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Safeway is a large food and drug retailer in North America with 1,802 stores. Their 2004 annual report includes financial statements showing $35.8 billion in sales and $560.2 million in net income. The balance sheet lists $15.4 billion in total assets including $8.7 billion in property, net of depreciation, and $6.1 billion in long-term debt including capital lease obligations. Footnote E discusses Safeway's capital and operating lease obligations.
Safeway is a large food and drug retailer in North America with 1,802 stores. Their 2004 annual report includes financial statements showing $35.8 billion in sales and $560.2 million in net income. The balance sheet lists $15.4 billion in total assets including $8.7 billion in property, net of depreciation, and $6.1 billion in long-term debt including capital lease obligations. Footnote E discusses Safeway's capital and operating lease obligations.
Safeway is a large food and drug retailer in North America with 1,802 stores. Their 2004 annual report includes financial statements showing $35.8 billion in sales and $560.2 million in net income. The balance sheet lists $15.4 billion in total assets including $8.7 billion in property, net of depreciation, and $6.1 billion in long-term debt including capital lease obligations. Footnote E discusses Safeway's capital and operating lease obligations.
Please refer to the 2004 financial statements of Safeway Inc. and Footnote E. on Lease Obligations.
Assume that there were no business acquisitions, business divestitures, impairments or FCTAs associated with Safeways leases during 2004.
1. What is the total book value of Safeways obligations under capital leases reported on the balance sheet as of fiscal year-end 2004? Place your answer to this question here $
2. What is the net book value of Safeways property under capital leases reported on the balance sheet as of fiscal year-end 2004? Place your answer to this question here $
3. What was the average aggregate interest rate that Safeway was paying on its capital leases as of the end of 2004? Place your answer to this question here
Safeway Lease Case page 2 of 13
4. (6 pts) Record all transactions Safeway expects to make in 2005 related to all of the capital and operating leases that they have outstanding as of fiscal year-end 2004. Assume that amortization expense for property under capital leases is the same in fiscal year 2005 as it was in fiscal year 2004. Also assume that your answer to Question #3 is the interest rate used to compute interest expense on capital leases.
Account Debit Credit
Safeway Lease Case page 3 of 13
5. What was the new obligation for capital leases entered into in 2004?
Place your answer to this question here $
6. What was the historical cost (i.e., gross book value) of the capital lease assets retired in 2004?
Place your answer to this question here $
Safeway Lease Case page 4 of 13
7. Refer to the operating lease payments shown in the Lease Obligation footnote. Assume that all the lease payments in 2005 and beyond will be made at the end of the year. Assume that the entire $2,778.6 payment scheduled for thereafter will be paid at the end of 2010. Ignore your answer to the previous question and assume that Safeways interest rate on its leases is 10%, compounded annually. If these operating leases had been treated as capital leases, by how much would Safeways total debt be greater as of the end of 2004?
Place your answer to this question here
Safeway 2004 Financial Statements page 5 of 13
Safeway Inc.
Safeway Inc. ("Safeway" or the "Company") is one of the largest food and drug retailers in North America, with 1,802 stores at year-end 2004. Safeway 2004 Financial Statements page 6 of 13
-------------------------------------------------------------------------------- Consolidated Statements of Operations SAFEWAY INC. AND SUBSIDIARIES
Operating profit 1,172.8 573.9 947.6 Interest expense (411.2) (442.4) (430.8) Other income, net 32.3 9.6 15.5 ---------- ---------- ----------
Income before income taxes and cumulative effect of accounting change 793.9 141.1 532.3 Income taxes (233.7) (310.9) (660.4) ---------- ---------- ----------
Income (loss) before cumulative effect of accounting change 560.2 (169.8) (128.1) Cumulative effect of accounting change -- -- (700.0) ---------- ---------- ---------- Net income (loss) $ 560.2 $ (169.8)$ (828.1)
---------- ---------- ----------
Safeway 2004 Financial Statements page 7 of 13
Consolidated Balance Sheets SAFEWAY INC. AND SUBSIDIARIES
Year-end Year-end 2004 2003 --------- ---------
(In millions)
Assets Current assets: Cash and equivalents $ 266.8 $ 174.8 Receivables 339.0 383.2 Merchandise inventories, net of LIFO reserve of $48.6 and $63.8 2,740.7 2,642.2 Prepaid expenses and other current assets 251.2 307.5 --------- --------- Total current assets 3,597.7 3,507.7 --------- --------- Property: Land 1,396.0 1,384.9 . . Property under capital leases 773.8 758.1 --------- --------- 15,042.7 14,024.8 Less accumulated depreciation and amortization (6,353.3) (5,619.0) --------- --------- Total property, net 8,689.4 8,405.8 Goodwill 2,406.6 2,404.9 Prepaid pension costs 321.0 418.7 Investments in unconsolidated affiliates 187.6 191.8 Other assets 175.1 167.8 --------- --------- Total assets $15,377.4 $15,096.7 --------- --------- Safeway 2004 Financial Statements page 8 of 13
-------------------------------------------------------------------------------- Consolidated Balance Sheets SAFEWAY INC. AND SUBSIDIARIES Year-end Year-end 2004 2003 --------- ----------
(In millions, except per-share amounts)
Liabilities and Stockholders' Equity Current liabilities: Current maturities of notes and debentures $ 596.9 $ 699.5 Current obligations under capital leases 42.8 50.5 Accounts payable 1,759.4 1,509.6 Accrued salaries and wages 426.4 406.0 Income taxes 270.3 134.0 Other accrued liabilities 696.3 664.7 --------- ---------- Total current liabilities 3,792.1 3,464.3 --------- ---------- Long-term debt: Notes and debentures 5,469.7 6,404.0 Obligations under capital leases 654.0 668.3 --------- ---------- Total long-term debt 6,123.7 7,072.3 . . --------- ---------- Total liabilities 11,070.5 11,452.4 --------- ---------- Commitments and contingencies Stockholders' equity: Common stock: par value $0.01 per share; 1,500 shares authorized; 578.5 and 575.4 shares issued 5.8 5.8 Additional paid-in capital 3,373.1 3,334.6 Treasury stock at cost; 130.8 and 131.2 shares (3,879.7) (3,887.4) Deferred stock compensation (15.2) (14.0) Accumulated other comprehensive income 144.9 87.5 Retained earnings 4,678.0 4,117.8 --------- ---------- Total stockholders' equity 4,306.9 3,644.3 --------- ---------- Total liabilities and stockholders' equity $15,377.4 $15,096.7 Safeway 2004 Financial Statements page 9 of 13
Consolidated Statement of Cash Flows SAFEWAY INC. AND SUBSIDIARIES
(In millions) Operating Activities: Net income (loss) $ 560.2 $ (169.8)$ (828.1) . . . . . Depreciation and amortization 894.6 863.6 888.3 Deferred income taxes (29.2) (77.9) 64.9 . . Loss (gain) on property retirements 20.6 (13.4) 19.3 Changes in working capital items: Receivables 46.3 56.6 (39.9) Inventories at FIFO cost (61.9) 144.4 (107.7) Prepaid expenses and other current assets 50.9 (72.8) 55.6 Income taxes 218.1 21.5 (90.7) Payables and accruals 284.8 (412.7) (127.8) --------- -------- --------- Net cash flow from operating activities 2,226.4 1,609.6 2,034.7 --------- -------- ---------
Investing Activities: Cash paid for property additions (1,212.5) (935.8) (1,467.4) Proceeds from sale of property 194.7 189.0 113.2 Other (52.5) (48.2) (41.5) --------- -------- --------- Net cash flow used by investing activities (1,070.3) (795.0) (1,395.7) -------------------------------------------------------------------------------- Safeway 2004 Financial Statements page 10 of 13
(In millions) Financing Activities: Additions to short-term borrowings $ 11.2 $ 2.6 $ 1.4 Payments on short-term borrowings (1.5) (3.1) (3.5) Additions to long-term borrowings 1,173.5 1,592.0 2,919.3 Payments on long-term borrowings (2,278.6) (2,331.0) (2,063.2) . . . --------- --------- --------- Net cash flow used by financing activities (1,077.6) (724.0) (631.3) --------- --------- --------- Effect of changes in exchange rates on cash 13.5 8.2 (0.2) --------- --------- --------- Increase in cash and equivalents 92.0 98.8 7.5
Cash and Equivalents Beginning of year 174.8 76.0 68.5 --------- --------- --------- End of year $ 266.8 $ 174.8 $ 76.0 --------- --------- ---------
Other Cash Information: Cash payments during the year for: Interest $ 434.8 $ 464.2 $ 440. Income taxes, net of refunds 43.8 361.6 686.2
Noncash Investing and Financing Activities: Tax benefit from stock options exercised $ 17.4 $ 13.6 $ 29.2 Capital lease obligations entered into 35.9 113.2 174.9 Mortgage notes assumed in property additions 5.5 -- 5.9
Safeway 2004 Financial Statements page 11 of 13
Notes to Consolidated Financial Statements
SAFEWAY INC. AND SUBSIDIARIES Note E: Lease Obligations
As of year-end 2004, future minimum rental payments applicable to non-cancelable capital and operating leases with remaining terms in excess of one year were as follows (in millions):
Operating Capital Leases Leases -------- ---------
2005 $ 111.6 $ 405.9 2006 105.5 396.8 2007 102.4 380.9 2008 99.0 362.5 2009 96.0 328.3 Thereafter 902.1 2,778.6 -------- --------- Total minimum lease payments 1,416.6 $ 4,653.0 --------- Less amounts representing interest (719.8) -------- Present value of net minimum lease payments 696.8 Less current obligations (42.8) -------- Long-term obligations $ 654.0 --------
Amortization expense for property under capital leases was $43.4 million in 2004, $35.4 million in 2003 and $42.4 million in 2002. Accumulated amortization of property under capital leases was $230.9 million at year-end 2004 and $181.6 million at year- end 2003.
Safeway 2004 Financial Statements page 12 of 13
Note H: Taxes on Income
The components of income tax expense are as follows (in millions):
Reconciliation of the provision for income taxes at the U.S. federal statutory income tax rate to the Company's income taxes is as follows (dollars in millions):
2004 2003 2002 ------ ------ ------ Statutory rate 35% 35% 35% Income tax expense using federal statutory rate$277.9 $ 49.4 $186.3 State taxes on income net of federal benefit 9.8 17.7 31.5 Nondeductible goodwill impairment -- 255.2 450.8 Equity earnings of foreign affiliates (1.5) 7.0 (2.7) Charitable donations of inventory (9.8) (8.5) (7.4) Affiliate's losses not currently benefitted 3.3 4.1 18.4 Tax settlements (40.0) (6.2) (19.2) Other (6.0) (7.8) 2.7 ------ ------ ------ $233.7 $310.9 $660.4 ------ ------ ------
Safeway 2004 Financial Statements page 13 of 13
Significant components of the Company's net deferred tax liability at year-end were as follows (in millions): 2004 2003 ------ ------ Deferred tax assets: Workers' compensation and other claims$201.1 $166.5 Reserves not currently deductible 95.1 66.3 Accrued claims and other liabilities 34.1 38.6 Employee benefits 56.7 24.6 Charitable contribution carryforwards 29.0 - Operating loss carryforwards 74.4 66.3 Other assets 56.5 108.4 ------ ------ 546.9 470.7 ------ ------ Valuation allowance (74.4) (66.3) ------ ------ $472.5 $404.4
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