1
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 30, 2001
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[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 6676, Asheville, NC 28816
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(Address of principal executive offices) (Zip Code)
(828) 669-2941
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Registrant's telephone number, including area code
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 [ ]
As of August 1, 2001, the Registrant had 10,001,401 shares of Class A
Common Stock, $.05 par value per share, outstanding and 12,635,338 shares of
Class B Common Stock, $.05 par value per share, outstanding.
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INGLES MARKETS, INCORPORATED
INDEX
Page No.
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Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 2001 and September 30, 2000.............................. 3
Condensed Consolidated Statements of Income
Three Months Ended June 30, 2001 and June 24, 2000................ 5
Nine Months Ended June 30, 2001 and June 24, 2000................. 6
Condensed Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended June 30, 2001 and June 24, 2000................. 7
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2001 and June 24, 2000................. 8
Notes to Unaudited Interim Financial Statements............................ 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 21
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K......................................... 21
Signatures.......................................................................... 22
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Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, SEPTEMBER 30,
2001 2000
(UNAUDITED) (NOTE)
------------ -------------
CURRENT ASSETS:
Cash $ 12,616,436 $ 11,176,013
Receivables 30,066,790 21,569,530
Inventories 178,746,044 179,396,630
Refundable income taxes -- 1,250,000
Other 5,761,388 6,188,703
------------ -------------
Total Current Assets 227,190,658 219,580,876
PROPERTY AND EQUIPMENT - Net 725,176,140 702,472,344
OTHER ASSETS 3,964,868 5,712,592
------------ -------------
TOTAL ASSETS $956,331,666 $ 927,765,812
============ =============
NOTE: The balance sheet at September 30, 2000 has been derived from the audited
financial statements at that date.
See notes to unaudited interim financial statements.
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4
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONCLUDED)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, SEPTEMBER 30,
2001 2000
(UNAUDITED) (NOTE)
------------ -------------
CURRENT LIABILITIES:
Short-term loans and current portion of long-term debt $152,934,173 $ 59,776,013
Accounts payable, accrued expenses and current portion
of other long-term liabilities 138,415,444 137,745,877
------------ ------------
Total Current Liabilities 291,349,617 197,521,890
DEFERRED INCOME TAXES 35,614,578 35,514,578
LONG-TERM DEBT 388,749,006 455,861,173
OTHER LONG-TERM LIABILITIES 4,932,075 6,729,921
------------ ------------
TOTAL LIABILITIES 720,645,276 695,627,562
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.05 par value;
10,000,000 shares authorized; no shares issued -- --
Common stocks:
Class A, $.05 par value; 150,000,000 shares authorized; 10,001,401 shares
issued and outstanding June 30, 2001; 9,932,614 shares issued
and outstanding September 30, 2000 500,070 496,631
Class B, $.05 par value; 100,000,000 shares authorized; 12,635,338 shares
issued and outstanding June 30, 2001; 12,645,125 shares issued and
outstanding September 30, 2000 631,767 632,256
Paid-in capital in excess of par value 98,565,820 97,943,633
Retained earnings 135,988,733 133,065,730
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 235,686,390 232,138,250
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $956,331,666 $927,765,812
============ ============
NOTE: The balance sheet at September 30, 2000 has been derived from the audited
financial statements at that date.
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
----------------------------------
JUNE 30, JUNE 24,
2001 2000
------------ ------------
Net sales $484,734,506 $469,364,035
Cost of goods sold 356,100,404 346,785,018
------------ ------------
Gross profit 128,634,102 122,579,017
Operating and administrative expenses 114,101,554 107,575,887
Rental income, net 2,774,045 2,410,755
------------ ------------
Income from operations 17,306,593 17,413,885
Other income, net 2,427,081 1,920,530
------------ ------------
Income before interest and income taxes 19,733,674 19,334,415
Interest expense 10,011,839 10,080,080
------------ ------------
Income before income taxes 9,721,835 9,254,335
------------ ------------
Income taxes:
Current 3,200,000 3,350,000
Deferred 600,000 300,000
------------ ------------
3,800,000 3,650,000
------------ ------------
Net income $ 5,921,835 $ 5,604,335
============ ============
Per share amounts:
Basic earnings per common share $ 0.26 $ 0.25
============ ============
Diluted earnings per common share
$ 0.26 $ 0.25
============ ============
Cash dividends per common share:
Class A Common Stock $ 0.165 $ 0.165
============ ============
Class B Common Stock $ 0.150 $ 0.150
============ ============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED
---------------------------------------
JUNE 30, JUNE 24,
2001 2000
-------------- ---------------
Net sales $1,464,596,170 $ 1,402,903,267
Cost of goods sold 1,082,038,813 1,044,297,451
-------------- ---------------
Gross profit 382,557,357 358,605,816
Operating and administrative expenses 339,214,882 315,087,506
Rental income, net 8,072,404 7,023,369
-------------- ---------------
Income from operations 51,414,879 50,541,679
Other income, net 3,231,528 6,908,495
-------------- ---------------
Income before interest and income taxes 54,646,407 57,450,174
Interest expense 32,716,274 29,896,165
-------------- ---------------
Income before income taxes 21,930,133 27,554,009
-------------- ---------------
Income taxes:
Current 6,600,000 11,050,000
Deferred 1,800,000 (400,000)
-------------- ---------------
8,400,000 10,650,000
-------------- ---------------
Net income $ 13,530,133 $ 16,904,009
============== ===============
Per share amounts:
Basic earnings per common share $ 0.60 $ 0.75
============== ===============
Diluted earnings per common share $ 0.60 $ 0.75
============== ===============
Cash dividends per common share:
Class A Common Stock $ 0.495 $ 0.495
============== ===============
Class B Common Stock $ 0.450 $ 0.450
============== ===============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 2001 AND JUNE 24, 2000
CLASS A CLASS B PAID-IN
COMMON STOCK COMMON STOCK CAPITAL
---------------------- ------------------------- IN EXCESS OF RETAINED
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS TOTAL
---------- -------- ----------- --------- ------------ ------------- -------------
Balance, September 25, 1999 9,786,491 $489,324 12,691,248 $ 634,563 $96,898,633 $ 126,099,336 $ 224,121,856
Net income -- -- -- -- -- 16,904,009 16,904,009
Cash dividends -- -- -- -- -- (10,589,260) (10,589,260)
Exercise of stock options 100,000 5,000 -- -- 1,045,000 -- 1,050,000
Common stock conversions 44,623 2,232 (44,623) (2,232) -- -- --
---------- -------- ----------- --------- ----------- ------------- -------------
Balance, June 24, 2000 9,931,114 $496,556 12,646,625 $ 632,331 $97,943,633 $ 132,414,085 $ 231,486,605
========= ======== =========== ========= =========== ============= =============
Balance, September 30, 2000 9,932,614 $496,631 12,645,125 $ 632,256 $97,943,633 $ 133,065,730 $ 232,138,250
Net income -- -- -- -- -- 13,530,133 13,530,133
Cash dividends -- -- -- -- -- (10,607,130) (10,607,130)
Exercise of stock options 59,000 2,950 -- -- 622,187 -- 625,137
Common stock conversions 9,787 489 (9,787) (489) -- -- --
---------- -------- ----------- --------- ----------- ------------- -------------
BALANCE, JUNE 30, 2001 10,001,401 $500,070 12,635,338 $ 631,767 $98,565,820 $ 135,988,733 $ 235,686,390
========== ======== =========== ========= =========== ============= =============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
-----------------------------------
JUNE 30, JUNE 24,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,530,133 $ 16,904,009
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 33,532,337 32,588,517
Amortization of deferred gain on sale/leasebacks (939,676) (772,177)
Gains on disposals of property and equipment (1,293,482) (2,485,424)
Receipt of advance payments on purchases contracts 575,000 2,844,282
Recognition of advance payments on purchases contracts (2,806,875) (3,532,572)
Increase (decrease) in deferred income taxes 1,800,000 (400,000)
(Increase) decrease in receivables (7,247,260) 4,616,739
Decrease (increase) in inventory 650,586 (3,258,099)
(Increase) decrease in other assets (1,660,238) 93,164
Increase (decrease) in accounts payable and accrued
expenses 1,819,371 (2,487,722)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 37,959,896 44,110,717
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 4,775,343 6,547,733
Capital expenditures (58,903,031) (83,346,398)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (54,127,688) (76,798,665)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 35,208,287 86,868,573
Proceeds from short-term borrowings, net 35,000,000 15,000,000
Proceeds from sale/leaseback transactions 1,544,215 10,453,676
Principal payments on long-term debt (44,162,294) (69,192,371)
Proceeds from exercise of stock options 625,137 1,050,000
Dividends paid (10,607,130) (10,589,260)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,608,215 33,590,618
------------ ------------
NET INCREASE IN CASH 1,440,423 902,670
Cash at beginning of period 11,176,013 13,959,751
------------ ------------
CASH AT END OF PERIOD $ 12,616,436 $ 14,862,421
============ ============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Nine Months Ended June 30, 2001 and June 24, 2000
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 30, 2001, and the results of operations, changes
in stockholders' equity and cash flows for the three month and nine month
periods ended June 30, 2001 and June 24, 2000. 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. These unaudited interim financial statements
should be read in conjunction with the audited financial statements and the
notes thereto included in the 2000 Annual Report on Form 10-K filed by the
Company under the Securities Exchange Act of 1934 on December 20, 2000.
The results of operations for the three month and nine month periods ended June
30, 2001 are not necessarily indicative of the results to be expected for the
full fiscal year.
Certain amounts for the three month and nine month periods ended June 24, 2000
have been reclassified for comparative purposes.
B. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of $359,640
and $256,630 at June 30, 2001 and September 30, 2000, respectively.
C. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND CURRENT PORTION OF OTHER LONG-TERM
LIABILITIES
Accounts payable, accrued expenses and current portion of other long-term
liabilities consist of the following:
JUNE 30, September 30,
2001 2000
------------ -------------
Accounts payable-trade $ 84,426,282 $ 87,359,538
Property, payroll and other taxes payable 14,464,508 12,557,199
Salaries, wages and bonuses payable 11,367,852 10,328,643
Self-insurance reserves 6,599,621 6,296,217
Accrued litigation settlement 6,246,801 7,049,407
Other 15,310,380 14,154,873
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$138,415,444 $137,745,877
============ ============
Self-insurance reserves are established for workers' compensation and employee
group medical and dental benefits based on claims filed and claims incurred but
not reported. The Company is insured for covered costs in excess of $350,000 per
occurrence for workers' compensation and $175,000 per covered person for medical
care benefits for a policy year.
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Employee insurance expense, including workers' compensation and medical care
benefits, net of employee contributions, totaled $5.1 million and $3.0 million
for the three month periods ended June 30, 2001 and June 24, 2000, respectively.
For the nine month periods ended June 30, 2001 and June 24, 2000, employee
insurance expense totaled $13.0 million and $11.4 million, respectively.
D. LONG-TERM DEBT
During the nine month period ended June 30, 2001, the Company obtained $35.2
million in long-term funding secured by real estate and equipment. In addition,
the Company obtained $35.0 million in net advances on lines of credit at
interest rates less than the prime rate. The proceeds of the loans were used to
fund capital expenditures, retire existing long-term debt and for general
corporate purposes.
E. DIVIDENDS
The Company paid cash dividends of $.165 for each share of Class A Common Stock
and $.15 for each share of Class B Common Stock on April 11, 2001, January 17,
2001 and on October 11, 2000 to stockholders of record on April 2, 2001, January
8, 2001 and October 2, 2000, respectively.
F. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
NINE MONTHS ENDED
----------------------------------
JUNE 30, June 24,
2001 2000
------------ -------------
Interest (net of amount capitalized) $ 32,919,301 $ 29,931,745
Income taxes 714,098 7,758,229
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G. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the periods indicated:
THREE MONTHS ENDED
----------------------------------
JUNE 30, June 24,
2001 2000
------------ ------------
BASIC:
Net income $ 5,921,835 $ 5,604,335
============ ============
Weighted average number of common shares
outstanding 22,579,252 22,577,739
============ ============
Basic earnings per common share $ .26 $ .25
============ ============
DILUTED:
Net income $ 5,921,835 $ 5,604,335
============ ============
Weighted average number of common shares and
common stock equivalent shares outstanding 22,995,877 22,642,081
============ ============
Diluted earnings per common share $ .26 $ .25
============ ============
The following table sets forth the computation of basic and diluted earnings per
share for the nine month period indicated:
NINE MONTHS ENDED
----------------------------------
JUNE 30, June 24,
2001 2000
------------ ------------
BASIC:
Net income $ 13,530,133 $ 16,904,009
============ ============
Weighted average number of common shares
outstanding 22,577,955 22,558,325
============ ============
Basic earnings per common share $ .60 $ .75
============ ============
DILUTED:
Net income $ 13,530,133 $ 16,904,009
============ ============
Weighted average number of common shares and
common stock equivalent shares outstanding 22,841,380 22,631,870
============ ============
Diluted earnings per common share $ .60 $ .75
============ ============
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H. LINES OF BUSINESS
The Company operates three lines of business: retail grocery sales, shopping
center rentals, and a fluid dairy processing plant. All of the Company's
operations are domestic. Information about the Company's operations by lines of
business (in thousands) is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -------------------------------
JUNE 30, June 24, JUNE 30, June 24,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues from unaffiliated customers:
Grocery sales $ 461,898 $ 451,878 $1,400,966 $1,349,974
Shopping center rentals 4,148 3,998 12,223 11,814
Fluid dairy 22,836 17,486 63,630 52,929
---------- ---------- ---------- ----------
Total revenues from unaffiliated
customers $ 488,882 $ 473,362 $1,476,819 $1,414,717
========== ========== ========== ==========
Income from operations:
Grocery sales $ 11,998 $ 13,058 $ 36,581 $ 38,394
Shopping center rentals 2,774 2,411 8,072 7,024
Fluid dairy 2,535 1,945 6,762 5,124
---------- ---------- ---------- ----------
Total income from operations $ 17,307 $ 17,414 $ 51,415 $ 50,542
========== ========== ========== ==========
JUNE 30, September 30,
2001 2000
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Assets:
Grocery sales $796,751 $777,431
Shopping center rentals 130,293 123,672
Fluid dairy 29,288 26,663
-------- --------
Total assets $956,332 $927,766
======== ========
Revenue from shopping center rentals is reported on the rental income, net line
of the income statements. Grocery sales and fluid dairy revenues comprise the
net sales reported.
The fluid dairy segment had $10.8 and $10.4 million in sales to the grocery
sales segment for the three months ended June 30, 2001 and June 24, 2000,
respectively. The fluid dairy segment had $33.3 and $33.2 million in sales to
the grocery sales segment in the nine months ended June 30, 2001 and June 24,
2000, respectively. These sales have been eliminated in consolidation.
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I. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued "Statement No.
133" Accounting for Derivative Instruments and Hedging Activities, which was
amended by "Statement No. 138" Accounting for Certain Derivative Instruments and
Hedging Activities issued in June 2000. The Statement requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not typically utilize derivative
financial instruments. The adoption of "Statement No. 133," as amended by
"Statement No. 138," on October 1, 2000 resulted in no effect on the Company's
earnings or financial position.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Ingles, a leading supermarket chain in the Southeast, operates 206 supermarkets
in Georgia (84), North Carolina (62), South Carolina (31), Tennessee (25),
Virginia (3) 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,
non-food products, including health and beauty care products and general
merchandise, as well as quality private label items. Within the markets it
serves, the Company has developed strong name recognition and a reputation for
combining low overall prices with high levels of customer service and
convenience. Real estate ownership is an important component of the Company's
operations, providing both operational and economic benefits.
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, respectively, ended June 30, 2001 and June 24, 2000. Comparable store
sales are defined as sales by grocery stores in operation for the entire
previous fiscal year. Replacement stores and major and minor remodels are
included in the comparable store sales calculation. A replacement store is a new
store that is opened to replace an existing store that is closed nearby. A major
remodel entails substantial remodeling of an existing store and may include
additional retail square footage. A minor remodel includes repainting,
remodeling and updating the lighting and equipment throughout an existing store.
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The following table sets forth, for the periods indicated, selected financial
information as a percentage of net sales:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------------------
JUNE 30, June 24, JUNE 30, June 24,
2001 2000 2001 2000
----------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 26.5% 26.1% 26.1% 25.6%
Operating and administrative
expenses 23.5% 22.9% 23.2% 22.5%
Rental income, net 0.6% 0.5% 0.6% 0.5%
Other income, net 0.5% 0.4% 0.2% 0.5%
Income before interest and
income taxes 4.1% 4.1% 3.7% 4.1%
Interest expense 2.1% 2.1% 2.2% 2.1%
Income before income taxes 2.0% 2.0% 1.5% 2.0%
Income taxes 0.8% 0.8% 0.6% 0.8%
Net income 1.2% 1.2% 0.9% 1.2%
EBITDA margin(1) 6.4% 6.5% 6.0% 6.4%
- ---------------------------------------------------
(1) EBITDA represents earnings before interest, income taxes, depreciation
and amortization, non-recurring charges and extraordinary items.
Management believes that EBITDA is a useful measure of operating
performance. EBITDA does not represent cash flow from operations as
defined by generally accepted accounting principles (GAAP), is not
necessarily indicative of cash available to fund all cash flow needs
and should not be considered as an alternative to net income under GAAP
for evaluating Ingles' results of operations.
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THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 24,
2000
Net Sales
Net sales for the three months ended June 30, 2001 increased 3.3% to $484.7
million, compared to $469.4 million for the three months ended June 24, 2000.
Comparable store sales increased 2.2% for the quarter compared to the same
period last year.
Sales increases were achieved through a combination of effective marketing,
community involvement and increased sales in maturing new stores, remodeled
stores and stores that have been replaced.
Gross Profit
Gross profit for the three months ended June 30, 2001 increased 4.9% to $128.6
million, or 26.5% of sales, compared to $122.6 million, or 26.1% of sales, for
the three months ended June 24, 2000. Efficient purchasing and an expanded array
of higher margin product offerings contributed to increased gross profit.
Operating and Administrative Expenses
Operating and administrative expenses increased 6.1% to $114.1 million, or 23.5%
of sales, for the three months ended June 30, 2001, from $107.6 million, or
22.9% of sales, for the three months ended June 24, 2000. A variety of factors
contributed to this increase. Insurance expense increased primarily from higher
costs under the self-insured employee group health plan due to a combination of
medical inflation, increased participation and enhanced benefits. Equipment rent
expense increases resulted from the leasing of store equipment for new and
replacement stores. Higher payroll costs resulted from rising wage rates in a
competitive labor market. However, the rise in payroll costs slowed to 4.5%
during the June 2001 quarter compared to 7.9% during the first nine months of
fiscal 2001. Higher fuel costs resulted in the increase in utility expense. The
increases were partially offset by the following decreases in expenses, as a
percentage of sales. Warehouse expenses decreased primarily due to the
stabilization of diesel fuel prices and reduced staffing. Advertising expense
decreased due to renegotiations of major advertising contracts and an increased
focus on co-op advertising. Repair charges decreased in the June 2001 quarter
due to a heavy emphasis on preventive maintenance in the first half of the year.
A breakdown of the major increases (decreases) in operating and administrative
expenses, expressed as a percentage of sales, is as follows:
Insurance 0.4%
Equipment rent expense 0.3%
Payroll 0.1%
Utilities 0.1%
Warehouse expense (0.1)%
Advertising (0.1)%
Repairs & maintenance (0.1)%
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Rental Income, Net
Rental income, net increased $0.4 million to $2.8 million for the three months
ended June 30, 2001, compared to $2.4 million for the three months ended June
24, 2000. The increase resulted from a gross rental income increase of $0.2
million combined with decreases in expenses of $0.2 million.
Other Income, Net
Other income, net increased $0.5 million to $2.4 million for the three months
ended June 30, 2001 from $1.9 million for the three months ended June 24, 2000.
The June 2001 quarter includes gains on sales of assets of approximately $1.3
million from the sale of land adjacent to an existing store and the sale of an
older leased store to another supermarket chain. Decreases in proceeds of vendor
accounts payable audits partially offset the increase.
Interest Expense
Interest expense decreased $0.1 million to $10.0 million for the three months
ended June 30, 2001 from $10.1 million for the three months ended June 24, 2000.
The decrease results from lower interest rates offset in part by higher debt
levels used to fund capital expenditures.
Income Taxes
Income tax expense as a percentage of pre-tax income remained substantially
unchanged at 39.1% in the June 2001 quarter compared to 39.4% in the June 2000
quarter.
Net Income
Net income for the June 2001 quarter increased 5.7% to $5.9 million compared to
$5.6 million, for the June 2000 quarter. Net income, as a percentage of sales,
remained stable at 1.2%. Basic and diluted earnings per common share were $.26
for the June 2001 quarter compared to $.25 for the June 2000 quarter.
NINE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE NINE MONTHS ENDED JUNE 24, 2000
Net Sales
Net sales for the nine months ended June 30, 2001 increased 4.4% to $1.465
billion, compared to $1.403 billion for the nine months ended June 24, 2000.
Comparable store sales increased 3.8% for such period. Effective marketing
strategies, increased community involvement and the improvement of store
conditions all had a positive effect on sales. Also the maturation of new stores
and increased sales from remodeled stores contributed to the increase.
Gross Profit
Gross profit for the nine months ended June 30, 2001 increased 6.7% to $382.6
million, or 26.1% of sales, compared to $358.6 million, or 25.6% of sales, for
the nine months ended June 24, 2000. Effective purchasing and an expanded array
of higher margin product offerings contributed to increased gross profit.
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Operating and Administrative Expenses
Operating and administrative expenses increased 7.7% to $339.2 million, or 23.2%
of sales, for the nine months ended June 30, 2001, from $315.1 million, or 22.5%
of sales, for the nine months ended June 24, 2000. A variety of factors
contributed to this increase. Higher payroll costs resulted from rising wage
rates in a highly competitive labor market. Higher fuel costs resulted in the
increase in utility expense. Equipment rent expense increases resulted from the
leasing of store equipment for new and replacement stores. Repairs and
maintenance costs rose primarily due to an increase in refrigeration
maintenance. A breakdown of the major increases in operating and administrative
expenses, expressed as a percentage of sales, is as follows:
Payroll 0.3%
Utilities 0.1%
Equipment rent expense 0.2%
Repairs and maintenance 0.1%
Rental Income, Net
Rental income, net increased $1.0 million to $8.0 million for the nine months
ended June 30, 2001, compared to $7.0 million for the nine months ended June 24,
2000. The improvement consists of gross rental income increases of $0.4 million
and operating cost decreases of $0.6 million.
Other Income, Net
Other income, net decreased $3.7 million to $3.2 million for the nine months
ended June 30, 2001 from $6.9 million for the nine months ended June 24, 2000.
Other income for the June 2001 nine-month period includes gains on the sale of
assets of $1.3 million compared to gains of $2.5 million for the same period of
fiscal 2000. The balance of the decrease in other income, net resulted primarily
from a reduction in the proceeds of vendor accounts payable audits.
Interest Expense
Interest expense increased $2.8 million to $32.7 million for the nine months
ended June 30, 2001 from $29.9 million for the nine months ended June 24, 2000.
The increase resulted from increased debt levels to fund capital expenditures
offset somewhat by lower interest rates.
Income Taxes
Income tax expense as a percentage of pre-tax income decreased to 38.3% in the
June 2001 nine-month period compared to 38.7% in the June 2000 nine-month
period. The decrease is primarily attributable to lower state income taxes in
the June 2001 nine-month period.
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Net Income
Net income for the June 2001 nine-month period decreased 20.0% to $ 13.5
million, or 0.9% of sales, compared to $16.9 million, or 1.2% of sales, for the
June 2000 nine-month period. Basic and diluted earnings per common share were
$.60 for the June 2001 nine-month period compared to $.75 for the June 2000
nine-month period.
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 broad selection of competitively
priced products. As such, the Company has invested and will 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 $58.9 million for the nine months ended June 30,
2001, including expenditures related to the opening of one new store,
replacement of four older stores, major remodeling of two stores, and the minor
remodeling of six stores, all of which were completed during the nine-month
period. Capital expenditures also included costs related to new stores to be
opened and remodels to be completed during the remainder of fiscal 2001 and in
fiscal 2002, as well as costs of upgrading and replacing store equipment,
technology investments, the purchase of future store sites, and capital
expenditures related to the Company's distribution operation and its milk
processing plant. Ingles capital expenditure plans for the whole of fiscal 2001
include investments of approximately $75 million.
Liquidity
The Company generated $38.0 million of cash from operations for the nine months
ended June 30, 2001 compared to $44.1 million for the nine months ended June 24,
2000.
Cash used by investing activities totaled $54.1 million. The primary use of this
cash was the $58.9 million of capital expenditures during the period, which
were partially offset by $4.8 million of proceeds from the sale of assets.
The Company generally funds its capital expenditures with cash provided from
operations and borrowings under lines of credit. The lines of credit are later
refinanced with secured long-term debt. During the June 2001 nine-month period,
the Company's financing activities provided $17.6 million in cash, the net
result of dividend payments, long- and short-term borrowings, proceeds from
sale/leaseback transactions and stock option proceeds. Proceeds from long-term
debt totaled $35.2 million, while payments on long-term debt were $44.2 million.
Proceeds from short-term borrowings, net were $35.0 million. As of June 30, 2001
the Company had unencumbered real property and equipment with a net book value
of approximately $236 million.
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At June 30, 2001, the Company had lines of credit with seven banks totaling
$130.0 million; of this amount $36.9 million was unused. The $93.1 million
outstanding under lines of credit at June 30, 2001 mature in fiscal year 2002;
however, the Company expects that it will be able to renew those commitments
upon maturity. The Company monitors its cash position daily and makes draws or
repayments on its lines of credit. The lines provide the Company with various
interest rate options generally at rates less than prime. The Company is not
required to maintain compensating balances in connection with these lines of
credit. The Company was in compliance with all financial covenants related to
these lines of credit at June 30, 2001.
The Company's principal sources of liquidity are expected to be cash flow from
operations, borrowings under its lines of credit and long-term financing. The
Company believes, based on its current results of operations and financial
condition, that its financial resources, including existing bank lines of
credit, 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
can be no assurance that any such source of financing will be available to the
Company on acceptable terms, or at all.
In addition, 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 intangible factors. These factors may include, among
others, increased competition, changing regional and national economic
conditions, adverse climatic conditions affecting food production and delivery
and changing demographics. It is also possible, for such reasons, that the
results of operations from 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.
Quarterly Cash Dividends
Since December 27, 1993, the Company has paid regular quarterly cash dividends
of $.165 (sixteen and one-half cents) per share on its Class A Common Stock and
$.15 (fifteen cents) per share on its Class B Common Stock for an annual rate of
$.66 and $.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, certain loan
agreements contain provisions restricting the ability of the Company to pay
additional dividends to approximately $3.9 million, based on tangible net worth
at June 30, 2001.
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
coverages. Self-insurance reserves 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. The majority of
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the Company's properties are self-insured for casualty losses and business
interruption, however liability coverage is maintained. The Company believes
that its mix between insurance and self-insurance is prudent, is in accordance
with general industry practice and is in the best interest of the Company.
Impact of Inflation
Inflation in food prices during the first three quarters of fiscal 2001 and
during fiscal 2000 continued to be lower than the overall increase in the
Consumer Price Index. One of the Company's significant costs is labor, which
increases with inflation.
Forward Looking Statements
This Quarterly Report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, relating to,
among other things, capital expenditures, cost reduction, operating improvements
and expected results. The words "expect", "anticipate", "intend", "plan",
"believe", "seek" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to inherent risks and
uncertainties including, among others: business and economic conditions
generally in the Company's operating area; pricing pressures and other
competitive factors; results of the Company's programs to reduce costs and
achieve improvements in operating results; and the availability and terms of
financing. 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes regarding the Company's market risk position
from the information provided in Form 10-K for the fiscal year ended September
30, 2000.
Part II. Other Information.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed
by the Company for the quarter ended June 30, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
INGLES MARKETS, INCORPORATED
Date: August 13, 2001 /s/ Robert P. Ingle
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Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: August 13, 2001 /s/ Brenda S. Tudor
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Brenda S. Tudor
Vice President-Finance and
Chief Financial Officer
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