Table of Contents
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 10, 2011
| ¨ | 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) | |
Registrant’s 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 11, 2011, there were issued and outstanding 339.9 million shares of the registrant’s common stock.
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
| Page | ||||||
| PART I–FINANCIAL INFORMATION (Unaudited) |
||||||
| Item 1. |
Financial Statements | |||||
| 3 | ||||||
| Condensed Consolidated Balance Sheets as of September 10, 2011 and January 1, 2011 |
4 | |||||
| 6 | ||||||
| 7 | ||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 22 | ||||
| Item 4. |
Controls and Procedures | 22 | ||||
| Item 1. |
Legal Proceedings | 23 | ||||
| Item 1A. |
Risk Factors | 23 | ||||
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 23 | ||||
| Item 6. |
Exhibits | 24 | ||||
2
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
(Unaudited)
| 12 Weeks Ended | 36 Weeks Ended | |||||||||||||||
| Sept. 10, 2011 |
Sept. 11, 2010 |
Sept. 10, 2011 |
Sept. 11, 2010 |
|||||||||||||
| Sales and other revenue |
$ | 10,064.3 | $ | 9,399.6 | $ | 30,032.6 | $ | 28,246.2 | ||||||||
| Cost of goods sold |
(7,347.1 | ) | (6,755.0 | ) | (21,871.3 | ) | (20,234.3 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Gross profit |
2,717.2 | 2,644.6 | 8,161.3 | 8,011.9 | ||||||||||||
| Operating and administrative expense |
(2,468.9 | ) | (2,402.2 | ) | (7,416.8 | ) | (7,269.8 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating profit |
248.3 | 242.4 | 744.5 | 742.1 | ||||||||||||
| Interest expense |
(60.7 | ) | (69.4 | ) | (187.9 | ) | (208.3 | ) | ||||||||
| Other income, net |
8.7 | 4.8 | 15.8 | 10.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income before income taxes |
196.3 | 177.8 | 572.4 | 544.3 | ||||||||||||
| Income tax expense |
(66.0 | ) | (55.1 | ) | (271.0 | ) | (184.5 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income before allocation to noncontrolling interests |
130.3 | 122.7 | 301.4 | 359.8 | ||||||||||||
| Noncontrolling interests |
(0.1 | ) | 0.1 | (0.3 | ) | 0.3 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income attributable to Safeway Inc. |
$ | 130.2 | $ | 122.8 | $ | 301.1 | $ | 360.1 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income per common share attributable to Safeway Inc. |
||||||||||||||||
| Basic |
$ | 0.38 | $ | 0.33 | $ | 0.85 | $ | 0.94 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted |
$ | 0.38 | $ | 0.33 | $ | 0.85 | $ | 0.94 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted average shares outstanding: |
||||||||||||||||
| Basic |
342.8 | 376.0 | 353.2 | 382.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted |
343.0 | 376.8 | 353.7 | 383.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
| Sept. 10, 2011 |
January 1, 2011 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and equivalents |
$ | 180.5 | $ | 778.8 | ||||
| Receivables |
499.4 | 557.4 | ||||||
| Merchandise inventories |
2,779.6 | 2,623.4 | ||||||
| Prepaid expenses and other current assets |
301.9 | 273.4 | ||||||
|
|
|
|
|
|||||
| Total current assets |
3,761.4 | 4,233.0 | ||||||
|
|
|
|
|
|||||
| Property |
20,452.2 | 20,233.4 | ||||||
| Less accumulated depreciation and amortization |
(10,687.6 | ) | (10,323.2 | ) | ||||
|
|
|
|
|
|||||
| Property, net |
9,764.6 | 9,910.2 | ||||||
| Goodwill |
431.0 | 430.9 | ||||||
| Investment in unconsolidated affiliates |
192.2 | 187.2 | ||||||
| Other assets |
365.6 | 386.8 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 14,514.8 | $ | 15,148.1 | ||||
|
|
|
|
|
|||||
(Continued)
4
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In millions, except per-share amounts)
(Unaudited)
| Sept. 10, 2011 |
January 1, 2011 |
|||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Current maturities of notes and debentures |
$ | 811.0 | $ | 505.6 | ||||
| Current obligations under capital leases |
31.3 | 30.7 | ||||||
| Accounts payable |
2,290.7 | 2,533.4 | ||||||
| Accrued salaries and wages |
457.6 | 468.9 | ||||||
| Deferred income taxes |
96.5 | 96.3 | ||||||
| Other accrued liabilities |
649.8 | 679.3 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
4,336.9 | 4,314.2 | ||||||
|
|
|
|
|
|||||
| Long-term debt: |
||||||||
| Notes and debentures |
3,772.6 | 3,843.8 | ||||||
| Obligations under capital leases |
433.4 | 456.2 | ||||||
|
|
|
|
|
|||||
| Total long-term debt |
4,206.0 | 4,300.0 | ||||||
| Deferred income taxes |
140.4 | 153.5 | ||||||
| Pension and post-retirement benefit obligations |
584.0 | 727.9 | ||||||
| Accrued claims and other liabilities |
677.1 | 654.8 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
9,944.4 | 10,150.4 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock: par value $0.01 per share; |
||||||||
| 1,500 shares authorized; 604.5 and 599.8 shares issued |
6.0 | 6.0 | ||||||
| Additional paid-in capital |
4,449.8 | 4,363.1 | ||||||
| Treasury stock at cost: 264.6 and 231.8 shares |
(7,015.5 | ) | (6,283.8 | ) | ||||
| Accumulated other comprehensive income |
148.0 | 88.0 | ||||||
| Retained earnings |
6,977.3 | 6,820.0 | ||||||
|
|
|
|
|
|||||
| Total Safeway Inc. equity |
4,565.6 | 4,993.3 | ||||||
| Noncontrolling interests |
4.8 | 4.4 | ||||||
|
|
|
|
|
|||||
| Total equity |
4,570.4 | 4,997.7 | ||||||
|
|
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | 14,514.8 | $ | 15,148.1 | ||||
|
|
|
|
|
|||||
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| 36 Weeks Ended | ||||||||
| Sept. 10, 2011 |
Sept. 11, 2010 |
|||||||
| OPERATING ACTIVITIES: |
||||||||
| Net income before allocation to noncontrolling interests |
$ | 301.4 | $ | 359.8 | ||||
| Reconciliation to net cash flow from operating activities: |
||||||||
| Depreciation and amortization |
794.3 | 806.1 | ||||||
| Property impairment charges |
33.7 | 48.7 | ||||||
| Share-based employee compensation |
33.4 | 37.3 | ||||||
| Excess tax benefit from share-based employee compensation |
(1.6 | ) | (0.7 | ) | ||||
| LIFO expense |
21.4 | — | ||||||
| Equity in earnings of unconsolidated affiliates |
(11.1 | ) | (7.7 | ) | ||||
| Net pension and post-retirement benefits expense |
78.1 | 86.6 | ||||||
| Contributions to pension and post-retirement plans |
(168.3 | ) | (11.7 | ) | ||||
| Loss (gain) on property retirements and lease exit costs, net |
2.8 | (1.4 | ) | |||||
| Increase in accrued claims and other liabilities |
39.4 | 38.5 | ||||||
| Amortization of deferred finance costs |
3.6 | 3.3 | ||||||
| Deferred income taxes |
(51.7 | ) | — | |||||
| Other |
15.1 | 0.5 | ||||||
| Changes in working capital items: |
||||||||
| Receivables |
3.4 | 34.0 | ||||||
| Inventories at FIFO cost |
(176.7 | ) | (55.4 | ) | ||||
| Prepaid expenses and other current assets |
11.2 | 0.9 | ||||||
| Income taxes |
94.9 | (69.4 | ) | |||||
| Payables and accruals |
4.7 | (63.9 | ) | |||||
| Payables related to third-party gift cards, net of receivables |
(317.1 | ) | (358.9 | ) | ||||
|
|
|
|
|
|||||
| Net cash flow provided by operating activities |
710.9 | 846.6 | ||||||
|
|
|
|
|
|||||
| INVESTING ACTIVITIES: |
||||||||
| Cash paid for property additions |
(682.5 | ) | (555.4 | ) | ||||
| Proceeds from sale of property |
9.3 | 43.9 | ||||||
| Other |
(71.2 | ) | (39.1 | ) | ||||
|
|
|
|
|
|||||
| Net cash flow used by investing activities |
(744.4 | ) | (550.6 | ) | ||||
|
|
|
|
|
|||||
| FINANCING ACTIVITIES: |
||||||||
| (Payments on) additions to short-term borrowings |
(0.7 | ) | 1.1 | |||||
| Additions to long-term borrowings |
1,128.7 | 1,461.9 | ||||||
| Payments on long-term borrowings |
(907.6 | ) | (1,091.5 | ) | ||||
| Purchase of treasury stock |
(729.6 | ) | (451.1 | ) | ||||
| Dividends paid |
(138.7 | ) | (123.4 | ) | ||||
| Net proceeds from exercise of stock options |
72.8 | 69.1 | ||||||
| Excess tax benefit from share-based employee compensation |
1.6 | 0.7 | ||||||
| Other |
(9.7 | ) | (6.4 | ) | ||||
|
|
|
|
|
|||||
| Net cash flow used by financing activities |
(583.2 | ) | (139.6 | ) | ||||
|
|
|
|
|
|||||
| Effect of changes in exchange rates on cash |
18.4 | 5.0 | ||||||
| (Decrease) increase in cash and equivalents |
(598.3 | ) | 161.4 | |||||
| CASH AND EQUIVALENTS: |
||||||||
| Beginning of period |
778.8 | 471.5 | ||||||
|
|
|
|
|
|||||
| End of period |
$ | 180.5 | $ | 632.9 | ||||
|
|
|
|
|
|||||
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A–THE 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 10, 2011 and September 11, 2010 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 Company’s 2010 Annual Report on Form 10-K, as amended. The results of operations for the 12 and 36 weeks ended September 10, 2011 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 $21.4 million of LIFO expense during the first 36 weeks of 2011 and no LIFO expense during the first 36 weeks of 2010.
Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets include $54.1 million of Canadian assets classified as held for sale as of September 10, 2011.
Comprehensive Income
Comprehensive income consists of the following (in millions):
| 12 Weeks Ended | 36 Weeks Ended | |||||||||||||||
| Sept. 10, 2011 |
Sept. 11, 2010 |
Sept. 10, 2011 |
Sept. 11, 2010 |
|||||||||||||
| Net income before allocation to noncontrolling interests |
$ | 130.3 | $ | 122.7 | $ | 301.4 | $ | 359.8 | ||||||||
| Foreign currency translation adjustments, net of tax |
(15.9 | ) | (2.9 | ) | 24.9 | 24.0 | ||||||||||
| Recognition of pension actuarial loss, net of tax |
11.1 | 11.3 | 33.8 | 33.9 | ||||||||||||
| Other, net of tax |
(0.6 | ) | 0.7 | 1.4 | 1.9 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Comprehensive income including noncontrolling interests |
$ | 124.9 | $ | 131.8 | $ | 361.5 | $ | 419.6 | ||||||||
| Comprehensive income attributable to noncontrolling interests |
(0.1 | ) | 0.1 | (0.3 | ) | 0.3 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Comprehensive income attributable to Safeway Inc. |
$ | 124.8 | $ | 131.9 | $ | 361.2 | $ | 419.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
7
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B–NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, eliminating the option to present other comprehensive income in the statement of changes in equity. Under either choice, items that are reclassified from other comprehensive income to net income are required to be presented on the face of the financial statements where the components of net income and the components of other comprehensive income are presented. This amendment is effective for Safeway in 2012 and will be applied retrospectively. This amendment will change the manner in which the Company presents comprehensive income.
In September 2011, the FASB issued ASU No. 2011-09, “Disclosure Requirements for Employers subject to Multiemployer Pension Plans.” ASU No. 2011-09 requires additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. For significant multiemployer plans in which an employer participates, the additional disclosures include the plan name and identifying number, contributions to the plan and whether such contributions represent 5% of the total contributions made to the plan by all employers, indication of funded status, minimum contribution requirements under collective-bargaining agreements and expirations of such agreements. For plans which do not have publicly available information other than employer financial statements, additional qualitative and quantitative disclosures are required including the description of the nature of the plan benefits, the extent to which the employer could be responsible for the obligations of the plan and, to the extent available, total plan assets, actuarial present value of accumulated plan benefits and total contributions received by the plan as of the most recent date available. This update is effective for Safeway’s fiscal year ending December 31, 2011.
NOTE C–SHARE-BASED EMPLOYEE COMPENSATION
The Company recognized share-based compensation expense of $11.3 million and $11.2 million in the third quarter of 2011 and 2010, respectively, as a component of operating and administrative expense. The Company recognized share-based compensation expense of $33.4 million and $37.3 million for the first 36 weeks of 2011 and 2010, respectively, as a component of operating and administrative expense.
The Company determines fair value of stock option awards using the Black-Scholes option pricing model. The following weighted-average assumptions used to value Safeway’s grants of stock options through the third quarter, by year, are as follows:
| 2011 | 2010 | |||
| Expected life (in years) |
6.5 | 6.5 | ||
| Expected stock volatility |
29.8% – 30.7% | 30.3% – 31.2% | ||
| Risk-free interest rate |
2.3% – 2.7% | 2.4% – 3.1% | ||
| Expected dividend yield during the expected term |
2.2% – 2.6% | 1.8% – 2.2% |
8
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D–INCOME PER SHARE
Beginning in the third quarter of 2011, the Company computes earnings per share under the two-class method, which is a method of computing earnings per share when an entity has both common stock and participating securities. Unvested restricted stock is considered a participating security because it contains rights to receive nonforfeitable dividends at the same rate as common stock. Under the two-class method, the calculation of basic and diluted earnings per common share excludes the income attributable to participating securities. Additionally, the weighted average shares outstanding exclude the impact of participating securities.
Historically, the Company computed earnings per share under the treasury stock method as the impact of participating securities did not change earnings per share prior to 2011.
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 10, 2011 | September 11, 2010 | |||||||||||||||
| Diluted | Basic | Diluted | Basic | |||||||||||||
| Net income attributable to Safeway Inc. |
$ | 130.2 | $ | 130.2 | $ | 122.8 | $ | 122.8 | ||||||||
| Distributed and undistributed earnings allocated to participating securities |
(0.9 | ) | (0.9 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income available to common stockholders |
$ | 129.3 | $ | 129.3 | $ | 122.8 | $ | 122.8 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted average common shares outstanding |
342.8 | 342.8 | 376.0 | 376.0 | ||||||||||||
|
|
|
|
|
|||||||||||||
| Diluted stock options |
0.2 | 0.8 | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Weighted average shares outstanding |
343.0 | 376.8 | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Income per share |
$ | 0.38 | $ | 0.38 | $ | 0.33 | $ | 0.33 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Anti-dilutive shares totaling 24.9 million and 35.5 million have been excluded from diluted weighted average shares outstanding for the 12 weeks ended September 10, 2011 and September 11, 2010, respectively.
| 36 Weeks Ended | ||||||||||||||||
| September 10, 2011 | September 11, 2010 | |||||||||||||||
| Diluted | Basic | Diluted | Basic | |||||||||||||
| Net income attributable to Safeway Inc. |
$ | 301.1 | $ | 301.1 | $ | 360.1 | $ | 360.1 | ||||||||
| Distributed and undistributed earnings allocated to participating securities |
(1.8 | ) | (1.8 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income available to common stockholders |
$ | 299.3 | $ | 299.3 | $ | 360.1 | $ | 360.1 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted average common shares outstanding |
353.2 | 353.2 | 382.5 | 382.5 | ||||||||||||
|
|
|
|
|
|||||||||||||
| Diluted stock options |
0.5 | 1.4 | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Weighted average shares outstanding |
353.7 | 383.9 | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Income per share |
$ | 0.85 | $ | 0.85 | $ | 0.94 | $ | 0.94 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Anti-dilutive shares totaling 24.7 million and 32.0 million have been excluded from diluted weighted average shares outstanding for the 36 weeks ended September 10, 2011 and September 11, 2010, respectively.
9
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E–GOODWILL
A summary of changes in Safeway’s goodwill during the first 36 weeks of 2011 by geographic area is as follows (in millions):
| 2011 | ||||||||||||
| U.S. | Canada | Total | ||||||||||
| Balance – beginning of year: |
||||||||||||
| Goodwill |
$ | 4,324.4 | $ | 97.8 | $ | 4,422.2 | ||||||
| Accumulated impairment charges |
(3,991.3 | ) | — | (3,991.3 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| 333.1 | 97.8 | 430.9 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Activity during the year: |
||||||||||||
| Other adjustments |
— | 0.1 | (1) | 0.1 | ||||||||
|
|
|
|
|
|
|
|||||||
| — | 0.1 | 0.1 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Balance – end of quarter: |
||||||||||||
| Goodwill |
4,324.4 | 97.9 | 4,422.3 | |||||||||
| Accumulated impairment charges |
(3,991.3 | ) | — | (3,991.3 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance – end of quarter |
$ | 333.1 | $ | 97.9 | $ | 431.0 | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | Represents foreign currency translation adjustments in Canada. |
NOTE F–FINANCING
Notes and debentures were composed of the following at September 10, 2011 and January 1, 2011 (in millions):
| Sept. 10, 2011 |
January 1, 2011 |
|||||||
| Commercial paper |
$ | 431.2 | $ | — | ||||
| Bank credit agreement |
10.1 | — | ||||||
| Other bank borrowings, unsecured |
1.7 | 2.4 | ||||||
| Mortgage notes payable, secured |
6.7 | 11.3 | ||||||
| 6.50% Senior Notes due 2011, unsecured |
— | 500.0 | ||||||
| 5.80% Senior Notes due 2012, unsecured |
800.0 | 800.0 | ||||||
| 3.00% Second Series Notes due 2014, unsecured |
302.2 | — | ||||||
| 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 | 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 |
24.2 | 24.1 | ||||||
| Interest rate swap fair value adjustment |
7.5 | 11.6 | ||||||
|
|
|
|
|
|||||
| 4,583.6 | 4,349.4 | |||||||
| Less current maturities |
(811.0 | ) | (505.6 | ) | ||||
|
|
|
|
|
|||||
| Long-term portion |
$ | 3,772.6 | $ | 3,843.8 | ||||
|
|
|
|
|
|||||
10
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G: FINANCIAL 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 gain or loss on the interest rate swap agreements, as well as the gain or loss on the debt being hedged, are recognized in current earnings. These amounts were immaterial in both 2011 and 2010.
NOTE H–PENSION AND POST-RETIREMENT PLANS
The following tables provide the components of net pension and post-retirement expense (in millions):
| 12 Weeks Ended | ||||||||||||||||
| September 10, 2011 | September 11, 2010 | |||||||||||||||
| Pension | Other Post- Retirement Benefits |
Pension | Other Post- Retirement Benefits |
|||||||||||||
| Estimated return on assets |
$ | (32.4 | ) | $ | — | $ | (28.7 | ) | $ | — | ||||||
| Service cost |
9.1 | 0.4 | 8.3 | 0.6 | ||||||||||||
| Interest cost |
28.7 | 1.4 | 29.0 | 1.6 | ||||||||||||
| Amortization of prior service cost |
3.6 | — | 4.0 | — | ||||||||||||
| Amortization of unrecognized losses |
15.9 | — | 13.5 | 0.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 24.9 | $ | 1.8 | $ | 26.1 | $ | 2.8 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 36 Weeks Ended | ||||||||||||||||
| September 10, 2011 | September 11, 2010 | |||||||||||||||
| Pension | Other Post- Retirement Benefits |
Pension | Other Post- Retirement Benefits |
|||||||||||||
| Estimated return on assets |
$ | (96.8 | ) | $ | — | $ | (86.2 | ) | $ | — | ||||||
| Service cost |
27.4 | 1.7 | 25.0 | 1.6 | ||||||||||||
| Interest cost |
85.3 | 4.7 | 87.0 | 5.0 | ||||||||||||
| Amortization of prior service cost |
10.9 | — | 12.0 | — | ||||||||||||
| Amortization of unrecognized losses |
44.3 | 0.6 | 40.5 | 1.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 71.1 | $ | 7.0 | $ | 78.3 | $ | 8.3 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company made $168.3 million of contributions to its defined benefit pension plans and post-retirement benefit plans in the first 36 weeks of 2011. For the remainder of 2011, Safeway currently anticipates contributing an additional $4 million to these plans.
NOTE I–CONTINGENCIES
Legal Matters
Note M to the Company’s consolidated financial statements, under the caption “Legal Matters” on page 63 of the Form 10-K included in the 2010 Annual Report to Stockholders, provides information on certain
11
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
litigation in which the Company is involved. There have been no subsequent material developments to these matters, except as provided in previous reports and as follows:
In State of California v. Safeway Inc. dba Vons, et al., the State’s time to file a petition for certiorari to the United States Supreme Court has expired, and the matter is over.
Guarantees
Note P to the Company’s consolidated financial statements, under the caption “Guarantees” of the 2010 Annual Report on Form 10-K provides information on guarantees.
NOTE J–STOCKHOLDERS’ EQUITY
Dividends Declared on Common Stock The following table presents information regarding dividends declared on Safeway’s common stock for the first 36 weeks of fiscal 2011 and 2010.
| (in millions, except per-share amounts) |
Date Declared |
Record Date |
Per-Share Amounts |
Total | YTD Total |
|||||||||||||||
| 2011 |
||||||||||||||||||||
| Quarter 3 |
08/24/11 | 09/22/11 | $ | 0.145 | $ | 49.3 | $ | 143.8 | ||||||||||||
| Quarter 2 |
05/19/11 | 06/23/11 | 0.145 | 50.7 | 94.5 | |||||||||||||||
| Quarter 1 |
03/15/11 | 03/24/11 | 0.120 | 43.8 | 43.8 | |||||||||||||||
| 2010 |
||||||||||||||||||||
| Quarter 3 |
08/24/10 | 09/23/10 | $ | 0.120 | $ | 44.7 | $ | 129.3 | ||||||||||||
| Quarter 2 |
05/19/10 | 06/24/10 | 0.120 | 45.8 | 84.6 | |||||||||||||||
| Quarter 1 |
03/10/10 | 03/25/10 | 0.100 | 38.8 | 38.8 | |||||||||||||||
Dividends Paid on Common Stock The following table presents information regarding dividends paid on Safeway’s common stock through the third quarters of fiscal 2011 and 2010.
| (in millions, except per-share amounts) |
Date Paid | Record Date |
Per-Share Amounts |
Total | YTD Total |
|||||||||||||||
| 2011 |
||||||||||||||||||||
| Quarter 3 |
07/14/11 | 06/23/11 | $ | 0.145 | $ | 50.7 | $ | 138.7 | ||||||||||||
| Quarter 2 |
04/14/11 | 03/24/11 | 0.120 | 43.8 | 88.0 | |||||||||||||||
| Quarter 1 |
01/13/11 | 12/23/10 | 0.120 | 44.2 | 44.2 | |||||||||||||||
| 2010 |
||||||||||||||||||||
| Quarter 3 |
07/15/10 | 06/24/10 | $ | 0.120 | $ | 45.8 | $ | 123.4 | ||||||||||||
| Quarter 2 |
04/15/10 | 03/25/10 | 0.100 | 38.8 | 77.6 | |||||||||||||||
| Quarter 1 |
01/14/10 | 12/24/09 | 0.100 | 38.8 | 38.8 | |||||||||||||||
12
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K–FAIR 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 which are measured at fair value on a recurring basis at September 10, 2011 (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 |
$ | 47.8 | $ | 17.1 | $ | 30.7 | $ | — | ||||||||
| Non-current investments 2 |
36.8 | — | 36.8 | — | ||||||||||||
| Interest rate swap 1 |
7.5 | — | 7.5 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 92.1 | $ | 17.1 | $ | 75.0 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | Included in Prepaid Expenses and Other Current Assets on the balance sheet. |
| 2 | Included in Other Assets on the balance sheet. |
The following table presents assets which are measured at fair value on a recurring basis at year-end 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: |
||||||||||||||||
| Cash equivalents |
$ | 222.2 | $ | — | $ | 222.2 | $ | — | ||||||||
| Short-term investments 1 |
59.9 | 59.8 | 0.1 | — | ||||||||||||
| Non-current investments 2 |
29.1 | — | 29.1 | — | ||||||||||||
| Interest rate swap 2 |
11.6 | — | 11.6 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 322.8 | $ | 59.8 | $ | 263.0 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | Included in Prepaid Expenses and Other Current Assets on the balance sheet. |
| 2 | Included in Other Assets on the balance sheet. |
In determining the fair value, 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 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.
13
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 2011, long-lived assets with a carrying value of $13.1 million, primarily store assets, were written down to their fair value of $1.4 million, resulting in an impairment charge of $11.7 million. For the first 36 weeks of 2011, long-lived assets with a carrying value of $44.8 million, primarily store assets, were written down to their fair value of $11.1 million, resulting in an impairment charge of $33.7 million. 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.
14
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations
ECONOMIC OUTLOOK There has been an increase in food cost inflation in the first three quarters of 2011, and the economic environment has continued to make consumers cautious. This has led to certain consumers trading down to a less expensive mix of products and/or trading down to discounters for grocery items, all of which have impacted Safeway’s sales. These difficult economic conditions may continue through 2011.
NET INCOME Net income attributable to Safeway Inc. was $130.2 million ($0.38 per diluted share) for the third quarter of 2011 compared to $122.8 million ($0.33 per diluted share) in the third quarter of 2010.
SALES AND OTHER REVENUE Total sales were $10.1 billion in the third quarter of 2011 compared to $9.4 billion in the third quarter of 2010. Fuel sales increased $338.8 million, primarily because the average retail price per gallon of fuel increased 25.9%, reflecting an increase in the cost of fuel. Additionally, a higher Canadian exchange rate increased sales by $91.6 million.
Prior to 2011, Safeway recorded Blackhawk Network distribution commissions on the sale of certain gift cards, net of commissions shared with other retailers. In the first quarter of 2011, Safeway determined that these commissions should be reported on a gross basis. This change increased both revenue and cost of goods sold in the third quarter of 2011 by $75.7 million but had no impact on identical-store sales, gross profit dollars or net income. Previously reported results are not adjusted because the impact is immaterial.
Identical-store sales, excluding fuel, increased 1.5%, or $122.6 million. This increase reflects an increase in average transaction size and a decrease in customer counts during the quarter.
| 12 Weeks Ended | ||||||||
| Sept. 10, 2011 | Sept. 11, 2010 | |||||||
| As reported * |
4.9 | % | (1.4 | %) | ||||
| Excluding fuel sales * |
1.5 | % | (2.0 | %) | ||||
| * | Excludes replacement stores. |
The following table presents sales revenue by type of similar product (dollars in millions):
| 12 Weeks Ended | ||||||||||||||||
| Sept. 10, 2011 | Sept. 11, 2010 | |||||||||||||||
| Non-perishables (1) |
$ | 4,023.0 | 40.0 | % | $ | 3,966.7 | 42.2 | % | ||||||||
| Perishables (2) |
3,696.0 | 36.7 | 3,541.0 | 37.7 | ||||||||||||
| Fuel |
1,099.6 | 10.9 | 760.8 | 8.1 | ||||||||||||
| Pharmacy |
875.5 | 8.7 | 870.3 | 9.2 | ||||||||||||
| Other (3) |
370.2 | 3.7 | 260.8 | 2.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total sales and other revenue |
$ | 10,064.3 | 100.0 | % | $ | 9,399.6 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (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. |
| (3) | Consists primarily of wholesale sales, commissions on gift cards and other revenue. |
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
15
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs of Safeway’s distribution network. Advertising and promotional expenses and vendor allowances are also components of cost of goods sold.
Gross profit declined 114 basis points to 27.00% of sales in the third quarter of 2011 compared to 28.14% of sales in the third quarter of 2010. The impact from fuel sales reduced gross profit 88 basis points, and the gross presentation of gift card commissions reduced gross profit 26 basis points.
Vendor allowances are shown below (in millions):
| Total | YTD Total |
|||||||
| 2011 |
||||||||
| Quarter 3 |
$ | 654.1 | $ | 2,044.1 | ||||
| Quarter 2 |
678.8 | 1,390.0 | ||||||
| Quarter 1 |
711.2 | 711.2 | ||||||
| 2010 |
||||||||
| Quarter 3 |
$ | 636.8 | $ | 1,952.2 | ||||
| Quarter 2 |
650.5 | 1,315.4 | ||||||
| Quarter 1 |
664.9 | 664.9 | ||||||
The Company believes that the recent increase in vendor allowances is primarily the result of vendors providing higher allowances to grocery retailers to mitigate a trend in price increases. With the large volume of vendor allowances that Safeway negotiates in a year, it is difficult to forecast with certainty whether that trend will continue.
Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances.
Promotional allowances make up nearly 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.
Slotting and promotional 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.
OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense, as a percentage of sales, decreased 103 basis points to 24.53% in the third quarter of 2011 from 25.56% in the third quarter of 2010. The impact from fuel sales reduced operating and administrative expense 71 basis points, and the impact from the change related to gift card commissions reduced operating and administrative expense 24 basis points.
INTEREST EXPENSE Interest expense declined to $60.7 million in the third quarter of 2011 from $69.4 million in the third quarter of 2010 due to lower average interest rates and lower average borrowings.
16
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES Income tax expense was 33.6% of pre-tax income in the third quarter of 2011 compared to 31.0% in the third quarter of 2010. Income tax expense was lower in 2010 due to the resolution of several individually immaterial items.
36-WEEKS ENDED SEPTEMBER 10, 2011 COMPARED WITH 36-WEEKS ENDED SEPTEMBER 11, 2010
Net income for the first 36 weeks of 2011 was $301.1 million ($0.85 per diluted share) compared to $360.1 million ($0.94 per diluted share) in the first 36 weeks of 2010 primarily due to the net negative impact from the Canadian dividend paid in the first half of 2011.
Identical-store sales increases (decreases) through the third quarters of 2011 and 2010 were as follows:
| 36 Weeks Ended | ||||||||
| Sept. 10, 2011 | Sept. 11, 2010 | |||||||
| As reported * |
4.5 | % | (1.3 | %) | ||||
| Excluding fuel sales * |
0.8 | % | (2.5 | %) | ||||
| * | Excludes replacement stores. |
The following table presents sales revenue by type of similar product (dollars in millions):
| 36 Weeks Ended | ||||||||||||||||
| September 10, 2011 | September 11, 2010 | |||||||||||||||
| Non-perishables (1) |
$ | 12,006.9 | 40.0 | % | $ | 11,925.7 | 42.2 | % | ||||||||
| Perishables (2) |
11,065.0 | 36.8 | 10,718.3 | 37.9 | ||||||||||||
| Fuel |
3,203.4 | 10.7 | 2,138.7 | 7.6 | ||||||||||||
| Pharmacy |
2,671.6 | 8.9 | 2,683.3 | 9.5 | ||||||||||||
| Other (3) |
1,085.7 | 3.6 | 780.2 | 2.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total sales and other revenue |
$ | 30,032.6 | 100.0 | % | $ | 28,246.2 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (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. |
| (3) | Consists primarily of wholesale sales, commissions on gift cards and other revenue. |
The gross profit margin was 27.17% in the first 36 weeks of 2011 compared to 28.36% in the first 36 weeks of 2010. Operating and administrative expense margin was 24.70% in the first 36 weeks of 2011 compared to 25.74% in the first 36 weeks of 2010.
Critical Accounting Policies
Critical accounting policies are those accounting policies that management believes are important to the portrayal of Safeway’s financial condition and results and require management’s 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 Company’s 2010 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.
17
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Financial Resources
Net cash flow provided by operating activities declined to $710.9 million in the first 36 weeks of 2011 compared to $846.6 million in the first 36 weeks of 2010 due primarily to contributions to pension plans and an increase in inventory, net of payables.
Net cash flow used by investing activities was $744.4 million in the first 36 weeks of 2011 compared to $550.6 million in the first 36 weeks of 2010 due primarily to increased cash capital expenditures.
Net cash flow used by financing activities increased to $583.2 million in the first 36 weeks of 2011 from $139.6 million in the first 36 weeks of 2010 due primarily to lower net long-term borrowings and increased purchases of treasury stock in 2011.
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 Safeway’s commercial paper program, its Credit Agreement, referred to below, and debt offerings 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 Safeway’s 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. 10, 2011 |
Sept. 11, 2010 |
Sept. 10, 2011 * |
Sept. 11, 2010 |
||||||||||||
| Net cash flow provided by operating activities, as reported |
$ | 523.3 | $ | 537.5 | $ | 710.9 | $ | 846.6 | ||||||||
| (Increase) decrease in payables related to third-party gift cards, net of receivables |
(16.7 | ) | 2.8 | 317.1 | 358.9 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash flow from operating activities, as adjusted |
506.6 | 540.3 | 1,028.0 | 1,205.5 | ||||||||||||
| Net cash flow used by investing activities |
(339.1 | ) | (157.0 | ) | (744.4 | ) | (550.6 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Free cash flow |
$ | 167.5 | $ | 383.3 | $ | 283.6 | $ | 654.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | In the 36 weeks ended September 10, 2011, free cash flow was reduced by $168.3 million of contributions to defined benefit pension and post-retirement plans and $97 million of taxes paid on Canadian dividends. |
Free cash flow provides information regarding the cash that the Company’s business generates, which management believes is useful to understanding the Company’s business. Free cash flow is also a useful indicator of Safeway’s ability to service debt, fund share repurchases and pay dividends that management believes will enhance stockholder value.
This non-U.S. 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-U.S. GAAP financial measures have limitations as analytical tools, and they should not be considered in isolation or as substitutes for analysis of the Company’s results
18
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
as reported under U.S. GAAP. Other companies in the Company’s industry may calculate free cash flow differently, limiting its usefulness as a comparative measure.
CREDIT AGREEMENT On June 1, 2011, the Company entered into a $1.5 billion credit agreement (the “Credit Agreement”) with a syndicate of banks. The Credit Agreement has a termination date of June 1, 2015 and replaced the former credit agreement that was scheduled to expire on June 1, 2012. The Credit Agreement provides (i) to Safeway, a four-year revolving domestic credit facility of up to $1,250.0 million for U.S. dollar advances, (ii) to Safeway and Canada Safeway Limited (“CSL”), a four-year revolving Canadian credit facility of up to $250.0 million for U.S. dollar and Canadian dollar advances and (iii) to Safeway, a $400.0 million subfacility of the domestic facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the domestic or Canadian credit facility commitments up to an additional $500.0 million, subject to the satisfaction of certain conditions. Safeway will guarantee the obligations of CSL under the Credit Agreement. The Credit Agreement contains various covenants that restrict, among other things and subject to certain exceptions, the ability of Safeway, CSL and their respective subsidiaries to incur certain liens, make certain asset sales, enter into certain mergers or amalgamations, engage in certain transactions with shareholders and affiliates and alter the character of its business from that conducted on the closing date. The Credit Agreement also contains two financial maintenance covenants: (i) an interest coverage ratio that requires Safeway not to permit the ratio of consolidated Adjusted EBITDA, as defined in the Credit Agreement, to consolidated interest expense to be less than 2.00:1.00, and (ii) a leverage ratio that requires Safeway not to permit the ratio of consolidated total debt, less unrestricted cash in excess of $75.0 million, to consolidated Adjusted EBITDA, to exceed 3.50:1.00. As of September 10, 2011, the Company was in compliance with these covenant requirements. As of September 10, 2011, there were $10.1 million of borrowings outstanding and $73.5 million in letters of credit under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,416.4 million as of September 10, 2011.
SHELF REGISTRATION On December 8, 2008, the Company filed a shelf registration statement (the “Shelf”) with the SEC which permits 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 $2.5 billion of securities under the Shelf. As of September 10, 2011, $1.0 billion of securities were available for issuance under the board’s authorization.
DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $50.7 million and $45.8 million for the third quarters of 2011 and 2010, respectively. Year-to-date dividends paid on common stock totaled $138.7 million and $123.4 million for 2011 and 2010, respectively. Note J to the Company’s 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 Company’s stock repurchase program in 1999 through the end of the third quarter of 2011, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $6.1 billion, leaving an authorized amount for repurchases of approximately $0.9 billion. During the third quarter of 2011, Safeway repurchased approximately 10.1 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $195.2 million. The average price per share, excluding commissions, was $19.30. The Company will evaluate the timing and volume of future repurchases based on several factors, including market conditions, and, subject to the foregoing factors, intends to continue to repurchase stock as circumstances warrant.
MULTI-EMPLOYER PENSION CONTRIBUTIONS Safeway participates in various multi-employer pension plans for substantially all employees represented by unions. We are required to make contributions to these plans in amounts established under collective bargaining agreements. Year-to-date through the third quarter of 2011, the Company had contributed $220.3 million to these plans, with $185.5 million going to U.S. plans and $34.8 million going to Canadian plans. In fiscal 2010, Safeway contributed $292.3 million to these plans, with $245.4 million going to U.S. plans and $46.9 million going to Canadian plans.
19
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Expenditure Program
Safeway invested $288.4 million in capital expenditures in the third quarter of 2011. The Company completed five new stores, completed seven Lifestyle remodels and closed 11 stores. For the year, Safeway plans to invest approximately $1.0 billion in capital expenditures, while completing 26 new Lifestyle stores and 30 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 and post-retirement benefit plan contributions; sufficiency of liquidity for the foreseeable future; repurchases of stock; capital expenditures; 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 volume 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 and Property Development Centers subsidiaries; |
| • | Legislative, regulatory, tax, accounting or judicial developments, including with respect to Blackhawk; |
| • | The cost and stability of fuel, energy and other power sources; |
20
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| • | 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, as amended, 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.
21
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes regarding the Company’s market risk position from the information provided under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Company’s 2010 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 Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s 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 Company’s 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 Company’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their 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 Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s 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 Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. There has been no change during the Company’s fiscal quarter ended September 10, 2011 in the Company’s 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 Company’s internal control over financial reporting.
22
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
| Item 1. | Legal Proceedings |
Legal Matters
Note M to the Company’s consolidated financial statements, under the caption “Legal Matters” on page 63 of the Form 10-K included in the 2010 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 provided in previous reports and as follows:
In State of California v. Safeway Inc. dba Vons, et al., the State’s time to file a petition for certiorari to the United States Supreme Court has expired, and the matter is over.
| Item 1A. | Risk Factors |
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, in the Company’s 2010 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 2011.
| 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 19, 2011 – July 16, 2011 |
— | $ | — | — | $ | 1,121.0 | ||||||||||
| July 17, 2011 – August 13, 2011 |
10,100,000 | 19.30 | 925.9 | |||||||||||||
| August 14, 2011 – September 10, 2011 |
— | — | 925.9 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| TOTAL |
10,100,000 | $ | 19.30 | $ | 925.9 | |||||||||||
| 1 | Average price per share excludes commissions. |
| 2 | In December 2010, the Company’s Board of Directors increased the authorized level of the Company’s stock repurchase program from $6.0 billion to $7.0 billion. From the initiation of the repurchase program in 1999 through the end of the third quarter of 2011, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $6.1 billion, leaving an authorized amount for repurchases of approximately $0.9 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. |
23
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
| Item 6. | Exhibits |
| Exhibit 3.1 | Restated Certificate of Incorporation of Safeway Inc., as amended May 19, 2010, June 17, 2004, May 12, 1998 and May 14, 1996. | |
| 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 10, 2011 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. | |
24
Table of Contents
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, 2011 |
/s/ Steven A. Burd | |||
|
|
||||
| Steven A. Burd | ||||
| Chairman, President and Chief Executive Officer |
||||
| Date: October 18, 2011 |
/s/ Robert L. Edwards | |||
|
|
||||
| Robert L. Edwards | ||||
| Executive Vice President and Chief Financial Officer |
||||
25
Table of Contents
SAFEWAY INC. AND SUBSIDIARIES
Exhibit Index
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED SEPTEMBER 10, 2011
| Exhibit 3.1 | Restated Certificate of Incorporation of Safeway Inc., as amended May 19, 2010, June 17, 2004, May 12, 1998 and May 14, 1996. | |
| 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 10, 2011 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. | |
26