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 12, 2009
¨ | 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 14, 2009, there were issued and outstanding 406.4 million shares of the registrants common stock.
Table of Contents
Page | ||||
PART IFINANCIAL INFORMATION (Unaudited) | ||||
Item 1. | Financial Statements |
|||
3 | ||||
Condensed Consolidated Balance Sheets as of September 12, 2009 and January 3, 2009 |
4 | |||
6 | ||||
7 | ||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
14 | ||
Item 3. | 21 | |||
Item 4. | 21 | |||
PART IIOTHER INFORMATION | ||||
Item 1. | 22 | |||
Item 1A. | 22 | |||
Item 2. | 22 | |||
Item 6. | 23 |
2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
(Unaudited)
12 Weeks Ended | 36 Weeks Ended | |||||||||||||||
September 12, 2009 |
September 6, 2008 |
September 12, 2009 |
September 6, 2008 |
|||||||||||||
Sales and other revenue |
$ | 9,458.3 | $ | 10,169.3 | $ | 28,156.8 | $ | 30,288.1 | ||||||||
Cost of goods sold |
(6,784.2 | ) | (7,373.7 | ) | (20,098.3 | ) | (21,749.0 | ) | ||||||||
Gross profit |
2,674.1 | 2,795.6 | 8,058.5 | 8,539.1 | ||||||||||||
Operating and administrative expense |
(2,396.0 | ) | (2,409.3 | ) | (7,141.3 | ) | (7,299.3 | ) | ||||||||
Operating profit |
278.1 | 386.3 | 917.2 | 1,239.8 | ||||||||||||
Interest expense |
(78.3 | ) | (80.0 | ) | (233.7 | ) | (246.2 | ) | ||||||||
Other income, net |
1.5 | 5.7 | 6.0 | 7.3 | ||||||||||||
Income before income taxes |
201.3 | 312.0 | 689.5 | 1,000.9 | ||||||||||||
Income tax expense |
(72.5 | ) | (112.3 | ) | (177.9 | ) | (373.5 | ) | ||||||||
Net income |
$ | 128.8 | $ | 199.7 | $ | 511.6 | $ | 627.4 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.31 | $ | 0.46 | $ | 1.22 | $ | 1.44 | ||||||||
Diluted |
$ | 0.31 | $ | 0.46 | $ | 1.21 | $ | 1.43 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
411.3 | 432.3 | 420.1 | 436.2 | ||||||||||||
Diluted |
411.9 | 435.0 | 421.2 | 439.4 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
September 12, 2009 |
January 3, 2009 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and equivalents |
$ | 380.3 | $ | 382.8 | ||||
Receivables |
404.8 | 515.1 | ||||||
Merchandise inventories |
2,601.0 | 2,591.4 | ||||||
Prepaid expenses and other current assets |
252.9 | 254.6 | ||||||
Income taxes receivable |
95.1 | 232.3 | ||||||
Total current assets |
3,734.1 | 3,976.2 | ||||||
Property |
20,104.9 | 19,692.3 | ||||||
Less accumulated depreciation and amortization |
(9,719.1 | ) | (9,049.2 | ) | ||||
Property, net |
10,385.8 | 10,643.1 | ||||||
Goodwill |
2,397.3 | 2,390.2 | ||||||
Investment in unconsolidated affiliates |
213.0 | 207.1 | ||||||
Other assets |
294.3 | 268.1 | ||||||
Total assets |
$ | 17,024.5 | $ | 17,484.7 | ||||
(Continued)
4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In millions, except per-share amounts)
(Unaudited)
September 12, 2009 |
January 3, 2009 |
|||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of notes and debentures |
$ | 1,006.6 | $ | 758.4 | ||||
Current obligations under capital leases |
36.1 | 40.6 | ||||||
Accounts payable |
1,965.3 | 2,448.5 | ||||||
Accrued salaries and wages |
400.2 | 450.3 | ||||||
Deferred income taxes |
114.7 | 107.2 | ||||||
Other accrued liabilities |
663.4 | 694.2 | ||||||
Total current liabilities |
4,186.3 | 4,499.2 | ||||||
Long-term debt: |
||||||||
Notes and debentures |
3,829.5 | 4,184.2 | ||||||
Obligations under capital leases |
495.9 | 516.6 | ||||||
Total long-term debt |
4,325.4 | 4,700.8 | ||||||
Deferred income taxes |
273.7 | 249.6 | ||||||
Pension and postretirement benefit obligations |
619.2 | 597.2 | ||||||
Accrued claims and other liabilities |
660.5 | 651.7 | ||||||
Total liabilities |
10,065.1 | 10,698.5 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock: par value $0.01 per share; 1,500 shares authorized; 591.3 and 590.7 shares issued |
5.9 | 5.9 | ||||||
Additional paid-in capital |
4,174.2 | 4,128.3 | ||||||
Treasury stock at cost: 184.9 and 161.8 shares |
(5,218.7 | ) | (4,776.8 | ) | ||||
Accumulated other comprehensive loss |
(53.6 | ) | (228.7 | ) | ||||
Retained earnings |
8,051.6 | 7,657.5 | ||||||
Total stockholders equity |
6,959.4 | 6,786.2 | ||||||
Total liabilities and stockholders equity |
$ | 17,024.5 | $ | 17,484.7 | ||||
See accompanying notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
36 Weeks Ended | ||||||||
September 12, 2009 |
September 6, 2008 |
|||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 511.6 | $ | 627.4 | ||||
Reconciliation to net cash flow from operating activities: |
||||||||
Depreciation and amortization |
803.1 | 770.8 | ||||||
Property impairment charges |
45.2 | 31.5 | ||||||
Stock-based employee compensation |
38.5 | 42.4 | ||||||
Excess tax benefit from exercise of stock options |
| (1.4 | ) | |||||
LIFO expense |
| 23.2 | ||||||
Equity in (earnings) loss of unconsolidated affiliates |
(5.9 | ) | 1.3 | |||||
Net pension expense |
93.7 | 58.2 | ||||||
Contributions to pension plans |
(22.9 | ) | (25.5 | ) | ||||
Loss on property retirements and lease exit costs, net |
18.8 | 1.6 | ||||||
Increase in accrued claims and other liabilities |
11.6 | 16.1 | ||||||
Amortization of deferred finance costs |
3.3 | 3.5 | ||||||
Deferred income taxes |
10.2 | 6.4 | ||||||
Other |
19.2 | 3.2 | ||||||
Changes in working capital items: |
||||||||
Receivables |
47.6 | 3.0 | ||||||
Inventories at FIFO cost |
27.1 | 58.3 | ||||||
Prepaid expenses and other current assets |
3.3 | (0.6 | ) | |||||
Income taxes |
92.2 | 84.7 | ||||||
Payables and accruals |
(204.3 | ) | (224.7 | ) | ||||
Payables related to third-party gift cards, net of receivables |
(205.0 | ) | (194.6 | ) | ||||
Net cash flow provided by operating activities |
1,287.3 | 1,284.8 | ||||||
INVESTING ACTIVITIES: |
||||||||
Cash paid for property additions |
(602.8 | ) | (1,007.3 | ) | ||||
Proceeds from sale of property |
7.1 | 62.6 | ||||||
Other |
(31.8 | ) | (35.4 | ) | ||||
Net cash flow used by investing activities |
(627.5 | ) | (980.1 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Payments on short-term borrowings |
(0.9 | ) | (10.0 | ) | ||||
Additions to long-term borrowings |
1,033.6 | 692.3 | ||||||
Payments on long-term borrowings |
(1,168.1 | ) | (466.8 | ) | ||||
Purchase of treasury stock |
(441.8 | ) | (359.5 | ) | ||||
Dividends paid |
(112.5 | ) | (96.6 | ) | ||||
Net proceeds from exercise of stock options |
3.3 | 27.4 | ||||||
Excess tax benefit from exercise of stock options |
| 1.4 | ||||||
Income tax refund related to prior years debt financing |
16.8 | 2.8 | ||||||
Other |
(7.8 | ) | (0.4 | ) | ||||
Net cash flow used by financing activities |
(677.4 | ) | (209.4 | ) | ||||
Effect of changes in exchange rates on cash |
15.1 | (14.9 | ) | |||||
(Decrease) increase in cash and equivalents |
(2.5 | ) | 80.4 | |||||
CASH AND EQUIVALENTS: |
||||||||
Beginning of period |
382.8 | 277.8 | ||||||
End of period |
$ | 380.3 | $ | 358.2 | ||||
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 12, 2009 and September 6, 2008 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 2008 Annual Report on Form 10-K. The results of operations for the 12 and 36 weeks ended September 12, 2009 are not necessarily indicative of the results expected for the full year.
The Company has evaluated subsequent events through October 19, 2009, the filing date of this Form 10-Q. See Note K for subsequent event relating to income taxes.
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. Safeway recorded no LIFO expense for the first 36 weeks of 2009 and LIFO expense of $23.2 million for the first 36 weeks of 2008.
Vendor Allowances
Vendor allowances totaled $588.8 million for the third quarter of 2009 and $566.4 million for the third quarter of 2008. Vendor allowances totaled $1.8 billion for the first 36 weeks of 2009 and 2008. 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 ending | 36 weeks ending | ||||||||||||||
Sept. 12, 2009 |
Sept. 6, 2008 |
Sept. 12, 2009 |
Sept. 6, 2008 |
||||||||||||
Net income |
$ | 128.8 | $ | 199.7 | $ | 511.6 | $ | 627.4 | |||||||
Foreign currency translation adjustments, net of tax |
93.5 | (54.4 | ) | 138.4 | (91.7 | ) | |||||||||
Recognition of pension actuarial loss, net of tax |
12.1 | 4.5 | 37.8 | 13.6 | |||||||||||
Other, net of tax |
0.7 | (0.3 | ) | (1.1 | ) | (1.6 | ) | ||||||||
Total comprehensive income |
$ | 235.1 | $ | 149.5 | $ | 686.7 | $ | 547.7 | |||||||
Fair Value Measurements
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, as amended, defines and establishes a framework for measuring fair value and expands related disclosures. This Statement does not require any new fair value measurements. The Company adopted SFAS No. 157 for financial assets and financial liabilities beginning in fiscal 2008 and for nonfinancial assets and liabilities beginning in fiscal 2009. See Note J for additional information.
Fair Value of Financial Instruments
Disclosures of the fair value of certain financial instruments are required, whether or not recognized in the balance sheet. The Company estimated the fair values presented below using appropriate valuation methodologies and market information available as of September 12, 2009. Considerable judgment is required to develop estimates of fair value, and the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair values. Additionally, the fair values were estimated as of September 12, 2009, and current estimates of fair value may differ significantly from the amounts presented.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and equivalents, accounts receivable, accounts payable and short-term debt. The carrying amount of these items approximates fair value.
Debt. Market values quoted in public markets are used to estimate the fair value of publicly traded debt. To estimate the fair value of debt issues that are not quoted in public markets, the Company uses those interest rates that are currently available to it for issuance of debt with similar terms and remaining maturities as a discount rate for the remaining principal payments. At September 12, 2009, the estimated fair value of debt was $5.2 billion compared to a carrying value of $4.8 billion.
NOTE BNEW ACCOUNTING STANDARDS
In December 2008, the FASB issued FSP 132(R)-1 Employers Disclosure about Postretirement Benefit Plan Assets. FSP 132(R)-1 provides additional guidance on employers disclosures about the plan assets of defined benefit pension or other postretirement plans. FSP 132(R)-1 requires disclosures about how investment allocation decisions are made, the fair value of each major category of plan assets, valuation techniques used to develop fair value measurements of plan assets, the impact of measurements on changes in plan assets when using significant unobservable inputs and significant concentrations of risk in the plan
8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
assets. These disclosures are required for fiscal years ending after December 15, 2009. FSP 132(R)-1 does not change the measurement or recognition of pension plans or other post-retirement benefit plans. Safeway is currently assessing the impact of FSP 132(R)-1 on its financial statement disclosures.
In June 2009, the FASB approved the FASB Accounting Standards Codification (Codification), as the single source of authoritative US GAAP for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which launched July 1, 2009, changes the referencing and organization of accounting guidance and is effective for interim and annual periods ending after September 15, 2009. Since it is not intended to change or alter existing US GAAP, the Codification is not expected to have any impact on Safeways financial condition or results of operations. Beginning after the third quarter of 2009, the Companys financial statements will refer to the Codification.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets. SFAS No. 166 is a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and amends the guidance on transfers of financial assets, including securitization transactions where entities have continued exposure to risks related to transferred financial assets. SFAS No. 166 also expands the disclosure requirements for such transactions. This statement will become effective for Safeway on January 3, 2010. The Company is currently evaluating the impact of this standard on its consolidated financial statements. However, the Company does not expect that SFAS No. 166 will have a material impact on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 is a revision to FIN No. 46(R), Consolidation of Variable Interest Entities, and amends the consolidation guidance for variable interest entities under FIN No. 46(R). This statement will become effective for Safeway on January 3, 2010. The Company is currently evaluating the impact of this standard on its consolidated financial statements. However, the Company does not expect that SFAS No. 167 will have a material impact on its consolidated financial statements.
NOTE CSTOCK-BASED EMPLOYEE COMPENSATION
The Company recognized share-based compensation expense of $12.7 million and $14.7 million in the third quarter of 2009 and 2008, respectively, and $38.5 million and $42.4 million for the first 36 weeks of 2009 and 2008, 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:
2009 | 2008 | |||
Expected life (in years) |
6.5 | 4.5 | ||
Expected stock volatility |
33.64% - 40.20% | 32.00% - 35.76% | ||
Risk-free interest rate |
2.35% - 3.20% | 2.83% - 3.19% | ||
Expected dividend yield during the expected term |
1.3% - 1.8% | 0.8% - 1.1% |
In 2009, the Company issued options with a longer term than had been used for prior years grants. Because not enough time has passed to provide the Company with sufficient data on the exercise behavior of employees who were granted these 2009 options, the expected life of the 2009 options was determined using the simplified method that utilizes the following formula: ((vesting term + original contract term)/2). The Company calculated the expected life of 2008 options based upon its historical data. Expected stock volatility was determined based upon a combination of historical volatility for the 6.5-year-period and 4.5-year-period for 2009 and 2008, respectively, preceding the measurement date and estimates of implied volatility based on open interests in traded option contracts on Safeway common stock. The risk-free interest rate was based on the yield curve in effect at the time the options were granted, using U.S. constant maturities over the expected life of the options. Expected dividend yield is based on Safeways dividend policy at the time the options were granted.
9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE DEARNINGS PER SHARE
Basic earnings per share is calculated on the basis of weighted average outstanding common shares. Diluted earnings per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock awards and other dilutive securities.
The following tables provide reconciliations of net earnings and shares used in calculating earnings per basic common share to those used in calculating earnings per diluted common share (in millions, except per-share amounts):
12 Weeks Ended | ||||||||||||
September 12, 2009 | September 6, 2008 | |||||||||||
Diluted | Basic | Diluted | Basic | |||||||||
Net income |
$ | 128.8 | $ | 128.8 | $ | 199.7 | $ | 199.7 | ||||
Weighted average common shares outstanding |
411.3 | 411.3 | 432.3 | 432.3 | ||||||||
Common share equivalents |
0.6 | 2.7 | ||||||||||
Weighted average shares outstanding |
411.9 | 435.0 | ||||||||||
Earnings per share |
$ | 0.31 | $ | 0.31 | $ | 0.46 | $ | 0.46 | ||||
Anti-dilutive shares totaling 39.6 million and 21.9 million have been excluded from diluted weighted average shares outstanding for the 12 weeks ended September 12, 2009 and September 6, 2008, respectively.
36 Weeks Ended | ||||||||||||
September 12, 2009 | September 6, 2008 | |||||||||||
Diluted | Basic | Diluted | Basic | |||||||||
Net income |
$ | 511.6 | $ | 511.6 | $ | 627.4 | $ | 627.4 | ||||
Weighted average common shares outstanding |
420.1 | 420.1 | 436.2 | 436.2 | ||||||||
Common share equivalents |
1.1 | 3.2 | ||||||||||
Weighted average shares outstanding |
421.2 | 439.4 | ||||||||||
Earnings per share |
$ | 1.21 | $ | 1.22 | $ | 1.43 | $ | 1.44 | ||||
Anti-dilutive shares totaling 35.4 million and 20.8 million have been excluded from diluted weighted average shares outstanding for the 36 weeks ended September 12, 2009 and September 6, 2008, respectively.
NOTE EGOODWILL
A summary of changes in Safeways goodwill during the first 36 weeks of 2009 by geographic area is as follows (in millions):
2009 | |||||||||||
U.S. | Canada | Total | |||||||||
Balancebeginning of period |
$ | 2,307.9 | $ | 82.3 | $ | 2,390.2 | |||||
Adjustments |
(0.6 | ) | 7.7 | (1) | 7.1 | ||||||
Balanceend of period |
$ | 2,307.3 | $ | 90.0 | $ | 2,397.3 | |||||
(1) | Represents foreign currency translation adjustments in Canada. |
10
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE FFINANCING
Notes and debentures were composed of the following at September 12, 2009 and January 3, 2009 (in millions):
September 12, 2009 |
January 3, 2009 |
|||||||
Commercial paper |
$ | | $ | 362.1 | ||||
Bank credit agreement, unsecured |
| | ||||||
Other bank borrowings, unsecured |
2.5 | 3.2 | ||||||
Mortgage notes payable, secured |
15.6 | 17.0 | ||||||
Floating Rate Notes paid March 2009, unsecured (interest at 1.82% as of January 3, 2009) |
| 250.0 | ||||||
7.50% Senior Notes due September 2009, unsecured |
500.0 | 500.0 | ||||||
4.95% Senior Notes due 2010, unsecured |
500.0 | 500.0 | ||||||
6.50% Senior Notes due 2011, unsecured |
500.0 | 500.0 | ||||||
5.80% Senior Notes due 2012, unsecured |
800.0 | 800.0 | ||||||
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 | | ||||||
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 |
16.5 | 7.7 | ||||||
Unamortized deferred gain on swap termination |
1.5 | 2.6 | ||||||
4,836.1 | 4,942.6 | |||||||
Less current maturities |
(1,006.6 | ) | (758.4 | ) | ||||
Long-term portion |
$ | 3,829.5 | $ | 4,184.2 | ||||
NOTE GEMPLOYEE BENEFIT PLANS
The following table provides the components of net pension expense for retirement plans (in millions):
12 Weeks Ended Sept. 12, 2009 |
12 Weeks Ended Sept. 6, 2008 |
36 Weeks Ended Sept. 12, 2009 |
36 Weeks Ended Sept. 6, 2008 |
|||||||||||||
Estimated return on assets |
$ | (26.2 | ) | $ | (39.3 | ) | $ | (76.6 | ) | $ | (118.2 | ) | ||||
Service cost |
9.0 | 23.4 | 30.9 | 70.4 | ||||||||||||
Interest cost |
26.3 | 28.8 | 80.1 | 86.6 | ||||||||||||
Amortization of prior service cost |
4.2 | 5.0 | 13.3 | 15.2 | ||||||||||||
Amortization of unrecognized losses |
14.9 | 1.4 | 46.0 | 4.2 | ||||||||||||
Net pension expense |
$ | 28.2 | $ | 19.3 | $ | 93.7 | $ | 58.2 | ||||||||
Safeway made approximately $25.4 million of contributions to its defined benefit pension plan trusts, including $2.5 million for the Retirement Restoration Plan, in the first 36 weeks of 2009. For the remainder of 2009, Safeway currently anticipates contributing an additional $10.7 million to these trusts.
11
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE HCONTINGENCIES
Legal Matters
Note K to the Companys consolidated financial statements, under the caption Legal Matters on page 66 of the Form 10-K included in the 2008 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. Through October 19, 2009, the filing date of this Form 10-Q, there have been no subsequent material developments to these matters, except as described below.
With respect to the case entitled State of California, ex rel. Jerry Brown v. Safeway Inc. dba Vons, et al., the argument on the appeal before the Ninth Circuit Court of Appeals was held on October 8, 2009.
Guarantees
Note N to the Companys consolidated financial statements, under the caption Guarantees of the 2008 Annual Report on Form 10-K, provides information on guarantees required under FIN No. 45.
NOTE ISTOCKHOLDERS EQUITY
Dividends Declared on Common Stock The following table presents information regarding dividends declared on Safeways common stock through the third quarters of fiscal 2009 and 2008.
(in millions, except per-share amounts) |
Date Declared |
Record Date |
Per-Share Amounts |
Total | YTD Total | ||||||||
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 | ||||||||
2008 |
|||||||||||||
Quarter 3 |
08/26/08 | 09/25/08 | $ | 0.0828 | $ | 35.5 | $ | 101.7 | |||||
Quarter 2 |
05/13/08 | 06/26/08 | 0.0828 | 36.0 | 66.2 | ||||||||
Quarter 1 |
03/06/08 | 03/27/08 | 0.0690 | 30.2 | 30.2 |
Dividends Paid on Common Stock The following table presents information regarding dividends paid on Safeways common stock through the third quarters of fiscal 2009 and 2008.
(in millions, except per-share amounts) |
Date Paid | Record Date |
Per-Share Amounts |
Total | YTD Total | ||||||||
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 | ||||||||
2008 |
|||||||||||||
Quarter 3 |
07/17/08 | 06/26/08 | $ | 0.0828 | $ | 36.0 | $ | 96.6 | |||||
Quarter 2 |
04/17/08 | 03/27/08 | 0.0690 | 30.2 | 60.6 | ||||||||
Quarter 1 |
01/17/08 | 12/27/07 | 0.0690 | 30.4 | 30.4 |
12
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE JFAIR VALUE MEASUREMENTS
SFAS No. 157 prioritizes the inputs used in measuring fair value into the following hierarchy:
Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities; | |
Level 2 | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; | |
Level 3 | Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. |
As of September 12, 2009, Safeway held various short-term investments with a fair value of $52.6 million; $47.5 million was measured at Level 1 in the fair value hierarchy, and $5.1 million was measured at Level 2 in the fair value hierarchy.
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.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets with a carrying value of $22.2 million were written down to their fair value of $2.3 million, resulting in an impairment charge of $19.9 million for the third quarter of 2009. For the first 36 weeks of 2009, long-lived assets with a carrying value of $59.4 million were written down to their fair value of $14.2 million, resulting in an impairment charge of $45.2 million. Impairment charges are included in operating and administrative expense.
NOTE KSUBSEQUENT EVENTS
The Company accelerated certain tax deductions for its 2008 income tax returns. As a result, in the fourth quarter of 2009, the Company received approximately $223 million of tax refunds, of which $107 million were received in cash and $116 million were applied to estimated fourth quarter income tax payments.
13
MANAGEMENTS 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 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 affected Safeways sales. In 2009, the Company has experienced deflation in certain product categories and expects this may continue in the fourth quarter of 2009. With continued deflation and investments in lower prices, the Company anticipates negative identical-store sales, excluding fuel, for the remainder of 2009.
Net income was $128.8 million ($0.31 per diluted share) for the third quarter of 2009 compared to net income of $199.7 million ($0.46 per diluted share) for the third quarter of 2008.
SALES AND OTHER REVENUE Same-store sales (decreases) increases for the third quarters of 2009 and 2008 were as follows:
12 Weeks Ended | ||||||||||||
September 12, 2009 | September 6, 2008 | |||||||||||
Comparable-Store Sales Decreases |
Identical-Store Sales Decreases* |
Comparable-Store Sales Increases |
Identical-Store Sales Increases* |
|||||||||
As reported |
(6.3 | )% | (6.4 | )% | 2.9 | % | 2.8 | % | ||||
Excluding fuel sales |
(3.0 | )% | (3.0 | )% | 0.6 | % | 0.5 | % |
* | Excludes replacement stores. |
Total sales declined 7.0% to $9.5 billion in the third quarter of 2009 compared to $10.2 billion in the third quarter of 2008. This decline was the result of a $365.5 million decrease in fuel sales (which was due primarily to lower fuel prices), a 3.0% decline in identical-store sales for the quarter, excluding fuel (driven largely by deflation in certain product categories), and an unfavorable change in the Canadian exchange rate of $96.6 million. The number of transactions increased, and average transaction size decreased during the quarter.
At the end of the third quarter of 2009, Safeway had 1,345 Lifestyle stores compared to 1,151 at the end of the third quarter of 2008.
The following table presents sales revenue by type of similar product (dollars in millions):
12 Weeks Ended | ||||||||||||
September 12, 2009 | September 6, 2008 | |||||||||||
Non-perishables (1) |
$ | 4,347.6 | 46 | % | $ | 4,449.3 | 44 | % | ||||
Perishables (2) |
3,525.9 | 37 | % | 3,784.4 | 37 | % | ||||||
Fuel |
712.4 | 8 | % | 1,077.9 | 11 | % | ||||||
Pharmacy |
872.4 | 9 | % | 857.7 | 8 | % | ||||||
Total sales and other revenue |
$ | 9,458.3 | 100 | % | $ | 10,169.3 | 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.
14
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross profit increased 78 basis points to 28.27% of sales in the third quarter of 2009 compared to 27.49% of sales in the third quarter of 2008. The impact from fuel sales increased gross profit 84 basis points. The offsetting six basis-point decline was largely the result of investments in everyday price and increased advertising, partly offset by lower LIFO expense and lower energy expense.
Vendor allowances totaled $588.8 million for the third quarter of 2009 and $566.4 million for the third quarter of 2008. Vendor allowances totaled $1.8 billion for the first 36 weeks of 2009 and 2008. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances.
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.
OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense declined $13.3 million to $2,396.0 million in the third quarter of 2009 from $2,409.3 million in the third quarter of 2008. However, due to lower sales, operating and administrative expense margin increased 164 basis points to 25.33% of sales in the third quarter of 2009 from 23.69% of sales in the third quarter of 2008. Lower fuel sales in the third quarter of 2009 increased operating and administrative expense margin by 75 basis points. The remaining 89 basis-point increase was primarily the result of decreased sales leverage, increased charges from property impairments and retirements and increased pension expense.
INTEREST EXPENSE Interest expense declined to $78.3 million in the third quarter of 2009 from $80.0 million in the third quarter of 2008 due to lower average borrowings, partly offset by higher average interest rates.
INCOME TAXES Income tax expense was 36.0% of pre-tax income in both the third quarters of 2009 and 2008.
36-WEEKS ENDED SEPTEMBER 12, 2009 COMPARED WITH 36-WEEKS ENDED SEPTEMBER 6, 2008
Net income for the first 36 weeks of 2009 was $511.6 million ($1.21 per diluted share) compared to $627.4 million ($1.43 per diluted share) in the first 36 weeks of 2008.
The gross profit margin was 28.62% in the first 36 weeks of 2009 compared to 28.19% for the first 36 weeks of 2008. Operating and administrative expense margin was 25.36% in the first 36 weeks of 2009 compared to 24.10% in the first 36 weeks of 2008.
Income tax expense was 25.8% of pre-tax income for the first 36 weeks of 2009 compared to 37.3% of pre-tax income in the first 36 weeks of 2008. The decline in the tax rate was due primarily to a benefit of $73.9 million from the favorable resolution of tax matters.
15
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Same-store sales (decreases) increases through the third quarters of 2009 and 2008 were as follows:
36 Weeks Ended | ||||||||||||
September 12, 2009 | September 6, 2008 | |||||||||||
Comparable-Store Sales Decreases |
Identical-Store Sales Decreases* |
Comparable-Store Sales Increases |
Identical-Store Sales Increases* |
|||||||||
As reported |
(5.3 | )% | (5.4 | )% | 2.8 | % | 2.7 | % | ||||
Excluding fuel sales |
(1.7 | )% | (1.7 | )% | 1.2 | % | 1.0 | % |
* | Excludes replacement stores. |
The following table presents sales revenue by type of similar product (dollars in millions):
36 Weeks Ended | ||||||||||||
September 12, 2009 | September 6, 2008 | |||||||||||
Non-perishables (1) |
$ | 13,038.6 | 46 | % | $ | 13,385.0 | 44 | % | ||||
Perishables (2) |
10,656.1 | 38 | % | 11,324.5 | 37 | % | ||||||
Fuel |
1,837.6 | 7 | % | 2,940.0 | 10 | % | ||||||
Pharmacy |
2,624.5 | 9 | % | 2,638.6 | 9 | % | ||||||
Total sales and other revenue |
$ | 28,156.8 | 100 | % | $ | 30,288.1 | 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. |
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 2008 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to workers compensation, store closures, employee benefit plans, stock-based employee compensation, goodwill and income tax contingencies.
New Accounting Standards
In December 2008, the FASB issued FSP 132(R)-1 Employers Disclosure about Postretirement Benefit Plan Assets. FSP 132(R)-1 provides additional guidance on employers disclosures about the plan assets of defined benefit pension or other postretirement plans. FSP 132(R)-1 requires disclosures about how investment allocation decisions are made, the fair value of each major category of plan assets, valuation techniques used to develop fair value measurements of plan assets, the impact of measurements on changes in plan assets when using significant unobservable inputs and significant concentrations of risk in the plan assets. These disclosures are required for fiscal years ending after December 15, 2009. FSP 132(R)-1 does not change the measurement or recognition of pension plans or other post-retirement benefit plans. Safeway is currently assessing the impact of FSP 132(R)-1 on its financial statement disclosures.
In June 2009, the FASB approved the FASB Accounting Standards Codification (Codification), as the single source of authoritative US GAAP for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which launched July 1, 2009, changes the referencing and organization of accounting guidance and is effective for interim and annual periods ending after September 15, 2009. Since it is not intended to change or alter existing US GAAP, the Codification is not expected to have any impact on Safeways financial condition or results of operations. Beginning after the third quarter of 2009, the Companys financial statements will refer to the Codification.
16
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets. SFAS No. 166 is a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and amends the guidance on transfers of financial assets, including securitization transactions where entities have continued exposure to risks related to transferred financial assets. SFAS No. 166 also expands the disclosure requirements for such transactions. This statement will become effective for Safeway on January 3, 2010. The Company is currently evaluating the impact of this standard on its consolidated financial statements. However, the Company does not expect that SFAS No. 166 will have a material impact on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 is a revision to FIN No. 46(R), Consolidation of Variable Interest Entities, and amends the consolidation guidance for variable interest entities under FIN No. 46(R). This statement will become effective for Safeway on January 3, 2010. The Company is currently evaluating the impact of this standard on its consolidated financial statements. However, the Company does not expect that SFAS No. 167 will have a material impact on its consolidated financial statements.
Liquidity and Financial Resources
Net cash flow provided by operating activities was $1,287.3 million in the first 36 weeks of 2009. This was essentially flat compared to $1,284.8 million of net cash flow provided by operating activities in the first 36 weeks of 2008.
Net cash flow used by investing activities declined to $627.5 million in the first 36 weeks of 2009 from $980.1 million in the first 36 weeks of 2008 because of reduced capital expenditures, partly offset by lower proceeds from the sale of property.
Net cash flow used by financing activities increased to $677.4 million in the first 36 weeks of 2009 compared to $209.4 million in the first 36 weeks of 2008 due primarily to a net reduction in borrowings and increased stock repurchases.
Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeways commercial paper program and 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 its commercial paper program and Credit Agreement (described below).
INCOME TAXES The Company accelerated certain tax deductions for its 2008 income tax returns. As a result, in the fourth quarter of 2009, the Company received approximately $223 million of tax refunds, of which $107 million were received in cash and $116 million were applied to estimated fourth quarter income tax payments.
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. There are approximately 25 banks in the syndicate with individual commitments to lend ranging from approximately $20 million to approximately $170 million. 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
17
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 12, 2009, the Company was in compliance with these covenant requirements. As of September 12, 2009, there were no borrowings and $47.2 million in letters of credit under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,552.8 million as of September 12, 2009.
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 12, 2009, $1.0 billion of securities were available for issuance under the boards authorization.
Pursuant to the Shelf, Safeway issued $500.0 million of 5.0% Notes (the Notes) on July 31, 2009. The Notes mature on August 15, 2019. The Company will pay interest on the Notes on February 15 and August 15 of each year commencing on February 15, 2010. 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 30 basis points. The Notes refinanced $500 million of 7.5% Notes that came due on September 15, 2009.
DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $41.6 million and $36.0 million for the third quarters of 2009 and 2008, respectively. Year-to-date dividends paid on common stock totaled $112.5 million and $96.6 million through the third quarters of 2009 and 2008, respectively. Note I to the Companys condensed consolidated financial statements in this report provides additional information on dividends declared and dividends paid on Safeway common stock.
STOCK REPURCHASE PROGRAM From the initiation of the Companys stock repurchase program in 1999 through the end of the third quarter of fiscal 2009, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $4.3 billion, leaving an authorized amount for repurchases of approximately $0.7 billion. This includes an increase in the total authorized level of the repurchase program by $1.0 billion to $5.0 billion approved by the Board of Directors in May 2008. During the third quarter of 2009, Safeway repurchased approximately 10.2 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $191.6 million. The average price per share, excluding commissions, was $18.84. The timing and volume of future repurchases will depend on several factors, including market conditions.
CREDIT RATINGS The senior long-term and short-term debt ratings and outlooks currently assigned to unsecured Safeway public debt securities by the rating agencies are as follows:
Senior Long-Term |
Short-Term | Outlook | ||||
Fitch Ratings |
BBB | F2 | Stable | |||
Moodys Investors Services |
Baa2 | P-2 | Stable | |||
Standard & Poors |
BBB | A-2 | Stable |
Investors should note that a credit rating is not a recommendation to buy, sell or hold securities and may be subject to withdrawal by the rating agency.
18
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Expenditure Program
Safeway invested $157.2 million in capital expenditures in the third quarter of 2009. The Company opened five new Lifestyle stores, completed 16 Lifestyle remodels and closed 10 stores. During the first 36 weeks of 2009, Safeway invested $602.8 million in capital expenditures, opened seven new Lifestyle stores, completed 62 Lifestyle remodels and closed 16 stores. For the year, the Company expects to spend approximately $1.0 billion in capital expenditures, open about 10 new Lifestyle stores and complete approximately 85 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; deflation in certain product categories; identical-store sales; price investments; 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; |
| 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 new business ventures, including Blackhawk Network Holdings, Inc. (Blackhawk); |
| Legislative, regulatory, tax, accounting or judicial developments, including with respect to Blackhawk; |
| The cost and stability of fuel, energy and other power sources; |
19
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENTS 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 and our ability to issue commercial paper or public debt or borrow under our lines of credit as a result of current financial market conditions; |
| Adverse developments with regard to food and drug safety and quality issues or concerns that may arise; |
| Loss of a key member of senior management; |
| Data security or other information technology issues that may arise; |
| Unanticipated events or changes in real estate matters, including acquisitions, dispositions and impairments; |
| Adverse weather conditions; |
| Performance in new business ventures or other opportunities that we pursue, including Blackhawk; 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.
20
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 2008 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 12, 2009 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.
21
SAFEWAY INC. AND SUBSIDIARIES
Item 1. | Legal Proceedings |
Note K to the Companys consolidated financial statements, under the caption Legal Matters on page 66 of the Form 10-K included in the 2008 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. Through October 19, 2009, the filing date of this Form 10-Q, there have been no subsequent material developments to these matters, except as described below.
With respect to the case entitled State of California, ex rel. Jerry Brown v. Safeway Inc. dba Vons, et al., the argument on the appeal before the Ninth Circuit Court of Appeals was held on October 8, 2009.
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 2008 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 2009.
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 21, 2009 July 18, 2009 |
| $ | | | $ | 911.3 | ||||
July 19, 2009 August 15, 2009 |
10,154,993 | 18.84 | 10,154,993 | 719.7 | ||||||
August 16, 2009 September 12, 2009 |
| | | 719.7 | ||||||
Total |
10,154,993 | $ | 18.84 | 10,154,993 | $ | 719.7 |
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 and then to $5.0 billion in May 2008. From the initiation of the repurchase program in 1999 through the end of the third quarter of 2009, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $4.3 billion, leaving an authorized amount for repurchases of approximately $0.7 billion. The timing and volume of future repurchases will depend on several factors, including market conditions. The repurchase program has no expiration date but may be terminated by the Board of Directors. |
22
SAFEWAY INC. AND SUBSIDIARIES
Item 6. | Exhibits |
Exhibit 4(i).12 | Form of Officers Certificate establishing the terms of the registrants 5.000% Notes due 2019, 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 7, 2009). | |
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 12, 2009 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, tagged as blocks of text. |
** | Furnished herewith. |
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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 19, 2009 | /s/ STEVEN A. BURD | |||
Steven A. Burd | ||||
Chairman, President and Chief Executive Officer | ||||
Date: October 19, 2009 | /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 12, 2009
Exhibit 4(i).12 | Form of Officers Certificate establishing the terms of the registrants 5.000% Notes due 2019, 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 7, 2009). | |
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 12, 2009 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, tagged as blocks of text. |
** | Furnished herewith. |
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