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 March 27, 2004 |
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission file number 1-41
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. Yes x No ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨.
As of April 30, 2004 there were issued and outstanding 446.3 million shares of the registrant’s common stock
SAFEWAY INC. AND SUBSIDIARIES
| PART I |
FINANCIAL INFORMATION (Unaudited) |
Page | ||
| Item 1. | Financial Statements | |||
| Condensed Consolidated Balance Sheets as of March 27, 2004 and January 3, 2004 | 3 | |||
| Condensed Consolidated Statements of Income for the 12 weeks ended March 27, 2004 and March 22, 2003 | 5 | |||
| Condensed Consolidated Statements of Cash Flows for the 12 weeks ended March 27, 2004 and March 22, 2003 | 6 | |||
| Notes to the Condensed Consolidated Financial Statements | 7 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 17 | ||
| Item 4. | Controls and Procedures | 17 | ||
| PART II | OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 18 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 18 | ||
2
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
| March 27, 2004 |
January 4, 2004 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and equivalents |
$ | 177.1 | $ | 174.8 | ||||
| Receivables |
396.5 | 383.2 | ||||||
| Merchandise inventories |
2,623.9 | 2,642.2 | ||||||
| Prepaid expenses and other current assets |
262.4 | 307.5 | ||||||
| Total current assets |
3,459.9 | 3,507.7 | ||||||
| Property |
14,072.4 | 14,024.8 | ||||||
| Less accumulated depreciation and amortization |
(5,663.6 | ) | (5,619.0 | ) | ||||
| Property, net |
8,408.8 | 8,405.8 | ||||||
| Goodwill |
2,402.7 | 2,404.9 | ||||||
| Prepaid pension costs |
398.6 | 418.7 | ||||||
| Investment in unconsolidated affiliates |
191.3 | 191.8 | ||||||
| Other assets |
168.8 | 167.8 | ||||||
| Total assets |
$ | 15,030.1 | $ | 15,096.7 | ||||
(Continued)
3
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In millions, except per-share amounts)
(Unaudited)
| March 27, 2004 |
January 4, 2004 |
|||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Current maturities of notes and debentures |
$ | 608.7 | $ | 699.5 | ||||
| Current obligations under capital leases |
51.3 | 50.5 | ||||||
| Accounts payable |
1,616.7 | 1,509.6 | ||||||
| Accrued salaries and wages |
369.7 | 406.0 | ||||||
| Other accrued liabilities |
705.4 | 798.7 | ||||||
| Total current liabilities |
3,351.8 | 3,464.3 | ||||||
| Long-term debt: |
||||||||
| Notes and debentures |
6,319.8 | 6,404.0 | ||||||
| Obligations under capital leases |
654.6 | 668.3 | ||||||
| Total long-term debt |
6,974.4 | 7,072.3 | ||||||
| Deferred income taxes |
421.8 | 421.9 | ||||||
| Accrued claims and other liabilities |
595.3 | 493.9 | ||||||
| Total liabilities |
11,343.3 | 11,452.4 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock: par value $0.01 per share; |
||||||||
| 1,500 shares authorized; 576.9 and 575.4 shares outstanding |
5.8 | 5.8 | ||||||
| Additional paid-in capital |
3,355.2 | 3,334.6 | ||||||
| Deferred stock compensation |
(15.2 | ) | (14.0 | ) | ||||
| Accumulated other comprehensive income |
63.9 | 87.5 | ||||||
| Retained earnings |
4,160.9 | 4,117.8 | ||||||
| 7,570.6 | 7,531.7 | |||||||
| Less: Treasury stock at cost; 131.0 and 131.2 shares |
(3,883.8 | ) | (3,887.4 | ) | ||||
| Total stockholders’ equity |
3,686.8 | 3,644.3 | ||||||
| Total liabilities and stockholders’ equity |
$ | 15,030.1 | $ | 15,096.7 | ||||
See accompanying notes to condensed consolidated financial statements.
4
SAFEWAY INC. AND SUBSIDIARIES
C ONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
(Unaudited)
| 12 Weeks Ended |
||||||||
| March 27, 2004 |
March 22, 2003 |
|||||||
| Sales |
$ | 7,638.8 | $ | 8,043.3 | ||||
| Cost of goods sold |
(5,362.2 | ) | (5,655.0 | ) | ||||
| Gross profit |
2,276.6 | 2,388.3 | ||||||
| Operating and administrative expense |
(2,121.4 | ) | (2,019.7 | ) | ||||
| Goodwill impairment charges |
— | (256.5 | ) | |||||
| Operating profit |
155.2 | 112.1 | ||||||
| Interest expense |
(96.2 | ) | (103.7 | ) | ||||
| Other income, net |
3.1 | 2.5 | ||||||
| Income before income taxes |
62.1 | 10.9 | ||||||
| Income tax (expense) benefit |
(19.0 | ) | 151.7 | |||||
| Net income |
$ | 43.1 | $ | 162.6 | ||||
| Earnings per share: |
||||||||
| Basic |
$ | 0.10 | $ | 0.37 | ||||
| Diluted |
$ | 0.10 | $ | 0.36 | ||||
| Weighted average shares outstanding: |
||||||||
| Basic |
444.1 | 441.2 | ||||||
| Diluted |
448.3 | 446.0 | ||||||
See accompanying notes to condensed consolidated financial statements.
5
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| 12 Weeks Ended |
||||||||
| March 27, 2004 |
March 22, 2003 |
|||||||
| OPERATING ACTIVITIES: |
||||||||
| Net income |
$ | 43.1 | $ | 162.6 | ||||
| Reconciliation to net cash flow from operating activities: |
||||||||
| Goodwill impairment charges |
— | 256.5 | ||||||
| Property impairment charges |
10.1 | 46.2 | ||||||
| Depreciation expense |
202.5 | 197.7 | ||||||
| LIFO expense |
2.3 | 2.3 | ||||||
| Equity in losses of unconsolidated affiliates, net |
0.5 | 1.1 | ||||||
| Net pension expense |
25.9 | 29.4 | ||||||
| Loss (gain) on property retirements and lease exit costs |
34.5 | (2.0 | ) | |||||
| Other |
38.3 | 2.7 | ||||||
| Change in working capital items: |
||||||||
| Receivables and prepaid expenses |
29.5 | 57.9 | ||||||
| Inventories at FIFO cost |
8.6 | 70.0 | ||||||
| Income taxes |
(11.7 | ) | (197.3 | ) | ||||
| Payables and accruals |
4.5 | (393.6 | ) | |||||
| Net cash flow from operating activities |
388.1 | 233.5 | ||||||
| INVESTING ACTIVITIES: |
||||||||
| Cash paid for property additions |
(237.2 | ) | (133.6 | ) | ||||
| Proceeds from sale of property |
57.4 | 38.8 | ||||||
| Other |
(26.1 | ) | (11.9 | ) | ||||
| Net cash flow used by investing activities |
(205.9 | ) | (106.7 | ) | ||||
| FINANCING ACTIVITIES: |
||||||||
| Payments on short-term borrowings |
(1.0 | ) | — | |||||
| Additions to long-term borrowings |
28.5 | 81.2 | ||||||
| Payments on long-term borrowings |
(217.6 | ) | (200.5 | ) | ||||
| Net proceeds from exercise of stock options |
12.5 | 3.5 | ||||||
| Other |
(0.1 | ) | — | |||||
| Net cash flow used by financing activities |
(177.7 | ) | (115.8 | ) | ||||
| Effect of changes in exchange rates on cash |
(2.2 | ) | 0.2 | |||||
| Increase in cash and equivalents |
2.3 | 11.2 | ||||||
| CASH AND EQUIVALENTS: |
||||||||
| Beginning of period |
174.8 | 76.0 | ||||||
| End of period |
$ | 177.1 | $ | 87.2 | ||||
See accompanying notes to condensed consolidated financial statements.
6
SAFEWAY INC. AND SUBSIDIARIES
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 weeks ended March 27, 2004 and March 22, 2003 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. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s 2003 Annual Report to Stockholders on Form 10-K. The results of operations for the 12 weeks ended March 27, 2004 are not necessarily indicative of the results expected for the full year.
During the fourth quarter of 2002, Safeway decided to sell Dominick’s and exit the Chicago market. After the winning bidder and the unions representing Dominick’s could not reach an agreement on a labor contract, Safeway announced that it was taking Dominick’s off the market in November 2003. Accordingly, Dominick’s is classified in continuing operations. Prior year amounts have been reclassified to include Dominick’s in continuing operations to conform to the current year’s presentation.
Inventory
Net income reflects the application of the LIFO method of valuing certain domestic inventories, based upon estimated annual inflation (“LIFO Indices”). Safeway recorded estimated LIFO expense of $2.3 million during the first 12 weeks of 2004 and 2003. Actual LIFO Indices are calculated during the fourth quarter of the year based upon a statistical sampling of inventories.
Vendor Allowances
Vendor allowances totaled $493.0 million for the first quarter of 2004 and $505.0 million for the first quarter of 2003. Vendor allowances did not materially impact the Company’s gross profit in the first quarter of 2004 and the first quarter of 2003 because Safeway spends the allowances received on pricing promotions, advertising expenses and slotting expenses. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances, and contract allowances. All vendor allowances are classified as an element of cost of goods sold.
Promotional allowances make up nearly three-quarters of all allowances. With promotional allowances, vendors pay Safeway to promote their product. The promotion may be any combination of a temporary price reduction, a feature in print ads, a feature in a Safeway circular, or a preferred location in the store. The promotions are typically one to two weeks long.
Slotting allowances are a small portion of total allowances (typically less than 5% of all allowances). With slotting allowances, the vendor reimburses Safeway for the cost of placing new product on the shelf. Safeway has no obligation or commitment to keep the product on the shelf for a minimum period.
Contract allowances make up the remainder of all allowances. Under the typical contract allowance, a vendor pays Safeway to keep product on the shelf for a minimum period of time or when volume thresholds are achieved.
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.
7
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Comprehensive Income
For the first quarter of 2004, total comprehensive income was $19.5 million which primarily consists of $43.1 million of net income offset by $23.7 million of foreign currency translation adjustments.
Total comprehensive income was $210.8 million for the first quarter of 2003 which primarily consists of $162.6 million of net income and $48.0 million of foreign currency translation adjustments.
NOTE B – NEW ACCOUNTING STANDARDS
In March 2004, the FASB issued Staff Position SFAS No. 106-b, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” SFAS No. 106-b supersedes SFAS No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” and provides guidance on the accounting, disclosure, effective date and transition related to the Prescription Drug Act. SFAS No. 106-b is expected to be effective for the first interim period beginning after June 15, 2004. Safeway is continuing to evaluate the impact of SFAS 106-b’s recognition, measurement and disclosure provisions on its financial statements.
In December 2003, the FASB published a revision to FIN No. 46 (hereafter refer