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 September 11, 2010
¨ | 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). 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 October 13, 2010, there were issued and outstanding 372.8 million shares of the registrants common stock.
SAFEWAY INC. AND SUBSIDIARIES
Page | ||||
PART IFINANCIAL INFORMATION (Unaudited) |
||||
Item 1. |
Financial Statements | |||
Condensed Consolidated Statements of Income for the 12 and 36 weeks ended September 11, 2010 and September 12, 2009 | 3 | |||
Condensed Consolidated Balance Sheets as of September 11, 2010 and January 2, 2010 | 4 | |||
Condensed Consolidated Statements of Cash Flows for the 36 weeks ended September 11, 2010 and September 12, 2009 | 6 | |||
Notes to Condensed Consolidated Financial Statements | 7 | |||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 23 | ||
Item 4. |
Controls and Procedures | 23 | ||
PART IIOTHER INFORMATION |
||||
Item 1. |
Legal Proceedings | 24 | ||
Item 1A. |
Risk Factors | 24 | ||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 24 | ||
Item 6. |
Exhibits | 25 |
2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
(Unaudited)
12 Weeks Ended | 36 Weeks Ended | |||||||||||||||
Sept. 11, 2010 |
Sept. 12, 2009 |
Sept. 11, 2010 |
Sept. 12, 2009 |
|||||||||||||
Sales and other revenue |
$ | 9,399.6 | $ | 9,458.3 | $ | 28,246.2 | $ | 28,156.8 | ||||||||
Cost of goods sold |
(6,755.0 | ) | (6,784.2 | ) | (20,234.3 | ) | (20,098.3 | ) | ||||||||
Gross profit |
2,644.6 | 2,674.1 | 8,011.9 | 8,058.5 | ||||||||||||
Operating and administrative expense |
(2,402.2 | ) | (2,396.0 | ) | (7,269.8 | ) | (7,141.3 | ) | ||||||||
Operating profit |
242.4 | 278.1 | 742.1 | 917.2 | ||||||||||||
Interest expense |
(69.4 | ) | (78.3 | ) | (208.3 | ) | (233.7 | ) | ||||||||
Other income, net |
4.8 | 1.5 | 10.5 | 6.0 | ||||||||||||
Income before income taxes |
177.8 | 201.3 | 544.3 | 689.5 | ||||||||||||
Income tax expense |
(55.1 | ) | (72.5 | ) | (184.5 | ) | (177.9 | ) | ||||||||
Net income before allocation to noncontrolling interests |
122.7 | 128.8 | 359.8 | 511.6 | ||||||||||||
Add noncontrolling interests |
0.1 | | 0.3 | | ||||||||||||
Net income attributable to Safeway Inc. |
$ | 122.8 | $ | 128.8 | $ | 360.1 | $ | 511.6 | ||||||||
Income per common share attributable to Safeway Inc. |
||||||||||||||||
Basic |
$ | 0.33 | $ | 0.31 | $ | 0.94 | $ | 1.22 | ||||||||
Diluted |
$ | 0.33 | $ | 0.31 | $ | 0.94 | $ | 1.21 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
376.0 | 411.3 | 382.5 | 420.1 | ||||||||||||
Diluted |
376.8 | 411.9 | 383.9 | 421.2 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
Sept. 11, 2010 |
January 2, 2010 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and equivalents |
$ | 632.9 | $ | 471.5 | ||||
Receivables |
410.2 | 522.4 | ||||||
Merchandise inventories |
2,570.4 | 2,508.9 | ||||||
Prepaid expenses and other current assets |
372.2 | 322.5 | ||||||
Total current assets |
3,985.7 | 3,825.3 | ||||||
Property |
20,315.1 | 20,248.0 | ||||||
Less accumulated depreciation and amortization |
(10,351.1 | ) | (9,965.3 | ) | ||||
Property, net |
9,964.0 | 10,282.7 | ||||||
Goodwill |
427.8 | 426.6 | ||||||
Investment in unconsolidated affiliates |
177.6 | 169.9 | ||||||
Other assets |
300.9 | 259.1 | ||||||
Total assets |
$ | 14,856.0 | $ | 14,963.6 | ||||
(Continued)
4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In millions, except per-share amounts)
(Unaudited)
Sept. 11, 2010 |
January 2, 2010 |
|||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of notes and debentures |
$ | 510.1 | $ | 509.2 | ||||
Current obligations under capital leases |
31.2 | 31.6 | ||||||
Accounts payable |
2,024.6 | 2,458.9 | ||||||
Accrued salaries and wages |
417.4 | 426.8 | ||||||
Deferred income taxes |
103.3 | 103.1 | ||||||
Other accrued liabilities |
640.3 | 708.2 | ||||||
Total current liabilities |
3,726.9 | 4,237.8 | ||||||
Long-term debt: |
||||||||
Notes and debentures |
4,285.9 | 3,874.3 | ||||||
Obligations under capital leases |
464.6 | 486.6 | ||||||
Total long-term debt |
4,750.5 | 4,360.9 | ||||||
Deferred income taxes |
181.7 | 150.5 | ||||||
Pension and postretirement benefit obligations |
657.5 | 635.4 | ||||||
Accrued claims and other liabilities |
662.9 | 632.6 | ||||||
Total liabilities |
9,979.5 | 10,017.2 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock: par value $0.01 per share; |
6.0 | 5.9 | ||||||
Additional paid-in capital |
4,300.5 | 4,212.4 | ||||||
Treasury stock at cost: 224.3 and 204.3 shares |
(6,113.6 | ) | (5,661.8 | ) | ||||
Accumulated other comprehensive income (loss) |
45.8 | (13.8 | ) | |||||
Retained earnings |
6,634.6 | 6,403.7 | ||||||
Total Safeway Inc. equity |
4,873.3 | 4,946.4 | ||||||
Noncontrolling interests |
3.2 | | ||||||
Total equity |
4,876.5 | 4,946.4 | ||||||
Total liabilities and stockholders equity |
$ | 14,856.0 | $ | 14,963.6 | ||||
See accompanying notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
36 Weeks Ended | ||||||||
Sept. 11, 2010 |
Sept. 12, 2009 |
|||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 359.8 | $ | 511.6 | ||||
Add noncontrolling interests |
0.3 | | ||||||
Reconciliation to net cash flow from operating activities: |
||||||||
Depreciation and amortization |
806.1 | 803.1 | ||||||
Property impairment charges |
48.7 | 45.2 | ||||||
Share-based employee compensation |
37.3 | 41.4 | ||||||
Excess tax benefit from exercise of stock options |
(0.7 | ) | | |||||
Equity in earnings of unconsolidated affiliates |
(7.7 | ) | (5.9 | ) | ||||
Net pension and post-retirement benefits expense |
86.6 | 96.2 | ||||||
Contributions to pension and post-retirement plans |
(11.7 | ) | (18.1 | ) | ||||
(Gain) loss on property retirements and lease exit costs, net |
(1.4 | ) | 18.8 | |||||
Increase in accrued claims and other liabilities |
38.5 | 4.3 | ||||||
Amortization of deferred finance costs |
3.3 | 3.3 | ||||||
Deferred income taxes |
| 10.2 | ||||||
Other |
0.2 | 16.8 | ||||||
Changes in working capital items: |
||||||||
Receivables |
34.0 | 47.6 | ||||||
Inventories at FIFO cost |
(55.4 | ) | 27.1 | |||||
Prepaid expenses and other current assets |
0.9 | 3.3 | ||||||
Income taxes |
(69.4 | ) | 92.2 | |||||
Payables and accruals |
(63.9 | ) | (204.8 | ) | ||||
Payables related to third-party gift cards, net of receivables |
(358.9 | ) | (205.0 | ) | ||||
Net cash flow provided by operating activities |
846.6 | 1,287.3 | ||||||
INVESTING ACTIVITIES: |
||||||||
Cash paid for property additions |
(555.4 | ) | (602.8 | ) | ||||
Proceeds from sale of property |
43.9 | 7.1 | ||||||
Other |
(39.1 | ) | (31.8 | ) | ||||
Net cash flow used by investing activities |
(550.6 | ) | (627.5 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Additions to (payments on) short-term borrowings, net |
1.1 | (0.9 | ) | |||||
Additions to long-term borrowings |
1,461.9 | 1,033.6 | ||||||
Payments on long-term borrowings |
(1,091.5 | ) | (1,168.1 | ) | ||||
Purchase of treasury stock |
(451.1 | ) | (441.8 | ) | ||||
Dividends paid |
(123.4 | ) | (112.5 | ) | ||||
Net proceeds from exercise of stock options |
69.1 | 3.3 | ||||||
Excess tax benefit from exercise of stock options |
0.7 | | ||||||
Income tax refund related to prior years' debt financing |
| 16.8 | ||||||
Other |
(6.4 | ) | (7.8 | ) | ||||
Net cash flow used by financing activities |
(139.6 | ) | (677.4 | ) | ||||
Effect of changes in exchange rates on cash |
5.0 | 15.1 | ||||||
Increase (decrease) in cash and equivalents |
161.4 | (2.5 | ) | |||||
CASH AND EQUIVALENTS: |
||||||||
Beginning of period |
471.5 | 382.8 | ||||||
End of period |
$ | 632.9 | $ | 380.3 | ||||
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 36 weeks ended September 11, 2010 and September 12, 2009 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 (US GAAP) 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 2009 Annual Report on Form 10-K. The results of operations for the 12 and 36 weeks ended September 11, 2010 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 or deflation. The LIFO method of inventory valuation can only be determined annually, when inflation or deflation rates and inventory levels are known; therefore, LIFO inventory costs for interim financial statements are estimated. Actual LIFO inflation or deflation indices for the year are calculated during the fourth quarter based upon a statistical sampling of inventories.
Vendor Allowances
Vendor allowances totaled $636.9 million for the third quarter of 2010 and $588.8 million for the third quarter of 2009. Vendor allowances totaled $2.0 billion for the first 36 weeks of 2010 and totaled $1.8 billion for the first 36 weeks of 2009. 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 approximately 90% 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
Comprehensive income consists of the following (in millions):
12 Weeks Ended | 36 Weeks Ended | |||||||||||||
Sept. 11, 2010 |
Sept 12, 2009 |
Sept. 11, 2010 |
Sept. 12, 2009 |
|||||||||||
Net income before allocation to noncontrolling interests |
$ | 122.7 | $ | 128.8 | $ | 359.8 | $ | 511.6 | ||||||
Foreign currency translation adjustments, net of tax |
(2.9 | ) | 93.5 | 24.0 | 138.4 | |||||||||
Recognition of pension actuarial loss, net of tax |
11.3 | 12.1 | 33.9 | 37.8 | ||||||||||
Other, net of tax |
0.7 | 0.7 | 1.9 | (1.1 | ) | |||||||||
Comprehensive income including noncontrolling interests |
$ | 131.8 | $ | 235.1 | $ | 419.6 | $ | 686.7 | ||||||
Comprehensive income attributable to noncontrolling interests |
0.1 | | 0.3 | | ||||||||||
Comprehensive income attributable to Safeway Inc. |
$ | 131.9 | $ | 235.1 | $ | 419.9 | $ | 686.7 | ||||||
Noncontrolling interests
In December 2007, the Financial Accounting Standards Board (FASB) issued new guidance on noncontrolling interests in consolidated financial statements. This guidance requires that (1) noncontrolling interests be reported as a separate component of equity; (2) net income attributable to the parent and to the noncontrolling interest be separately identified in the statement of operations; (3) changes in a parents ownership interest while the parent retains its controlling interest be accounted for as equity transactions; and (4) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. This guidance was effective for Safeway for the first quarter of fiscal 2009. However, due to the immateriality of the noncontrolling interests in 2009, the Company did not adopt this guidance until the first quarter of 2010. If Safeway had adopted the guidance in fiscal 2009, income attributable to noncontrolling interests, net of tax, would have been $2.2 million for the year, most of which was generated in the fourth quarter. Additionally, noncontrolling interests would have reduced accrued claims and other liabilities by $4.3 million, increased equity by $2.8 million and increased noncurrent deferred tax liability by $1.5 million. Fiscal 2009 results were not restated due to the insignificance of these amounts.
NOTE BNEW ACCOUNTING STANDARDS
In January 2010, the FASB issued guidance which amends and clarifies existing guidance related to fair value measurements and disclosures. This guidance requires new disclosures for (1) transfers in and out of Level 1 and Level 2 fair value measurements and reasons for such transfers; and (2) the separate presentation of purchases, sales, issuances and settlement in the Level 3 reconciliation. It also clarifies guidance around disaggregation and disclosures of inputs and valuation techniques for Level 2 and Level 3 fair value measurements. Safeway adopted this guidance effective the first quarter of fiscal 2010, except for the new disclosures in the Level 3 reconciliation. The Level 3 disclosures are effective for Safeway for the first quarter of fiscal 2011 and are not expected to have a material impact on Safeways consolidated financial statements.
8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE CSHARE-BASED EMPLOYEE COMPENSATION
The Company recognized share-based compensation expense of $11.2 million and $14.0 million in the third quarter of 2010 and 2009, respectively, as a component of operating and administrative expense. The Company recognized share-based compensation expense of $37.3 million and $41.4 million for the first 36 weeks of 2010 and 2009, 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 third quarter, by year, are as follows:
2010 | 2009 | |||
Expected life (in years) |
6.5 | 6.5 | ||
Expected stock volatility |
30.3% 31.2% | 33.6% 40.2% | ||
Risk-free interest rate |
2.37% 3.10% | 2.35% 3.20% | ||
Expected dividend yield during the expected term |
1.8% 2.2% | 1.3% 1.8% |
NOTE DINCOME PER SHARE
Basic income per share is calculated on the basis of weighted average outstanding common shares. Diluted income 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 income per basic common share to those used in calculating income per diluted common share (in millions, except per-share amounts):
12 Weeks Ended | ||||||||||||
September 11, 2010 | September 12, 2009 | |||||||||||
Diluted | Basic | Diluted | Basic | |||||||||
Net income attributable to Safeway Inc. |
$ | 122.8 | $ | 122.8 | $ | 128.8 | $ | 128.8 | ||||
Weighted average common shares outstanding |
376.0 | 376.0 | 411.3 | 411.3 | ||||||||
Common share equivalents |
0.8 | 0.6 | ||||||||||
Weighted average shares outstanding |
376.8 | 411.9 | ||||||||||
Income per share |
$ | 0.33 | $ | 0.33 | $ | 0.31 | $ | 0.31 | ||||
Anti-dilutive shares totaling 35.5 million and 39.6 million have been excluded from diluted weighted average shares outstanding for the 12 weeks ended September 11, 2010 and September 12, 2009, respectively.
9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
36 Weeks Ended | ||||||||||||
September 11, 2010 | September 12, 2009 | |||||||||||
Diluted | Basic | Diluted | Basic | |||||||||
Net income attributable to Safeway Inc. |
$ | 360.1 | $ | 360.1 | $ | 511.6 | $ | 511.6 | ||||
Weighted average common shares outstanding |
382.5 | 382.5 | 420.1 | 420.1 | ||||||||
Common share equivalents |
1.4 | 1.1 | ||||||||||
Weighted average shares outstanding |
383.9 | 421.2 | ||||||||||
Earnings per share |
$ | 0.94 | $ | 0.94 | $ | 1.21 | $ | 1.22 | ||||
Anti-dilutive shares totaling 32.0 million and 35.4 million have been excluded from diluted weighted average shares outstanding for the 36 weeks ended September 11, 2010 and September 12, 2009, respectively.
NOTE EGOODWILL
A summary of changes in Safeways goodwill during the first 36 weeks of 2010 by geographic area is as follows (in millions):
2010 | ||||||||||||
U.S. | Canada | Total | ||||||||||
Balance beginning of year: |
||||||||||||
Goodwill |
$ | 4,324.4 | $ | 93.5 | $ | 4,417.9 | ||||||
Accumulated impairment charges |
(3,991.3 | ) | | (3,991.3 | ) | |||||||
333.1 | 93.5 | 426.6 | ||||||||||
Activity during the first 36 weeks of 2010: |
||||||||||||
Other adjustments |
| 1.2 | (1) | 1.2 | ||||||||
| 1.2 | 1.2 | ||||||||||
Balance at Sept. 11, 2010: |
||||||||||||
Goodwill |
4,324.4 | 94.7 | 4,419.1 | |||||||||
Accumulated impairment charges |
(3,991.3 | ) | | (3,991.3 | ) | |||||||
Balance at Sept. 11, 2010 |
$ | 333.1 | $ | 94.7 | $ | 427.8 | ||||||
(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 (in millions):
Sept. 11, 2010 |
January 2, 2010 |
|||||||
Commercial paper |
$ | 443.8 | $ | 50.0 | ||||
Other bank borrowings, unsecured |
3.2 | 2.1 | ||||||
Mortgage notes payable, secured |
15.6 | 14.9 | ||||||
4.95% Senior Notes due 2010, unsecured |
| 500.0 | ||||||
6.50% Senior Notes due 2011, unsecured |
500.0 | 500.0 | ||||||
5.80% Senior Notes due 2012, unsecured |
800.0 | 800.0 | ||||||
6.25% Senior Notes due 2014, unsecured |
500.0 | 500.0 | ||||||
5.625% Senior Notes due 2014, unsecured |
250.0 | 250.0 | ||||||
6.35% Senior Notes due 2017, unsecured |
500.0 | 500.0 | ||||||
5.0% Senior Notes due 2019, unsecured |
500.0 | 500.0 | ||||||
3.95% Senior Notes due 2020, unsecured |
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 |
21.7 | 22.1 | ||||||
Interest rate swap fair value adjustment |
11.7 | (6.6 | ) | |||||
Unamortized deferred gain on swap termination |
| 1.0 | ||||||
4,796.0 | 4,383.5 | |||||||
Less current maturities |
(510.1 | ) | (509.2 | ) | ||||
Long-term portion |
$ | 4,285.9 | $ | 3,874.3 | ||||
11
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE GFINANCIAL INSTRUMENTS
Safeway manages interest rate risk through the strategic use of fixed- and variable-interest rate debt and, from time to time, interest rate swaps. The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments.
Fair Value Hedges In December 2009, the Company effectively converted $800 million of its 5.80% fixed-rate debt due 2012 to floating-rate debt through interest rate swap agreements. These interest rate swaps, under which the Company agrees to pay variable rates of interest, are designated as fair value hedges of fixed-rate debt. The change in the fair value of the hedged debt is recognized as an increase or decrease in interest expense and, on the balance sheet, as an increase or decrease in debt (see Note F). The offsetting change in the fair value of the swap is also recognized as an increase or decrease in interest expense and, on the balance sheet, as a change to other assets or accrued claims and other liabilities.
The adjustments to interest expense from the change in fair value of the interest rate swap and the hedged debt are as follows (in millions):
12 Weeks Ended Sept. 11, 2010 | 36 Weeks Ended Sept. 11, 2010 | |||||||||||||
Income statement classification |
Gain on interest rate swaps |
Loss on debt | Gain on interest rate swaps |
Loss on debt | ||||||||||
Interest expense |
$ | 4.7 | $ | (4.7 | ) | $ | 18.3 | $ | (18.3 | ) |
The fair value and the balance sheet presentation of derivative instruments as of September 11, 2010 are as follows (in millions):
Location in consolidated balance sheet |
Fair Value | ||||
Derivative assets designated as hedges: |
|||||
Interest rate swaps |
Other assets | $ | 11.7 | ||
Total derivative assets |
$ | 11.7 | |||
The fair value and the balance sheet presentation of derivative instruments as of January 2, 2010 are as follows (in millions):
Location in consolidated balance sheet |
Fair Value | ||||
Derivative liabilities designated as hedges: |
|||||
Interest rate swaps |
Accrued claims and other liabilities | $ | 6.6 | ||
Total derivative liabilities |
$ | 6.6 | |||
12
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE HPENSION AND POST-RETIREMENT PLANS
The following tables provide the components of net pension and post-retirement expense (in millions):
12 Weeks Ended | ||||||||||||||
Sept. 11, 2010 | Sept. 12, 2009 | |||||||||||||
Pension | Other Post- Retirement Benefits |
Pension | Other Post- Retirement Benefits | |||||||||||
Estimated return on assets |
$ | (28.7 | ) | $ | | $ | (25.8 | ) | $ | | ||||
Service cost |
8.3 | 0.6 | 7.1 | 0.3 | ||||||||||
Interest cost |
29.0 | 1.6 | 26.1 | 1.6 | ||||||||||
Amortization of prior service cost |
4.0 | | 4.5 | | ||||||||||
Amortization of unrecognized losses |
13.5 | 0.6 | 14.3 | 0.4 | ||||||||||
Total |
$ | 26.1 | $ | 2.8 | $ | 26.2 | $ | 2.3 | ||||||
36 Weeks Ended | ||||||||||||||
Sept. 11, 2010 | Sept. 12, 2009 | |||||||||||||
Pension | Other Post- Retirement Benefits |
Pension | Other Post- Retirement Benefits | |||||||||||
Estimated return on assets |
$ | (86.2 | ) | $ | | $ | (76.2 | ) | $ | | ||||
Service cost |
25.0 | 1.6 | 27.3 | 1.0 | ||||||||||
Interest cost |
87.0 | 5.0 | 79.8 | 4.7 | ||||||||||
Amortization of prior service cost |
12.0 | | 13.6 | | ||||||||||
Amortization of unrecognized losses |
40.5 | 1.7 | 44.9 | 1.1 | ||||||||||
Total |
$ | 78.3 | $ | 8.3 | $ | 89.4 | $ | 6.8 | ||||||
The Company made approximately $11.7 million of contributions to its defined benefit pension plan trusts and the Retirement Restoration Plan, in the first 36 weeks of 2010. For the remainder of 2010, Safeway currently anticipates contributing an additional $6.9 million to these trusts and plan.
NOTE ICONTINGENCIES
Legal Matters
Note M to the Companys consolidated financial statements, under the caption Legal Matters on page 65 of the Form 10-K included in the 2009 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. There have been no subsequent material developments to these matters, except as follows:
In the case entitled State of California, ex rel. Jerry Brown v. Safeway Inc. dba Vons, et al., on August 17, 2010, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit, by a 2-1 vote, reversed the district court judgment in favor of the defendants on the States antitrust claim and remanded the case for entry of judgment in favor of the State and for any further proceedings consistent with the courts decision. On September 30, 2010, the defendants filed a petition for rehearing and rehearing en banc with the Ninth Circuit.
It is managements opinion that although the amount of liability with respect to all of the above matters cannot be ascertained at this time, any resulting liability, including any punitive damages, will not have a material adverse effect on the Companys financial statements taken as a whole.
13
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Guarantees
Note P to the Companys consolidated financial statements, under the caption Guarantees of the 2009 Annual Report on Form 10-K, provides information on guarantees required under FIN No. 45.
NOTE JSTOCKHOLDERS EQUITY
Dividends Declared on Common Stock The following table presents information regarding dividends declared on Safeways common stock through the third quarters of fiscal 2010 and 2009.
(in millions, except per-share amounts) |
Date Declared |
Record Date |
Per-Share Amounts |
Total | YTD Total | ||||||||
2010 |
|||||||||||||
Quarter 3 |
08/24/10 | 09/23/10 | $ | 0.1200 | $ | 44.7 | $ | 129.3 | |||||
Quarter 2 |
05/19/10 | 06/24/10 | 0.1200 | 45.8 | 84.6 | ||||||||
Quarter 1 |
03/10/10 | 03/25/10 | 0.1000 | 38.8 | 38.8 | ||||||||
2009 |
|||||||||||||
Quarter 3 |
08/25/09 | 09/24/09 | $ | 0.1000 | $ | 40.6 | $ | 117.5 | |||||
Quarter 2 |
04/29/09 | 06/25/09 | 0.1000 | 41.6 | 76.9 | ||||||||
Quarter 1 |
03/05/09 | 03/26/09 | 0.0828 | 35.3 | 35.3 |
Dividends Paid on Common Stock The following table presents information regarding dividends paid on Safeways common stock through the third quarters of fiscal 2010 and 2009.
(in millions, except per-share amounts) |
Date Paid | Record Date |
Per-Share Amounts |
Total | YTD Total | ||||||||
2010 |
|||||||||||||
Quarter 3 |
07/15/10 | 06/24/10 | $ | 0.1200 | $ | 45.8 | $ | 123.4 | |||||
Quarter 2 |
04/15/10 | 03/25/10 | 0.1000 | 38.8 | 77.6 | ||||||||
Quarter 1 |
01/14/10 | 12/24/09 | 0.1000 | 38.8 | 38.8 | ||||||||
2009 |
|||||||||||||
Quarter 3 |
07/16/09 | 06/25/09 | $ | 0.1000 | $ | 41.6 | $ | 112.5 | |||||
Quarter 2 |
04/16/09 | 03/26/09 | 0.0828 | 35.3 | 70.9 | ||||||||
Quarter 1 |
01/14/09 | 12/24/08 | 0.0828 | 35.6 | 35.6 |
14
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE KFAIR VALUE MEASUREMENTS
The accounting guidance for fair value measurements 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. |
The following table presents assets and liabilities which are measured at fair value on a recurring basis at September 11, 2010 (in millions):
Fair Value Measurements | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Assets: |
||||||||||||||||
Short-term investments 1 |
$ | 50.8 | $ | 50.6 | $ | 0.2 | $ | | ||||||||
Non-current investments 2 |
29.3 | | 29.3 | | ||||||||||||
Interest rate swap 2 |
11.7 | | 11.7 | | ||||||||||||
Total |
$ | 91.8 | $ | 50.6 | $ | 41.2 | $ | | ||||||||
Liabilities: |
||||||||||||||||
Other 3 |
$ | 3.0 | $ | | $ | | $ | 3.0 | ||||||||
Warrants 3 |
19.0 | | | 19.0 | ||||||||||||
Total |
$ | 22.0 | $ | | $ | | $ | 22.0 | ||||||||
1 | Included in Prepaid Expenses and Other Current Assets on the balance sheet. |
2 | Included in Other Assets on the balance sheet. |
3 | Included in Accrued Claims and Other Liabilities on the balance sheet. |
15
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents assets and liabilities which are measured at fair value on a recurring basis at year-end 2009 (in millions):
Fair Value Measurements | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 1.2 | $ | 1.2 | $ | | $ | | ||||||||
Short-term investments 1 |
51.8 | 48.1 | 3.7 | | ||||||||||||
Non-current investments 2 |
24.3 | | 24.3 | | ||||||||||||
Total |
$ | 77.3 | $ | 49.3 | $ | 28.0 | $ | | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swap 3 |
$ | 6.6 | $ | | $ | 6.6 | $ | | ||||||||
Warrants 3 |
15.2 | | | 15.2 | ||||||||||||
Total |
$ | 21.8 | $ | | $ | 6.6 | $ | 15.2 | ||||||||
1 | Included in Prepaid Expenses and Other Current Assets on the balance sheet. |
2 | Included in Other Assets on the balance sheet. |
3 | Included in Accrued Claims and Other Liabilities on the balance sheet. |
A reconciliation of the beginning and ending balances for Level 3 liabilities for the 36 weeks ended September 11, 2010 follows (in millions):
Other | Warrants | Total | ||||||||||
Balance as of January 2, 2010 |
$ | | $ | 15.2 | $ | 15.2 | ||||||
Additions |
3.0 | 0.1 | 3.1 | |||||||||
Unrealized losses |
| 3.7 | 3.7 | |||||||||
Balance as of September 11, 2010 |
$ | 3.0 | $ | 19.0 | $ | 22.0 | ||||||
In determining the fair value of assets and liabilities, the Company maximizes the use of quoted market prices and minimizes the use of unobservable inputs. The Level 1 fair values are based on quoted market values for identical assets. The fair values of Level 2 assets and liabilities are determined using prices from pricing agencies and financial institutions that develop values based on observable inputs in active markets. Level 3 fair values are determined from industry valuation models based on externally developed inputs.
Long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. Fair value of long-lived assets is determined by estimating the amount and timing of net future cash flows (including rental expense for leased properties, sublease rental income, common area maintenance costs and real estate taxes) and discounting them using a risk-adjusted rate of interest. Safeway estimates future cash flows based on its experience and knowledge of the market in which the store is located and, when necessary, uses real estate brokers. During the third quarter of 2010, long-lived assets with a carrying value of $21.9 million, primarily store assets, were written down to their fair value of $4.0 million, resulting in an impairment charge of $17.9 million. For the first 36 weeks of 2010, long-lived assets with a carrying value of $74.6 million, primarily store assets, were written down to their fair value of $25.9 million, resulting in an impairment charge of $48.7 million. During the third quarter of 2009, long-lived assets with a carrying value of $22.2 million, primarily store assets, were written down to their fair value of $2.3 million, resulting in an impairment charge of $19.9 million. For the first 36 weeks of 2009, long-lived assets with a carrying value of $59.4 million, primarily store assets, were written down to their fair value of $14.2 million, resulting in an impairment charge of $45.2 million.
16
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
ECONOMIC OUTLOOK The current economic environment has made consumers more cautious. This has led to reduced consumer spending, to consumers trading down to a less expensive mix of products and to consumers trading down to discounters for grocery items, all of which have reduced Safeways sales. Additionally, the Company has experienced deflation in certain product categories. These difficult economic conditions may continue for the remainder of 2010 and into 2011.
Net income was $122.8 million ($0.33 per diluted share) for the third quarter of 2010 compared to net income of $128.8 million ($0.31 per diluted share) for the third quarter of 2009. Results for the third quarter of 2010 include $12 million ($0.02 per diluted share) of employee severance charges and a lower tax rate compared to the third quarter of 2009.
SALES AND OTHER REVENUE Same-store sales decreases for the third quarters of 2010 and 2009 were as follows:
12 Weeks Ended | ||||||||||||||||
September 11, 2010 | September 12, 2009 | |||||||||||||||
Comparable- Store Sales Decreases |
Identical-Store Sales Decreases* |
Comparable- Store Sales Decreases |
Identical-Store Sales Decreases* |
|||||||||||||
As reported |
(1.1 | %) | (1.4 | %) | (6.3 | %) | (6.4 | %) | ||||||||
Excluding fuel sales |
(1.7 | %) | (2.0 | %) | (3.0 | %) | (3.0 | %) |
* | Excludes replacement stores. |
Total sales were $9.4 billion in the third quarter of 2010, down slightly compared to $9.5 billion in the third quarter of 2009. A 2.0% decline in identical-store sales, excluding fuel, and reduced sales from store closures were partly offset by a favorable change in the Canadian exchange rate of $84.4 million and a $48.4 million increase in fuel sales. The number of transactions was flat, and average transaction size decreased during the quarter.
At the end of the third quarter of 2010, Safeway had 1,408 Lifestyle stores compared to 1,345 at the end of the third quarter of 2009.
The following table presents sales revenue by type of similar product (dollars in millions):
12 Weeks Ended | ||||||||||||||||
September 11, 2010 | September 12, 2009 | |||||||||||||||
Non-perishables (1) |
$ | 4,227.5 | 45 | % | $ | 4,347.6 | 46 | % | ||||||||
Perishables (2) |
3,541.0 | 38 | % | 3,525.9 | 37 | % | ||||||||||
Pharmacy |
870.3 | 9 | % | 872.4 | 9 | % | ||||||||||
Fuel |
760.8 | 8 | % | 712.4 | 8 | % | ||||||||||
Total sales and other revenue |
$ | 9,399.6 | 100 | % | $ | 9,458.3 | 100 | % | ||||||||
(1) | Consists primarily of general merchandise, grocery, meal ingredients, soft drinks and other beverages, snacks and frozen foods. |
(2) | Consists primarily of produce, dairy, meat, bakery, deli, floral and seafood. |
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.
17
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross profit declined 13 basis points to 28.14% of sales in the third quarter of 2010 compared to 28.27% of sales in the third quarter of 2009. Excluding the 13 basis point impact from fuel sales, gross profit margin was flat. Investments in price carried forward from the second half of fiscal 2009 and $12 million of employee severance charges were offset by reduced advertising and improvement in shrink.
OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense was $2.4 billion in the third quarter of 2010, essentially flat compared to the third quarter of 2009. Operating and administrative expense increased 23 basis points to 25.56% of sales in the third quarter of 2010 from 25.33% of sales in the third quarter of 2009. Excluding the 14 basis point impact of higher fuel sales in the third quarter of 2010, operating and administrative expense margin increased 37 basis points. This increase was largely the result of lower sales coupled with expected increases in wages and benefits, partly offset by lower losses from the combination of property disposals and impairment.
INTEREST EXPENSE Interest expense declined to $69.4 million in the third quarter of 2010 from $78.3 million in the third quarter of 2009 due to lower average interest rates and lower average borrowings.
INCOME TAXES Income tax expense was 31.0% of pre-tax income in the third quarter of 2010 compared to 36.0% in the third quarter of 2009. The income tax rate in 2010 was lower due to benefits from several individually immaterial items.
36-WEEKS ENDED SEPTEMBER 11, 2010 COMPARED WITH 36-WEEKS ENDED SEPTEMBER 12, 2009
Net income for the first 36 weeks of 2010 was $360.1 million ($0.94 per diluted share) compared to $511.6 million ($1.21 per diluted share) in the first 36 weeks of 2009. The first 36 weeks of 2009 included a $73.9 million tax benefit from the favorable resolution of tax matters.
The gross profit margin was 28.36% in the first 36 weeks of 2010 compared to 28.62% in the first 36 weeks of 2009. Operating and administrative expense margin was 25.74% in the first 36 weeks of 2010 compared to 25.36% in the first 36 weeks of 2009.
Same-store sales decreases through the third quarters of 2010 and 2009 were as follows:
36 Weeks Ended | ||||||||||||||||
September 11, 2010 | September 12, 2009 | |||||||||||||||
Comparable- Store Sales Decreases |
Identical-Store Sales Decreases* |
Comparable- Store Sales Decreases |
Identical-Store Sales Decreases* |
|||||||||||||
As reported |
(1.2 | %) | (1.3 | %) | (5.3 | %) | (5.4 | %) | ||||||||
Excluding fuel sales |
(2.4 | %) | (2.5 | %) | (1.7 | %) | (1.7 | %) |
* | Excludes replacement stores. |
The following table presents sales revenue by type of similar product (dollars in millions):
36 Weeks Ended | ||||||||||||||||
September 11, 2010 | September 12, 2009 | |||||||||||||||
Non-perishables (1) |
$ | 12,705.9 | 45 | % | $ | 13,038.6 | 46 | % | ||||||||
Perishables (2) |
10,718.3 | 38 | % | 10,656.1 | 38 | % | ||||||||||
Pharmacy |
2,683.3 | 9 | % | 2,624.5 | 9 | % | ||||||||||
Fuel |
2,138.7 | 8 | % | 1,837.6 | 7 | % | ||||||||||
Total sales and other revenue |
$ | 28,246.2 | 100 | % | $ | 28,156.8 | 100 | % | ||||||||
(1) | Consists primarily of general merchandise, grocery, meal ingredients, soft drinks and other beverages, snacks and frozen foods. |
(2) | Consists primarily of produce, dairy, meat, bakery, deli, floral and seafood. |
18
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2009 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, goodwill and income tax contingencies.
New Accounting Pronouncements
See Part I, Item 1, Note B to this report for disclosure of accounting pronouncements which are applicable to the Company.
Liquidity and Financial Resources
Net cash flow provided by operating activities was $846.6 million in the first 36 weeks of 2010 compared to $1,287.3 million in the first 36 weeks of 2009. This was primarily due to increased income tax payments, a decline in third-party gift card payables, net of receivables, and lower net income.
Net cash flow used by investing activities declined to $550.6 million in the first 36 weeks of 2010 from $627.5 million in the first 36 weeks of 2009 because of reduced capital expenditures and increased proceeds from the sale of property.
Net cash flow used by financing activities declined to $139.6 million in the first 36 weeks of 2010 from $677.4 million in the first 36 weeks of 2009 due primarily to a net increase in borrowings in 2010.
Based upon the current level of operations, management believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeways commercial paper program and its Credit Agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments and stock repurchases and scheduled principal payments 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.
FREE CASH FLOW Free cash flow is calculated as net cash flow from operating activities, as adjusted to exclude payables related to third-party gift cards, net of receivables, less net cash flow used by investing activities. Cash from the sale of third-party gift cards is held for a short period of time and then remitted, less our commission, to card partners. Because this cash flow is temporary, it is not available for other uses, and it is therefore excluded from our calculation of free cash flow.
12 Weeks Ended | 36 Weeks Ended | |||||||||||||||
(in millions) |
Sept. 11, 2010 | Sept. 12, 2009 | Sept. 11, 2010 | Sept. 12, 2009 | ||||||||||||
Net cash flow provided by operating activities, as reported |
$ | 537.5 | $ | 603.3 | $ | 846.6 | $ | 1,287.3 | ||||||||
Decrease in payables related to third-party gift cards, net of receivables |
2.8 | 18.8 | 358.9 | 205.0 | ||||||||||||
Net cash flow from operating activities, as adjusted |
540.3 | 622.1 | 1,205.5 | 1,492.3 | ||||||||||||
Net cash flow used by investing activities |
(157.0 | ) | (166.3 | ) | (550.6 | ) | (627.5 | ) | ||||||||
Free cash flow |
$ | 383.3 | $ | 455.8 | $ | 654.9 | $ | 864.8 | ||||||||
Free cash flow provides information regarding the cash that the Companys business generates, which management believes is useful to understanding the Companys business. Free cash flow is also a useful
19
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
indicator of Safeways ability to service debt, fund share repurchases and pay dividends that management believes will enhance stockholder value.
This non-GAAP financial measure should not be considered as an alternative to net cash flow from operating activities or other increases and decreases in cash as shown on our Consolidated Statements of Cash Flows as a measure of liquidity. Non-GAAP financial measures have limitations as analytical tools, and they should not be considered in isolation or as substitutes for analysis of the Companys results as reported under GAAP. Other companies in the Companys industry may calculate free cash flow differently, limiting its usefulness as a comparative measure.
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, at the option of the lenders and 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 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 is required to 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 September 11, 2010, the Company was in compliance with these covenant requirements. As of September 11, 2010, there were no borrowings outstanding and $79.6 million in letters of credit under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,520.4 million as of September 11, 2010.
SHELF REGISTRATION On December 8, 2008, the Company filed a shelf registration statement (the Shelf) with the SEC which enables Safeway to issue an unlimited amount of debt securities and/or common stock. The Shelf expires on December 8, 2011. The Safeway Board of Directors has authorized issuance of up to $2.0 billion of securities under the Shelf. As of September 11, 2010, $0.5 billion of securities were available for issuance under the boards authorization.
Pursuant to the Shelf, Safeway issued $500.0 million of 3.95% Notes (the Notes) on August 3, 2010. The Notes mature on August 15, 2020. The Company will pay interest on the Notes on February 15 and August 15 of each year commencing on February 15, 2011. The Notes can be redeemed, in whole or in part, at any time, at the Companys option, at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed discounted to the date of redemption on a semiannual basis at the then current United States Treasury Rate, plus 20 basis points. The Notes refinanced $500 million of 4.95% Notes that came due on August 16, 2010.
DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $45.8 million and $41.6 million for the third quarters of 2010 and 2009, respectively. Year-to-date dividends paid on common stock totaled $123.4 million and $112.5 million through the third quarters of 2010 and 2009, respectively. Note J 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 third quarter of fiscal 2010, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $5.2 billion, leaving an authorized amount for repurchases of approximately $0.8 billion. This includes an increase in the total
20
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
authorized level of the repurchase program by $1.0 billion to $6.0 billion approved by the Board of Directors in December 2009. During the third quarter of 2010, Safeway repurchased approximately 8.8 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $182.5 million. The average price per share, excluding commissions, was $20.81. The timing and volume of future repurchases will depend on several factors, including market conditions.
Capital Expenditure Program
Safeway invested $170.7 million in capital expenditures in the third quarter of 2010. The Company opened two new stores, completed nine Lifestyle remodels and closed 12 stores. For the year, Safeway plans to invest approximately $900 million, open approximately 15 new Lifestyle stores and complete approximately 60 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.
This Quarterly Report on Form 10-Q includes forward-looking statements, including forward-looking statements relating to pension plan contributions; sufficiency of liquidity for the foreseeable future; capital expenditures; new accounting standards; outcomes of legal proceedings; 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 or deflation, consumer spending levels, currency valuations, population, employment and job growth and/or losses in our markets; |
| Sales volumes levels and price per item trends; |
| 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 expand 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 existing or new business ventures, including our Blackhawk subsidiary; |
21
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Legislative, regulatory, tax, accounting or judicial developments, including with respect to Blackhawk; |
| The cost and stability of fuel, energy and other power sources; |
| The impact of the cost of fuel on gross margin and identical-store sales; |
| Discount rates used in actuarial calculations for pension obligations and self-insurance reserves; |
| The rate of return on our pension assets; |
| The availability and terms of financing, including interest rates; |
| 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 and effects from natural disasters; |
| Performance in new business ventures or other opportunities that we pursue; and |
| The capital investment in and financial results from our Lifestyle stores. |
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.
22
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 2009 Annual Report on Form 10-K.
Item 4. | Controls and Procedures |
The Company maintains disclosure controls and procedures, as such term is defined under Exchange Act Rule 13a-15(e), 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. In designing and evaluating the disclosure controls and procedures, the Companys management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, the Companys management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 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 were effective at the reasonable assurance level. There has been no change during the Companys fiscal quarter ended September 11, 2010 in the Companys internal control over financial reporting that was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) which has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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SAFEWAY INC. AND SUBSIDIARIES
PART IIOTHER INFORMATION
Item 1. | Legal Proceedings |
Note M to the Companys consolidated financial statements, under the caption Legal Matters on page 65 of the Form 10-K included in the 2009 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. There have been no subsequent material developments to these matters, except as follows:
In the case entitled State of California, ex rel. Jerry Brown v. Safeway Inc. dba Vons, et al., on August 17, 2010, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit, by a 2-1 vote, reversed the district court judgment in favor of the defendants on the States antitrust claim and remanded the case for entry of judgment in favor of the State and for any further proceedings consistent with the courts decision. On September 30, 2010, the defendants filed a petition for rehearing and rehearing en banc with the Ninth Circuit.
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 2009 Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table contains information for shares repurchased during the third quarter of 2010.
Fiscal period |
Total number of shares purchased |
Average price paid per share1 |
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)2 | ||||||
June 20, 2010 July 17, 2010 |
| $ | | | $ | 1,008.0 | ||||
July 18, 2010 August 14, 2010 |
8,761,200 | 20.81 | 8,761,200 | 825.5 | ||||||
August 15, 2010 September 11, 2010 |
| | | 825.5 | ||||||
Total |
8,761,200 | $ | 20.81 | 8,761,200 | $ | 825.5 |
1 | Average price per share excludes commissions. |
2 | 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, to $5.0 billion in 2008 and then to $6.0 billion in December 2009. From the initiation of the repurchase program in 1999 through the end of the third quarter of 2010, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $5.2 billion, leaving an authorized amount for repurchases of approximately $0.8 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. |
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SAFEWAY INC. AND SUBSIDIARIES
Item 6. | Exhibits |
Exhibit 4(i).11 |
Form of Officers Certificate establishing the terms of the registrants 3.950% Notes due 2020, including the form of Notes (incorporated by reference to Exhibits 4.2 and 4.3 to the registrants Current Report on Form 8-K dated August 3, 2010). | |
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. | |
Exhibit 101 ** |
The following materials from the Safeway Inc. Quarterly Report on Form 10-Q for the quarter ended September 11, 2010 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes. |
** | In accordance with Rule 402 of Regulation S-T, Exhibit 101 to this report is furnished and shall not be deemed to be filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended (the Securities Act), and Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and shall not be incorporated by reference into any registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
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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: October 18, 2010 | /s/ Steven A. Burd |
|||
Steven A. Burd | ||||
Chairman, President and Chief Executive Officer |
||||
Date: October 18, 2010 | /s/ Robert L. Edwards |
|||
Robert L. Edwards | ||||
Executive Vice President and Chief Financial Officer |
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SAFEWAY INC. AND SUBSIDIARIES
Exhibit Index
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED SEPTEMBER 11, 2010
Exhibit 4(i).11 |
Form of Officers Certificate establishing the terms of the registrants 3.950% Notes due 2020, including the form of Notes (incorporated by reference to Exhibits 4.2 and 4.3 to the registrants Current Report on Form 8-K dated August 3, 2010). | |
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. | |
Exhibit 101 ** | The following materials from the Safeway Inc. Quarterly Report on Form 10-Q for the quarter ended September 11, 2010 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes. |
** | In accordance with Rule 402 of Regulation S-T, Exhibit 101 to this report is furnished and shall not be deemed to be filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended (the Securities Act), and Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and shall not be incorporated by reference into any registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
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