UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 202026, 2021
¨ 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 0-14706.
INGLES MARKETS, INCORPORATED
(Exact name of registrant as specified in its charter)
North Carolina |
| 56-0846267 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
P.O. Box 6676, Asheville NC |
| 28816 |
(Address of principal executive offices) |
| (Zip Code) |
(828) 669-2941
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Common Stock, $0.05 par value per share | IMKTA | The NASDAQ Global Select Market |
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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨ | Accelerated Filer x |
Non-Accelerated Filer ¨ | Smaller Reporting Company ¨ |
Emerging Growth Company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
Securities registered pursuant to Section 12(b) of the Act:
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As of August 4, 2020,2, 2021, the Registrant had 14,204,36014,261,835 shares of Class A Common Stock, $0.05 par value per share, outstanding and 6,055,4164,732,541 shares of Class B Common Stock, $0.05 par value per share, outstanding.
INGLES MARKETS, INCORPORATED
INDEX
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Part I – Financial Information |
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Item 1. Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets as of June |
| 3 |
Condensed Consolidated Statements of Income and Comprehensive Income for the |
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Three Months Ended June | 4 | |
Nine Months Ended June | 5 | |
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months and Nine Months Ended June |
| 6 |
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June |
| 7 |
Notes to Unaudited Interim Financial Statements |
| 8 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. Controls and Procedures |
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Part II – Other Information |
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Item 6. Exhibits |
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Signatures |
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 27, | September 28, | June 26, | September 26, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
ASSETS | ||||||||||||
Current Assets: | ||||||||||||
Cash and cash equivalents | $ | 152,121,128 | $ | 42,125,105 | ||||||||
Cash | $ | 24,469,623 | $ | 6,903,955 | ||||||||
Short term investments | 295,000,000 | — | ||||||||||
Receivables - net | 77,018,848 | 71,951,303 | 90,175,648 | 81,358,357 | ||||||||
Inventories | 355,499,657 | 374,129,060 | 380,501,312 | 366,824,438 | ||||||||
Other current assets | 11,577,103 | 8,897,903 | 10,250,828 | 15,100,110 | ||||||||
Total Current Assets | 596,216,736 | 497,103,371 | 800,397,411 | 470,186,860 | ||||||||
Property and Equipment - Net | 1,341,443,741 | 1,344,267,315 | 1,372,648,309 | 1,354,489,690 | ||||||||
Operating lease right of use assets | 45,857,261 | — | 42,161,910 | 46,590,718 | ||||||||
Other Assets | 27,595,485 | 25,957,682 | 32,284,094 | 28,031,634 | ||||||||
Total Assets | $ | 2,011,113,223 | $ | 1,867,328,368 | $ | 2,247,491,724 | $ | 1,899,298,902 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Current portion of long-term debt | $ | 168,935,779 | $ | 12,600,131 | $ | 314,533,835 | $ | 19,305,976 | ||||
Current portion of operating lease liabilities | 8,147,470 | — | 8,558,556 | 8,384,435 | ||||||||
Accounts payable - trade | 167,029,150 | 151,329,975 | 180,157,108 | 204,110,150 | ||||||||
Accrued expenses and current portion of other long-term liabilities | 83,913,117 | 83,649,283 | 82,320,509 | 92,012,346 | ||||||||
Total Current Liabilities | 428,025,516 | 247,579,389 | 585,570,008 | 323,812,907 | ||||||||
Deferred Income Taxes | 72,890,000 | 75,499,000 | 74,244,000 | 73,334,000 | ||||||||
Long-Term Debt | 650,340,830 | 839,637,691 | 586,714,754 | 586,198,360 | ||||||||
Noncurrent operating lease liabilities | 40,560,520 | — | 36,076,971 | 40,962,735 | ||||||||
Other Long-Term Liabilities | 55,145,058 | 41,889,682 | 50,593,135 | 55,659,943 | ||||||||
Total Liabilities | 1,246,961,924 | 1,204,605,762 | 1,333,198,868 | 1,079,967,945 | ||||||||
Stockholders’ Equity | ||||||||||||
Preferred stock, $0.05 par value; 10,000,000 shares authorized; 0 shares issued | — | — | — | — | ||||||||
Common stocks: | ||||||||||||
Class A, $0.05 par value; 150,000,000 shares authorized; | 710,218 | 709,024 | ||||||||||
Class B, convertible to Class A, $0.05 par value; | 302,771 | 303,965 | ||||||||||
Class A, $0.05 par value; 150,000,000 shares authorized; | 713,015 | 710,618 | ||||||||||
Class B, convertible to Class A, $0.05 par value; | 236,704 | 302,371 | ||||||||||
Paid-in capital in excess of par value | 12,311,249 | 12,311,249 | — | 12,311,249 | ||||||||
Accumulated other comprehensive expense | (10,814,065) | (1,265,650) | ||||||||||
Accumulated other comprehensive income | (3,710,997) | (10,251,296) | ||||||||||
Retained earnings | 761,641,126 | 650,664,018 | 917,054,134 | 816,258,015 | ||||||||
Total Stockholders’ Equity | 764,151,299 | 662,722,606 | 914,292,856 | 819,330,957 | ||||||||
Total Liabilities and Stockholders’ Equity | $ | 2,011,113,223 | $ | 1,867,328,368 | $ | 2,247,491,724 | $ | 1,899,298,902 | ||||
See notes to unaudited condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended | Three Months Ended | |||||||||||
June 27, | June 29, | June 26, | June 27, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Net sales | $ | 1,189,599,756 | $ | 1,062,262,169 | $ | 1,277,465,132 | $ | 1,189,599,756 | ||||
Cost of goods sold | 864,879,153 | 803,322,422 | 939,999,706 | 864,879,153 | ||||||||
Gross profit | 324,720,603 | 258,939,747 | 337,465,426 | 324,720,603 | ||||||||
Operating and administrative expenses | 234,596,892 | 216,462,666 | 239,409,986 | 234,596,892 | ||||||||
Gain from sale or disposal of assets | 1,338,702 | 875,708 | 2,529,504 | 1,338,702 | ||||||||
Income from operations | 91,462,413 | 43,352,789 | 100,584,944 | 91,462,413 | ||||||||
Other income, net | 626,310 | 129,971 | 678,392 | 626,310 | ||||||||
Interest expense | 9,714,681 | 11,655,475 | 5,529,211 | 9,714,681 | ||||||||
Loss on early extinguishment of debt | 1,082,633 | — | ||||||||||
Income before income taxes | 82,374,042 | 31,827,285 | 94,651,492 | 82,374,042 | ||||||||
Income tax expense | 19,621,000 | 8,317,000 | 22,677,000 | 19,621,000 | ||||||||
Net income | $ | 62,753,042 | $ | 23,510,285 | $ | 71,974,492 | $ | 62,753,042 | ||||
Other comprehensive expense: | ||||||||||||
Change in fair value of interest rate swap | $ | (1,554,774) | $ | (1,036,759) | $ | (865,315) | $ | (1,554,774) | ||||
Income tax benefit | 380,000 | 238,662 | 211,000 | 380,000 | ||||||||
Other comprehensive expense, net of tax | (1,174,774) | (798,097) | (654,315) | (1,174,774) | ||||||||
Comprehensive income | $ | 61,578,268 | $ | 22,712,188 | $ | 71,320,177 | $ | 61,578,268 | ||||
Per share amounts: | ||||||||||||
Class A Common Stock | ||||||||||||
Basic earnings per common share | $ | 3.18 | $ | 1.19 | $ | 3.88 | $ | 3.18 | ||||
Diluted earnings per common share | $ | 3.10 | $ | 1.16 | $ | 3.79 | $ | 3.10 | ||||
Class B Common Stock | ||||||||||||
Basic earnings per common share | $ | 2.89 | $ | 1.08 | $ | 3.52 | $ | 2.89 | ||||
Diluted earnings per common share | $ | 2.89 | $ | 1.08 | $ | 3.52 | $ | 2.89 | ||||
Cash dividends per common share | ||||||||||||
Class A Common Stock | $ | 0.165 | $ | 0.165 | $ | 0.165 | $ | 0.165 | ||||
Class B Common Stock | $ | 0.150 | $ | 0.150 | $ | 0.150 | $ | 0.150 | ||||
See notes to unaudited condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
Nine Months Ended | Nine Months Ended | |||||||||||
June 27, | June 29, | June 26, | June 27, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Net sales | $ | 3,413,436,742 | $ | 3,125,942,755 | $ | 3,652,463,010 | $ | 3,413,436,742 | ||||
Cost of goods sold | 2,539,638,667 |
| 2,364,291,547 | 2,690,309,051 |
| 2,539,638,667 | ||||||
Gross profit | 873,798,075 | 761,651,208 | 962,153,959 | 873,798,075 | ||||||||
Operating and administrative expenses | 684,971,162 | 651,613,713 | 714,459,236 | 684,971,162 | ||||||||
Gain from sale or disposal of assets | 4,411,539 | 3,524,821 | 3,644,501 | 4,411,539 | ||||||||
Income from operations | 193,238,452 | 113,562,316 | 251,339,224 | 193,238,452 | ||||||||
Other income, net | 1,031,238 | 1,473,344 | 2,015,696 | 1,031,238 | ||||||||
Interest expense | 31,847,806 | 35,863,999 | 18,124,714 | 31,847,806 | ||||||||
Loss on early extinguishment of debt | 3,719,209 | — | 1,082,633 | 3,719,209 | ||||||||
Income before income taxes | 158,702,675 | 79,171,661 | 234,147,573 | 158,702,675 | ||||||||
Income tax expense | 37,970,000 | 18,509,000 | 56,160,000 | 37,970,000 | ||||||||
Net income | $ | 120,732,675 | $ | 60,662,661 | $ | 177,987,573 | $ | 120,732,675 | ||||
Other comprehensive expense: | ||||||||||||
Other comprehensive income (expense): | ||||||||||||
Change in fair value of interest rate swap | $ | (12,632,429) | $ | (1,191,486) | $ | 8,654,299 | $ | (12,632,429) | ||||
Income tax benefit | 3,084,014 | 274,280 | ||||||||||
Other comprehensive expense, net of tax | (9,548,415) | (917,206) | ||||||||||
Income tax (expense) benefit | (2,114,000) | 3,084,014 | ||||||||||
Other comprehensive income (expense), net of tax | 6,540,299 | (9,548,415) | ||||||||||
Comprehensive income | $ | 111,184,260 | $ | 59,745,455 | $ | 184,527,872 | $ | 111,184,260 | ||||
Per share amounts: | ||||||||||||
Class A Common Stock | ||||||||||||
Basic earnings per common share | $ | 6.13 | $ | 3.07 | $ | 9.22 | $ | 6.13 | ||||
Diluted earnings per common share | $ | 5.96 | $ | 2.99 | $ | 8.98 | $ | 5.96 | ||||
Class B Common Stock | ||||||||||||
Basic earnings per common share | $ | 5.57 | $ | 2.80 | $ | 8.38 | $ | 5.57 | ||||
Diluted earnings per common share | $ | 5.57 | $ | 2.80 | $ | 8.38 | $ | 5.57 | ||||
Cash dividends per common share | ||||||||||||
Class A Common Stock | $ | 0.495 | $ | 0.495 | $ | 0.495 | $ | 0.495 | ||||
Class B Common Stock | $ | 0.450 | $ | 0.450 | $ | 0.450 | $ | 0.450 | ||||
See notes to unaudited condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
THREE AND NINE MONTHS ENDED JUNE 27, 202026, 2021 AND JUNE 29, 201927, 2020
Paid-in | Accumulated | Paid-in | Accumulated | |||||||||||||||||||||||||||||||||||||||||
Class A | Class B | Capital in | Other | Class A | Class B | Capital in | Other | |||||||||||||||||||||||||||||||||||||
Common Stock | Common Stock | Excess of | Comprehensive | Retained | Common Stock | Common Stock | Excess of | Comprehensive | Retained | |||||||||||||||||||||||||||||||||||
| Shares |
| Amount | Shares | Amount | Par Value | Income (Loss) |
| Earnings | Total |
| Shares |
| Amount | Shares | Amount | Par Value | Income (Loss) |
| Earnings | Total | |||||||||||||||||||||||
Balance, September 29, 2018 | 14,145,385 |
| $ | 707,269 | 6,114,391 | $ | 305,720 | $ | 12,311,249 | $ | — | $ | 582,089,570 | $ | 595,413,808 | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 22,152,337 | 22,152,337 | ||||||||||||||||||||||||||||||||||||
Other comprehensive (expense) income, net of income tax | — | — | — | — | — | 340,339 | — | 340,339 | ||||||||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,251,148) | (3,251,148) | ||||||||||||||||||||||||||||||||||||
Common stock conversions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Balance, December 29, 2018 | 14,145,385 | $ | 707,269 | 6,114,391 | $ | 305,720 | $ | 12,311,249 | $ | 340,339 | $ | 600,990,759 | $ | 614,655,336 | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 15,000,040 | 15,000,040 | ||||||||||||||||||||||||||||||||||||
Other comprehensive (expense) income, net of income tax | — | — | — | — | — | (459,448) | — | (459,448) | ||||||||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,251,152) | (3,251,152) | ||||||||||||||||||||||||||||||||||||
Common stock conversions | 31,950 | 1,598 | (31,950) | (1,598) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Balance, March 30, 2019 | 14,177,335 | $ | 708,867 | 6,082,441 | $ | 304,122 | $ | 12,311,249 | $ | (119,109) | $ | 612,739,647 | $ | 625,944,776 | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 23,510,285 | 23,510,285 | ||||||||||||||||||||||||||||||||||||
Other comprehensive (expense) income, net of income tax | — | — | — | — | — | (798,097) | — | (798,097) | ||||||||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,251,627) | (3,251,627) | ||||||||||||||||||||||||||||||||||||
Common stock conversions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Balance, June 29, 2019 | 14,177,335 | $ | 708,867 | 6,082,441 | $ | 304,122 | $ | 12,311,249 | $ | (917,206) | $ | 632,998,305 | $ | 645,405,337 | ||||||||||||||||||||||||||||||
Balance, September 28, 2019 | 14,180,485 |
| $ | 709,024 | 6,079,291 | $ | 303,965 | $ | 12,311,249 | $ | (1,265,650) | $ | 650,664,018 | $ | 662,722,606 | 14,180,485 |
| $ | 709,024 | 6,079,291 | $ | 303,965 | $ | 12,311,249 | $ | (1,265,650) | $ | 650,664,018 | $ | 662,722,606 | ||||||||||||||
Net income | — | — | — | — | — | — | 17,687,353 | 17,687,353 | — | — | — | — | — | — | 17,687,353 | 17,687,353 | ||||||||||||||||||||||||||||
Other comprehensive (expense) income, net of income tax | — | — | — | — | — | 2,151,893 | — | 2,151,893 | ||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of income tax | — | — | — | — | — | 2,151,893 | — | 2,151,893 | ||||||||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,251,673) | (3,251,673) | — | — | — | — | — | — | (3,251,673) | (3,251,673) | ||||||||||||||||||||||||||||
Common stock conversions | 12,500 | 625 | (12,500) | (625) | — | — | — | — | 12,500 | 625 | (12,500) | (625) | — | — | — | — | ||||||||||||||||||||||||||||
Balance, December 28, 2019 | 14,192,985 | $ | 709,649 | 6,066,791 | $ | 303,340 | $ | 12,311,249 | $ | 886,243 | $ | 665,099,698 | $ | 679,310,179 | 14,192,985 | $ | 709,649 | 6,066,791 | $ | 303,340 | $ | 12,311,249 | $ | 886,243 | $ | 665,099,698 | $ | 679,310,179 | ||||||||||||||||
Net income | — | — | — | — | — | — | 40,292,280 | 40,292,280 | — | — | — | — | — | — | 40,292,280 | 40,292,280 | ||||||||||||||||||||||||||||
Other comprehensive (expense) income, net of income tax | — | — | — | — | — | (10,525,534) | — | (10,525,534) | ||||||||||||||||||||||||||||||||||||
Other comprehensive expense, net of income tax | — | — | — | — | — | (10,525,534) | — | (10,525,534) | ||||||||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,251,862) | (3,251,862) | — | — | — | — | — | — | (3,251,862) | (3,251,862) | ||||||||||||||||||||||||||||
Common stock conversions | 375 | 19 | (375) | (19) | — | — | — | — | 375 | 19 | (375) | (19) | — | — | — | — | ||||||||||||||||||||||||||||
Balance, March 28, 2020 | 14,193,360 | $ | 709,668 | 6,066,416 | $ | 303,321 | $ | 12,311,249 | $ | (9,639,291) | $ | 702,140,116 | $ | 705,825,063 | 14,193,360 | $ | 709,668 | 6,066,416 | $ | 303,321 | $ | 12,311,249 | $ | (9,639,291) | $ | 702,140,116 | $ | 705,825,063 | ||||||||||||||||
Net income | — | — | — | — | — | — | 62,753,042 | 62,753,042 | — | — | — | — | — | — | 62,753,042 | 62,753,042 | ||||||||||||||||||||||||||||
Other comprehensive (expense) income, net of income tax | — | — | — | — | — | (1,174,774) | — | (1,174,774) | ||||||||||||||||||||||||||||||||||||
Other comprehensive expense, net of income tax | — | — | — | — | — | (1,174,774) | — | (1,174,774) | ||||||||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,252,032) | (3,252,032) | — | — | — | — | — | — | (3,252,032) | (3,252,032) | ||||||||||||||||||||||||||||
Common stock conversions | 11,000 | 550 | (11,000) | (550) | — | — | — | — | 11,000 | 550 | (11,000) | (550) | — | — | — | — | ||||||||||||||||||||||||||||
Balance, June 27, 2020 | 14,204,360 | $ | 710,218 | 6,055,416 | $ | 302,771 | $ | 12,311,249 | $ | (10,814,065) | $ | 761,641,126 | $ | 764,151,299 | 14,204,360 | $ | 710,218 | 6,055,416 | $ | 302,771 | $ | 12,311,249 | $ | (10,814,065) | $ | 761,641,126 | $ | 764,151,299 | ||||||||||||||||
Balance, September 26, 2020 | 14,212,360 |
| $ | 710,618 | 6,047,416 | $ | 302,371 | $ | 12,311,249 | $ | (10,251,296) | $ | 816,258,015 | $ | 819,330,957 | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 53,824,087 | 53,824,087 | ||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of income tax | — | — | — | — | — | 2,088,738 | — | 2,088,738 | ||||||||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,252,151) | (3,252,151) | ||||||||||||||||||||||||||||||||||||
Common stock conversions | 8,175 | 409 | (8,175) | (409) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Balance, December 26, 2020 | 14,220,535 | $ | 711,027 | 6,039,241 | $ | 301,962 | $ | 12,311,249 | $ | (8,162,558) | $ | 866,829,951 | $ | 871,991,631 | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 52,188,993 | 52,188,993 | ||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of income tax | — | — | — | — | — | 5,105,876 | — | 5,105,876 | ||||||||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,252,276) | (3,252,276) | ||||||||||||||||||||||||||||||||||||
Stock repurchases, at cost | — | — | (1,265,400) | (63,270) | (12,311,249) | — | (67,624,069) | (79,998,588) | ||||||||||||||||||||||||||||||||||||
Common stock conversions | 32,750 | 1,638 | (32,750) | (1,638) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Balance, March 27, 2021 | 14,253,285 | $ | 712,665 | 4,741,091 | $ | 237,054 | $ | — | $ | (3,056,682) | $ | 848,142,599 | $ | 846,035,636 | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 71,974,492 | 71,974,492 | ||||||||||||||||||||||||||||||||||||
Other comprehensive expense, net of income tax | — | — | — | — | — | (654,315) | — | (654,315) | ||||||||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,062,957) | (3,062,957) | ||||||||||||||||||||||||||||||||||||
Stock repurchases, at cost | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Common stock conversions | 7,000 | 350 | (7,000) | (350) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Balance, June 26, 2021 | 14,260,285 | $ | 713,015 | 4,734,091 | $ | 236,704 | $ | — | $ | (3,710,997) | $ | 917,054,134 | $ | 914,292,856 | ||||||||||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| |||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||
| June 27, | June 29, |
| June 26, | June 27, | |||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income | $ | 120,732,675 | $ | 60,662,661 | $ | 177,987,573 | $ | 120,732,675 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization expense | 86,312,817 | 83,592,966 | 90,909,221 | 86,312,817 | ||||||||
Non cash operating lease cost | 7,166,298 | — | 5,999,943 | 7,166,298 | ||||||||
Gain from sale or disposal of assets | (4,411,539) | (3,524,821) | (3,644,501) | (4,411,539) | ||||||||
Loss on early extinguishment of debt | 3,719,209 | — | 1,082,633 | 3,719,209 | ||||||||
Receipt of advance payments on purchases contracts | 1,806,454 | 2,284,000 | 1,531,731 | 1,806,454 | ||||||||
Recognition of advance payments on purchases contracts | (3,329,682) | (1,903,432) | (2,203,915) | (3,329,682) | ||||||||
Deferred income taxes | 475,000 | 4,918,000 | (1,204,000) | 475,000 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Receivables | (5,067,545) | (7,753,599) | (8,817,290) | (5,067,545) | ||||||||
Inventory | 18,629,403 | 4,107,507 | (13,676,873) | 18,629,403 | ||||||||
Other assets | (4,317,001) | 29,543,048 | 596,821 | (4,317,001) | ||||||||
Operating lease liabilities | (7,444,633) | — | (6,282,778) | (7,444,633) | ||||||||
Accounts payable and accrued expenses | 14,690,061 | (27,412,258) | (28,355,258) | 14,690,061 | ||||||||
Net Cash Provided by Operating Activities | 228,961,517 | 144,514,072 | 213,923,307 | 228,961,517 | ||||||||
Cash Flows from Investing Activities: | ||||||||||||
Proceeds from sales of property and equipment | 7,257,103 | 8,183,106 | 6,508,215 | 7,257,103 | ||||||||
Purchase of short term investments | (295,000,000) | |||||||||||
Capital expenditures | (78,884,499) | (123,218,270) | (107,952,929) | (78,884,499) | ||||||||
Net Cash Used by Investing Activities | (71,627,396) | (115,035,164) | (396,444,714) | (71,627,396) | ||||||||
Cash Flows from Financing Activities: | ||||||||||||
Proceeds from short-term borrowings | — | 303,810,043 | 653,623,780 | — | ||||||||
Payments on short-term borrowings | — | (303,810,043) | (692,507,850) | — | ||||||||
Proceeds from issuance of bonds | 350,000,000 | — | ||||||||||
Debt issuance costs | (854,793) | — | (5,239,937) | (854,793) | ||||||||
Proceeds from new long term debt | 155,000,000 | — | ��� | 155,000,000 | ||||||||
Principal payments on long-term borrowings | (188,756,386) | (11,709,191) | (16,222,945) | (188,756,386) | ||||||||
Prepayment penalties on debt extinguishment | (2,971,350) | — | — | (2,971,350) | ||||||||
Stock repurchases | (79,998,588) | — | ||||||||||
Dividends paid | (9,755,569) | (9,753,927) | (9,567,385) | (9,755,569) | ||||||||
Net Cash Used by Financing Activities | (47,338,098) | (21,463,118) | ||||||||||
Net Cash Provided (Used) by Financing Activities | 200,087,075 | (47,338,098) | ||||||||||
Net Increase in Cash and Cash Equivalents | 109,996,023 | 8,015,790 | 17,565,668 | 109,996,023 | ||||||||
Cash and cash equivalents at beginning of period | 42,125,105 | 10,537,303 | 6,903,955 | 42,125,105 | ||||||||
Cash and Cash Equivalents at End of Period | $ | 152,121,128 | $ | 18,553,093 | $ | 24,469,623 | $ | 152,121,128 | ||||
See notes to unaudited condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Three Months and Nine Months Ended June 27, 202026, 2021 and June 29, 201927, 2020
A. BASIS OF PREPARATION
In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to present fairly the Company’s financial position as of June 27, 2020,26, 2021, and the results of operations and changes in stockholders’ equity for the three-month and nine-month periods ended June 27, 202026, 2021 and June 29, 2019,27, 2020, and cash flows for the nine months ended June 27, 202026, 2021 and June 29, 2019.27, 2020. The adjustments made are of a normal recurring nature. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. It is suggested that these unaudited interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended September 28, 2019,26, 2020, filed by the Company under the Securities Exchange Act of 1934, as amended, on December 10, 2019.2020.
The results of operations for the three-month and nine-month periods ended June 27, 202026, 2021 are not necessarily indicative of the results to be expected for the full fiscal year.
B. NEW ACCOUNTING PRONOUNCEMENTS
On September 29, 2019, the Company adopted Financial Accounting Standards Board Accounting Standards Update ASU 2016-02, “Leases” (ASU 2016-02), which requires the Company as lessee to recognize most leases on the balance sheet thereby resulting in the recognition of right of use assets and lease liabilities for those leases currently classified as operating leases. The accounting for leases where the Company is the lessor remains largely unchanged. As both lessee and lessor, the Company adopted the standard utilizing the transition election to not restate comparative periods for the impact of adopting the standard. The Company elected the practical expedient related to leases of twelve months or less. The Company elected the package of transition expedients available for expired or existing contracts, which allowed the carryforward of historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.
The adoption of ASU 2016-02 resulted in the recognition of operating lease assets of $45.0 million and operating lease liabilities of $48.1 million, respectively as of September 29, 2019. Included in the measurement of the new lease assets is the reclassification of certain balances historically recorded as deferred rent and lease obligations for closed stores. The adoption of ASU 2016-02 did not materially affect the Company’s consolidated net income or cash flows.
See Note I for additional information required by ASU 2016-02.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting in response to the risk of cessation of the London Interbank Offered Rate (“LIBOR”). This amendment provides for optional expedients and exceptions for applying generally accepted accounting principles to contracts and hedging relationships that are affected by LIBOR and other reference rates. The ASU generally allows for hedge accounting to continue if the hedge was highly effective or met other standards prior to reference rate reform. Entities are permitted to apply the amendments to all contracts, cash flow and net investment hedge relationships that exist as of March 12, 2020. The relief provided in this ASU is only available for a limited time, generally through December 31, 2022. The Company’s debt agreements and interest rate swaps that utilize LIBOR have not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. To the extent our debt and interest rate swap arrangements change to another accepted rate, we will utilize the relief in this ASU to continue hedge accounting.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of $81,000 at June 26, 2021 and $325,000 at June 27, 2020 and $156,000 at September 28, 2019.26, 2020.
D. INCOME TAXES
The Company’s effective tax rate differs from the federal statutory rate primarily as a result of state income taxes and tax credits.
The Company has unrecognized tax benefits and could incur interest and penalties related to uncertain tax positions. These amounts are insignificant and are not expected to significantly increase or decrease within the next twelve months.
E. ACCRUED EXPENSES AND CURRENT PORTION OF OTHER LONG-TERM LIABILITIES
Accrued expenses and current portion of other long-term liabilities consist of the following:
June 27, | September 28, | June 26, | September 26, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Property, payroll and other taxes payable | $ | 18,406,201 | $ | 20,273,626 | $ | 17,447,671 | $ | 22,334,471 | ||||
Salaries, wages and bonuses payable | 40,779,443 | 31,861,220 | 40,020,750 | 44,975,510 | ||||||||
Self-insurance liabilities | 13,676,727 | 13,146,292 | 13,920,488 | 14,064,210 | ||||||||
Interest payable | 2,978,914 | 13,342,260 | 1,533,110 | 6,686,195 | ||||||||
Income tax payable | 5,291,815 | — | ||||||||||
Other | 8,071,832 | 5,025,885 | 4,106,675 | 3,951,960 | ||||||||
$ | 83,913,117 | $ | 83,649,283 | $ | 82,320,509 | $ | 92,012,346 | |||||
Self-insurance liabilities are established for general liability claims, workers’ compensation and employee group medical and dental benefits based on claims filed and estimates of claims incurred but not reported. Since October 1, 2019, theThe Company has beenis currently insured for covered costs in excess of $1.0 million per occurrence for workers’ compensation and for general liability and $450,000 per covered person for medical care benefits for a policy year. The Company’s self-insurance reserves totaled $33.5$33.7 million and $31.0$34.1 million at June 27, 202026,
2021 and September 28, 2019,26, 2020, respectively. Of this amount, $13.7$13.9 million is accounted for as a current liability and $19.8 million as a long-term liability, which is inclusive of $4.8 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable at June 27, 2020.26, 2021. At September 28, 2019, $13.126, 2020, $14.1 million was accounted for as a current liability and $17.9$20.0 million as a long-term liability, which is inclusive of $3.6$4.7 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable.
Employee insurance expense, including workers’ compensation and medical care benefits, net of employee contributions, totaled $9.4$7.8 million and $7.3$9.4 million for the three-month periods ended June 27, 202026, 2021 and June 29, 2019,27, 2020, respectively. For the nine-month periods ended June 27, 202026, 2021 and June 29, 201927, 2020, employee insurance expense, net of employee contributions totaled $27.7$28.2 million and $26.9$27.7 million, respectively.
The Company’s fuel operations contain underground tanks for the storage of gasoline and diesel fuel. The Company reviewed FASB Accounting Standards Codification Topic 410 (“FASB ASC 410”) and determined we have a legal obligation to remove tanks at a point in the future and accordingly determined we have met the requirements of an asset retirement obligation. The Company followed the FASB ASC 410 model for determining the asset retirement cost and asset retirement obligation. The amounts recorded are immaterial for each fuel center as well as in the aggregate at June 27, 202026, 2021 and September 28, 2019.26, 2020.
F. LONG-TERM DEBT
In June 2013,2021, the Company issued $700.0at par $350.0 million aggregate principal amount of senior 4.00% notes due in 2031 (the “2031 Notes”). Upon issuance of the 2031 Notes, the Company issued an irrevocable notice to redeem the remaining $295.0 million aggregate principal amount of its 5.75% senior notes due in 2023 (the “Notes”“2023 Notes”). and invested $295.0 million of 2031 Notes proceeds in short term investments pending redemption of the 2023 Notes. The 2023 Notes bear an interest ratewere redeemed at par value on July 16, 2021. Accordingly, at June 26, 2021 both $350.0 million of 5.750% per annumthe 2031 Notes and $295.0 million of the 2023 Notes were issued at par.outstanding, and the $295.0 million of 2023 Notes outstanding were included in the line item “Current portion of long-term debt” on the Condensed Consolidated Balance Sheet as of June 26, 2021.
The Company may redeem all or a portion of the 2031 Notes at any time at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning June 15 of the years indicated below:
Year | |
2018 | 102.875% |
2019 | 101.917% |
2020 | 100.958% |
2021 and thereafter | 100.000% |
Year | |
2026 | 102.000% |
2027 | 101.333% |
2028 | 100.667% |
2029 and thereafter | 100.000% |
In November 2019, the Company closed a $155 million ten year amortizing real estate loan (the “Loan”) and issued notice to redeem a like principal amount of the 2023 Notes. The Loan was funded and the 2023 Notes were redeemed thirty days after the redemption notice in December 2019. The 2023 Notes were redeemed at 101.917% of par value, and the Company recognized debt extinguishment costs of approximately $3.7 million during the quarter ended December 28, 2019. The Loan matures January 31, 2030 and has monthly principal payments of $0.65 million plus floating rate interest based on LIBOR.
In June 2020, the Company issued an irrevocable notice to redeem $150 million principal amount of the 2023 Notes. The 2023 Notes were redeemed at 100.958% of par value on July 9, 2020. The Company will recognize debt extinguishment costs of approximately $2.0 million during the quarter ending September 26, 2020. This $150 million is included in the line “Current portion of long-term debt” on the June 27, 2020 Condensed Consolidated Balance Sheet.
In July 2020, the Company issued an irrevocable notice to redeem $100 million principal amount of the 2023 Notes. The 2023 Notes will bewere redeemed at 100.958% of par value on August 27, 2020. The Company will recognize debt extinguishment costs of approximately $1.4 million during the quarter ending September 26, 2020. Following this redemption, there will be $295.0 million of the Notes outstanding.
TheIn June 2021, the Company hasentered into a $175.0$150.0 million line of credit (the “Line”) that matures in September 2022.June 2026 . The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or LIBOR. The Line allows the Company to issue up to $20.0$10.0 million in unused letters of credit, of which $9.5 million of unused letters of creditnone were issued at June 27, 2020.26, 2021. The Company is not required to maintain compensating balances in connection with the Line. At June 27, 2020,26, 2021, the Company had 0 borrowings outstanding under the Line.
In December 2010, the Company completed the funding of $99.7 million of bonds (the “Bonds”) for construction of new warehouse and distribution space adjacent to its existing space in Buncombe County, North Carolina (the “Project”). The final maturity date of the Bonds is January 1, 2036.
Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between certain financial institutions and the Company, the financial institutions would hold the Bonds until September 2026, subject to certain events. Mandatory redemption of the Bonds by the Company in the annual amount of $4.5 million began on January 1, 2014. The outstanding balance of the Bonds is $68.0$63.5 million as of June 27, 2020.26, 2021. The Company may redeem the Bonds without penalty or premium at any time prior to September 26, 2026.
Interest earned by bondholders on the Bonds is exempt from Federal and North Carolina income taxation. The interest rate on the Bonds is equal to one-month LIBOR (adjusted monthly) plus a credit spread, adjusted to reflect the income tax exemption.
The Company’s obligation to repay the Bonds is collateralized by the Project. The Covenant Agreement incorporates substantially all financial covenants included in the Line.
The Company has an interest rate swap agreement for a current notional amount of $44.0$38.0 million at a fixed rate of 3.92%. Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.
The Company has an interest rate swap agreement for a current notional amount of $149.8$142.1 million at a fixed rate of 2.95%. Under this agreement, the Company pays monthly the fixed rate of 2.95% and receives the one-month LIBOR plus 1.50%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.65 million and mature in fiscal year 2030.
The Company recognizes differences between the variable rate interest payments and the fixed interest rate settlements with the swap counterparties as an adjustment to interest expense each period over the life of the swaps. The Company has designated the swaps as cash flow hedges and records the changes in the estimated fair value of the swaps to other comprehensive income each period. For the three- and nine-month periods ended June 26, 2021, the Company recorded $0.7 million of other comprehensive expense and $6.5 million of other comprehensive income, net of income taxes, in its Consolidated Statements of Comprehensive Income. Unrealized losses of $4.9 million are recorded as a liability at fair value in the line “Other Long Term Liabilities” on the Consolidated Balance Sheet as of June 26, 2021. For the three- and nine-month periods ended June 27, 2020, the Company recorded $1.2 million and $9.5 million of other comprehensive expense, respectively, net of income taxes, in its Consolidated Statements of Comprehensive Income. Unrealized losses of $14.3 million are recorded as a liability at fair value in the line “Other Long Term Liabilities” on the Consolidated Balance Sheet as of June 27, 2020. For the three- and nine-month periods ended June 29, 2019, the Company recorded $0.8 million and $0.9 million of other comprehensive expense, respectively, net of income taxes, in its Consolidated Statements of Comprehensive Income. Unrealized losses of $1.2 million are recorded as a liability at fair value in the line “Other Long Term Liabilities” on the Consolidated Balance Sheet as of June 29, 2019.
The Company’s long-term debt agreements generally contain provisions that under certain circumstances would permit lending institutions to terminate or withdraw their respective extensions of credit to the Company. Included among the triggering factors permitting the termination or withdrawal of the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents. The Company was in compliance with all financial covenants at June 27, 2020.26, 2021.
The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under all long-term debt agreements in the event of default under any one instrument.
At June 27, 2020,26, 2021, property and equipment with an undepreciated cost of approximately $307.9$298.5 million was pledged as collateral for long-term debt. Long-term debt and Line agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios. At June 27, 2020,26, 2021, the Company had excess net worth totaling $170.4$202.6 million calculated under covenants in the 2031 Notes, the Bonds, the Loan, and the Line. This amount is available to pay dividends; however, certain loan agreements containing provisions outlining minimum tangible net worth requirements restrict the ability of the Company to pay cash dividends in excess of the current annual per share dividends paid on the Company’s Class A and Class B Common Stock. Further, the Company is prevented from paying cash dividends at any time that it is in default under the indenture governing the 2031 Notes. In addition, the terms of the indenture may restrict the ability of the Company to pay additional cash dividends based on certain financial parameters.
G. DIVIDENDS
The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on October 17, 201915, 2020 to stockholders of record on October 10, 2019.8, 2020.
The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on January 16, 202014, 2021 to stockholders of record on January 9, 2020.7, 2021.
The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on April 16, 202015, 2021 to stockholders of record on April 9, 2020.8, 2021.
For additional information regarding the dividend rights of the Class A Common Stock and Class B Common Stock, please see Note 8, “Stockholders’ Equity” to the Consolidated Financial Statements of the Annual Report on Form 10-K filed by the Company under the Securities Exchange Act of 1934, as amended, on December 10, 2019.2020.
H. EARNINGS PER COMMON SHARE
The Company has 2 classes of common stock: Class A which is publicly traded, and Class B, which has no public market. The Class B Common Stock has restrictions on transfer; however, each share is convertible into one share of Class A Common Stock at any time. Each share of Class A Common Stock has 1 vote per share and each share of Class B Common Stock has 10 votes per share. Each share of Class A Common Stock is entitled to receive cash dividends equal to 110% of any cash dividend paid on Class B Common Stock.
The Company calculates earnings per share using the two-class method in accordance with FASB ASC Topic 260.
The two-class method of computing basic earnings per share for each period reflects the cash dividends declared per share for each class of stock, plus allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock. Diluted earnings per share is calculated assuming the conversion of all shares of Class B Common Stock to shares of Class A Common Stock on a share-for-share basis. The tables below reconcile the numerators and denominators of basic and diluted earnings per share for current and prior periods.
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
June 27, 2020 | June 27, 2020 | June 26, 2021 | June 26, 2021 | |||||||||||||||||||||
Class A | Class B | Class A | Class B | Class A | Class B | Class A | Class B | |||||||||||||||||
Numerator: Allocated net income | ||||||||||||||||||||||||
Net income allocated, basic | $ | 45,205,674 | $ | 17,547,368 | $ | 86,935,954 | $ | 33,796,721 | $ | 55,276,248 | $ | 16,698,244 | $ | 131,185,114 | $ | 46,802,459 | ||||||||
Conversion of Class B to Class A shares |
| 17,547,368 | — | 33,796,721 | — | 16,698,244 | — | 46,802,459 | — | |||||||||||||||
Net income allocated, diluted | $ | 62,753,042 | $ | 17,547,368 | $ | 120,732,675 | $ | 33,796,721 | $ | 71,974,492 | $ | 16,698,244 | $ | 177,987,573 | $ | 46,802,459 | ||||||||
| ||||||||||||||||||||||||
Denominator: Weighted average shares outstanding |
| |||||||||||||||||||||||
Weighted average shares outstanding, basic |
| 14,197,250 | 6,062,526 | 14,191,074 | 6,068,702 | 14,257,035 | 4,737,341 | 14,234,599 | 5,584,837 | |||||||||||||||
Conversion of Class B to Class A shares |
| 6,062,526 | — | 6,068,702 | — | 4,737,341 | — | 5,584,837 | — | |||||||||||||||
Weighted average shares outstanding, diluted |
| 20,259,776 | 6,062,526 | 20,259,776 | 6,068,702 | 18,994,376 | 4,737,341 | 19,819,436 | 5,584,837 | |||||||||||||||
Earnings per share | ||||||||||||||||||||||||
Basic | $ | 3.18 | $ | 2.89 | $ | 6.13 | $ | 5.57 | $ | 3.88 | $ | 3.52 | $ | 9.22 | $ | 8.38 | ||||||||
Diluted | $ | 3.10 | $ | 2.89 | $ | 5.96 | $ | 5.57 | $ | 3.79 | $ | 3.52 | $ | 8.98 | $ | 8.38 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||
June 27, 2020 | June 27, 2020 | |||||||||||
Class A | Class B | Class A | Class B | |||||||||
Numerator: Allocated net income | ||||||||||||
Net income allocated, basic | $ | 45,205,674 | $ | 17,547,368 | $ | 86,935,954 | $ | 33,796,721 | ||||
Conversion of Class B to Class A shares | 17,547,368 | — | 33,796,721 | — | ||||||||
Net income allocated, diluted | $ | 62,753,042 | $ | 17,547,368 | $ | 120,732,675 | $ | 33,796,721 | ||||
Denominator: Weighted average shares outstanding | ||||||||||||
Weighted average shares outstanding, basic | 14,197,250 | 6,062,526 | 14,191,074 | 6,068,702 | ||||||||
Conversion of Class B to Class A shares | 6,062,526 | — | 6,068,702 | — | ||||||||
Weighted average shares outstanding, diluted | 20,259,776 | 6,062,526 | 20,259,776 | 6,068,702 | ||||||||
Earnings per share | ||||||||||||
Basic | $ | 3.18 | $ | 2.89 | $ | 6.13 | $ | 5.57 | ||||
Diluted | $ | 3.10 | $ | 2.89 | $ | 5.96 | $ | 5.57 | ||||
Three Months Ended | Nine Months Ended | |||||||||||
June 29, 2019 | June 29, 2019 | |||||||||||
Class A | Class B | Class A | Class B | |||||||||
Numerator: Allocated net income | ||||||||||||
Net income allocated, basic | $ | 16,913,589 | $ | 6,596,695 | $ | 43,579,258 | $ | 17,083,403 | ||||
Conversion of Class B to Class A shares | 6,596,695 | — | 17,083,403 | — | ||||||||
Net income allocated, diluted | $ | 23,510,284 | $ | 6,596,695 | $ | 60,662,661 | $ | 17,083,403 | ||||
Denominator: Weighted average shares outstanding | ||||||||||||
Weighted average shares outstanding, basic | 14,177,335 | 6,082,441 | 14,155,632 | 6,104,144 | ||||||||
Conversion of Class B to Class A shares | 6,082,441 | — | 6,104,144 | — | ||||||||
Weighted average shares outstanding, diluted | 20,259,776 | 6,082,441 | 20,259,776 | 6,104,144 | ||||||||
Earnings per share | ||||||||||||
Basic | $ | 1.19 | $ | 1.08 | $ | 3.07 | $ | 2.80 | ||||
Diluted | $ | 1.16 | $ | 1.08 | $ | 2.99 | $ | 2.80 | ||||
I. LEASES
Leases as Lessee
The Company conducts part of its retail operations from leased facilities. The initial terms of the leases are generally 20 years. The majority of the leases includeincludes one or more renewal options and provide that the Company pay property taxes, utilities, repairs and certain other costs incidental to occupation of the premises. Several leases contain clauses calling for percentage rentals based upon gross sales of the supermarket occupying the leased space. Step rent provisions, escalation clauses and lease incentives are taken into account in computing minimum lease payments.
Operating lease cost for all operating leases totaled $2.4$2.7 million for the three months ended June 27,202026, 2021 and $7.3$8.4 million for the nine months endingended June 27, 2020.26, 2021. This amount includedincludes short-term (less than one year) leases, common area expenses, and variable lease costs, all of which are insignificant. Cash paid for lease liabilities in operating activities approximates operating lease cost.
Maturities of operating lease liabilities as of June 27, 202026, 2021 are as follows:
Fiscal Year | ||||
Remainder of 2020 | $ | 2,483,871 | ||
2021 | 9,561,737 | |||
Remainder of 2021 | $ | 2,497,202 | ||
2022 | 9,149,391 | 9,990,903 | ||
2023 | 7,043,212 | 8,300,557 | ||
2024 | 4,649,005 | 5,516,257 | ||
2025 | 4,715,550 | |||
Thereafter | 29,318,449 | 25,889,333 | ||
Total lease payments | $ | 62,205,665 | $ | 56,909,802 |
Less amount representing interest | 13,497,675 | 12,274,275 | ||
Present value of lease liabilities | $ | 48,707,990 | $ | 44,635,527 |
On the Condensed Consolidated Balance Sheets, lease extensions exercised less leased properties purchased during the current quarterfiscal year 2021 increased the line items “Operating lease right of use assets” and “Noncurrent operating lease liabilities” by $8.0$1.6 million each during the quarternine months ended June 27, 2020.26, 2021. The weighted average remaining lease term for the Company’s operating leases is 13.112.9 years. The weighted average discount rate used to determine lease liability balances as of June 27, 202026, 2021 is 3.51%, based on the most recent Company financings collateralized by store properties.
Prior Period Disclosures – Lessee
As a result of the adoption of ASU 2016-02 on September 29, 2019 the Company is required to present future minimum lease payments for operating leases having initial or remaining non-cancelable lease terms in excess of one year. These future minimum lease payments were previously disclosed in our 2019 Annual Report on Form 10-K and accounted for under previous lease guidance. Commitments as of September 28, 2019 were as follows:
Fiscal Year | ||
2020 | $ | 9,756,136 |
2021 | 7,532,373 | |
2022 | 6,692,661 | |
2023 | 4,907,148 | |
2024 | 2,583,629 | |
Thereafter | 27,187,519 | |
Total minimum future rental commitments | $ | 58,659,466 |
Leases as Lessor
At September 28, 2019,June 26, 2021, the Company owned and operated 7984 shopping centers in conjunction with its supermarket operations. The Company leases to others a portion of its shopping center properties. The leases are non-cancelable operating lease agreements for periods ranging up to 20 years.
Rental income is included in the line item “Net sales” on the Consolidated Statements of Income. Depreciation on owned properties leased to others and other shopping center expenses are included in the line item “Cost of goods sold” on the Consolidated Statements of Income.
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||
June 27, 2020 | June 27, 2020 | June 26, 2021 | June 26, 2021 | |||||||
Rents earned on owned and subleased properties: | ||||||||||
Base rentals | $ | 1,848,402 | $ | 9,813,041 | $ | 4,532,913 | $ | 14,450,465 | ||
Variable rentals | 69,665 | 208,995 | 72,458 | 217,373 | ||||||
Total | 1,918,067 | 10,022,036 | 4,605,371 | 14,667,838 | ||||||
Depreciation on owned properties leased to others | (1,328,968) | (3,986,904) | (1,054,469) | (3,693,739) | ||||||
Other shopping center expenses | (753,134) | (2,503,882) | (571,999) | (2,199,072) | ||||||
Total | $ | (164,035) | $ | 3,531,250 | $ | 2,978,903 | $ | 8,775,027 | ||
Future minimum operating lease receipts at June 27, 202026, 2021 are as follows:
Fiscal Year | ||||
Remainder of 2020 | $ | 2,918,915 | ||
2021 | 11,000,184 | |||
Remainder of 2021 | $ | 3,500,699 | ||
2022 | 9,481,526 | 14,269,749 | ||
2023 | 8,403,861 | 12,962,271 | ||
2024 | 7,529,625 | 11,876,474 | ||
2025 | 10,553,809 | |||
Thereafter | 26,998,098 | 38,267,329 | ||
Total minimum future rental income | $ | 66,332,209 | $ | 91,430,331 |
Prior Period Disclosures – Lessor
As a result of the adoption of ASU 2016-02 on September 29, 2019 the Company is required to present future minimum operating lease income receipts for operating leases having initial or remaining non-cancelable lease terms in excess of one year. These future minimum lease payments were previously disclosed in our 2019 Annual Report on Form 10-K and accounted for under previous lease guidance. Future minimum operating lease receipts as of September 28, 2019 were as follows:
Fiscal Year | ||
2020 | $ | 11,265,775 |
2021 | 8,855,781 | |
2022 | 6,967,583 | |
2023 | 5,862,260 | |
2024 | 5,145,632 | |
Thereafter | 13,723,315 | |
Total minimum future rental income | $ | 51,820,346 |
J. SEGMENT INFORMATION
The Company operates 1 primary business segment, retail grocery sales. “Other” includes our remaining operations - fluid dairy and shopping center rentals. Information about the Company’s operations by lines of business (amounts in thousands) is as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
June 27, | June 29, | June 27, | June 29, | June 26, | June 27, | June 26, | June 27, | |||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
Revenues from unaffiliated customers: | ||||||||||||||||||||||||
Grocery | $ | 452,725 | $ | 352,687 | $ | 1,255,718 | $ | 1,079,884 | $ | 433,395 | $ | 452,725 | $ | 1,302,734 | $ | 1,255,718 | ||||||||
Non-foods | 281,306 | 238,471 | 788,252 | 694,036 | 291,596 | 281,306 | 840,083 | 788,252 | ||||||||||||||||
Perishables | 344,597 | 281,655 | 929,507 | 824,614 | 348,284 | 344,597 | 990,040 | 929,507 | ||||||||||||||||
Gasoline | 84,127 | 155,897 | 345,170 | 430,393 | 164,249 | 84,127 | 405,397 | 345,170 | ||||||||||||||||
Total Retail | $ | 1,162,755 | $ | 1,028,710 | $ | 3,318,647 | $ | 3,028,927 | $ | 1,237,524 | $ | 1,162,755 | $ | 3,538,254 | $ | 3,318,647 | ||||||||
Other | 26,845 | 33,552 | 94,790 | 97,016 | 39,941 | 26,845 | 114,209 | 94,790 | ||||||||||||||||
Total revenues from unaffiliated customers | $ | 1,189,600 | $ | 1,062,262 | $ | 3,413,437 | $ | 3,125,943 | $ | 1,277,465 | $ | 1,189,600 | $ | 3,652,463 | $ | 3,413,437 | ||||||||
Income from operations: | ||||||||||||||||||||||||
Retail | $ | 89,206 | $ | 38,746 | $ | 181,496 | $ | 100,796 | $ | 94,466 | $ | 89,206 | $ | 233,630 | $ | 181,496 | ||||||||
Other | 2,256 | 4,607 | 11,742 | 12,766 | 6,119 | 2,256 | 17,709 | 11,742 | ||||||||||||||||
Total income from operations | $ | 91,462 | $ | 43,353 | $ | 193,238 | $ | 113,562 | $ | 100,585 | $ | 91,462 | $ | 251,339 | $ | 193,238 | ||||||||
June 27, | September 28, | June 26, | September 26, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Assets: | ||||||||||||
Retail | $ | 1,839,660 | $ | 1,698,904 | $ | 2,071,161 | $ | 1,712,203 | ||||
Other | 173,666 | 170,720 | 178,850 | 189,607 | ||||||||
Elimination of intercompany receivable | (2,213) | (2,296) | (2,519) | (2,511) | ||||||||
Total assets | $ | 2,011,113 | $ | 1,867,328 | $ | 2,247,492 | $ | 1,899,299 | ||||
The grocery category includes grocery, dairy, and frozen foods.
The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.
The perishables category includes meat, produce, deli and bakery.
For the three-month periods ended June 27, 202026, 2021 and June 29, 2019, respectively,27, 2020, the fluid dairy operation had $11.2 million$11.1 and $10.2$11.2 million in sales, respectively to the grocery sales segment. The fluid dairy operation had $35.0$34.8 million and $31.4$35.0 million in sales to the retail grocery segment for the nine-month periods ended June 27, 202026, 2021 and June 29, 2019,27, 2020, respectively. These sales have been eliminated in consolidation and are excluded from the amounts in the table above.
K. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.
The fair value of the Company’s debt and interest rate swaps are estimated using valuation techniques under the accounting guidance related to fair value measurements based on observable and unobservable inputs. Observable inputs reflect readily available data from independent sources, while unobservable inputs reflect the Company’s market assumptions. These inputs are classified into the following hierarchy:
Level 1 Inputs – | Quoted prices for identical assets or liabilities in active markets. |
Level 2 Inputs – | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
Level 3 Inputs – | Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation. |
The carrying amount and fair value of the Company’s debt, interest rate swaps, and non-qualified retirement plan assets at June 27, 2020 are26, 2021 were as follows (in thousands):
Carrying |
| Fair Value | Carrying |
| Fair Value | |||||||||||
Amount | Fair Value | Measurements | Amount | Fair Value | Measurements | |||||||||||
Senior Notes | $ | 545,000 | $ | 546,363 | Level 2 | |||||||||||
2023 Senior Notes | $ | 295,000 | $ | 295,738 | Level 2 | |||||||||||
2031 Senior Notes | 350,000 | 350,000 | Level 2 | |||||||||||||
Facility Bonds | 68,030 | 68,030 | Level 2 | 63,500 | 63,500 | Level 2 | ||||||||||
Secured notes payable and other | 206,247 | 206,247 | Level 2 | 192,749 | 192,638 | Level 2 | ||||||||||
Interest rate swap derivative contracts | 14,307 | 14,307 | Level 2 | 4,908 | 4,908 | Level 2 | ||||||||||
Non-qualified retirement plan assets | 15,705 | 15,705 | Level 2 | 20,565 | 20,565 | Level 2 | ||||||||||
The fair values for Level 2 measurements were determined primarily using market yields and taking into consideration the underlying terms of the instrument.
L. COMMITMENTS AND CONTINGENCIES
Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims is not expected to materially affect the Company’s financial position, the results of its operations, or its cash flows.
M. RELATED PARTY TRANSACTIONS
In November 2019,On March 19, 2021, the Company’s Board of Directors authorized the repurchase of up to an aggregate of 2.0 million shares of its Class A and Class B Common Stock. The share repurchase program may be carried out through open market purchases, block trades, purchases from the Company’s Investment/Profit Sharing Plan and in negotiated private transactions.
On March 23, 2021, the Company sold 2 land parcels for $4.3approved the repurchase of 1.3 million toshares of the Company’s Class B Common Stock from a limited liability corporation havingtrust that is part of the estate of Robert P. Ingle, II,former CEO and Director of the Company. The aggregate purchase price paid for the repurchased shares was approximately $80.0 million, which was equal to the fair market value of the Company’s Chairmanpublicly traded Class A Common Stock at the time of the Board, as one of its principals with a financial interesttransaction. The transaction was approved by the Company’s Executive Committee and Audit Committee in the transaction. In accordance with the Company’s Related Party Transactionrelated-party transaction policy independent fair market value appraisals were obtainedand regulatory guidelines.
The Company will from time to determine the selling price, andtime make short-term non-interest bearing loans to the Company’s Audit Committee approvedInvestment/Profit Sharing Plan to allow the transactions.plan to meet distribution obligations during a time when the plan was prohibited from selling shares of the Company’s Class A Common Stock. During the nine months ended June 26, 2021, such a loan in the amount of $0.4 million was both made and repaid in full.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Ingles, a leading supermarket chain in the Southeast, operates 197198 supermarkets in North Carolina (73)(74), Georgia (66), South Carolina (35), Tennessee (21), Virginia (1) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and rural communities. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products. Non-food products include fuel centers, pharmacies, health and beauty carehealth/beauty/cosmetic products and general merchandise, as well as quality private label items. In addition, the Company focuses on selling high-growth, high-margin products to its customers through the development of certified organic products, bakery departments and prepared foods including delicatessen sections. As of June 27, 2020,26, 2021, the Company operated 109111 in-store pharmacies and 106107 fuel centers.
Coronavirus (COVID-19) Pandemic Impact
The coronavirus (COVID-19) pandemic was declared a national emergency on March 13, 2020. As an essential business, the Company has remained open throughout the pandemic and implemented numerous protocols to keep our customers and associates safe. Since the pandemic was declared, sales and customer traffic have increased and have had a significant impact on the Company’s results of operation. The three months ended June 26, 2021 represent the first full fiscal quarter in which both the current and the prior year fiscal quarters were impacted by the pandemic. During this time period, and especially after vaccines became widely available, isolation measures have lifted to some extent as restaurants and schools have reopened and many public activities have resumed. As discussed later in this form 10-Q, the Company’s sales and financial performance for the three months ended June 26, 2021 continue to be significantly above pre-pandemic levels and compare favorably with the quarter ended June 27, 2020 early in the pandemic.
As the economy and daily life have opened back up
We have experienced labor shortages and upward pressure on wages
Availability of some products has been disrupted
Transportation delays have been encountered
Food at home costs have increased, and the overall rate of inflation has increased to levels not seen for many years
In future months, our sales and financial performance could be impacted by
The delta variant (and any future variants) of COVID-19, which has recently increased the number of people impacted by the coronavirus
The return to classrooms in late summer 2021
Changes to or elimination of various economic assistance programs
Accordingly, at the present time we do not know how long, and to what extent the pandemic could impact our sales and financial performance.
Critical Accounting Policies
Critical accounting policies are those accounting policies that management believes are important to the portrayalpresentation of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates aboutestimate the effect of matters that are inherently uncertain. Estimates are based on historical experience and other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management estimates, by their nature, involve judgments regarding future uncertainties, and actual results may therefore differ materially from these estimates.
Self-Insurance
The Company is self-insured for workers’ compensation and group medical and dental benefits. Risks and uncertainties are associated with self-insurance; however, the Company has limited its exposure by maintaining excess liability coverage of $1.0 million per occurrence for workers’ compensation and for general liability, and $450,000 per covered person for medical care benefits for a policy year. Self-insurance liabilities are established based on claims filed and estimates of claims incurred but not reported. The estimates are based on data provided by the respective claims administrators. These estimates can fluctuate if historical trends are not predictive of the future. The majority of the Company’s properties are self-insured for casualty losses and business interruption; however, liability coverage is maintained. At June 27, 202026, 2021 the Company’s self-insurance reserves totaled $33.5$33.7 million. This amount is inclusive of $4.8 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable.
Asset Impairments
The Company accounts for the impairment of long-lived assets in accordance with FASB ASC Topic 360. For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal associates. Estimates of future cash flows and expected sales prices are judgments based upon the Company’s experience and knowledge of local operations and cash flows that are projected for several years into the future. These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital spending decisions and inflation. The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether any indicators of impairment have occurred. There were no asset impairments during the nine-month period ended June 27, 2020.26, 2021.
Vendor Allowances
The Company receives funds for a variety of merchandising activities from the many vendors whose products the Company buys for resale in its stores. These incentives and allowances are primarily comprisedcomposed of volume or purchase based incentives, advertising allowances, slotting fees, and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs incurred by the Company for stocking, advertising, promoting and selling the applicable vendor’s products. These allowances generally relate to short term arrangements with vendors, often relating to a period of a month or less, and are negotiated on a purchase-by-purchase or transaction-by-transaction basis. Whenever possible,practicable, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a component of item cost in inventory and recognized in merchandise costs when the item is sold. Due to system constraintsthe use of the retail method of store inventory and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the vendor consideration received is sold. Vendor allowances applied as a reduction of merchandise costs totaled $22.4$30.0 million and $27.0$22.4 million for the fiscal quarters ended June 27, 202026, 2021 and June 29, 2019,27, 2020, respectively. For the nine-month periods ended June 27, 202026, 2021 and June 29, 2019,27, 2020, vendor allowances applied as a reduction of merchandise costs totaled $81.2$88.7 million
and $84.8$81.2 million, respectively. Vendor advertising allowances that represent a reimbursement of specific identifiable incremental costs of advertising the vendor’s specific products are recorded as a reduction to the related expense in the period in which the related expense is incurred. Vendor advertising allowances recorded as a reduction of advertising expense totaled $0.7$2.0 million and $3.3$0.7 million for the fiscal quarters ended June 27, 202026, 2021 and June 29, 2019,27, 2020, respectively. For the nine-month periods ended June 27, 202026, 2021 and June 29, 2019,27, 2020, vendor advertising allowances recorded as a reduction of advertising expense totaled $6.0 million and $6.5 million, and $10.6 million, respectively. VendorOverall, vendor allowances have been lower duringdecreased at the March 2020 onset of the COVID-19 pandemic as many promotional activities were curtailed. During the current fiscal year, as the COVID-19 pandemic has resulted in less vendor support for promotional activities.activities have increased, but have not fully returned to pre-pandemic levels.
If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising, as well as the volume and frequency of the Company’s product advertising, which could increase or decrease the Company’s expenditures.
Similarly, the Company is not able to assess the impact of vendor advertising allowances on creating additional revenue, as such allowances do not directly generate revenue for the Company’s stores.
Results of Operations
Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in September. There are 13 and 39 weeks of operations included in the Unaudited Condensed Consolidated Statements of Income for the three- and nine-month periods ended June 27, 202026, 2021 and June 29, 2019,27, 2020, respectively. Comparable store sales are defined as sales by retail stores in operation for five full fiscal quarters. Sales from replacement stores, major remodels and the addition of fuel stations to existing stores are included in the comparable store sales calculation from the date thereof. A replacement store is a newnewly-opened store that is opened to replacereplaces an existing nearby store that is closed. A major remodel entails substantial remodeling of an existing store and includes additional retail square footage. For both the three- and nine-month periods ended June 26, 2021 and June 27, 2020, comparable store sales included 197 and 196 stores. For the three- and nine-month periods ended June 29, 2019, comparable store sales included 196 stores.stores, respectively.
The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the various segments of the business, see Note I “Segment Information” to the Condensed Consolidated Financial Statements.
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
June 27, | June 29, | June 27, | June 29, | June 26, | June 27, | June 26, | June 27, | |||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Gross profit | 27.3 | % | 24.4 | % | 25.6 | % | 24.4 | % | 26.4 | % | 27.3 | % | 26.3 | % | 25.6 | % | ||||||||
Operating and administrative expenses | 19.7 | % | 20.4 | % | 20.1 | % | 20.9 | % | 18.7 | % | 19.7 | % | 19.5 | % | 20.1 | % | ||||||||
Gain from sale or disposal of assets | 0.1 | % | 0.1 | % | 0.1 | % | 0.1 | % | 0.2 | % | 0.1 | % | 0.1 | % | 0.1 | % | ||||||||
Income from operations | 7.7 | % | 4.1 | % | 5.6 | % | 3.6 | % | 7.9 | % | 7.7 | % | 6.9 | % | 5.6 | % | ||||||||
Other income, net | 0.1 | % | — | % | — | % | — | % | — | % | 0.1 | % | — | % | — | % | ||||||||
Interest expense | 0.8 | % | 1.1 | % | 0.9 | % | 1.1 | % | 0.4 | % | 0.8 | % | 0.5 | % | 0.9 | % | ||||||||
Loss on early extinguishment of debt | — | % | — | % | 0.1 | % | — | % | 0.1 | % | — | % | — | % | 0.1 | % | ||||||||
Income tax expense | 1.7 | % | 0.8 | % | 1.1 | % | 0.6 | % | 1.8 | % | 1.7 | % | 1.5 | % | 1.1 | % | ||||||||
Net income | 5.3 | % | 2.2 | % | 3.5 | % | 1.9 | % | 5.6 | % | 5.3 | % | 4.9 | % | 3.5 | % | ||||||||
Three Months Ended June 27, 202026, 2021 Compared to the Three Months Ended June 29, 201927, 2020
Net income for the third quarter of fiscal 20202021 totaled $62.8$72.0 million, compared with net income of $23.5$62.8 million earned for the third quarter of fiscal 2019.2020. The COVID-19 pandemic resulted inwas declared a national emergency on March 13, 2020, therefore, each of the three months ended June 26, 2021 and June 27, 2020 was influenced by the pandemic. These comparative third quarters had high sales as various stay-at-home measures, as well as the closing of most schools and restaurants beginning in March 2020. Many of thesesocial distancing measures, were still in place throughoutand most schools and restaurants were not fully back to pre-pandemic operations. While the quarter. As a result, retail grocery sales increased substantially. CorrespondingCompany has incurred significant additional operating expenses to maintain clean and safe stores, expenses did not increase as much as sales, resulting in higher pre-tax income.
Net Sales. Net sales increased by $127.3$87.9 million, or 12.0%7.4%, to $1.28 billion for the three months ended June 26, 2021 compared with $1.19 billion for the three months ended June 27, 2020 compared with $1.06 billion for the three months ended June 29, 2019.2020. Comparing the third quarter of fiscal 20202021 with the third quarter of fiscal 2020, total grocery sales excluding gasoline only decreased by 0.5% even with a reopening of daily life in most of our market area. Compared with the pre-pandemic third quarter ended June 2019, grocery sales excluding gasoline for the June 2021 quarter increased 23.0%. Gasoline sales dollars and gallons sold were lowerhigher for the June 2021 fiscal quarter as compared to the June 2020 fiscal quarter due to decreased demand due to theincreased travel as COVID-19 pandemic and oversupply.restrictions have eased. Excluding gasoline sales, total grocery comparable store sales increased 23.1%for the June 2021 quarter decreased 0.9% over the comparative fiscal quarters.quarter. Comparing the third quarters of fiscal years 20202021 and 20192020 (and excluding gasoline), the number of customer transactions decreased 10.3%increased 8.2% and the average transaction size increased 26.6%
decreased 8.0%. We believe that becauseeasing of the COVID-19 pandemic customers consolidatedrestrictions has resulted in more trips to our stores resulting inat a lower transaction count and a higher spend per visit.size even as dollar sales were somewhat level.
Ingles operated 198 stores at June 26, 2021 and 197 stores at June 27, 2020 and 199 stores at June 29, 2019.2020. Retail square feet totaled approximately 11.3 million square feet at bothJune 26, 2021 and at June 27, 2020 and June 29, 2019.2020. During the last twelve months ended June 26, 2021, the Company closed two stores.opened one store.
Sales by product category (in thousands) are as follows:
Three Months Ended | Three Months Ended | |||||||||||
June 27, | June 29, | June 26, | June 27, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Grocery | $ | 452,725 | $ | 352,687 | $ | 433,395 | $ | 452,725 | ||||
Non-foods | 281,306 | 238,471 | 291,596 | 281,306 | ||||||||
Perishables | 344,597 | 281,655 | 348,284 | 344,597 | ||||||||
Gasoline | 84,127 | 155,897 | 164,249 | 84,127 | ||||||||
Total retail grocery | $ | 1,162,755 | $ | 1,028,710 | $ | 1,237,524 | $ | 1,162,755 | ||||
The grocery category includes grocery, dairy, and frozen foods.
The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.
The perishables category includes meat, produce, deli and bakery.
Changes in retail grocery sales for the quarter ended June 27, 202026, 2021 are summarized as follows (in thousands):
|
| |||||
Total retail sales for the three months ended June 29, 2019 | $ | 1,028,710 | ||||
Total retail sales for the three months ended June 27, 2020 | $ | 1,162,755 | ||||
Comparable store sales increase (including gasoline) | 128,775 | 68,700 | ||||
Impact of stores opened in fiscal 2019 | 7,123 | |||||
Impact of stores closed in fiscal 2019 and 2020 | (1,536) | |||||
Impact of stores opened in fiscal 2021 | 5,989 | |||||
Impact of stores closed in fiscal 2020 | (288) | |||||
Other | (317) | 368 | ||||
Total retail sales for the three months ended June 27, 2020 | $ | 1,162,755 | ||||
Total retail sales for the three months ended June 26, 2021 | $ | 1,237,524 | ||||
Gross Profit. Gross profit for the three-month period ended June 27, 202026, 2021 totaled $324.7$337.5 million, an increase of $65.8$12.8 million, or 25.4%3.9%, compared with gross profit of $258.9$324.7 million for the three-month period ended June 29, 2019.27, 2020. Gross profit as a percentage of sales was 27.3%26.4% and 24.4%27.3% for the three months ended June 26, 2021 and June 27, 2020, and June 29, 2019, respectively. There was lessSince the beginning of the COVID-19 pandemic, we have seen a decrease in discounting and promotional pricing duringshrink, resulting in higher gross profit and gross margin. As a comparison, gross profit as a percentage of sales for the current year quarter.pre-pandemic quarter ended June 2019 was 24.4%. Retail grocery gross margin excluding gasoline was 55 basis points higher for the quarter ended June 26, 2021 compared with the quarter ended June 27, 2020. Gasoline gross profit was also higher for the June 2021 fiscal quarter compared with the June 2020 fiscal quarter as travel has increased due to the easing of COVID-19 restrictions.
Operating and Administrative Expenses. Operating and administrative expenses increased $18.1$4.8 million, or 8.4%2.1%, to $239.4 million for the three months ended June 26, 2021, from $234.6 million for the three months ended June 27, 2020, from $216.5 million for the three months ended June 29, 2019.2020. As a percentage of sales, operating and administrative expenses were 19.7%18.7% and 20.4%19.7% for the June 20202021 and June 20192020 quarters, respectively. Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 21.0%21.3% of sales for the third fiscal quarter of 20202021 compared with 23.6%21.0% for the third fiscal quarter of 2019. The fiscal 2020 third quarter expense percentages are lower due to additional pandemic-related sales during the current fiscal quarter.2020.
A breakdown of the major changes in operating and administrative expenses is as follows:
Increase | ||||||
Increase | as a % of | |||||
in millions | sales | |||||
Salaries and wages | $ | 13.4 | 1.12 | % | ||
Insurance | $ | 2.7 | 0.23 | % | ||
Advertising and promotion | $ | 2.0 | 0.17 | % | ||
Repairs and maintenance | $ | 1.2 | 0.10 | % | ||
Increase | ||||||
Increase | (Decrease) | |||||
(Decrease) | as a % of | |||||
in millions | sales | |||||
Store supplies | $ | 2.5 | 0.20 | % | ||
Depreciation and amortization | $ | 2.0 | 0.16 | % | ||
Bank charges | $ | 1.3 | 0.10 | % | ||
Insurance | $ | (0.8) | (0.06) | % | ||
Salaries and wagesStore supplies increased in dollars due to additional labor hours requiredraw material cost increases and commensurate with the increase in sales.
Depreciation expense increased due to equipment purchased for store improvements and the distribution network.
Bank charges increased as a result of increased sales volume, including extra labor needed in response to the COVID-19 pandemic.and higher card usage compared with cash or checks.
Insurance expense increaseddecreased due to increasedlower claims reserves under the Company’s self-insurance programs.
Gain (loss) from Sale or Disposal of Assets. Gain from the sale or disposal of assets totaled $1.3$2.5 million during the three months ended June 27, 2020,26, 2021, primarily from the sale of a land parcel sale.former store property. During the quarter ended June 29, 2019,27, 2020, the gain from the sale or disposal of assets totaled $0.9 million.$1.3 million primarily from a land parcel sale.
Interest Expense. Interest expense totaled $5.5 million for the three-month period ended June 26, 2021 compared with $9.7 million for the three-month period ended June 27, 2020 compared with $11.7 million for the three-month period ended June 29, 2019.2020. Total debt at June 20202021 was $819.3$901.2 million compared with $854.7$819.3 million at June 2019.2020. Excluding the $295.0 million of the 2023 Notes redeemed on July 16, 2021, debt would total $606.2 million at June 26, 2021. Over the past twelve months, the Company’sCompany has reduced debt and line of credit usage, andor refinanced approximately $155 million of outstanding debt at significantly lower interest rates.its higher rate debt. LIBOR has decreased significantly since Marchduring calendar year 2020, reducing the carrying cost of some of the Company’s debt.
Loss on Early Extinguishment of Debt. In conjunction with the June 2021 issuance of the 2031 Notes and the Line, the Company wrote off $1.1 million of capitalized loan costs related to the 2023 Notes and the Company’s former line of credit.
Income Taxes. Income tax expense totaled $22.7 million for the three months ended June 26, 2021, an effective tax rate of 24.0% of pretax income. Income tax expense totaled $19.6 million for the three months ended June 27, 2020, an effective tax rate of 23.8% of pretax income. Income tax expense totaled $8.3 million for the three months ended June 29, 2019, an effective tax rate of 26.1% of pretax income.
Net Income. Net income totaled $72.0 million for the three-month period ended June 26, 2021 compared with $62.8 million for the three-month period ended June 27, 2020 compared with $23.5 million for the three-month period ended June 29, 2019.2020. Basic and diluted earnings per share for Class A Common Stock were $3.88 and $3.79, respectively, for the June 2021 quarter, compared to $3.18 and $3.10, respectively, for the June 2020 quarter, compared to $1.19 and $1.16, respectively, for the June 2019 quarter. Basic and diluted earnings per share for Class B Common Stock were each $3.52 for the June 2021 quarter compared with $2.89 for the June 2020 quarter compared with $1.08 for the June 2019 quarter.
Nine Months Ended June 27, 202026, 2021 Compared to the Nine Months Ended June 29, 201927, 2020
Net income for the first nine months of fiscal 2020ended June 26, 2021 totaled $120.7$178.0 million, compared with net income of $60.7$120.7 million earned for the first nine months of fiscal 2019. As was outlined in the discussion of our three month June 2020 results, the2020. The COVID-19 pandemic resulted in various stay-at-home measures, as well as the closing of most schools and restaurants.restaurants beginning in March 2020. Many of these measures were still in place throughout the nine-month period ended June 26, 2021. As a result, retail grocery sales increased since the pandemic was declared on March 13, 2020.increased. Corresponding operating expenses did not increase as much, resulting in higher pre-tax income compared with the first nine months of fiscal 2019. Offsetting that, the Company incurred debt extinguishment costs of $3.7 million to refinance and extend $155 million of debt at a substantially lower interest rate.income.
Net Sales. Net sales increased by $287.5$239.0 million, or 9.2%7.0%, to $3.65 billion for the nine months ended June 26, 2021 compared with $3.41 billion for the nine months ended June 27, 2020 compared with $3.13 billion for2020. The COVID-19 pandemic impacted the nine monthsfull nine-month period ended June 29, 2019.2021, while it impacted only 15 of the 39 weeks ended June 2020. Comparing the first nine months of fiscal 20202021 with the first nine months of fiscal 2019,2020, gasoline sales dollars and gallons sold were lower duehigher as the public began to decreased demand due to the COVID-19 pandemictravel more and oversupply.market prices increased. Excluding gasoline sales, total grocery comparable store sales increased 14.4%5.2% over the comparative nine month periods.nine-month period. Comparing the first nine months of fiscal years 20202021 and 20192020 (and excluding gasoline), the number of customer transactions decreasedincreased 2.2% and the average transaction size increased 14.5%3.1%.
Sales by product category (in thousands) are as follows:
| Nine Months Ended | |||||
June 26, | June 27, | |||||
2021 | 2020 | |||||
Grocery | $ | 1,302,734 | $ | 1,255,718 | ||
Non-foods | 840,083 | 788,252 | ||||
Perishables | 990,040 | 929,507 | ||||
Gasoline | 405,397 | 345,170 | ||||
Total retail grocery | $ | 3,538,254 | $ | 3,318,647 | ||
Changes in retail grocery sales for the nine months ended June 26, 2021 are summarized as follows (in thousands):
| Nine Months Ended | |||||
June 27, | June 29, | |||||
2020 | 2019 | |||||
Grocery | $ | 1,255,718 | $ | 1,079,884 | ||
Non-foods | 788,252 | 694,036 | ||||
Perishables | 929,507 | 824,614 | ||||
Gasoline | 345,170 | 430,393 | ||||
Total retail grocery | $ | 3,318,647 | $ | 3,028,927 | ||
| |||
Total retail sales for the nine months ended June 27, 2020 | $ | 3,318,647 | |
Comparable store sales increase (including gasoline) | 211,628 | ||
Impact of stores opened in fiscal 2021 | 8,676 | ||
Impact of stores closed in fiscal 2020 | (1,450) | ||
Other | 753 | ||
Total retail sales for the nine months ended June 26, 2021 | $ | 3,538,254 |
The grocery category includes grocery, dairy, and frozen foods.
The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.
The perishables category includes meat, produce, deli and bakery.
| |||
Total retail sales for the nine months ended June 29, 2019 | $ | 3,028,927 | |
Comparable store sales increase (including gasoline) | 283,110 | ||
Impact of stores opened in fiscal 2019 | 19,394 | ||
Impact of stores closed in fiscal 2019 and 2020 | (12,827) | ||
Other | 43 | ||
Total retail sales for the nine months ended June 27, 2020 | $ | 3,318,647 |
Sales growth for the remainder of fiscal 2020 will depend largely on the duration of various COVID-19 pandemic stay-at-home measures, including restaurant and travel restrictions.
Gross Profit. Gross profit for the nine-month period ended June 27, 202026, 2021 totaled $873.8$962.2 million, an increase of $112.1$88.4 million, or 14.7%10.1%, compared with gross profit of $761.7$873.8 million for the nine-month period ended June 29, 2019.27, 2020. Gross profit as a percentage of sales was 25.6%26.3% and 24.4%25.6% for the nine months ended June 26, 2021 and June 27, 2020, and June 29, 2019, respectively. Gasoline gross profit dollars and margin were higher during the first nine months of the current fiscal year. Retail grocery gross margin excluding gasgasoline was also102 basis points higher overfor the comparable nine-month period, as therenine months ended June 26, 2021 compared with the nine months ended June 27, 2020. There was less discounting and promotional pricing.shrink during the current nine-month period as compared with the prior nine-month period.
Operating and Administrative Expenses. Operating and administrative expenses increased $33.4$29.5 million, or 5.1%4.3%, to $714.5 million for the nine months ended June 26, 2021, from $685.0 million for the nine months ended June 27, 2020, from $651.6 million for the nine months ended June 29, 2019.2020. As a percentage of sales, operating and administrative expenses were 19.6% and 20.1% for the nine months endedJune 2021 and June 2020 and 20.9% for the nine months ended June 2019.nine-month periods, respectively. Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 22.1%21.8% of sales for the first nine-months of fiscal 2020 compared with 24.0% for the first nine months of 2021 compared with 22.1% for the first nine months of 2020. The fiscal 2019.2021 first nine month expense percentages are lower due to additional pandemic-related sales during the first nine months of 2021.
A breakdown of the major changes in operating and administrative expenses is as follows:
Increase | ||||||||||||
Increase | (decrease) | Increase | ||||||||||
(decrease) | as a % of | Increase | as a % of | |||||||||
in millions | sales | in millions | sales | |||||||||
Salaries and wages | $ | 27.1 | 0.79 | % | $ | 11.0 | 0.30 | % | ||||
Advertising and promotion | $ | 5.1 | 0.15 | % | ||||||||
Depreciation and amortization | $ | 5.4 | 0.15 | % | ||||||||
Bank charges | $ | 4.0 | 0.11 | % | ||||||||
Store supplies | $ | 3.9 | 0.11 | % | ||||||||
Repairs and maintenance | $ | 2.7 | 0.08 | % | $ | 3.0 | 0.08 | % | ||||
Utilities | $ | (2.3) | (0.07) | % | ||||||||
Salaries and wages increased in dollars due to additional labor hours required for the increased sales volume, including extra labor needed in response to the COVID-19 pandemic.
Advertising and promotion expensesDepreciation expense increased due to equipment purchased for store improvements, information technology, and the distribution network.
Bank charges increased as a result of increased sales and higher digital advertising expensescard usage compared with cash or checks.
Store supplies increased due to raw material cost increases and lower income contributions from vendors.commensurate with the increase in sales.
Repairs and maintenance expense increased due to extra sales and enhanced cleaning protocols as a result of the COVID-19 pandemic.
Utilities decreased due to decreases in market energy costs.
Gain (loss) from Sale or Disposal of Assets. Gain from the sale or disposal of assets totaled $4.4$3.6 million from the sales of land during the nine months ended June 27, 2020. During the prior year nine-month period, the Company recognized a $3.2 million gain on26, 2021, primarily from the sale of a former store property. There were no other significant sale/disposal transactions in either nine-month periodDuring the nine months ended June 27, 2020, the gain from the sale or June 29, 2019.disposal of assets totaled $4.4 million primarily from the sale of land.
Interest Expense. Interest expense totaled $18.1 million for the nine-month period ended June 26, 2021 compared with $31.8 million for the nine-month period ended June 27, 2020 compared with $35.9 million for the nine-month period ended June 29, 2019. Total debt at June 2020 was $819.3 million compared with $854.7 million at June 2019.2020. Over the past twelve months, the Company has reduced debt and line of credit usage, andor refinanced approximately $155 million of outstanding debt at significantly lower interest rates.its higher rate debt. LIBOR has decreased significantly since Marchduring calendar year 2020, reducing the cost of some of the Company’s debt.
Loss on Early Extinguishment of Debt. In November 2019,During the nine month June 2021 period, the Company closed a $155wrote off $1.1 million ten-year amortizing real estate loan (the “Loan”) and issued notice to redeem a like principal amount of the Notes. The Loan was funded and the Notes redeemed thirty days after the redemption notice in December 2019. The Notes were redeemed at 101.917% of par value, and the Company recognized debt extinguishment costs of approximately $3.7 million during the quarter ending December 28, 2019. The debt extinguishment costs were comprised of $3.0 million of redemption premium and a $0.7 million write off of capitalized loan costs related to the redeemedretirement of the 2023 Notes and the Company’s former line of credit. During the nine-month June 2020 period, the Company incurred $3.7 million of extinguishment costs related to the early repayment of $155 million of 2023 Notes.
Income Taxes. Income tax expense totaled $56.2 million for the nine months ended June 26, 2021, an effective tax rate of 24.0% of pretax income. Income tax expense totaled $38.0 million for the nine months ended June 27, 2020, an effective tax rate of 23.9% of pretax income. Income tax expense totaled $18.5 million for the nine months ended June 29, 2019, an effective tax rate of 23.4% of pretax income.
Net Income. Net income totaled $178.0 million for the nine-month period ended June 26, 2021 compared with $120.7 million for the nine-month period ended June 27, 2020 compared with $60.7 million for the nine-month period ended June 29, 2019.2020. Basic and diluted earnings per share for Class A Common Stock were $9.22 and $8.98, respectively, for the nine months ended June 26, 2021, compared to $6.13 and $5.96, respectively, for the nine months ended June 27, 2020, compared to $3.07 and $2.99, respectively, for the nine months ended June 29, 2019.2020. Basic and diluted earnings per share for Class B Common Stock were each $8.38 for the nine-months ended June 26, 2021 compared with $5.57 for the nine months ended June 2020 nine-month period compared with $2.80 for the June 2019 nine-month period.27, 2020.
Liquidity and Capital Resources
Capital Expenditures
The Company believes that a key to its ability to continue to develop a loyal customer base is providing conveniently located, clean and modern stores which provide customers with good service and a broadan increasingly diverse selection of competitively priced products. Therefore, the Company has invested and willplans to continue to invest significant amounts of capital toward the modernization of its store base. The Company’s modernization program includes the opening of new stores, the completion of major remodels and expansion of selected existing stores, the relocation of selected existing stores to larger, more convenient locations and the completion of minor remodeling of its remaining existing stores.
Capital expenditures totaled $78.9$108.0 million for the nine-month period ended June 27, 2020.26, 2021. These capital expenditures focused on construction onof stores opened or scheduled to open later in fiscal 2020,2021, site acquisition, and smaller-scale remodeling projects in a number of the Company’s stores. Capital expenditures also included the costs of upgrading and replacing store equipment, technology investments, rolling stock, and capital expenditures related to the Company’s milk processing plant.
Ingles’ capital expenditure plans for fiscal 20202021 currently include investments of approximately $100$120 to $120$140 million. At this timeThe Company currently plans to dedicate the Company does not anticipate that the COVID-19 pandemic will have an adverse impact on its capital expenditure plans. The majority of the Company’sits fiscal 20202021 capital expenditures will be dedicated to continued improvement of its store base and also include investments in stores expected to open in fiscal 2020,2021, as well as technology improvements, upgrading and replacing existing store equipment and warehouse and transportation equipment and improvements to the Company’s milk processing plant.
The Company currently expects that its annual capital expenditures will be in the range of approximately $100 to $160 million going forward in order to maintain a modern store base. PlannedAmong other things, planned expenditures for any given future fiscal year will be affected by the availability of financing, which can affect both the number of projects pursued at any given time and the cost of those projects. The number of projects may also fluctuate due to the varying costs of the types of projects pursued including new stores and major remodel/expansions. The Company makes decisions on the allocation of capital expenditure dollars based on many factors including the competitive environment, other Company capital initiatives and its financial condition.
The Company does not generally enter into commitments for capital expenditures other than on a store-by-store basis at the time it begins construction on a new store or begins a major or minor remodeling project. Outstanding construction commitments totaled $11.4$3.2 million at June 27, 2020.26, 2021.
Liquidity
The Company generated $229.0$213.9 million net cash from operations in the June 20202021 nine-month period compared with $144.5$229.0 million during the June 20192020 nine-month period. The increase is primarily attributableNet income was higher for the nine-month 2021 period compared with the prior year, but this was offset by higher working capital uses to maintain higher net income as a resultlevels of inventory needed to support increased sales due to the COVID-19 pandemic.pandemic-related sales.
Cash used by investing activities for the nine-month periods ended June 26, 2021 and June 27, 2020 totaled $396.4 million and June 29, 2019 totaled $71.6 million, and $115.0respectively. $295.0 million respectively, consisting primarily of capital expenditures offset by insignificant2031 Notes proceeds from property and equipment sales. Capital expenditures were higher during theinvested short-term prior year nine-month period due to the purchaseredemption of a shopping center where the Company had previously leased a store.2023 Notes in July 2021.
Cash provided by financing activities totaled $200.1 million for the nine-month period ended June 26, 2021, compared with cash used by financing activities totaledof $47.3 million for the nine-month period ended June 27, 2020, compared with $21.5 million for the nine-month period ended June 29, 2019.2020. The increase is primarily related to the repaymentissuance of certain long-term borrowings.the 2031 Notes and the repurchase of common stock during the 2021 period.
In June 2013,2021, the Company issued $700.0$350.0 million aggregate principal amount of senior notes due in 20232031 (the “Notes”“2031 Notes”). The 2031 Notes bear an interest rate of 5.750%4.00% per annum and were issued at par. Upon issuance of the 2031 Notes, the Company issued an irrevocable notice to redeem the remaining $295.0 million principal amount of 5.75% senior notes due in 2023 (the “2023 Notes”). These 2023 Notes were redeemed at par value on July 16, 2021.
In November 2019, the Company closed the $155a $155.0 million Loanten year amortizing real estate loan (the “Loan”) and issued notice to redeem a like principal amount of the 2023 Notes. The Loan was funded and the 2023 Notes were redeemed at 101.917% of par value thirty days after the redemption notice in December 2019. The Notes were redeemed at 101.917% of par value, and the Company recognized debt extinguishment costs of approximately $3.7 million during the quarter ending December 28, 2019. The Loan matures January 31, 2030 and has monthly principal payments of $0.65 million plus floating rate interest payments based on LIBOR.
In June 2020, the Company issued an irrevocable notice to redeem $150$150.0 million principal amount of the 2023 Notes. The 2023 Notes were redeemed at 100.958% of par value on July 9, 2020. The Company will recognize debt extinguishment costs of approximately $2.0 million during the quarter ending September 26, 2020. This $150 million is included in the line “Current portion of long-term debt” on the June 27, 2020 Condensed Consolidated Balance Sheet.
In July 2020, the Company issued an irrevocable notice to redeem $100 million principal amount of the 2023 Notes. The 2023 Notes will bewere redeemed at 100.958% of par value on August 27, 2020. The Company will recognize debt extinguishment costs of approximately $1.4 million during the quarter ending September 26, 2020. Following this redemption, there will be $295.0 million of the Notes outstanding.
The Company has a $175.0$150.0 million line of credit (the “Line”) that matures in September 2022.June 2026. The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or LIBOR. The Line allows the Company to issue up to $20.0$10.0 million in unused letters of credit, of which $9.5 million of unused letters of creditnone were issued at June 27, 2020.26, 2021. The Company is not required to maintain compensating balances in connection with the Line. At June 27, 2020,26, 2021, the Company had no borrowings outstanding under the Line.
In December 2010, the Company completed the funding of $99.7 million of Bonds (the “Bonds”) for the construction of new warehouse and distribution space adjacent to its existing space in Buncombe County, North Carolina (the “Project”). The final maturity date of the Bonds is January 1, 2036.
Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between certain financial institutions and the Company, the financial institutions would hold the Bonds until September 26, 2026, subject to certain events. Mandatory redemption of the Bonds by the Company in the annual amount of $4.5 million began on January 1, 2014. The outstanding balance of the Bonds is $68.0$63.5 million as of June 27,2020.26, 2021. The Company may redeem the Bonds without penalty or premium at any time prior to September 26, 2026.
The Company has an interest rate swap agreement for a current notional amount of $44.0$38.0 million at a fixed rate of 3.92%. Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest rate swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.
The Company has an interest rate swap agreement for a current notional amount of $149.8$142.1 million at a fixed rate of 2.95%. Under this agreement, the Company pays monthly the fixed rate of 2.95% and receives the one-month LIBOR plus 1.50%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.65 million and mature in fiscal year 2030.
The fair market value of the interest rate swaps are measured quarterly with adjustments recorded in other comprehensive income.
The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under the Company’s Line, Bonds and 2031 Notes indenture in the event of default under any one instrument.
The Company’s long-term debt agreements generally contain provisions that under certain circumstances would permit lending institutions to terminate or withdraw their respective extensions of credit to the Company. Included among the triggering factors permitting the termination or withdrawal of the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents. As of June 27, 2020,26, 2021, the Company was in compliance with these covenants. Under the most restrictive of these covenants, the Company would be able to incur approximately $1.2$1.53 billion of additional borrowings (including borrowings under the Line) as of June 27, 2020.
26, 2021.
The Company’s principal sources of liquidity are expected to be cash flow from operations, borrowings under the Line and long-term debt financing. The Company believes, based on its current results of operations and financial condition, that its financial resources, including the Line, short- and long-term financing expected to be available to it and internally generated funds, will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future, including any debt service requirements of additional borrowings. However, there is no assurance that any such sources of financing will be available to the Company when needed on acceptable terms, or at all.
It is possible that, in the future, the Company’s results of operations and financial condition will be different from that described in this report based on a number of factors. These factors may include, among others, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery, changing demographics, and the impact of the COVID-19 pandemic, as well as the additional factors discussed below under “Forward Looking Statements.” It is also possible, for such reasons, that the results of operations from the new, expanded, remodeled and/or replacement stores will not meet or exceed the results of operations from existing stores that are described in this report.
Contractual Obligations and Commercial Commitments
The Company has assumed various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements, such as debt and lease arrangements. The following table represents the scheduled maturities of the Company’s long-term contractual obligations as of June 27, 2020:
Contractual Obligations | Less than | 1-3 | 3-5 | More than | |||||||||||
(amounts in thousands) | Total | 1 year | years | years | 5 years | ||||||||||
Long-term debt and line of credit | $ | 819,277 | $ | 168,936 | $ | 433,296 | $ | 40,381 | $ | 176,664 | |||||
Scheduled interest on long-term debt (1) | 125,079 | 36,359 | 71,576 | 7,366 | 9,778 | ||||||||||
Advance payments on purchase contracts | 3,330 | 1,777 | 600 | 100 | 853 | ||||||||||
Operating leases (2) | 60,911 | 9,439 | 16,210 | 8,874 | 26,388 | ||||||||||
Construction commitments | 11,396 | 11,396 | — | — | — | ||||||||||
Total | $ | 1,019,993 | $ | 227,907 | $ | 521,682 | $ | 56,721 | $ | 213,683 | |||||
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The Company has entered supply contracts to provide approximately 92% of the fuel sold in its fuel centers. Pricing is based on certain market indices at the time of purchase. The suppliers can modify or terminate the contracts if the Company does not meet certain minimum monthly purchase requirements.
The Company is self-insured for workers’ compensation, general liability, and group medical and dental benefits. The Company’s self-insurance reserves totaled $33.5 million at June 27, 2020 and $31.0 million at September 28, 2019. Self-insurance liabilities are based on estimates and actuarial assumptions and can fluctuate in both amount and in timing of cash settlement if historical trends are not predictive of the future. For this reason they are not included in the above table.
The Company has a nonqualified investment plan to provide retirement benefits to certain of the Company’s management employees who are otherwise subject to limited participation in the 401(k) feature of the Company’s Investment/Profit Sharing Plan. The liability to plan participants totaled $15.7 million at June 27, 2020 and $16.4 million at September 28, 2019. The settlement of this obligation is dependent upon participant elections to withdraw funds, which cannot be predicted. For this reason they are not included in the above table.
Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims will not materially affect the Company’s financial position, the results of its operations, or its cash flows.
There have been no other material changes in contractual obligations and commercial commitments subsequent to September 28, 2019 other than as described elsewhere in this Form 10-Q.
Off Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Quarterly Cash Dividends
Since December 27, 1993, the Company has paid regular quarterly cash dividends of $0.165 (sixteen and one-half cents) per share on its Class A Common Stock and $0.15 (fifteen cents) per share on its Class B Common Stock for an annual rate of $0.66 and $0.60 per share, respectively.
The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors periodically reconsiders the declaration of dividends. The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant. In addition, the 2031 Notes, the Bonds, the Line, and other debt agreements contain provisions that, based on certain financial parameters, restrict the ability of the Company to pay additional cash dividends in excess of current quarterly per share amounts. Further, the Company is prevented from declaring dividends at any time that it is in default under the indenture governing the 2031 Notes.
Seasonality
Grocery sales are subject to a slight seasonal variance due to holiday related sales and due to sales in areas where seasonal homes are located. Sales are traditionally higher in the Company’s first fiscal quarter due to the inclusion of sales related to Thanksgiving and Christmas. The Company’s second fiscal quarter traditionally has the lowest sales of the year, unless Easter falls in that quarter. In the third and fourth quarter, sales are affected by the return of customers to seasonal homes in our market area. The Company’s fluid dairy operations have slight seasonal variation to the extent of its sales into the grocery industry. The Company’s real estate activities are not subject to seasonal variations.
Impact of Inflation
The following table from the United States Bureau of Labor Statistics lists annualized changes in the Consumer Price Index that could have an effect on the Company’s operations. One of the Company’s significant costs is labor, which changes with general inflation. Inflation or deflation in energy costs affects the Company’s gasoline sales, distribution expenses, utility expenses and plastic supply costs.
| Nine Months Ended | |||||
| June 27, | June 29, | ||||
2020 | 2019 | |||||
All items |
| 0.1 | % | 0.2 | % | |
Food and beverages |
| 0.4 | % | 0.1 | % | |
Energy |
| (1.7) | % | — | % | |
Forward Looking Statements
This Quarterly Report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect”, “anticipate”, “intend”, “plan”, “likely”, “goal”, “believe”, “seek”, “will”, “may”, “would”, “should” and similar expressions are intended to identify forward-looking statements. While these forward-looking statements and the related assumptions are made in good faith and reflect the Company’s current judgment regarding the direction of the Company’s business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.or described by such forward-looking statements. Such statements are based upon a number of assumptions and estimates which are inherently subject to significant risks and uncertainties many of which are beyond the Company’s control. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect the Company’s results. Some important factors (but not necessarily all factors) that affect the Company’s revenues, financial position, growth strategies, future profitability and operating results, or that otherwise could cause actual results to differ materially from those expressed in or implied by any forward-looking statement, include the potential continued impact of the COVID-19 pandemic on our business and economic conditions generally in the Company’s operating area; the Company’s ability to successfully implement its expansion and operating strategies and to manage rapid expansion; pricing pressures and other competitive factors; reduction in per gallon retail gasoline prices; the maturation of new and expanded stores; the Company’s ability to reduce costs and achieve improvements in operating results; the availability and terms of financing; increases in labor and utility costs; success or failure in the ownership and development of real estate; changes in the laws and government regulations applicable to the Company; disruptions in the efficient distribution of food products; changes in accounting policies, standards, guidelines or principles as may be adopted by regulatory agencies as well as the Financial Accounting Standards Board; and those factors contained under the heading “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K.
Consequently, actual events affecting the Company and the impact of such events on the Company’s operations may vary significantly from those described in this report or contemplated or implied by statements in this report. The Company does not undertake and specifically denies any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.developments, except to the extent required by applicable law.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As disclosed elsewhere in this Quarterly Report on Form 10Q,10-Q, the Company is a party to interest rate swap agreements for a current aggregate notional amount of $193.8$180.1 million. Otherwise, the Company does not typically utilize financial instruments for trading or other speculative purposes, nor does it typically utilize leveraged financial instruments. There have been no other material changes in the market risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended September 28, 2019.26, 2020.
Item 4. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission. Disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that the Company’s system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of June 27, 2020,26, 2021, the end of the period covered by this report. In making this evaluation, it considered matters previously identified and disclosed in connection with the filing of its Annual Report on Form 10-K for fiscal 2019.2020. After consideration of the matters discussed above and the changes in internal control over financial reporting discussed below, the Company has concluded that its controls and procedures were effective as of June 27, 2020.26, 2021.
(b) Changes in Internal Control over Financial Reporting
The Company is currently planning and performing tests of internal controls over financial reporting for fiscal year 2020.2021.
No changes in internal control over financial reporting occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1A. RISK FACTORS
The following risk factor disclosure should be read in conjunction with the risk factors described in the Company’s most recent Annual Report on Form 10-K.
Coronavirus (COVID-19) Pandemic Impact
The coronavirus (COVID-19) pandemic was declared a national emergency on March 13, 2020 and the Company was classified as an essential business. We remained open to safely serve the needs of our customers during various isolation measures imposed to reduce pandemic risks.
These measures closed schools, restaurants, and many businesses in the Company’s market area. Sales and customer traffic increased and the Company’s implemented numerous sanitation, face covering and social distancing protocols to keep our customers and our associates safe. These protocols included changes to operating hours, frequent extensive cleaning, personal protective equipment, and measures to maintain safe distances in our stores. We hired additional associates due to the increased demands on our stores and our distribution center, and our business could be negatively impacted by a shortage of qualified labor.
At the present time, we do not know how long current national, state and local mandates related to the pandemic will continue, or how mandates will change in the future. We do not know how our customer base will be impacted by unemployment, the reopening of schools and businesses, or various assistance programs. We may experience adverse impacts to our business as a result of economic recession, and/or reduced consumer confidence.
We do not know what risks may impact our suppliers as a result of plant closures or transportation disruptions. Our supply chain could be adversely impacted due to increased demand, the availability of transportation, as well as adequate warehouse space and personnel. We offered rent deferrments to our tenants, but we do not know the longer-term impact on tenants in Company-owned shopping centers.
Any of the foregoing factors, or other effects of the pandemic that are not currently foreseeable, may materially increase costs, negatively impact sales and adversely affect the Company’s financial condition, results of operations, cash flows and its liquidity position. The significance and duration of any such impacts are not possible to predict due to the overall uncertainty associated with the coronavirus (COVID-19) pandemic.
Item 6. EXHIBITS
(a) Exhibits.
101 | * | The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended June |
104 | * | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
________
*Filed herewith.
**Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
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| INGLES MARKETS, INCORPORATED |
Date: August |
| /s/ James W. Lanning
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| James W. Lanning |
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| Chief Executive Officer and President |
Date: August |
| /s/ Ronald B. Freeman
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| Ronald B. Freeman |
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| Vice President-Finance and Chief Financial Officer |