Safeway 2004 Annual Report Download - page 47

SAFEWAY INC. 2004 ANNUAL REPORT 45
SAFEWAY INC. AND SUBSIDIARIES
ADDITIONAL STOCK PLAN INFORMATION The Company
accounts for its stock-based awards using the intrinsic
value method in accordance with Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial
statements for employee stock option awards granted at
fair market value.
SFAS No. 123, “Accounting for Stock-Based
Compensation,” as amended by SFAS No. 148, requires the
disclosure of pro forma net income and earnings per share
as if the Company had adopted the fair value method as of
the beginning of fiscal 1995. Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated
through the use of option pricing models, even though such
models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company’s
stock option awards. These models also require subjective
assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the
calculated values. The Company’s calculations were made
using the Black-Scholes option pricing model with the
following weighted average assumptions: five to seven
years expected life; stock volatility of 34.8% in 2004, 37.0%
in 2003 and 36.0% in 2002; risk-free interest rates of 3.97%
in 2004, 3.53% in 2003 and 4.35% in 2002; and no
dividends during the expected term.
The Company’s calculations are based on a single-option
valuation approach and forfeitures are recognized as they
occur. However, the impact of outstanding unvested stock
options granted prior to 1995 has been excluded from the
pro forma calculation; accordingly, the pro forma results
presented are not indicative of future period pro forma
results. Had compensation cost for Safeway’s stock option
plans been determined based on the fair value at the grant
date for awards from 1996 through 2002, consistent with
the provisions of SFAS No. 123, the Company’s net income
and earnings per share would have been reduced to the pro
forma amounts disclosed in Note A.
Note H: Taxes on Income
The components of income tax expense are as follows
(in millions):
2004 2003 2002
Current:
Federal $153.5 $251.5 $470.0
State 25.7 51.8 63.6
Foreign 83.7 85.5 61.9
262.9 388.8 595.5
Deferred:
Federal (17.4) (48.5) 81.6
State (10.6) (24.5) (15.1)
Foreign (1.2) (4.9) (1.6)
(29.2) (77.9) 64.9
$233.7 $310.9 $660.4
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
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