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 27, 1998
---------------
[ ] 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
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(828) 669-2941
--------------------------------------------------
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 3, 1998, the Registrant had 9,580,591 shares of Class A
Common Stock, $.05 par value per share, outstanding and 12,785,148 shares of
Class B Common Stock, $.05 par value per share, outstanding.
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INGLES MARKETS, INCORPORATED
INDEX
Part I - Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 27, 1998 and September 27, 1997..................................... 3
Condensed Consolidated Statements of Income
Three Months Ended June 27, 1998 and June 28, 1997....................... 5
Nine Months Ended June 27, 1998 and June 28, 1997........................ 6
Condensed Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended June 27, 1998 and June 28, 1997........................ 7
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 27, 1998 and June 28, 1997 ....................... 8
Notes to Unaudited Interim Financial Statements .................................. 9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ............................................................. 14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K ................................................ 22
Signatures ................................................................................ 23
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PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 27, September 27,
1998 1997
(UNAUDITED) (NOTE)
------------ -------------
CURRENT ASSETS:
Cash $ 25,426,481 $ 25,389,386
Receivables 19,557,315 15,571,536
Inventories 150,109,378 141,259,929
Refundable income taxes 1,800,000 2,400,000
Other 4,860,199 3,786,873
------------ ------------
Total current assets 201,753,373 188,407,724
PROPERTY AND EQUIPMENT, Net 707,006,037 606,362,801
OTHER ASSETS 5,017,926 7,812,188
------------ ------------
TOTAL ASSETS $913,777,336 $802,582,713
============ ============
NOTE: The balance sheet at September 27, 1997 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 27, September 27,
1998 1997
(UNAUDITED) (NOTE)
------------ -------------
CURRENT LIABILITIES:
Short-term loans and current portion of long-term liabilities $111,760,200 $ 58,776,976
Accounts payable and accrued expenses 113,857,274 99,346,604
------------ ------------
Total current liabilities 225,617,474 158,123,580
DEFERRED INCOME TAXES 29,834,578 26,434,578
LONG-TERM LIABILITIES 431,432,522 395,042,113
------------ ------------
Total liabilities 686,884,574 579,600,271
------------ ------------
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; 9,579,466
shares issued and outstanding June 27, 1998; 9,058,441 shares
issued and outstanding September 27, 1997 478,973 452,922
Class B, $.05 par value; 100,000,000 shares authorized; 12,786,273
shares issued and outstanding June 27, 1998; 12,788,298 shares
issued and outstanding September 27, 1997 639,314 639,415
Paid-in capital in excess of par value 95,765,167 90,924,742
Retained earnings 130,009,308 130,965,363
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 226,892,762 222,982,442
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $913,777,336 $802,582,713
============ ============
NOTE: The balance sheet at September 27, 1997 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 27, June 28,
1998 1997
------------ ------------
Net sales $417,660,466 $386,392,333
Cost of goods sold 313,446,729 291,075,697
------------ ------------
Gross profit 104,213,737 95,316,636
Operating and administrative expenses 91,246,054 81,185,722
Rental income, net 2,117,132 1,441,782
------------ ------------
Income from operations 15,084,815 15,572,696
Other income, net 566,827 446,768
------------ ------------
Income before interest and income taxes 15,651,642 16,019,464
Interest expense 10,651,217 7,975,477
------------ ------------
Income before income taxes 5,000,425 8,043,987
------------ ------------
Income taxes:
Current 615,000 100,000
Deferred 1,235,000 3,000,000
------------ ------------
1,850,000 3,100,000
------------ ------------
Net income $ 3,150,425 $ 4,943,987
============ ============
PER SHARE AMOUNTS:
Earnings per common share:
Basic earnings per common share $ .14 $ .23
============ ============
Diluted earnings per common share $ .14 $ .22
============ ============
Cash dividends per common share:
Class A Common Stock $ .165 $ .165
------------ ------------
Class B Common Stock $ .150 $ .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 27, June 28,
1998 1997
--------------- ---------------
Net sales $ 1,214,221,918 $ 1,143,650,589
Cost of goods sold 915,432,877 865,373,169
--------------- ---------------
Gross profit 298,789,041 278,277,420
Operating and administrative expenses 262,009,372 234,919,300
Rental income, net 5,064,191 4,118,715
--------------- ---------------
Income from operations 41,843,860 47,476,835
Other income, net 2,384,168 1,550,522
--------------- ---------------
Income before interest and income taxes 44,228,028 49,027,357
Interest expense 29,406,139 23,263,284
--------------- ---------------
Income before income taxes and extraordinary item 14,821,889 25,764,073
--------------- ---------------
Income taxes:
Current 3,200,000 6,800,000
Deferred 2,300,000 3,100,000
--------------- ---------------
5,500,000 9,900,000
--------------- ---------------
Income before extraordinary item 9,321,889 15,864,073
Extraordinary item-early extinguishment of debt (net of income tax
benefit) -- (565,275)
--------------- ---------------
Net income $ 9,321,889 $ 15,298,798
=============== ===============
PER SHARE AMOUNTS:
Earnings per common share:
Basic earnings per common share before extraordinary item $ .42 $ .76
Extraordinary item-early extinguishment of debt -- (.02)
--------------- ---------------
Basic earnings per common share $ .42 $ .74
=============== ===============
Diluted earnings per common share before extraordinary item $ .42 $ .74
Extraordinary item-early extinguishment of debt -- (.02)
--------------- ---------------
Diluted earnings per common share $ .42 $ .72
=============== ===============
Cash dividends per common share:
Class A Common Stock $ .495 $ .495
--------------- ---------------
Class B Common Stock $ .450 $ .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)
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 28, 1996 5,097,291 $254,864 13,006,859 $ 650,344 $50,139,088 $ 123,965,566 $ 175,009,862
Net income -- -- -- -- -- 15,298,798 15,298,798
Cash dividends -- -- -- -- -- (9,486,979) (9,486,979)
Exercise of stock options 439,200 21,960 -- -- 4,283,565 -- 4,305,525
Conversion of Convertible
Subordinated Debentures 3,303,389 165,169 -- -- 36,502,089 -- 36,667,258
Common stock conversions 130,177 6,509 (130,177) (6,509) -- -- --
--------- -------- ----------- --------- ----------- ------------- -------------
Balance, June 28, 1997 8,970,057 $448,502 12,876,682 $ 643,835 $90,924,742 $ 129,777,385 $ 221,794,464
========= ======== =========== ========= =========== ============= =============
Balance, September 27, 1997 9,058,441 $452,922 12,788,298 $ 639,415 $90,924,742 $ 130,965,363 $ 222,982,442
Net income -- -- -- -- -- 9,321,889 9,321,889
Cash dividends -- -- -- -- -- (10,277,944) (10,277,944)
Exercise of stock options 519,000 25,950 -- -- 4,840,425 -- 4,866,375
Common stock conversions 2,025 101 (2,025) (101) -- -- --
--------- -------- ----------- --------- ----------- ------------- -------------
BALANCE, JUNE 27, 1998 9,579,466 $478,973 12,786,273 $ 639,314 $95,765,167 $ 130,009,308 $ 226,892,762
========= ======== =========== ========= =========== ============= =============
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 27, June 28,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,321,889 $ 15,298,798
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 33,288,937 28,367,593
Receipt of advance payments on purchases contracts -- 674,000
Recognition of advance payments on purchases contracts (1,961,225) (2,833,870)
Gains on disposals of property and equipment (1,526,037) (754,869)
Deferred income taxes 2,300,000 3,100,000
Extraordinary item-early extinguishment of debt (net of income tax benefit) -- 565,275
Increase in receivables (875,799) (2,895,311)
Increase in inventory (8,849,449) (633,197)
Decrease (increase) in other assets 93,523 (628,782)
Increase (decrease) in accounts payable and accrued expenses 20,071,896 (4,438,560)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 51,863,735 35,821,077
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 3,653,843 1,192,118
Capital expenditures (140,403,772) (77,412,529)
------------- -------------
NET CASH (USED) BY INVESTING ACTIVITIES (136,749,929) (76,220,411)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 114,293,241 106,177,583
Principal payments on long-term debt (42,958,383) (45,403,116)
Proceeds (payments) on short-term borrowings, net 20,000,000 (10,000,000)
Proceeds from exercise of stock options 3,866,375 3,025,525
Dividends paid (10,277,944) (9,486,979)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 84,923,289 44,313,013
------------- -------------
NET INCREASE IN CASH 37,095 3,913,679
Cash at beginning of period 25,389,386 22,418,003
------------- -------------
CASH AT END OF PERIOD $ 25,426,481 $ 26,331,682
============= =============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
June 27, 1998
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, 1998, and the results of operations,
changes in stockholders' equity and cash flows for the three month and nine
month periods ended June 27, 1998 and June 28, 1997. 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 1997 Annual Report on Form 10-K filed by the Company under the
Securities Exchange Act of 1934 on December 22, 1997.
The results of operations for the three month and nine month periods
ended June 27, 1998 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
28, 1997 have been reclassified for comparative purposes.
B. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of
$107,859 and $113,726 at June 27, 1998 and September 27, 1997, respectively.
C. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 27, September 27,
1998 1997
------------ -------------
Accounts payable-trade $ 80,365,014 $67,219,567
Property, payroll, and other taxes payable 10,236,228 9,678,603
Salaries, wages and bonuses payable 8,031,280 9,700,404
Self-insurance reserves 4,840,000 4,400,000
Other 10,384,752 8,348,030
------------ -----------
$113,857,274 $99,346,604
============ ===========
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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 $150,000 per covered
person for medical care benefits for a policy year. Employee insurance expense,
including workers' compensation and medical care benefits, net of employee
contributions, totaled $2,752,116 and $2,434,483 for the three month periods
ended June 27, 1998 and June 28, 1997, respectively. For the nine month periods
ended June 27, 1998 and June 28, 1997, employee insurance expense totaled
$7,438,368 and $7,094,927, respectively.
D. LONG-TERM LIABILITIES
During the nine month period ended June 27, 1998, the Company obtained
$114,293,241 in long-term loans. The proceeds were used to reduce short-term
borrowings outstanding under existing bank lines of credit. Additional
short-term debt was subsequently incurred to pay for capital expenditures and
for general corporate purposes. Details of the new long-term debt are as
follows:
Long-term lines of credit, interest rates at
less than the prime rate $ 53,000,000
Weighted average interest rate of 7.44%,
maturing 2003, secured by equipment 36,826,072
Weighted average interest rate of 7.76%,
maturing 2005-2008, secured by real property 18,703,569
Other 5,763,600
------------
$114,293,241
============
On June 29, 1998, the Company obtained a $38 million loan secured by
real estate bearing a 7.5% interest rate with a ten-year term. The proceeds of
this debt were used to reduce short-term borrowings outstanding at June 27,
1998. Short-term borrowings of $38 million have been reclassified to long-term
liabilities at June 27, 1998 pursuant to this refinancing.
On January 20, 1997, the Company redeemed $.8 million of its
outstanding Convertible Subordinated Debentures (the "Debentures") at 101.8% of
face value. In connection with the redemption, the holders of the remaining
$36.7 million of the Debentures converted their Debentures into approximately
3.3 million shares of Class A Common Stock at $11.10 per share. The write-off of
unamortized loan costs and redemption premium of $565,275 (net of the income tax
benefit of $350,000) relating to the converted Debentures is included as an
extraordinary item in the accompanying statement of income for the nine months
ended June 28, 1997.
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 13, 1998,
January 19, 1998 and on October 13, 1997 to stockholders of record on April 3,
1998, January 9, 1998 and October 3, 1997, respectively.
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F. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
Nine Months Ended
----------------------------
June 27, June 28,
1998 1997
----------- -----------
Interest (net of amount capitalized) $28,377,207 $24,427,424
Income taxes 2,374,501 8,601,367
G. LITIGATION
Ingles is a defendant in a lawsuit filed by four employees alleging
gender discrimination. The plaintiffs are seeking to have the lawsuit certified
as a class action so that the claims being asserted can be asserted on behalf of
other past, current and future female Ingles employees. This lawsuit had not
been certified as a class action as of August 10, 1998. The action seeks
injunctive and declaratory relief, along with unspecified monetary damages.
Management believes that this case is without merit and intends to vigorously
defend itself. While the ultimate results of this litigation are unknown and
cannot presently be determined, management believes, based upon present
information, that the resolution of these proceedings will not have a material
adverse effect on the Company.
Various other legal proceedings and claims arising in the ordinary
course of business are pending against Ingles. In the opinion of management, the
ultimate liability, if any, from these other pending legal proceedings and
claims will not have a material adverse effect on the Company.
H. EARNINGS PER COMMON SHARE
The Company adopted Financial Accounting Standards Board Statement 128,
Earnings Per Share at the beginning of fiscal year 1998. Statement 128 replaced
primary and fully diluted earnings per share with basic and diluted earnings per
share. Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options is excluded. The calculation of diluted
earnings per share is similar to the old method. All per share amounts in the
accompanying income statements for all prior periods have been restated to
conform to the requirements of Statement 128.
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The following table sets forth the computation of basic and diluted
earnings per share for the three month periods:
THREE MONTHS ENDED
----------------------------
JUNE 27, June 28,
1998 1997
----------- -----------
BASIC:
Net income $ 3,150,425 $ 4,943,987
=========== ===========
Shares
Weighted average number of common shares outstanding 22,186,619 21,846,740
=========== ===========
Basic earnings per common share $ .14 $ .23
=========== ===========
DILUTED:
Diluted earnings $ 3,150,425 $ 4,943,987
=========== ===========
Shares
Weighted average number of common shares and common stock
equivalent shares outstanding 22,287,386 22,297,408
=========== ===========
Diluted earnings per common share $ .14 $ .22
=========== ===========
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The following table sets forth the computation of basic and diluted
earnings per share for the nine month periods:
NINE MONTHS ENDED
------------------------------
JUNE 27, June 28,
1998 1997
------------ ------------
BASIC:
Income before extraordinary item $ 9,321,889 $ 15,864,073
Extraordinary item-early extinguishment of debt (net of income tax
benefit) -- (565,275)
------------ ------------
Net income $ 9,321,889 $ 15,298,798
============ ============
Shares
Weighted average number of common shares outstanding 22,001,381 20,787,232
============ ============
Basic earnings per common share before extraordinary item $ .42 $ .76
Extraordinary item-early extinguishment of debt -- (.02)
------------ ------------
Basic earnings per common share $ .42 $ .74
============ ============
DILUTED:
Income before extraordinary item $ 9,321,889 $ 15,864,073
Add after tax and bonus effect of interest expense applicable to
Convertible Subordinated Debentures -- 89,859
------------ ------------
Diluted earnings before extraordinary item 9,321,889 15,953,932
Extraordinary item-early extinguishment of debt (net of income tax
benefit) -- (565,275)
------------ ------------
Diluted earnings $ 9,321,889 $ 15,388,657
============ ============
Shares
Weighted average number of common shares and common stock
equivalent shares outstanding 22,209,947 21,254,987
Additional shares assuming conversion of Convertible
Subordinated Debentures -- 210,145
------------ ------------
Weighted average number of common shares outstanding as
adjusted 22,209,947 21,465,132
============ ============
Diluted earnings per common share before extraordinary item $ .42 $ .74
Extraordinary item-early extinguishment of debt -- (.02)
------------ ------------
Diluted earnings per common share $ .42 $ .72
============ ============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Item 2 should be read in conjunction with the unaudited condensed
consolidated financial statements included in Item 1 hereto.
Unless the context requires otherwise, references herein to "Ingles" or
the "Company" include Ingles Markets, Incorporated and its subsidiaries.
Certain statements contained herein and elsewhere in this report which
are not historical facts are forward-looking statements that involve risks and
uncertainties referenced elsewhere in this report. See "LIQUIDITY AND CAPITAL
RESOURCES--FORWARD LOOKING STATEMENTS."
RESULTS OF OPERATIONS
GENERAL
At June 27, 1998, Ingles operated 206 supermarkets in North Carolina
(64), South Carolina (32), Georgia (82), Tennessee (24), Virginia (3) and
Alabama (1). Ingles operates on a 52 or 53 week fiscal year ending on the last
Saturday in September. The unaudited condensed consolidated statements of income
for the three month periods ended June 27, 1998 and June 28, 1997 both include
13 weeks of operations. The unaudited condensed consolidated statements of
income for the nine month periods ended June 27, 1998, and June 28, 1997, both
include 39 weeks of operations. Comparable store sales is defined as sales for
grocery stores in operation for the entire duration of the previous fiscal year.
Replacement stores and major and minor remodels are included in the comparable
stores 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 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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COMPARISON OF THE THREE MONTH PERIOD ENDED JUNE 27, 1998 TO THE THREE MONTH
PERIOD ENDED JUNE 28, 1997
The following table sets forth certain income statement components
expressed as a percentage of net sales for the three month periods ended June
27, 1998 and June 28, 1997:
Three Month Period Ended (1)
-------------------------------------------------------
JUNE 27, 1998 June 28, 1997
------------------------ -----------------------
AMOUNT PERCENT OF Amount Percent of
(THOUSANDS) SALES (thousands) Sales
------------------------ -----------------------
Results of Operations:
Net sales $417,661 100.0% $386,392 100.0%
Cost of goods sold 313,447 75.0% 291,075 75.3%
-------- ----- -------- -----
Gross profit 104,214 25.0% 95,317 24.7%
Operating and
administrative expenses 91,246 21.8% 81,186 21.0%
Rental income, net 2,117 0.5% 1,442 0.4%
-------- ----- -------- -----
Income from operations 15,085 3.7% 15,573 4.1%
Other income, net 567 0.1% 446 0.1%
-------- ----- -------- -----
Income before interest and
income taxes 15,652 3.8% 16,019 4.2%
Interest expense 10,651 2.6% 7,975 2.1%
-------- ----- -------- -----
Income before income taxes 5,001 1.2% 8,044 2.1%
Income taxes 1,850 0.4% 3,100 0.8%
-------- ----- -------- -----
Net income $ 3,151 0.8% $ 4,944 1.3%
======== ===== ======== =====
EBITDA (2) $ 27,365 6.6% $ 25,686 6.6%
======== ===== ======== =====
(1) The three month periods shown are each 13-week periods.
(2) EBITDA is defined as net earnings before interest, income taxes,
depreciation, amortization and non-recurring and extraordinary items.
EBITDA is a measure commonly used in the grocery industry and is
presented to assist in understanding the Company's operating results.
EBITDA is not intended to represent cash flow from operations as
defined by generally accepted accounting principles ("GAAP") and should
not be considered as an alternative to cash flow as a measure of
liquidity or as an alternative to net earnings as an indicator of
operating performance. EBITDA is included herein because management
believes that certain investors find it to be a useful tool for
measuring the Company's ability to service its debt. Because EBITDA is
not calculated identically by all companies, the presentation herein
may not be comparable to other similarly titled measures of other
companies.
Net Sales. Net sales for the three months ended June 27, 1998 were
$417.7 million compared to $386.4 million for the three months ended June 28,
1997. The 8.1% increase in net sales for the period was driven both by the
opening of additional supermarket square footage and an increase in comparable
store sales of 1.2% for the quarter, the highest comparable store sales growth
in six quarters. The Company opened five new stores, replaced two stores and
completed a major remodel to one store during the three-month period in 1998.
Gross Profit. Gross profit for the three months ended June 27, 1998
increased 9.3% to $104.2 million, or 25.0% of sales, compared to $95.3 million,
or 24.7% of sales, for the three months ended June 28, 1997. Gross profit
continued to improve primarily through a combination of increased sales in the
higher margin perishable departments and the realization of improvements in
category management.
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Operating and Administrative Expenses. Operating and administrative
expenses increased 12.4% to $91.2 million, or 21.8% of sales, for the three
months ended June 27, 1998 compared to $81.2 million, or 21.0% of sales, for the
three months ended June 28, 1997. The primary components of the increase were
higher depreciation, utilities, property taxes and payroll for operating
supermarket facilities, combined with rent expense and other costs associated
with unopened supermarket facilities purchased from Bruno's, Inc. ("Bruno's") in
March 1998.
Depreciation expense, utility costs and property taxes rose in
connection with Ingles' expansion and renovation strategy. Payroll, as a
percentage of sales, continued to increase over the prior year; however, the
increase slowed significantly compared with the previous four quarters. Payroll
comparisons continued to be affected by the hike in the minimum wage in
September 1997 and labor costs relating to the increased sales in the higher
margin, but labor intensive, perishable departments.
Operating and administrative expenses in the 1998 three-month period
included approximately $.9 million in rent expense and other associated costs
related to the unopened portion of the 13 supermarket facilities purchased from
Bruno's on March 11, 1998. During the March 1998 quarter, two of these
supermarket facilities were leased to third party supermarket chains. Ingles
leased two more supermarket facilities to a third party supermarket chain in May
1998 and opened two of the supermarket facilities during the June 1998 quarter.
The Company expects to open three of the remaining locations in the fourth
quarter. The Company has not yet finalized plans for the other four locations.
Rental Income, Net. Rental income, net increased $.7 million to $2.1
million for the 1998 three-month period from $1.4 million for the 1997
three-month period. The increase resulted from higher gross rental income of
$1.0 million, net of increased expenses of $.3 million, which resulted primarily
from Ingles' purchases, during the March 1998 quarter, of two former Bruno's
shopping centers and five shopping centers in which Ingles is a tenant.
Other Income, Net. Other income, net rose $.1 million to $.6 million
for the 1998 three-month period compared to $.5 million for the 1997 three-month
period.
Income Before Interest and Income Taxes. Income before interest and
income taxes decreased $.3 million to $15.7 million, or 3.8% of sales, during
the 1998 three-month period compared to $16.0 million, or 4.2% of sales, during
the 1997 three-month period.
Interest Expense. Interest expense increased $2.7 million to $10.7
million for the three months ended June 27, 1998 from $8.0 million for the three
months ended June 28, 1997, primarily as a result of debt incurred to fund
expansion and renovation.
Income Taxes. Income tax expense as a percentage of pre-tax income
declined to 37.0% in the 1998 three-month period compared to 38.5% in the fiscal
1997 three-month period, due primarily to the Work Opportunity Tax Credit and
lower effective state income taxes.
Net Income. Net income for the 1998 three-month period was $3.2
million, or .8% of sales, compared to $4.9 million, or 1.3% of sales, for the
1997 three-month period. Basic earnings per common share were $0.14 for the 1998
three-month period compared to $.23 for the 1997 three-month period. Diluted
earnings per common were $.14 for the June 1998 three-month period versus $.22
in the 1997 three-month period.
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COMPARISON OF THE NINE MONTH PERIOD ENDED JUNE 27, 1998 TO THE NINE MONTH PERIOD
ENDED JUNE 28, 1997
The following table sets forth certain income statement components
expressed as a percentage of net sales for the nine month periods ended June 27,
1998 and June 28, 1997:
Nine Month Period Ended (1)
--------------------------------------------------------
JUNE 27, 1998 June 28, 1997
------------------------------------------------------
AMOUNT PERCENT OF Amount Percent of
(THOUSANDS) SALES (thousands) Sales
----------------------- ------------------------
Results of Operations:
Net sales $1,214,222 100.0% $1,143,651 100.0 %
Cost of goods sold 915,433 75.4% 865,374 75.7 %
---------- ---- ---------- ----
Gross profit 298,789 24.6% 278,277 24.3 %
Operating and
administrative expenses 262,009 21.6% 234,919 20.5 %
Rental income, net 5,064 0.4% 4,119 0.4 %
---------- ---- ---------- ----
Income from operations 41,844 3.4% 47,477 4.2 %
Other income, net 2,384 0.2% 1,550 0.1 %
---------- ---- ---------- ----
Income before interest,
income taxes and
extraordinary item 44,228 3.6% 49,027 4.3 %
Interest expense 29,406 2.4% 23,263 2.0 %
---------- ---- ---------- ----
Income before income taxes
and extraordinary item 14,822 1.2% 25,764 2.3 %
Income taxes 5,500 0.4% 9,900 0.9 %
---------- ---- ---------- ----
Income before extraordinary
item 9,322 0.8% 15,864 1.4 %
Extraordinary item(2) -- --% (565) (0.1)%
---------- ---- ---------- ----
Net income $ 9,322 0.8% $ 15,299 1.3 %
========== ==== ========== ====
EBITDA(3) $ 77,517 6.4% $ 77,395 6.8 %
========== ==== ========== ====
(1) The nine month periods shown are each 39-week periods.
(2) The extraordinary item represents the early extinguishment of debt (net
of income tax benefit) in connection with the redemption of all of
Ingles' then outstanding Convertible Subordinated Debentures.
(3) EBITDA is defined as net earnings before interest, income taxes,
depreciation, amortization and non-recurring and extraordinary items.
EBITDA is a measure commonly used in the grocery industry and is
presented to assist in understanding the Company's operating results.
EBITDA is not intended to represent cash flow from operations as
defined by generally accepted accounting principles ("GAAP") and should
not be considered as an alternative to cash flow as a measure of
liquidity or as an alternative to net earnings as an indicator of
operating performance. EBITDA is included herein because management
believes that certain investors find it to be a useful tool for
measuring the Company's ability to service its debt. Because EBITDA is
not calculated identically by all companies, the presentation herein
may not be comparable to other similarly titled measures of other
companies.
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Net Sales. Net sales for the nine months ended June 27, 1998 increased
$70.6 million to $1.214 billion, up 6.2% over sales of $1.144 billion for the
nine months ended June 28, 1997. Comparable store sales for the nine-month
period were slightly positive. The Company opened eight new stores, replaced six
stores, completed a major remodel to one store, and completed minor remodels to
nine stores during the nine-month period in 1998.
Gross Profit. Gross profit for the 1998 nine-month period increased
7.4% to $298.8 million, or 24.6% of sales, compared to $278.3 million, or 24.3%
of sales, for the 1997 nine-month period. Higher perishable department sales and
effective category management both contributed to the continued improvement, as
in the three-month period.
Operating and Administrative Expenses. Operating and administrative
expenses for the nine months ended June 27, 1998 increased $27.1 million to
$262.0 million, or 21.6% sales, compared to $234.9 million, or 20.5% of sales,
for the nine months ended June 28, 1997. As in the three-month period, higher
payroll, depreciation expense, property taxes, utilities and costs related to
the former Bruno's locations were components of the increase, as well as
elevated expenses for repairs and maintenance.
Rental Income, Net. Rental income, net increased $.9 million to $5.0
million for the 1998 nine-month period compared to $4.1 million for the 1997
nine-month period. The improvement resulted from gross rental income increases
of $1.5 million, net of operating cost increases of $.6 million.
Other Income, Net. Other income, net increased $.8 million to $2.4
million for the 1998 nine-month period compared to $1.6 million for the 1997
nine-month period. Gains on the sales of assets totaling $1.5 million and $.8
million for the 1998 and 1997 nine-month periods, respectively, are included in
other income, net.
Income Before Interest, Income Taxes and Extraordinary Item. Income
before interest, income taxes and the extraordinary item decreased $4.8 million
to $44.2 million, or 3.6% of sales, during the 1998 nine-month period compared
to $49.0 million, or 4.3% of sales, during the 1997 nine-month period.
Interest Expense. Interest expense for the 1998 nine-month period
increased $6.1 million to $29.4 million compared to $23.3 million for the 1997
nine-month period, mainly as a result of additional debt incurred to fund
expansion and renovation. Capital expenditures for the 1998 nine-month period
totaled $140.4 million.
Income Taxes. Income tax expense as a percentage of pre-tax income
declined to 37.1% in the 1998 nine-month period compared to 38.4% in the fiscal
1997 nine-month period, due primarily to the Work Opportunity Tax Credit and
lower effective state income taxes.
Net Income. Net income for the 1998 nine-month period was $9.3 million,
or 0.8% of sales, compared to $15.3 million, or 1.3% of sales, for the 1997
nine-month period. Basic earnings per common share were $.42 for the 1998
nine-month period compared to $.74 for the 1997 nine-month period. Diluted
earnings per common share were $.42 for the 1998 nine-month period compared to
$.72 for the 1997 nine-month period.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company generated $51.9 million of cash from operations during the
nine-month period ended June 27, 1998. Depreciation and amortization expense
totaled $33.3 million, inventory increased $8.8 million and accounts payable and
accrued expenses increased $20.1 million.
The increase in inventory at June 27, 1998 was primarily the result of
additional retail square footage and heightened inventory levels to accommodate
the upcoming Fourth of July holiday. The increase in accounts payable and
accrued expenses resulted primarily from payables resulting from heightened
inventory levels and timing differences in trade payables.
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Cash used by investing activities totaled $136.7 million. The primary
use of this cash was the $140.4 million of capital expenditures during the
period. (SEE "CAPITAL EXPENDITURES" BELOW.) Capital expenditures were partially
offset by $3.7 million of proceeds from the sale of assets.
Ingles' financing activities provided $84.9 million in cash for the
nine-month period. Proceeds from long-term debt totaled $114.3 million, while
payments on long-term debt were $43.0 million. Ingles used the proceeds of the
long-term debt to reduce short-term borrowings outstanding under existing bank
lines of credit. Ingles generally funds its capital expenditures from short-term
lines of credit and later refinances with long-term debt. Ingles subsequently
incurred additional short-term debt to pay for capital expenditures and for
general corporate purposes. Proceeds from short-term borrowings, net were $20.0
million.
Dividends paid totaled $10.3 million. Ingles 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
since December 1993. Ingles expects to continue paying regular cash dividends on
a quarterly basis. However, the Board of Directors periodically reconsiders the
declaration of dividends. Ingles 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 Ingles and other
factors which the Board of Directors deems relevant.
CAPITAL EXPENDITURES
Ingles 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. Ingles has invested and will continue to invest significant
amounts of capital toward the modernization of its store base. Ingles'
modernization program includes the opening of new stores, the major remodeling
of selected existing stores, the relocation of selected existing stores to
larger, more convenient locations and the minor remodeling of its remaining
existing stores.
Capital expenditures totaled $140.4 million for the nine-month period
ended June 27, 1998. Capital expenditures included the construction of six new
stores, improvements to two former Bruno's stores, the replacement of six
stores, a major remodel to one store and minor remodels of nine stores, all of
which were completed during the nine-month period ended June 27, 1998. Also
included, is the purchase of two shopping centers (including supermarket
facilities), 11 leased supermarket facilities and all furniture, fixtures and
equipment at each supermarket location from Bruno's, and the acquisition of nine
unimproved store sites and five existing shopping centers in which Ingles was a
tenant. Capital expenditures also include a portion of the expenditures with
respect to improvements to three former Bruno's locations, one major renovation
to an existing store and five minor remodels, all of which Ingles expects to
open during the balance of fiscal year 1998.
The investment in the former Bruno's stores is a departure from Ingles'
usual plan of building stores from the ground up. Ingles viewed the acquisition
as a good opportunity from both a grocery operation and real estate perspective.
The stores are all in Ingles' current operating market. (SEE "COMPARISON OF THE
THREE MONTH PERIOD ENDED JUNE 27, 1998 TO THE THREE MONTH PERIOD ENDED JUNE 28,
1997 - OPERATING EXPENSES".)
Ingles also believes that each of the five shopping centers it acquired
in which it was a tenant provided a good real estate investment. The acquisition
allowed Ingles to decrease its occupancy costs, obtain flexibility for future
store expansion, control its development and expansion of each property and
benefit from the value created by operating shopping centers in smaller markets.
Ingles capitalized on these growth opportunities that were available
during the nine-month period ended June 27, 1998, which resulted in higher than
normal capital expenditures. The Company is ahead of schedule in its expansion
program and plans to moderate over the next couple of months, which will allow
it to
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focus on two critical areas of its business: improving sales and controlling
costs. The Company anticipates that its capital expenditures will aggregate
approximately $150 million during fiscal 1998. Ingles expects to finance the
remaining capital expenditures with internally generated funds and through short
and long-term financing arrangements. Ingles' ability to execute its capital
expenditure plans will depend, in part, on its ability to generate these funds
and obtain external financing.
The ability of the Company to implement its expansion and renovation
program also depends, in part, upon identifying suitable sites and obtaining
access to such sites on reasonable commercial terms. There can be no assurance
that additional suitable locations will be available on reasonable commercial
terms or at all. Furthermore, there can be no assurance that the level of sales
and profit margins achieved by the Company with respect to its existing stores
can be duplicated in any newly created or expanded stores. The success of the
Company's expansion and renovation program is also dependent on attracting and
retaining qualified personnel.
The Company's expansion and renovation plans are continually reviewed
and are subject to change. There can be no assurance that any such plans, if
implemented, will be successful or will improve operating results. The Company's
ability to continue to pursue these plans and achieve the desired benefits from
these plans are subject to several factors including: the Company's ability to
manage rapid expansion; the Company's ability to secure any necessary financing;
the receipt of necessary zoning approvals; changes in regional and national
economic conditions; changing demographics, changes in the laws and government
regulations applicable to the Company; and competition.
FINANCIAL RESOURCES
At June 27, 1998, Ingles had lines of credit with nine banks totaling
$141.0 million; of this amount $12.0 million was unused. On June 29, 1998, the
Company obtained a $38.0 million loan secured by real estate bearing a 7.5%
interest rate with a ten-year term. The proceeds of the loan were used to repay
balances outstanding under lines of credit. Ingles monitors its cash position
daily and makes draws or repayments on its lines of credit. The lines provide
Ingles with various interest rate options, generally at rates less than prime.
Ingles is not required to maintain compensating balances in connection with
these lines of credit. Ingles finances its expansion and renovation program
primarily with cash provided from operations and from short-term borrowings
under its credit facilities. Ingles typically replaces such short-term
financing, as necessary, with long-term financing secured by equipment and real
estate mortgages. As of June 27, 1998, Ingles had approximately $382 million
outstanding in loans secured by real property and equipment and had unencumbered
real property and equipment with a net book value of approximately $270 million.
The Company's principal sources of liquidity are expected to be cash
flows from operations, borrowing under its lines of credit and long-term
financing. The Company believes, based on its current results of operations and
financial condition, that the financial resources available, including bank
lines of credit, long-term financing 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. A
decline in Ingles' sales, Ingles' failure to achieve expected financial results,
or a failure of Ingles' expansion and renovation program to meet management's
expectations, or any combination of these or similar factors, may have a
material adverse effect on Ingles' business, financial conditions or results of
operations and on its renovation and expansion strategy.
LEGAL PROCEEDINGS
Ingles is a defendant in a lawsuit filed by four employees alleging
gender discrimination. The plaintiffs are seeking to have the lawsuit certified
as a class action so that the claims being asserted can be asserted on behalf of
other past, current and future female Ingles employees. This lawsuit had not
been certified as a class action as of August 10, 1998. The action seeks
injunctive and declaratory relief, along with unspecified monetary damages.
Management believes that this case is without merit and intends to vigorously
defend itself. While the ultimate results of this litigation are unknown and
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cannot presently be determined, management believes, based upon present
information that the resolution of these proceedings will not have a material
adverse effect on the Company.
Various other legal proceedings and claims arising in the ordinary
course of business are pending against Ingles. In the opinion of management, the
ultimate liability, if any, from these other pending legal proceedings and
claims will not have a material adverse effect on the Company.
INSURANCE
Ingles maintains general liability, automobile and excess liability
coverages. Ingles carries $10 million liability insurance coverage on one
aircraft and $5 million liability insurance coverage on the other aircraft used
in its business. Ingles carries casualty insurance only on those properties
where it is required to do so. The Company has elected to self-insure its other
properties.
Because of the sharp escalation in the cost of insurance, Ingles has
elected to self-insure certain other costs representing approximately 75% of the
total cost of insurance. Risks and uncertainties are associated with
self-insurance; however, Ingles has limited its exposure by maintaining excess
liability coverages. Ingles 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 Ingles.
The Company is self-insured for workers' compensation and employee
group medical and dental benefits based on claims filed and claims incurred but
not reported, with a maximum per occurrence of $350,000 for workers'
compensation and up to a maximum of $150,000 per covered person for medical care
benefits for a policy year. Ingles is insured for covered costs in excess of
these limits.
IMPACT OF INFLATION
Inflation in food prices during fiscal year 1997 and thus far in fiscal
1998 continued to be lower than the overall increase in the Consumer Price
Index. One of Ingles' other significant costs is labor, which tends to increase
with inflation, but also may be impacted by other factors. Ingles seeks to
minimize the impact of cost inflation through improved operating efficiencies
and, to the extent possible, through improved gross margins.
SEASONALITY
Sales are slightly seasonal with higher volume in the summer months due
to increased sales by stores located in vacation and seasonal home areas.
YEAR 2000
The Company is evaluating the extent to which its computer operating
systems will be disrupted upon the turn of the century as a result of the
widely-known dating system flaw inherent in many operating systems and software
applications (the "Year 2000 Issue"). The Company has assessed key financial,
informational and operational systems and is modifying its existing computer
software applications and installing new software and hardware to address the
Year 2000 Issue. While the Company believes that new and modified software and
new hardware will address the Year 2000 issue, there can be no assurance that
existing software can be modified or that new software and hardware will be
installed in time to remedy the Year 2000 Issue, that the Company's computer
operating systems will not be disrupted upon the turn of the century or that
such modifications will not require unanticipated expenditures. Furthermore, any
such disruption, whether caused by the Company's systems or those of any of its
suppliers or customers, could have a material adverse effect on the Company.
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FORWARD LOOKING STATEMENTS
Certain statements, estimates, predictions and projections under the
heading "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION" constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are prospective, involving risks and uncertainties. While these forward-looking
statements, and any assumptions upon which they are based, are made in good
faith and reflect the Company's current judgment regarding the direction of its
business, actual results will almost always vary, sometimes materially, from any
estimates, predictions, projections, assumptions or other future performance
suggested herein. These statements are based upon a number of assumptions and
estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. 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 could affect the Company's revenues, 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 following: the ability of the Company to
successfully implement its expansion and operating strategies; the Company's
ability to manage rapid expansion; acquisitions and other opportunities that the
Company may pursue; changes in the availability of debt or equity capital and
increases in borrowing costs or interest rates; increased labor costs; issues
arising from addressing year 2000 computer issues; changes in regional and
national business and economic conditions, including the rate of inflation;
adverse climatic conditions affecting food production and delivery; changing
demographics; changes in the laws and government regulations applicable to the
Company; increased competition; and the other matters referred to herein.
Factors that could cause actual results to differ are discussed throughout this
Form 10-Q, Ingles' 1997 Annual Report on Form 10-K and Ingles' Quarterly Reports
on Form 10-Q for the periods ended March 28, 1998 and December 27, 1997. Ingles
undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
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 27.1 - Financial Data Schedule for the period ended June 27,
1998 (for SEC purposes only)
Exhibit 27.2 - Financial Data Schedule for the period ended June 28,
1997 (for SEC purposes only)
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Company for the quarter ended June 27, 1998.
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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 10, 1998 /s/ Robert P. Ingle
--------------------------------------------
Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: August 10, 1998 /s/ Brenda S. Tudor
--------------------------------------------
Brenda S. Tudor
Vice President-Finance and
Chief Financial Officer
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