Lecture18 Safeway Case

8/11/2019 Lecture18 Safeway Case

1/13

Safeway Lease Case page 1 of 13

Safeway Inc. Annual Report 2004Leases

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 FCTAsassociated with Safeways leases during 2004.

1. What is the total book value of Safeways obligationsunder capital leases reportedon the balance sheet as of fiscal year-end 2004?

Place your answer to this question here $

2. What is the netbook value of Safeways property under capital leases reported onthe balance sheet as of fiscal year-end 2004?


3. What was the average aggregate interest rate that Safeway was paying on its capitalleases as of the end of 2004?Place your answer to this question here


2/13


4. (6 pts) Record all transactions Safeway expects to make in 2005 related to all of thecapital and operating leasesthat they have outstanding as of fiscal year-end 2004.

Assume that amortization expense for property under capital leases is the same infiscal year 2005 as it was in fiscal year 2004. Also assume that your answer toQuestion #3 is the interest rate used to compute interest expense on capital leases.

Account Debit Credit


3/13


5. What was the new obligation for capital leases entered into in 2004?


6. What was the historical cost (i.e., gross book value) of the capital lease assets retiredin 2004?



4/13


5/13

Safeway 2004 Financial Statements page 5 of

Safeway Inc.

Safeway Inc. ("Safeway" or the "Company") is one of the largest food and drug retailers in NorthAmerica, with 1,802 stores at year-end 2004.


6/13


--------------------------------------------------------------------------------

Consolidated Statements of Operations

SAFEWAY INC. AND SUBSIDIARIES

52 Weeks 53 Weeks 52 Weeks

2004 2003 2002

---------- ---------- ----------

(In millions, except per-share amounts)

Sales and other revenue $ 35,822.9 $ 35,727.2 $ 34,917.2

Cost of goods sold (25,227.6) (25,003.0) (23,920.8)

---------- ---------- ----------

Gross profit 10,595.3 10,724.2 10,996.4

Operating and administrative expense (9,422.5) (9,421.2) (8,760.8)

Goodwill impairment charges -- (729.1) (1,288.0)

---------- ---------- ----------

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)

---------- ---------- ----------


7/13

Safeway 2004 Financial Statements page 7 of 13

Consolidated Balance Sheets


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

--------- ---------


8/13


9/13


Consolidated Statement of Cash Flows


52 Weeks

53 Weeks 52 Weeks

2004 2003 2002

--------- -------- ---------

(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) 55.6Income 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)

--------------------------------------------------------------------------------


10/13


Consolidated Statements of Cash Flows


52 Weeks 53 Weeks 52 Weeks

2004 2003 2002

--------- --------- ---------

(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


11/13


Notes to Consolidated Financial Statements


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.


12/13


13/13

Documents

Lecture18 Safeway Case