Safeway 2010 Annual Report Download - page 28

SAFEWAY INC. AND SUBSIDIARIES
addition, there is an increasing number of cases being filed against companies generally, which contain class-action
allegations under federal and state wage and hour laws. We estimate our exposure to these legal proceedings and
establish reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial
uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings, or
changes in management’s evaluations or predictions, could have a material adverse impact on our financial results.
Insurance Plan Claims We use a combination of insurance and self-insurance to provide for potential liabilities for
workers’ compensation, automobile and general liability, property risk (including earthquake coverage), director and
officers’ liability, employment practices liability, cyber risks, terrorism and employee health care benefits. We estimate the
liabilities associated with the risks retained by us, in part, by considering historical claims experience, demographic and
severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Any
actuarial projection of losses concerning workers’ compensation and general liability is subject to a high degree of
variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount
rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.
The majority of the Company’s workers’ compensation liability is from claims occurring in California. California workers’
compensation has received intense scrutiny from the state’s politicians, insurers, employers and providers, as well as the
public in general. Recent years have seen escalation in the number of legislative reforms, judicial rulings and social
phenomena affecting our business. Some of the many sources of uncertainty in the Company’s reserve estimates include
changes in benefit levels, medical fee schedules, medical utilization guidelines and apportionment. Reversals of reforms by
legislation or judicial action could have a material adverse impact on our financial results.
Leadership Development and Succession Planning The training and development of our future leaders is important
to our long-term growth. We rely on the experience of our senior management, who have specific knowledge of our
business and industry that is difficult to replace. If we are unable to attract and retain highly-qualified senior management
or effectively provide for the succession of senior management, including our Chief Executive Officer, our business may
be adversely affected.
Impairment of Goodwill and Long-Lived Assets On our balance sheet, we have $430.9 million of goodwill subject
to periodic testing for impairment. Our long-lived assets, primarily stores, also are subject to periodic testing for
impairment. Failure to achieve sufficient levels of cash flow at reporting units could result in impairment charges on
goodwill and/or long-lived assets. Our goodwill impairment analysis also includes a comparison of the aggregate
estimated fair value of all reporting units to our total market capitalization. Therefore, a significant and sustained decline
in our stock price could result in goodwill impairment charges. During times of financial market volatility, significant
judgment is required to determine the underlying cause of the decline and whether stock price declines are short-term in
nature or indicative of an event or change in circumstances. We have incurred significant impairment charges to earnings
in the past, including fiscal 2010 and 2009.
Information Technology Risks The Company has large, complex information technology systems that are important
to business operations. The Company could encounter difficulties developing new systems or maintaining and upgrading
existing systems. Such difficulties could lead to significant expenses or losses due to disruption in business operations.
As a merchant who accepts debit and credit cards for payment, Safeway is subject to the Payment Card Industry Data
Security Standard (“PCI DSS”), issued by the PCI Council. PCI DSS contains compliance guidelines and standards with
regards to the Company’s security surrounding the physical and electronic storage, processing and transmission of
individual cardholder data.
Despite the Company’s considerable efforts and technology to secure our computer network and payment cardholder
data, security could be compromised, confidential information could be misappropriated or system disruptions could
occur. This could lead to loss of sales or profits or cause the Company to incur significant costs to reimburse third parties
for damages.
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