1
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 25, 1994
/ / 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
P.O. Box 6676, Asheville, NC 28816
- - ------------------------------- ---------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code: (704) 669-2941
---------------------------
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 July 29, 1994, the registrant had 4,408,267 shares of Class A Common
Stock, $.05 par value per share, and 13,495,883 shares of Class B Common Stock,
$.05 par value per share, outstanding.
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INGLES MARKETS, INCORPORATED
INDEX
Page No.
--------
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
June 25, 1994 and
September 25, 1993 3
Consolidated Statements of Income -
Three Months Ended
June 25, 1994 and
June 26, 1993 5
Nine Months Ended
June 25, 1994 and
June 26, 1993 6
Consolidated Statements of Changes in
Stockholders' Equity -
Nine Months Ended
June 25, 1994 and
June 26, 1993 7
Consolidated Statements of Cash Flows -
Nine Months Ended
June 25, 1994 and
June 26, 1993 8
Notes to Unaudited Interim Financial Statements 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibits
11 Computation of Earnings Per Common Share
Three Months Ended
June 25, 1994 and
June 26, 1993 20
Nine Months Ended
June 25, 1994 and
June 26, 1993 21
2
3
Part I. Financial Information
Item 1. Financial Statements
INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 25, SEPTEMBER 25,
1994 1993
(UNAUDITED) (NOTE)
------------ -------------
CURRENT ASSETS
Cash $ 17,795,922 $ 17,720,151
Receivables 13,777,893 14,043,992
Inventories 101,118,724 101,718,841
Other 2,556,081 2,833,268
------------- -------------
TOTAL CURRENT ASSETS 135,248,620 136,316,252
PROPERTY AND EQUIPMENT - Net 337,934,296 312,516,161
OTHER ASSETS 8,033,994 7,716,358
------------- -------------
TOTAL ASSETS $ 481,216,910 $ 456,548,771
============= =============
NOTE: The balance sheet at September 25, 1993 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
CONSOLIDATED BALANCE SHEETS (CONCLUDED)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 25, SEPTEMBER 25,
1994 1993
(UNAUDITED) (NOTE)
------------ -------------
CURRENT LIABILITIES
Short-term loans and current
portion of long-term liabilities $ 43,272,735 $ 43,832,239
Accounts payable and accrued
expenses 79,499,635 80,049,770
------------ ------------
TOTAL CURRENT LIABILITIES 122,772,370 123,882,009
DEFERRED GAINS ON SALE LEASEBACKS 135,756 148,486
DEFERRED INCOME TAXES 18,326,161 21,815,873
LONG-TERM LIABILITIES 186,315,547 163,013,274
------------ ------------
TOTAL LIABILITIES 327,549,834 308,859,642
------------ ------------
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; 4,406,357
shares issued and outstanding
June 25, 1994; 4,310,855 shares
issued and outstanding
September 25, 1993 220,318 215,543
Class B, $.05 par value; 100,000,000
shares authorized; 13,497,793
shares issued and outstanding
June 25, 1994; 13,592,845 shares
issued and outstanding
September 25, 1993 674,890 679,642
Paid-in capital in excess of
par value 48,599,088 48,594,115
Retained earnings 104,172,780 98,199,829
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 153,667,076 147,689,129
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $481,216,910 $456,548,771
============ ============
NOTE: The balance sheet at September 25, 1993 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
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
-------------------------
JUNE 25, JUNE 26,
1994 1993
------------ ------------
NET SALES $313,861,847 $289,166,687
COST OF GOODS SOLD 244,218,094 225,414,869
------------ ------------
GROSS PROFIT 69,643,753 63,751,818
OPERATING AND ADMINISTRATIVE
EXPENSES 61,412,983 55,995,175
RENTAL INCOME, NET 2,150,472 1,175,779
------------ ------------
INCOME FROM OPERATIONS 10,381,242 8,932,422
OTHER INCOME (EXPENSE), NET 1,164,988 (53,532)
------------ ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 11,546,230 8,878,890
INTEREST EXPENSE 4,383,920 4,260,557
------------ ------------
INCOME BEFORE
INCOME TAXES 7,162,310 4,618,333
------------ ------------
INCOME TAXES:
Current 3,300,000 1,600,000
Deferred (700,000) -
------------ ------------
2,600,000 1,600,000
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 4,562,310 3,018,333
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE FOR INCOME TAXES - -
------------ ------------
NET INCOME $ 4,562,310 $ 3,018,333
============ ============
PER-SHARE AMOUNTS:
Earnings per common share:
Primary earnings per common
share before cumulative effect
of change in accounting principle $ .25 $ .17
Cumulative effect of change in
accounting principle for income taxes - -
------------ ------------
Primary earnings per common share $ .25 $ .17
============ ============
Fully diluted earnings per common
share before cumulative effect of
change in accounting principle $ .23 $ .17
Cumulative effect of change in
accounting principle for income taxes - -
------------ ------------
Fully diluted earnings per common share $ .23 $ .17
============ ============
Cash dividends per common share:
Class A $ .33 $ .055
------------ ------------
Class B $ .30 $ .050
------------ ------------
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONCLUDED)
(UNAUDITED)
NINE MONTHS ENDED
-------------------------
JUNE 25, JUNE 26,
1994 1993
------------ ------------
NET SALES $913,268,391 $846,497,352
COST OF GOODS SOLD 710,270,856 661,642,067
------------ ------------
GROSS PROFIT 202,997,535 184,855,285
OPERATING AND ADMINISTRATIVE
EXPENSES 177,316,621 163,087,652
RENTAL INCOME, NET 5,145,575 3,553,073
------------ ------------
INCOME FROM OPERATIONS 30,826,489 25,320,706
OTHER INCOME, NET 1,541,958 394,680
------------ ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 32,368,447 25,715,386
INTEREST EXPENSE 13,001,592 13,262,275
------------ ------------
INCOME BEFORE
INCOME TAXES 19,366,855 12,453,111
------------ ------------
INCOME TAXES:
Current 7,300,000 4,300,000
Deferred (200,000) 100,000
------------ ------------
7,100,000 4,400,000
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 12,266,855 8,053,111
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE FOR INCOME TAXES 3,334,860 -
------------ ------------
NET INCOME $ 15,601,715 $ 8,053,111
============ ============
PER-SHARE AMOUNTS:
Earnings per common share:
Primary earnings per common
share before cumulative effect
of change in accounting principle $ .67 $ .45
Cumulative effect of change in
accounting principle for income taxes .18 -
------------ ------------
Primary earnings per common share $ .85 $ .45
============ ============
Fully diluted earnings per common
share before cumulative effect of
change in accounting principle $ .63 $ .45
Cumulative effect of change in
accounting principle for income taxes .16 -
------------ ------------
Fully diluted earnings per common share $ .79 $ .45
============ ============
Cash dividends per common share:
Class A $ .5775 $ .165
------------ ------------
Class B $ .5250 $ .150
------------ ------------
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
PAID-IN
CLASS A CLASS B CAPITAL IN
...COMMON STOCK... ...COMMON STOCK... EXCESS OF RETAINED
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS TOTAL
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
SEPTEMBER 26, 1992. 4,292,747 $214,637 13,610,953 $680,548 $48,594,115 $ 90,623,702 $140,113,002
NET INCOME . . . . . - - - - - 8,053,111 8,053,111
CASH DIVIDENDS . . . - - - - - (2,750,000) (2,750,000)
COMMON STOCK
CONVERSIONS . . . . 15,988 800 (15,988) (800) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
JUNE 26, 1993 . . . 4,308,735 $215,437 13,594,965 $679,748 $48,594,115 $ 95,926,813 $145,416,113
========= ======== ========== ======== =========== ============ ============
BALANCE,
SEPTEMBER 25, 1993. 4,310,855 $215,543 13,592,845 $679,642 $48,594,115 $ 98,199,829 $147,689,129
NET INCOME . . . . . - - - - - 15,601,715 15,601,715
CASH DIVIDENDS . . . - - - - - (9,628,764) (9,628,764)
CONVERSION OF
CONVERTIBLE
SUBORDINATED
DEBENTURES. . . . . 450 23 - - 4,973 - 4,996
COMMON STOCK
CONVERSIONS . . . . 95,052 4,752 (95,052) (4,752) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
JUNE 25, 1994 . . . 4,406,357 $220,318 13,497,793 $674,890 $48,599,088 $104,172,780 $153,667,076
========= ======== ========== ======== =========== ============ ============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
--------------------------
JUNE 25, JUNE 26,
1994 1993
------------ ------------
Cash Flows From Operating Activities:
Net income $ 15,601,715 $ 8,053,111
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 16,708,028 15,679,488
Recognition of advance payment on purchases
contract (638,262) -
Amortization of deferred gains (12,730) (23,091)
Gains on disposals of property and
equipment (594,782) (48,910)
Deferred income taxes (200,000) 100,000
Cumulative effect of change in accounting
principle for income taxes (3,334,860) -
Increase in receivables (2,202,251) (3,584,435)
Decrease in inventory 600,117 2,477,041
Decrease (increase) in other assets 1,129,468 (181,736)
(Decrease) increase in accounts payable
and accrued expenses (550,135) 11,278,072
------------ ------------
Net Cash Provided by Operating Activities 26,506,308 33,749,540
------------ ------------
Cash Flows From Investing Activities:
Proceeds from sales of property and
equipment 897,192 166,889
Capital expenditures (41,084,992) (71,604,406)
------------ -----------
Net Cash (Used) by Investing Activities (40,187,800) (71,437,517)
------------ ------------
Cash Flows From Financing Activities:
Conversion of Convertible Subordinated
Debentures 4,996 -
Proceeds from issuance of long-term debt 12,204,876 100,000
Principal payments of long-term debt (15,823,845) (8,351,273)
Proceeds from short-term borrowings, net 27,000,000 41,500,000
Dividends paid (9,628,764) (2,750,000)
------------ ------------
Net Cash Provided By Financing Activities 13,757,263 30,498,727
------------ ------------
Net Increase (Decrease) in Cash 75,771 (7,189,250)
Cash at Beginning of Period 17,720,151 24,743,544
------------ ------------
Cash at End of Period $ 17,795,922 $ 17,554,294
============ ============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
June 25, 1994
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 25, 1994 and
September 25, 1993, and the results of operations for the three month
and nine month periods ended June 25, 1994 and June 26, 1993 and
changes in stockholders' equity and cash flows for the nine months
ended June 25, 1994 and June 26, 1993. 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 generally accepted accounting principles 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 1993 Annual Report on Form 10-K filed by the
Company under the Securities Exchange Act of 1934 on December 20,
1993.
The results of operations for the three month and nine month periods
ended June 25, 1994 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
26, 1993 have been reclassified for comparative purposes.
B. EARNINGS PER COMMON SHARE
Primary earnings per common share is computed by dividing consolidated
net income by the weighted average number of shares of common stock
and dilutive common stock equivalent shares outstanding during the
period (18,388,950 and 18,368,370 for the three month and nine month
periods ended June 25, 1994, respectively and 17,961,614 and
17,941,028 for the three month and nine month periods ended June 26,
1993, respectively).
Fully diluted earnings per common share gives effect to the assumed
conversion, if dilutive, of the Convertible Subordinated Debentures,
after elimination of related interest expense, net of the bonus and
income tax effect. The weighted average number of shares used to
compute fully diluted earnings per common share were 21,763,635 and
21,743,055 for the three month and nine month periods ended June 25,
1994, respectively. For the three months ended June 26, 1993, shares
used to compute fully diluted earnings per common share were
21,336,749. The effect for the nine months ended June 26, 1993 of the
conversion of the Convertible Subordinated Debentures was
anti-dilutive, therefore the conversion was not assumed in the fully
diluted calculation for this period.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of
$100,000 at June 25, 1994 and September 25, 1993.
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D. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 25, September 25,
1994 1993
------------ -------------
Accounts payable-trade $ 57,113,805 $ 57,679,269
Property, payroll, and
other taxes payable 6,933,236 6,526,695
Income taxes payable 1,779,520 1,428,220
Salaries, wages and
bonuses payable 5,799,654 5,765,393
Interest payable 1,556,624 2,525,586
Self-insurance reserves 4,625,000 4,260,000
Other 1,691,796 1,864,607
------------ -------------
$ 79,499,635 $ 80,049,770
============ =============
E. LONG-TERM DEBT
On September 30, 1993, the Company obtained a $12 million loan from an
insurance company. The loan is secured by store equipment and is
payable in sixty monthly installments of $226,730 including interest
at a rate equal to the average weekly yield of thirty day Commercial
Paper plus 190 basis points (6.24% at June 25, 1994). Proceeds of the
loan were used to reduce short-term debt outstanding at that time.
Proceeds from short-term borrowings, net under lines of credit
totalled $27 million for the nine months ended June 25, 1994. The
borrowings were used primarily to fund capital expenditures. On July
21, 1994, the Company replaced an existing $7 million bank line of
credit with a $30 million line of credit with the same bank. The line
matures December 15, 1995. Interest on any oustanding borrowings
under this line of credit is payable at a rate per annum, at the
Company's option, of the bank's floating prime rate or LIBOR plus one
and one-eighth (1.125%) percent. Among other things, the agreement
requires the maintenance of tangible net worth of at least $139
million and limits the ratio of liabilities to tangible net worth to
2.5 to 1. Short-term borrowings under lines of credit totalling $30
million have been reclassified to long-term liabilities pursuant to
this agreement.
F. DIVIDENDS
The Company paid cash dividends of $.0825 for each share of Class A
Common Stock and $.075 for each share of Class B Common Stock on
October 8, 1993 to stockholders of record on September 28, 1993. 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 each of
December 27, 1993, April 8, 1994 and June 10, 1994 to stockholders of
record on December 17, 1993, March 29, 1994 and May 31, 1994.
G. RENTAL INCOME, NET
Rental income, net includes a gain of approximately $.9 million for
the termination of a tenant lease during the three month period ended
June 25, 1994.
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H. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
NINE MONTHS ENDED
-------------------------------
June 25, June 26,
1994 1993
------------ ------------
Interest (net of
amount capitalized) $ 13,970,554 $ 14,000,433
Income taxes 6,948,700 3,082,371
I. CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES
Effective September 26, 1993, the Company adopted FASB Statement No.
109, "Accounting for Income Taxes". Under Statement 109, the
liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates.
Prior to the adoption of Statement 109, income tax expense was
determined using the deferred method. Deferred tax expense was based
on items of income and expense that were reported in different years
in the financial statements and tax returns and were measured at the
tax rate in effect in the year the difference originated.
As permitted by Statement 109, the Company has elected not to restate
the financial statements of any prior years. The effect of the change
on pre-tax income for the three and nine month periods ended June 25,
1994 was not material; however, the cumulative effect of the change
increased net income by $3,334,860 or $.18 per common share.
Significant components of the Company's deferred tax liabilities and
assets as of September 26, 1993 were as follows (in thousands):
Deferred tax liabilities:
Tax over book depreciation $22,203
Property tax method 272
-------
Total deferred tax liabilities 22,475
-------
Deferred tax assets:
Excess of tax basis over financial reporting
basis of property and equipment 3,977
Insurance reserves 1,619
Other 414
-------
Total deferred tax assets 6,010
-------
Net deferred tax liabilities $16,465
=======
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Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.
THREE MONTHS ENDED JUNE 25, 1994 COMPARED
WITH THE THREE MONTHS ENDED JUNE 26, 1993
NET SALES
Net sales for the three months ended June 25, 1994 increased $24.7 million to
$313.9 million, up 8.5% over sales of $289.2 million last year. In addition to
continuing the lower price strategy on dry grocery goods commenced during the
third quarter of fiscal 1992, the Company has pursued an aggressive
merchandising and pricing strategy to boost sales in its perishable departments
and has increased variety in its grocery department. An effective advertising
campaign has been used to call attention to these practices. The Company has
reported increases in net sales, from the comparable quarter of the prior
fiscal year, of $10.6, $15.4, $17.0, $22.1, $16.5, $19.9, $21.3, $20.8 and
$24.7 million in the third and fourth quarters of fiscal 1992, the first,
second, third and fourth quarters of fiscal 1993 and the first, second and
third quarters of fiscal 1994, respectively.
During the third quarter of fiscal 1994, two new stores were opened. At June
25, 1994, the Company operated 174 supermarkets in North Carolina, South
Carolina, Georgia, Tennessee and Virginia.
GROSS PROFIT
Gross profit for the 1994 three month period increased 9.2% to $69.6 million,
or 22.2% of sales, compared with $63.8 million, or 22.0% of sales, a year ago.
Grocery gross profit, as a percentage of sales, was down slightly due to the
lower price strategy. Meat, produce, frozen food and bakery/deli gross profit,
as a percentage of sales, was up due to better merchandising, more aggressive
pricing and an effective advertising campaign.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, were 19.6%
this year compared to 19.4% last year. The percentage increase is principally
due to increases in the cost of labor, warehouse and transportation expense,
and the cost of insurance. These increases were partially offset by a decrease
in advertising and promotional expenditures and the cost of utilities and store
supplies.
RENTAL INCOME, NET
Rental income, net increased from $1.2 million last year to $2.2 million this
year. The increase is principally due to the payment of $.9 million, net for
the termination of a lease by a tenant.
INCOME FROM OPERATIONS
Income from operations increased 16.2% to $10.4 million, or 3.3% of sales,
compared to $8.9 million, or 3.1% of sales, last year. The increase in
operating income was due to the increase in sales, the related increase in
gross profit and the increase in net rental income.
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OTHER INCOME (EXPENSE), NET
Other income increased $1.2 million. The increase is primarily due to a gain
of $.6 million on the sale of two outparcels of land and buildings situated
thereon and an increase of $.6 million in miscellaneous other income.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes was $11.5 million, or 3.7% of sales,
this year compared with $8.9 million, or 3.1% of sales, last year.
INTEREST EXPENSE
Despite an increase in debt this quarter, compared to the comparable quarter
last year, interest expense increased only slightly from $4.3 million in 1993
to $4.4 million in 1994, due to lower borrowing rates.
INCOME BEFORE INCOME TAXES
Income before income taxes was $7.2 million, or 2.3% of sales, this year
compared to $4.6 million, or 1.6% of sales, last year.
INCOME TAX EXPENSE
Income tax expense, as a percentage of pre-tax income, was 36.3% this year
compared with 34.6% last year due primarily to an increase in the federal
income tax rate.
NET INCOME
Net income for the three month period ended June 25, 1994 increased $1.5
million, to $4.5 million, up 51.2% over income of $3.0 million last year.
Primary earnings per common share rose from $.17 last year to $.25 this year.
NINE MONTHS ENDED JUNE 25, 1994 COMPARED
WITH THE NINE MONTHS ENDED JUNE 26, 1993
NET SALES
Net sales for the nine month period ended June 25, 1994 increased $66.8 million
to $913.3 million, up 7.9% over sales of $846.5 million last year. Growth in
identical store sales (grocery stores open for the entire duration of the
previous fiscal year) was 7.0%. Approximately one half of the dollar increase
in sales resulted from an increase in grocery sales - the other half from an
increase in sales in the perishable departments. In addition to continuing the
lower price strategy on dry grocery goods commenced during the third quarter of
fiscal 1992, the Company has pursued an aggressive merchandising and pricing
strategy in its perishable departments, has conducted an overall effective
advertising campaign and has increased variety in its grocery department.
GROSS PROFIT
Gross profit for the nine months ended June 25, 1994 increased 9.8% to
$203.0 million, or 22.2% of sales, compared to $184.9 million, or 21.8% of
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sales, last year. Grocery gross profit, as a percentage of sales, increased
slightly due to an aggressive purchasing program. Meat, produce and frozen
food gross profit, as a percentage of sales, improved due to better
merchandising, aggressive pricing and more effective advertising.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, were 19.4%
this year compared to 19.3% last year. Increases in the cost of labor,
warehouse and transportation expense and repairs and maintenance, as a
percentage of sales, were partially offset by a decrease, as a percentage of
sales, in advertising and promotional expenditures, rent expense and the cost
of utilities.
RENTAL INCOME, NET
Rental income, net increased from $3.5 million last year to $5.1 million this
year. Fiscal 1994 includes gains of $1.5 million in connection with the
termination of three leases of premises owned by the Company which were leased
by tenants.
INCOME FROM OPERATIONS
Income from operations increased 21.7% to $30.8 million, or 3.4% of sales,
compared with $25.3 million, or 3.0% of sales last year. The increase is due
to the increase in sales, the increase in gross profit and the increase in
rental income, net.
OTHER INCOME, NET
Other income, net increased from $.4 million last year to $1.5 million this
year. The increase is due to a gain of $.6 million realized on the sale of two
outparcels of land and the buildings situated thereon and an increase of $.6
million in miscellaneous other income.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes was $32.4 million, or 3.5% of sales, in
fiscal 1994 compared with $25.7 million, or 3.0% of sales, in fiscal 1993.
INTEREST EXPENSE
Despite an increase in debt this nine month period, compared to the comparable
period last year, interest expense decreased from $13.3 million in 1993 to
$13.0 million in 1994, due to lower borrowing rates.
INCOME BEFORE INCOME TAXES
Income before income taxes increased $6.9 million to $19.4 million, or 2.1% of
sales, this year compared to $12.5 million, or 1.5% of sales, last year.
INCOME TAX EXPENSE
Income tax expense, as a percentage of pre-tax income, was 36.7% this year
compared with 35.3% last year due primarily to the increase in the federal
income tax rate.
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INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Income before the cumulative effect of the change in accounting principle for
the nine months ended June 25, 1994 increased $4.2 million, to $12.3 million,
up 52.3% over income of $8.1 million last year. Primary earnings per common
share before the cumulative effect of the change in accounting principle rose
from $.45 last year to $.67 this year.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE FOR INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued a new
standard (SFAS 109), "Accounting for Income Taxes". A significant feature of
the standard is the use of an approach under which recorded deferred taxes are
adjusted for changes in tax rates. Under prior rules (APB 11), deferred taxes
were provided at current tax rates and were not adjusted for subsequent changes
in these rates. The new standard was adopted by the Company at the beginning
of the current fiscal year. The cumulative effect of adopting the standard
resulted in a non-cash credit to net earnings for the nine month period ended
June 25, 1994 of $3.3 million, or $.18 per common share.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Net cash provided by operating activities for the nine month period ended June
25, 1994 totalled $26.5 million. Depreciation and amortization expense was
$16.7 million. The cumulative effect of the change in accounting principle
that resulted from the Company's adoption of the Financial Accounting Standards
Board (FASB) Statement Number 109, "Accounting for Income Taxes" was $3.3
million (See above).
INVESTING ACTIVITIES
Net cash used by investing activities during the 1994 nine month period
totalled $40.2 million. Capital expenditures aggregated $41.1 million. The
Company's capital expenditure program was devoted primarily to obtaining land
for new store locations, the construction of new facilities, and the renovation
and modernization of existing stores. The installation of electronic scanning
systems in 19 stores and expenditures on new stores and remodels expected to
become operational in calendar 1995 also are included in such investing
activities.
FINANCING ACTIVITIES
Net cash provided by financing activities totalled $13.8 million. Proceeds
from the issuance of long-term debt were $12.2 million. Proceeds from
short-term borrowings, net totalled $27 million. Principal payments of
long-term debt totalled $15.8 million. The Company paid cash dividends of $9.6
million.
ACTIVITY/PROFITABILITY RATIOS
The following activity/profitability ratios are calculated by annualizing the
results for the nine month periods ended June 25, 1994 and June 26, 1993.
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Favorable inventory turnover rates (cost of sales/inventory) in 1994 of 9.4
(compared with 8.8 in 1993) helped generate cash flow from operations. Return
on assets (income before the cumulative effect of the change in accounting
principle/total assets) increased from 2.4% in 1993 to 3.4% in 1994. Return on
investment (income before the cumulative effect of the change in accounting
principle/average stockholders' equity) improved significantly to 10.9%
compared to 7.5% the prior year.
FINANCIAL STRENGTH
The Company remains in sound financial condition. At June 25, 1994, total
assets were $481.2 million and stockholders' equity was $153.7 million compared
with $456.5 million and $147.7 million, respectively, at year-end, September
25, 1993. Working capital totalled $12.5 million.
CAPITAL REQUIREMENTS
The Company has resumed its store expansion program in calendar 1994 and has
increased the number of stores it expects to expand and/or remodel. The
Company currently has 16 new stores under construction and 28 stores which are
in the process of being expanded and/or remodeled. In calendar 1994, the
Company expects to open 6 of the new stores under construction and complete 5
of the stores being expanded and/or remodeled. One of the new stores which
will be opened in calendar 1994 will be located in Centre, Alabama - the
Company's first venture into this state. The remaining new stores currently
under construction and the balance of those presently in the process of being
expanded and/or remodeled will be opened in calendar 1995.
During fiscal 1994, the Company expects to invest approximately $50-$55
million in new stores, expanding and/or remodeling existing stores,
replacing equipment, installing electronic scanning systems in new and existing
stores and securing sites for future expansion.
FINANCIAL RESOURCES
Available lines of credit at June 25, 1994 with two banks totalled $25.0
million. Both of the lines carry interest rates below prime. The Company is
not required to maintain compensating balances in connection with these lines
of credit. On July 21, 1994, the Company replaced an existing $7 million bank
line of credit with a $30 million line of credit with the same bank. The line
matures December 15, 1995. Interest on any outstanding borrowings under this
line of credit is payable at a rate per annum, at the Company's option, of the
bank's floating prime rate or LIBOR plus one and one-eighth (1.125%) percent.
The Company has unencumbered property with a net book value of approximately
$200 million which is available to collateralize additional debt. The Company
believes that long-term bank financing is available as well as sale/leaseback
arrangements. The Company continues to pursue appropriate long-term financing
to replace short-term borrowings, currently outstanding, used to finance the
purchase on October 1, 1992 of twenty-two shopping center properties and one
free-standing store which were previously subject to a sale-leaseback
arrangement.
The Company believes that the financial resources available, including amounts
available under long-term financing arrangements, existing bank lines of credit
and internally generated funds, will be sufficient to meet planned capital
expenditures and working capital requirements for the foreseeable future,
including any debt servicing required by additional borrowings.
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At their quarterly meeting on December 3, 1993, the Company's Board of
Directors voted to increase the Company's regular quarterly cash dividends
100%. Effective with dividends paid December 27, 1993, the dividends were
increased from $.0825 (eight and one-quarter cents) per share on Class A
Common Stock to $.165 (sixteen and one-half cents) per share and from $.075
(seven and one-half cents) per share on Class B Common Stock to $.15 (fifteen
cents) per share for an annual rate of $.66 and $.60 per share, respectively.
The Company expects to continue the payment of regular dividends on a quarterly
basis at the rates approved December 3, 1993. The Board of Directors, however,
reconsiders the declaration of dividends periodically, and there can be no
assurance as to the declaration of or the amount of dividends to be paid. The
payment of dividends is subject to the discretion of the Board of Directors and
will depend upon the results of operations, the financial condition of the
Company and other factors which the Board of Directors deems relevant.
IMPACT OF INFLATION
Inflation in retail food prices continues to be lower than the overall increase
in the Consumer Price Index. Ingles' primary costs, inventory and labor,
increase with inflation. Recovery of these costs has to come from improved
operating efficiencies and, to the extent possible, through improved gross
margins.
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Part II. Other Information.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this report. The
exhibit number refers to Item 601 of Regulation S-K.
Exhibit 11 - Computation of Earnings Per Common Share.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed
for the quarter ended June 25, 1994.
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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 8, 1994 /s/ Robert P. Ingle
----------------------------
Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: August 8, 1994 /s/ Jack R. Ferguson
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Jack R. Ferguson
Vice President-Finance and
Chief Financial Officer
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