | 440.0 | 440.0 | ||||||||
Common share equivalents |
3.3 | 6.2 | ||||||||||
Weighted average shares outstanding |
440.3 | 446.2 | ||||||||||
Earnings per share |
$ | 0.53 | $ | 0.54 | $ | 0.49 | $ | 0.50 | ||||
Anti-dilutive shares totaling 22.1 million and 15.4 million have been excluded from diluted weighted average shares outstanding for the 12 weeks ended June 14, 2008 and June 16, 2007, respectively. | ||||||||||||
24 Weeks Ended | ||||||||||||
June 14, 2008 | June 16, 2007 | |||||||||||
Diluted | Basic | Diluted | Basic | |||||||||
Net income |
$ | 427.7 | $ | 427.7 | $ | 392.6 | $ | 392.6 | ||||
Weighted average common shares outstanding |
438.2 | 438.2 | 440.1 | 440.1 | ||||||||
Common share equivalents |
3.4 | 6.2 | ||||||||||
Weighted average shares outstanding |
441.6 | 446.3 | ||||||||||
Earnings per share |
$ | 0.97 | $ | 0.98 | $ | 0.88 | $ | 0.89 | ||||
Anti-dilutive shares totaling 20.4 million and 14.0 million have been excluded from diluted weighted average shares outstanding for the 24 weeks ended June 14, 2008 and June 16, 2007, respectively.
NOTE EGOODWILL
A summary of changes in Safeways goodwill during the first 24 weeks of 2008 by geographic area is as follows (in millions):
2008 | |||||||||||
U.S. | Canada | Total | |||||||||
Balancebeginning of period |
$ | 2,308.8 | $ | 97.5 | $ | 2,406.3 | |||||
Adjustments |
0.2 | (2.6 | ) (1) | (2.4 | ) | ||||||
Balanceend of period |
$ | 2,309.0 | $ | 94.9 | $ | 2,403.9 | |||||
(1) | Represents foreign currency translation adjustments in Canada. |
10
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE FFINANCING
Notes and debentures were composed of the following at June 14, 2008 and December 29, 2007 (in millions):
June 14, 2008 |
December 29, 2007 |
|||||||
Commercial paper |
$ | 234.9 | $ | 25.0 | ||||
Bank credit agreement, unsecured |
| | ||||||
Other bank borrowings, unsecured |
104.4 | 99.7 | ||||||
Mortgage notes payable, secured |
18.9 | 20.1 | ||||||
4.125% Senior Notes due November 2008, unsecured |
300.0 | 300.0 | ||||||
4.45% Senior Notes due November 2008, unsecured |
292.9 | 301.1 | ||||||
6.50% Senior Notes due November 2008, unsecured |
250.0 | 250.0 | ||||||
7.50% Senior Notes due 2009, unsecured |
500.0 | 500.0 | ||||||
Floating Rate Notes due 2009, unsecured (interest at 3.0% as of June 14, 2008) |
250.0 | 250.0 | ||||||
4.95% Senior Notes due 2010, unsecured |
500.0 | 500.0 | ||||||
6.50% Senior Notes due 2011, unsecured |
500.0 | 500.0 | ||||||
5.80% Senior Notes due 2012, unsecured |
800.0 | 800.0 | ||||||
5.625% Senior Notes due 2014, unsecured |
250.0 | 250.0 | ||||||
6.35% Senior Notes due 2017, unsecured |
500.0 | 500.0 | ||||||
7.45% Senior Debentures due 2027, unsecured |
150.0 | 150.0 | ||||||
7.25% Senior Debentures due 2031, unsecured |
600.0 | 600.0 | ||||||
Other notes payable, unsecured |
7.5 | 2.5 | ||||||
Deferred gain on swap termination |
5.3 | | ||||||
5,263.9 | 5,048.4 | |||||||
Less current maturities |
(1,205.6 | ) | (954.9 | ) | ||||
Long-term portion |
$ | 4,058.3 | $ | 4,093.5 | ||||
In January 2008, Safeway terminated its interest rate swap agreements on its $500 million debt due 2010 at a gain of approximately $7.5 million. This gain is included in debt and is being amortized as an offset to interest expense over the remaining term of the debt.
11
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE GEMPLOYEE BENEFIT PLANS
The following table provides the components of net pension expense for retirement plans (in millions):
12 Weeks Ended June 14, 2008 |
12 Weeks Ended June 16, 2007 |
24 Weeks Ended June 14, 2008 |
24 Weeks Ended June 16, 2007 |
|||||||||||||
Estimated return on assets |
$ | (39.4 | ) | $ | (38.9 | ) | $ | (78.9 | ) | $ | (77.6 | ) | ||||
Service cost |
23.8 | 21.4 | 47.1 | 42.5 | ||||||||||||
Interest cost |
28.9 | 27.7 | 57.8 | 55.2 | ||||||||||||
Amortization of prior service cost |
5.0 | 5.3 | 10.1 | 10.6 | ||||||||||||
Amortization of unrecognized losses |
1.4 | 1.2 | 2.8 | 2.4 | ||||||||||||
Net pension expense |
$ | 19.7 | $ | 16.7 | $ | 38.9 | $ | 33.1 | ||||||||
Safeway made approximately $23.2 million of contributions to its defined benefit pension plan trusts, including $1.6 million for the Retirement Restoration Plan, in the first 24 weeks of 2008. For the remainder of 2008, Safeway currently anticipates contributing an additional $17.6 million to these trusts.
NOTE HCONTINGENCIES
Legal Matters
Note K to the Companys consolidated financial statements, under the caption Legal Matters on page 62 of the Form 10-K included in the 2007 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. There have been no material developments to these matters, except as noted in subsequent filings and except as described below.
With respect to the case entitled State of California, ex rel. Bill Lockyer v. Safeway Inc. dba Vons, et al. (now entitled State of California, ex rel. Edmund G. Brown, Jr. v. Safeway Inc. dba Vons, et al.), on April 18, 2008, the Attorney General filed a notice of appeal to the Ninth Circuit Court of Appeals. On April 24, 2008, defendants filed a notice of appeal with respect to the district courts earlier denial of their non-statutory labor exemption defense. Briefs are due in the Fall of 2008. No hearing date has been set.
Guarantees
Note N to the Companys consolidated financial statements, under the caption Guarantees of the 2007 Annual Report on Form 10-K provides information on guarantees required under FIN No. 45.
12
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE ISTOCKHOLDERS EQUITY
Dividends Declared on Common Stock The following table presents information regarding dividends declared on Safeways common stock for the first 24 weeks of fiscal 2008 and 2007.
(in millions, except per-share amounts) |
Date Declared |
Record Date |
Per-Share Amounts |
Total | YTD Total | ||||||||
2008 |
|||||||||||||
Quarter 2 |
05/13/08 | 06/26/08 | $ | 0.0828 | $ | 36.1 | $ | 66.3 | |||||
Quarter 1 |
03/06/08 | 03/27/08 | 0.0690 | 30.2 | 30.2 | ||||||||
2007 |
|||||||||||||
Quarter 2 |
05/16/07 | 06/29/07 | $ | 0.0690 | $ | 30.3 | $ | 55.7 | |||||
Quarter 1 |
03/08/07 | 03/30/07 | 0.0575 | 25.4 | 25.4 |
Dividends Paid on Common Stock The following table presents information regarding dividends paid on Safeways common stock through the second quarters of fiscal 2008 and 2007.
(in millions, except per-share amounts) |
Date Paid | Record Date |
Per-Share Amounts |
Total | YTD Total | ||||||||
2008 |
|||||||||||||
Quarter 2 |
04/17/08 | 03/27/08 | $ | 0.069 | $ | 30.2 | $ | 60.6 | |||||
Quarter 1 |
01/17/08 | 12/27/07 | 0.069 | 30.4 | 30.4 | ||||||||
2007 |
|||||||||||||
Quarter 2 |
04/20/07 | 03/30/07 | $ | 0.0575 | $ | 25.4 | $ | 50.7 | |||||
Quarter 1 |
01/19/07 | 12/29/06 | 0.0575 | 25.3 | 25.3 |
13
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations
Net income was $234.3 million ($0.53 per diluted share) for the second quarter of 2008 compared to net income of $218.2 million ($0.49 per diluted share) in the second quarter of 2007.
ECONOMIC OUTLOOK The current economic environment has made consumers more cautious. This trend may lead to reduced consumer spending which could affect Safeways sales growth. Additionally, rising food inflation combined with reduced consumer spending could also put pressure on gross profit margins.
However, in a slowing economy, we anticipate that some customers may trade down from dining out in restaurants to shopping more at grocery stores such as Safeway and from purchasing national brand products to purchasing less expensive Safeway private label brands. Additionally, rising fuel prices may lead some consumers to switch from shopping at more remote club and discount stores to Safeways more convenient neighborhood locations.
SALES AND OTHER REVENUE Total sales increased 3.0% to $10.1 billion in the second quarter of 2008 compared to $9.8 billion in the second quarter of 2007. This increase was driven by contributions from Lifestyle stores, an increase in fuel sales of $138.1 million and an increase of $132.2 million (in U.S. dollars) due to a change in the Canadian dollar exchange rate, partly offset by a shift in Easter holiday sales which occurred in the first quarter of 2008 compared to the second quarter of 2007. At the end of the second quarter of 2008, Safeway had 1,096 Lifestyle stores compared to 838 at the end of the second quarter of 2007. Non-fuel, identical-store sales declined 0.3% due in part to the shift in Easter holiday sales. When adjusted to exclude the estimated impact of the Easter holiday shift, non-fuel, identical-store sales increased 1.0%.
Safeways marketing strategies have evolved in recent years and are based on consumer research and competitive analysis. This helps us carry the right products (such as organic products and our revitalized corporate brands) at the right prices (including our club card specials), increasingly merchandised in a warm and inviting shopping environment (our Lifestyle stores). We have communicated this message through our Ingredients for life advertising campaign. We believe all of these elements have contributed to our sales growth.
Through past experience, we have further improved our Lifestyle store execution by refining the layout and décor of the Lifestyle format and improving our store opening promotions. We believe this has contributed to our sales growth.
Same-store sales increases (decreases) for the second quarters of 2008 and 2007 were as follows:
12 weeks ended | ||||||||||||
June 14, 2008 | June 16, 2007 | |||||||||||
Comparable- Store Sales Increases/ (Decreases) |
Identical- Store Sales Increases/ (Decreases)* |
Comparable- Store Sales Increases |
Identical-Store Sales Increases* |
|||||||||
As reported |
1.0 | % | 0.9 | % | 4.9 | % | 4.5 | % | ||||
Excluding fuel sales |
(0.2 | %) | (0.3 | %) | 4.0 | % | 3.7 | % | ||||
Excluding fuels sales and estimated Easter holiday shift |
1.1 | % | 1.0 | % | ** | ** |
* | Excludes replacement stores. |
** | There was no Easter holiday shift in 2007 since Easter fell in the second quarter of both fiscal 2007 and fiscal 2006. |
14
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The amount and percentage of total sales and other revenue contributed by food, drug, general merchandise and other and by fuel sales are shown below:
12 weeks ended | ||||||||||||
(dollars in millions) |
June 14, 2008 | June 16, 2007 | ||||||||||
Food, drug, general merchandise and other |
$ | 9,094.5 | 90 | % | $ | 8,935.9 | 91 | % | ||||
Fuel |
1,025.5 | 10 | % | 887.4 | 9 | % | ||||||
Total sales and other revenue |
$ | 10,120.0 | 100 | % | $ | 9,823.3 | 100 | % |
GROSS PROFIT Gross profit represents the portion of sales revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs of Safeways distribution network. Advertising and promotional expenses are also a component of cost of goods sold. Additionally, all vendor allowances are classified as an element of cost of goods sold.
Gross profit declined 20 basis points to 28.31% of sales in the second quarter of 2008 compared to 28.51% of sales in the second quarter of 2007. Excluding the effect of higher fuel sales (which have a lower gross margin) gross profit margin increased 26 basis points. This improvement was the result of improved shrink and lower advertising expense, partly offset by investments in price.
The decline in advertising expense was primarily the result of a different mix of advertising media and may not necessarily continue in the future. Improved shrinkage and supply-chain initiatives are the result of long-term efforts which we do expect to continue into the future. Supply-chain initiatives consist primarily of Company programs to reduce cost of goods, transportation and warehouse expenses.
Vendor allowances totaled $583.9 million for the second quarter of 2008 and $579.0 million for the second quarter of 2007. Vendor allowances totaled $1.2 billion for the first 24 weeks of 2008 and 2007. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances. All vendor allowances are classified as an element of cost of goods sold.
Promotional allowances make up nearly three-quarters of all allowances. With promotional allowances, vendors pay Safeway to promote their product. The promotion may be any combination of a temporary price reduction, a feature in print ads, a feature in a Safeway circular or a preferred location in the store. The promotions are typically one to two weeks long.
Slotting allowances are a small portion of total allowances, typically less than 5% of all allowances. With slotting allowances, the vendor reimburses Safeway for the cost of placing new product on the shelf. Safeway has no obligation or commitment to keep the product on the shelf for a minimum period.
Contract allowances make up the remainder of all allowances. Under the typical contract allowance, a vendor pays Safeway to keep product on the shelf for a minimum period of time or when volume thresholds are achieved.
OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense improved 36 basis points to 23.85% of sales in the second quarter of 2008 from 24.21% of sales in the second quarter of 2007. Higher fuel sales in 2008 reduced operating and administrative expense margin by 26 basis points. The remaining 10 basis point improvement was the result of reduced employee costs, partly offset by lower property gains and higher energy and occupancy costs.
INTEREST EXPENSE Interest expense declined to $81.7 million in the second quarter of 2008 from $89.7 million in the second quarter of 2007 due to a combination of lower interest rates and lower average borrowings.
15
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER INCOME, NET Other income declined to $2.0 million in the second quarter of 2008 from $5.4 million in the second quarter of 2007 due primarily to lower operating results at Casa Ley, Safeways unconsolidated affiliate.
INCOME TAX Income tax expense was $137.6 million, or 37.0% of pre-tax income in the second quarter of 2008. Income tax expense in the second quarter of 2007 was $119.9 million, or 35.5% of pre-tax income.
24-WEEKS ENDED JUNE 14, 2008 COMPARED WITH 24-WEEKS ENDED JUNE 16, 2007 Net income for the first 24 weeks of 2008 was $427.7 million ($0.97 per diluted share) compared to $392.6 million ($0.88 per diluted share) in the first 24 weeks of 2007.
The gross profit margin was 28.55% in the first 24 weeks of 2008 compared to 28.89% for the first 24 weeks of 2007. Operating and administrative expense margin was 24.31% in the first 24 weeks of 2008 compared to 24.80% in the first 24 weeks of 2007.
Same-store sales increases through the second quarters of 2008 and 2007 were as follows:
24 weeks ended | ||||||||||||
June 14, 2008 | June 16, 2007 | |||||||||||
Comparable- Store Sales Increases |
Identical- Store Sales Increases* |
Comparable- Store Sales Increases |
Identical-Store Sales Increases* |
|||||||||
As reported |
2.8 | % | 2.6 | % | 4.9 | % | 4.6 | % | ||||
Excluding fuel sales |
1.4 | % | 1.3 | % | 4.3 | % | 4.0 | % | ||||
* | Excludes replacement stores. |
The amount and percentage of total sales and other revenue contributed by food, drug, general merchandise and other and by fuel sales are shown below:
24 weeks ended | ||||||||||||
(dollars in millions) |
June 14, 2008 | June 16, 2007 | ||||||||||
Food, drug, general merchandise and other |
$ | 18,256.7 | 91 | % | $ | 17,607.1 | 92 | % | ||||
Fuel |
1,862.1 | 9 | % | 1,538.0 | 8 | % | ||||||
Total sales and other revenue |
$ | 20,118.8 | 100 | % | $ | 19,145.1 | 100 | % |
Critical Accounting Policies
Critical accounting policies are those accounting policies that management believes are important to the portrayal of Safeways financial condition and results and require managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Companys 2007 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to workers compensation, store closures, employee benefit plans, stock-based employee compensation, goodwill and income tax contingencies.
New Accounting Standards
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effects of the derivative instruments on an entitys financial position, financial performance and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Safeway is currently assessing the potential impact of SFAS No. 161 on its financial statements.
16
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R). SFAS No. 141R established principles and requirements for how an entity which obtains control of one or more businesses (1) recognizes and measures the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination and (3) determines what information to disclose regarding business combinations. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual report period beginning on or after December 15, 2008. The Company is currently assessing the potential impact of SFAS No. 141R on its financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, SFAS No. 160 requires expanded disclosures in the consolidated financial statements. SFAS No. 160 is effective for fiscal years and interim periods beginning on or after December 15, 2008. The Company is currently assessing the potential impact of SFAS No. 160 on its financial statements.
Liquidity and Financial Resources
Net cash flow from operating activities was $712.9 million in the first 24 weeks of 2008 compared to $652.1 million in the first 24 weeks of 2007.
Net cash flow used by investing activities was $657.0 million in the first 24 weeks of 2008 compared to $692.8 million in the first 24 weeks of 2007.
Net cash flow used by financing activities was $0.8 million in the first 24 weeks of 2008 compared to net cash flow provided by financing activities of $23.4 million in the first 24 weeks of 2007.
As of June 14, 2008, current maturities of notes and debentures were $1.2 billion. Safeway expects to repay these borrowings with cash on hand, borrowings of commercial paper and/or the issuance of public debt.
Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeways commercial paper program and Credit Agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments and stock repurchases, if any, for the foreseeable future. There can be no assurance, however, that Safeways business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the commercial paper program and Credit Agreement.
CREDIT AGREEMENT The Company has a $1,600.0 million credit agreement (as amended, the Credit Agreement) with a syndicate of banks which has a termination date of June 1, 2012 and provides for two additional one-year extensions of the termination date. The Credit Agreement provides (i) to Safeway a $1,350.0 million revolving credit facility (the Domestic Facility), (ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of
17
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA, as defined in the Credit Agreement, to interest expense ratio of 2.0 to 1 and not exceed an Adjusted Debt (total consolidated debt less cash and cash equivalents in excess of $75.0 million) to Adjusted EBITDA ratio of 3.5 to 1. As of June 14, 2008, the Company was in compliance with the covenant requirements. As of June 14, 2008, there were no borrowings, and letters of credit totaled $37.1 million under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,562.9 million as of June 14, 2008.
SHELF REGISTRATION In 2004, the Company filed a shelf registration statement covering the issuance from time to time of up to $2.3 billion of debt securities and/or common stock. As of June 14, 2008, $825.0 million of securities were available for issuance under the shelf registration. The Company may issue debt or common stock in the future depending on market conditions, the need to refinance existing debt and capital expenditure plans.
DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $30.2 million and $25.4 million for the second quarters of 2008 and 2007, respectively. Year-to-date dividends paid on common stock totaled $60.6 million and $50.7 million for 2008 and 2007, respectively. Note I to the Companys condensed consolidated financial statements in this report provides additional information on dividends declared and dividends paid on Safeway common stock.
STOCK REPURCHASE PROGRAM From the initiation of the Companys stock repurchase program in 1999 through the end of the second quarter of fiscal 2008, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $3.7 billion, leaving an authorized amount for repurchases of approximately $1.3 billion. This includes an increase in the total authorized level of the repurchase program by $1.0 billion to $5.0 billion approved by the Board of Directors in May 2008. During the second quarter of 2008, Safeway repurchased approximately 3.2 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $100.6 million. The average price per share, excluding commissions, was $31.07. The timing and volume of future repurchases will depend on several factors, including market conditions.
CREDIT RATINGS On April 8, 2008, Standard & Poors upgraded Safeways corporate credit and senior unsecured long-term debt ratings to BBB from BBB-. Concurrently, the short-term rating was raised to A-2 from A-3. The outlook was revised from positive to stable.
Investors should note that a credit rating is not a recommendation to buy, sell or hold securities and may be subject to withdrawal by the rating agency.
Capital Expenditure Program
Safeway invested $676.8 million in capital expenditures in the first 24 weeks of 2008. The Company opened four new Lifestyle stores, completed 68 Lifestyle remodels and closed seven stores. For the year, the Company expects to spend $1.70 billion to $1.75 billion in capital expenditures, open approximately 20 new Lifestyle stores and complete approximately 250 Lifestyle remodels.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Forward-looking statements contain information about our future operating or financial performance. Forward-looking statements are based on our current expectations and involve risks and uncertainties, which may be beyond our control, as well as assumptions. If assumptions prove to be incorrect or if known or unknown risks and uncertainties materialize into actual events or circumstances, actual results could differ materially from those included in or contemplated or implied by these statements. Forward-looking statements do not strictly relate to historic or current facts. Forward-looking statements are indicated by words or phrases such as will, may, continuing, ongoing, expects, estimates, anticipates, believes, guidance and similar words or phrases and the negative of such words or phrases.
18
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements, including forward-looking statements relating to pension plan contributions; debt repayments; sufficiency of liquidity for the foreseeable future; capital expenditures; improved shrinkage; supply-chain initiatives; and Lifestyle stores. The following are among the principal factors that could cause actual results to differ materially from those included in or contemplated or implied by the forward-looking statements:
| General business and economic conditions in our operating regions, including the rate of inflation, consumer spending levels, currency valuations, population, employment and job growth in our markets; |
| Pricing pressures and competitive factors, which could include pricing strategies, store openings, remodels or acquisitions by our competitors; |
| Results of our programs to control or reduce costs, improve buying practices and control shrink; |
| Results of our programs to increase sales; |
| Results of our continuing efforts to improve corporate brands; |
| Results of our programs to improve our perishables departments; |
| Results of our promotional programs; |
| Results of our capital program; |
| Results of our efforts to improve working capital; |
| Results of any ongoing litigation in which we are involved or any litigation in which we may become involved; |
| The resolution of uncertain tax positions; |
| The ability to achieve satisfactory operating results in all geographic areas where we operate; |
| Changes in the financial performance of our equity investments; |
| Labor costs, including benefit plan costs and severance payments, or labor disputes that may arise from time to time and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future; |
| Failure to fully realize or delay in realizing growth prospects for new business ventures, including Blackhawk Network Holdings, Inc. (Blackhawk); |
| Legislative, regulatory, tax, accounting or judicial developments, including with respect to Blackhawk; |
| The cost and stability of fuel, energy and other power sources; |
| Adverse developments with regard to food and drug safety and quality issues or concerns that may arise; |
| Loss of a key member of senior management; |
| Data security or other information technology issues that may arise; |
| Unanticipated events or changes in real estate matters, including acquisitions, dispositions and impairments; |
| Adverse weather conditions; |
| Performance in new business ventures or other opportunities that we pursue, including Blackhawk; |
| The capital investment in and financial results from our Lifestyle stores; |
| The rate of return on our pension assets; and |
| The availability and terms of financing, including interest rates. |
We undertake no obligation to update forward-looking statements to reflect new information, events or developments after the date hereof. Please refer to our most recent Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q and subsequent Current Reports on Form 8-K for more information regarding these risks and uncertainties. These reports are not intended to be a discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.
19
SAFEWAY INC. AND SUBSIDIARIES
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes regarding the Companys market risk position from the information provided under Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Companys 2007 Annual Report on Form 10-K.
Item 4. | Controls and Procedures |
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Companys Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to the Companys management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding managements control objectives. Management, including the Companys President and Chief Executive Officer along with the Companys Chief Financial Officer, concluded that the Companys disclosure controls and procedures are effective in reaching the level of reasonable assurance regarding managements control objectives. The Company also has investments in certain unconsolidated entities, including Casa Ley, S.A. de C.V. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.
The Company has carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys President and Chief Executive Officer along with the Companys Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of the end of the period covered by this quarterly report on Form 10-Q, the Companys President and Chief Executive Officer along with the Companys Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys Exchange Act reports. There has been no change during the Companys fiscal quarter ended June 14, 2008 in the Companys internal control over financial reporting that was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
20
SAFEWAY INC. AND SUBSIDIARIES
Item 1. | Legal Proceedings |
Note K to the Companys consolidated financial statements, under the caption Legal Matters on page 62 of the Form 10-K included in the 2007 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. There have been no material developments to these matters, except as noted in subsequent filings and except as described below.
With respect to the case entitled State of California, ex rel. Bill Lockyer v. Safeway Inc. dba Vons, et al. (now entitled State of California, ex rel. Edmund G. Brown, Jr. v. Safeway Inc. dba Vons, et al.), on April 18, 2008, the Attorney General filed a notice of appeal to the Ninth Circuit Court of Appeals. On April 24, 2008, defendants filed a notice of appeal with respect to the district courts earlier denial of their non-statutory labor exemption defense. Briefs are due in the Fall of 2008. No hearing date has been set.
Item 1A. | Risk Factors |
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, in the Companys 2007 Annual Report on Form 10-K.
21
SAFEWAY INC. AND SUBSIDIARIES
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table contains information for shares repurchased during the second quarter of 2008.
Fiscal period |
Total number of shares purchased1 |
Average price paid per share3 |
Total number of shares purchased as part of publicly announced plans or programs |
Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions)4 | |||||||
March 23, 2008 April 19, 2008 |
9,765 | $ | 28.70 | | $ | 447.0 | |||||
April 20, 2008 May 17, 2008 |
1,862,100 | 2 | 30.74 | 1,839,600 | 1,389.7 | ||||||
May 18, 2008 June 14, 2008 |
1,394,018 | 31.01 | 1,394,018 | 1,346.4 | |||||||
Total |
3,265,883 | $ | 30.85 | 3,233,618 | $ | 1,346.4 |
1 |
Includes 9,765 shares withheld, at the election of certain holders of restricted stock, by the Company from the vested portion of restricted stock awards with a market value approximating the amount of the withholding taxes due from such restricted stockholders. |
2 |
Includes 22,500 shares of restricted stock that were repurchased in conjunction with an employees termination during the period. |
3 |
Average price per share excludes commissions. Average price per share excluding the withheld restricted shares referred to in footnote 1 and restricted stock referred to in footnote 2 above was $31.07. |
4 |
In 1999, the Companys Board of Directors initiated a $2.5 billion stock repurchase program. The Board increased the authorized level of the stock repurchase program to $3.5 billion in 2002, to $4.0 billion in 2006 and then to $5.0 billion in May 2008. From the initiation of the repurchase program in 1999 through the end of the second quarter of 2008, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $3.7 billion, leaving an authorized amount for repurchases of approximately $1.3 billion. The timing and volume of future repurchases will depend on several factors, including market conditions. The repurchase program has no expiration date but may be terminated by the Board of Directors. |
22
SAFEWAY INC. AND SUBSIDIARIES
Item 4. | Submission of Matters to a Vote of Security Holders |
The Companys Annual Meeting of Stockholders was held on May 14, 2008, at which the stockholders voted on proposals as follows:
Votes For | Votes Against | Abstentions | Broker Non-Votes | |||||
Proposal 1. Election of Directors. Steven A. Burd Janet E. Grove Mohan Gyani Paul Hazen Frank C. Herringer Robert I. MacDonnell Douglas J. Mackenzie Kenneth W. Oder Rebecca A. Stirn William Y. Tauscher Raymond G. Viault |
371,399,170 369,039,058 364,998,149 370,633,639 375,044,308 366,121,608 373,443,257 375,173,172 368,619,904 372,561,554 362,588,357 |
6,204,188 8,776,448 12,470,376 6,926,588 2,754,923 11,443,028 4,370,754 2,361,211 9,196,134 4,955,266 15,212,880 |
4,098,804 3,886,656 4,233,636 4,141,935 3,902,930 4,137,525 3,888,151 4,167,778 3,886,124 4,185,341 3,900,925 |
N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A | ||||
Proposal 2. Ratification of Appointment of Deloitte & Touche LLP as the Companys Independent Registered Public Accounting Firm for Fiscal Year 2008. |
368,283,177 | 9,489,254 | 3,929,731 | N/A | ||||
Proposal 3. Stockholder Proposal Regarding Cumulative Voting. |
114,670,695 | 237,896,429 | 3,937,722 | 25,197,316 | ||||
Proposal 4. Stockholder Proposal Requesting Stockholder Approval of Future Supplemental Employee Retirement Plans or Individual Retirement Arrangements for Senior Executives. (1) |
||||||||
Proposal 5. Stockholder Proposal Requesting Adoption of a Policy Regarding Use of Rule 10b5-1 Trading Plans by Senior Executives. |
94,819,542 | 257,008,254 | 4,677,050 | 25,197,316 |
(1) | The proponent withdrew this proposal prior to the meeting. Accordingly, the proposal was not submitted to a vote of the stockholders. |
23
SAFEWAY INC. AND SUBSIDIARIES
Item 6. | Exhibits |
Exhibit 31.1 | Rule 13(a)-14(a)/15d-14(a) Certification. | |
Exhibit 31.2 | Rule 13(a)-14(a)/15d-14(a) Certification. | |
Exhibit 32 | Section 1350 Certifications. |
24
SAFEWAY INC. AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SAFEWAY INC. | ||||
Date: July 17, 2008 | /s/ Steven A. Burd | |||
Steven A. Burd | ||||
Chairman, President and Chief Executive Officer | ||||
Date: July 17, 2008 | /s/ Robert L. Edwards | |||
Robert L. Edwards | ||||
Executive Vice President and Chief Financial Officer |
25
SAFEWAY INC. AND SUBSIDIARIES
Exhibit Index
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED JUNE 14, 2008
Exhibit 31.1 | Rule 13(a)-14(a)/15d-14(a) Certification. | |
Exhibit 31.2 | Rule 13(a)-14(a)/15d-14(a) Certification. | |
Exhibit 32 | Section 1350 Certifications. |
26