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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 March 27, 1999
[ ] 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.
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INGLES MARKETS, INCORPORATED
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(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 May 3, 1999, the Registrant had 9,665,291 shares of Class A
Common Stock, $.05 par value per share, outstanding and 12,712,448 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 No.
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Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 27, 1999 and September 26, 1998.................................... 3
Condensed Consolidated Statements of Income
Three Months Ended March 27, 1999 and March 28, 1998..................... 5
Six Months Ended March 27, 1999 and March 28, 1998....................... 6
Condensed Consolidated Statements of Changes in Stockholders'
Equity
Six Months Ended March 27, 1999 and March 28, 1998....................... 7
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 27, 1999 and March 28, 1998....................... 8
Notes to Unaudited Interim Financial Statements................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... 20
Part II - Other Information
Item 1. Legal Proceedings............................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders........................... 21
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
MARCH 27, SEPTEMBER 26,
1999 1998
(UNAUDITED) (NOTE)
------------ ------------
CURRENT ASSETS:
Cash $ 21,545,754 $ 19,121,409
Receivables 25,189,556 20,671,972
Inventories 161,347,290 151,222,136
Refundable income taxes -- 1,000,000
Other 4,422,117 4,023,916
------------ ------------
Total Current Assets 212,504,717 196,039,433
PROPERTY AND EQUIPMENT - Net 648,281,464 661,772,182
OTHER ASSETS 4,617,989 4,975,350
------------ ------------
TOTAL ASSETS $865,404,170 $862,786,965
============ ============
NOTE: The balance sheet at September 26, 1998 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 BALANCE SHEETS (CONCLUDED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 27, SEPTEMBER 26,
1999 1998
(UNAUDITED) (NOTE)
------------ ------------
CURRENT LIABILITIES:
Short-term loans and current portion of long-term debt $114,896,785 $ 55,759,283
Accounts payable, accrued expenses and current portion
of other long-term liabilities 124,020,277 121,209,027
------------ ------------
Total Current Liabilities 238,917,062 176,968,310
DEFERRED INCOME TAXES 24,734,578 24,934,578
LONG-TERM DEBT 361,408,784 427,414,169
OTHER LONG-TERM LIABILITIES 20,820,968 15,234,165
------------ ------------
TOTAL LIABILITIES 645,881,392 644,551,222
------------ ------------
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; 9,664,691 shares issued and outstanding
March 27, 1999; 9,581,641 shares issued and
outstanding September 26, 1998 483,235 479,082
Class B, $.05 par value; 100,000,000 shares authorized;
12,713,048 shares issued and outstanding March 27,
1999; 12,784,098 shares issued and outstanding
September 26, 1998 635,652 639,205
Paid-in capital in excess of par value 95,866,133 95,765,167
Retained earnings 122,537,758 121,352,289
------------ ------------
Total Stockholders' Equity 219,522,778 218,235,743
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $865,404,170 $862,786,965
============ ============
NOTE: The balance sheet at September 26, 1998 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
-----------------------------------
MARCH 27, MARCH 28,
1999 1998
------------ ------------
Net sales $442,177,123 $393,513,196
Cost of goods sold 332,929,041 296,458,795
------------ ------------
Gross profit 109,248,082 97,054,401
Operating and administrative expenses 95,338,618 85,276,539
Rental income, net 2,447,023 1,517,850
------------ ------------
Income from operations 16,356,487 13,295,712
Other income, net 508,978 1,616,074
------------ ------------
Income before interest and income taxes 16,865,465 14,911,786
Interest expense 10,250,360 9,705,327
------------ ------------
Income before income taxes 6,615,105 5,206,459
------------ ------------
Income taxes:
Current 1,600,000 845,000
Deferred 900,000 1,030,000
------------ ------------
2,500,000 1,875,000
------------ ------------
Net income $ 4,115,105 $ 3,331,459
============ ============
Per share amounts:
Basic earnings per common share $ 0.18 $ 0.15
============ ============
Diluted earnings per common share $ 0.18 $ 0.15
============ ============
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)
SIX MONTHS ENDED
------------------------------------
MARCH 27, MARCH 28,
1999 1998
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Net sales $895,518,407 $796,561,452
Cost of goods sold 675,682,558 601,986,148
------------ ------------
Gross profit 219,835,849 194,575,304
Operating and administrative expenses 191,592,758 170,763,318
Rental income, net 4,618,111 2,947,059
------------ ------------
Income from operations 32,861,202 26,759,045
Other income, net 912,057 1,817,341
------------ ------------
Income before interest and income taxes 33,773,259 28,576,386
Interest expense 20,688,475 18,754,922
------------ ------------
Income before income taxes 13,084,784 9,821,464
------------ ------------
Income taxes:
Current 5,100,000 2,585,000
Deferred (200,000) 1,065,000
------------ ------------
4,900,000 3,650,000
------------ ------------
Net income $ 8,184,784 $ 6,171,464
============ ============
Per share amounts:
Basic earnings per common share $ 0.36 $ 0.28
============ ============
Diluted earnings per common share $ 0.36 $ 0.28
============ ============
Cash dividends per common share:
Class A Common Stock $ 0.33 $ 0.33
------------ ------------
Class B Common Stock $ 0.30 $ 0.30
------------ ------------
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)
SIX MONTHS ENDED MARCH 27, 1999 AND MARCH 28, 1998
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 27, 1997 9,058,441 $452,922 12,788,298 $ 639,415 $90,924,742 $ 130,965,363 $ 222,982,442
Net income -- -- -- -- -- 6,171,464 6,171,464
Cash dividends -- -- -- -- -- (6,828,916) (6,828,916)
Exercise of stock options 219,000 10,950 -- -- 1,840,425 -- 1,851,375
Common stock conversions 225 11 (225) (11) -- -- --
--------- -------- ---------- --------- ----------- ------------- -------------
Balance, March 28, 1998 9,277,666 $463,883 12,788,073 $ 639,404 $92,765,167 $ 130,307,911 $ 224,176,365
========= ======== ========== ========= =========== ============= =============
Balance, September 26, 1998 9,581,641 $479,082 12,784,098 $ 639,205 $95,765,167 $ 121,352,289 $ 218,235,743
Net income -- -- -- -- -- 8,184,784 8,184,784
Cash dividends -- -- -- -- -- (6,999,315) (6,999,315)
Exercise of stock options 12,000 600 -- -- 100,966 -- 101,566
Common stock conversions 71,050 3,553 (71,050) (3,553) -- -- --
--------- -------- ---------- --------- ----------- ------------- -------------
BALANCE, MARCH 27, 1999 9,664,691 $483,235 12,713,048 $ 635,652 $95,866,133 $ 122,537,758 $ 219,522,778
========= ======== ========== ========= =========== ============= =============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
------------------------------------------
MARCH 27, MARCH 28,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,184,784 $ 6,171,464
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 21,097,676 21,576,353
Amortization of deferred gain on sale/leasebacks (322,804) --
Gains on disposals of property and equipment (195,106) (1,335,930)
Receipt of advance payments on purchases contracts 7,248,750 --
Recognition of advance payments on purchases contracts (1,816,351) (1,418,879)
Deferred income taxes (200,000) 1,065,000
Increase in receivables (3,499,380) (3,578,684)
Increase in inventory (10,125,154) (643,367)
Increase in other assets (206,463) (249,419)
Increase in accounts payable and accrued expenses 3,563,251 12,508,377
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,729,203 34,094,915
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 224,380 3,202,414
Capital expenditures (23,924,239) (115,495,344)
------------ ------------
NET CASH (USED) BY INVESTING ACTIVITIES (23,699,859) (112,292,930)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 24,988,894 88,989,888
Proceeds from short-term borrowings, net 16,500,000 20,000,000
Proceeds from sale/leaseback transactions 16,160,633 --
Principal payments on long-term debt (48,356,777) (27,554,807)
Proceeds from exercise of stock options 101,566 1,266,375
Dividends paid (6,999,315) (6,828,916)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,395,001 75,872,540
------------ ------------
NET INCREASE (DECREASE) IN CASH 2,424,345 (2,325,475)
Cash at beginning of period 19,121,409 25,389,386
------------ ------------
CASH AT END OF PERIOD $ 21,545,754 $ 23,063,911
============ ============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Six Months Ended March 27, 1999 and March 28, 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 March 27, 1999, and the results of operations, changes
in stockholders' equity and cash flows for the three month and six month
periods ended March 27, 1999 and March 28, 1998. 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 1998 Annual Report on Form 10-K filed by the
Company under the Securities Exchange Act of 1934 on December 21, 1998.
The results of operations for the three month and six month periods ended March
27, 1999 are not necessarily indicative of the results to be expected for the
full fiscal year.
Certain amounts for the three month and six month periods ended March 28, 1998
have been reclassified for comparative purposes.
B. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of $206,000
and $159,000 at March 27, 1999 and September 26, 1998, 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:
MARCH 27, September 26,
1999 1998
-------------- --------------
Accounts payable-trade $ 87,198,069 $ 82,057,508
Property, payroll, and other taxes payable 8,180,410 11,304,982
Salaries, wages and bonuses payable 7,645,168 9,613,336
Self-insurance reserves 4,780,000 4,600,000
Other 16,216,630 13,633,201
-------------- --------------
$ 124,020,277 $ 121,209,027
============== ==============
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
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of employee contributions, totaled $3.7 million and $2.4 million for the three
month periods ended March 27, 1999 and March 28, 1998, respectively.
For the six month periods ended March 27, 1999 and March 28, 1998, employee
insurance expense totaled $7.1 million and $4.7 million, respectively.
D. LONG-TERM DEBT
During the six month period ended March 27, 1999, the Company obtained $25
million in long-term funding. Included in this total are $20 million in
advances on long-term lines of credit at interest rates less than the prime
rate. The remaining $5 million pertains to a long-term note secured by
equipment. The proceeds of the loans were used to fund capital expenditures and
for general corporate purposes. During the second quarter, the Company
completed several equipment sale/leaseback transactions that netted proceeds of
$16.2 million. The proceeds were used to reduce unsecured lines of credit.
Subsequent to March 27, 1999, the Company obtained long-term financing secured
by equipment. The proceeds of this debt were used to reduce short-term
borrowings outstanding at March 27, 1999. Short-term borrowings of $11.5
million have been reclassified to long-term debt at March 27, 1999 due
to this refinancing.
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 January 18, 1999 and on
October 12, 1998 to stockholders of record on January 8, 1999, and October 2,
1998, respectively.
F. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
SIX MONTHS ENDED
--------------------------------
MARCH 27, March 28,
1999 1998
------------- -------------
Interest (net of amount capitalized) $ 20,429,360 $ 18,077,515
Income taxes 4,157,223 2,527,610
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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
------------------------------------------
MARCH 27, March 28,
1999 1998
------------ ------------
BASIC:
Net income $ 4,115,105 $ 3,331,459
============ ============
Weighted average number of common shares
outstanding 22,377,717 21,963,519
============ ============
Basic earnings per common share $ .18 $ .15
============ ============
DILUTED:
Net income $ 4,115,105 $ 3,331,459
============ ============
Weighted average number of common shares and
common stock equivalent shares outstanding 22,394,296 22,300,374
============ ============
Diluted earnings per common share $ .18 $ .15
============ ============
The following table sets forth the computation of basic and diluted earnings
per share for the six month period indicated:
SIX MONTHS ENDED
------------------------------------------
MARCH 27, March 28,
1999 1998
------------ ------------
BASIC:
Net income $ 8,184,784 $ 6,171,464
============ ============
Weighted average number of common shares
outstanding 22,374,585 21,908,761
============ ============
Basic earnings per common share $ .36 $ .28
============ ============
DILUTED:
Net income $ 8,184,784 $ 6,171,464
============ ============
Weighted average number of common shares and
common stock equivalent shares outstanding 22,391,164 22,287,178
============ ============
Diluted earnings per common share $ .36 $ .28
============ ============
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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 205 supermarkets
in Georgia (83), North Carolina (62), South Carolina (32), Tennessee (24),
Virginia (3) and Alabama (1). The Company locates its supermarkets primarily in
suburban areas, small towns and rural communities, where management believes
the market may be under-served by existing supermarkets. 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 26 weeks of operations included in the unaudited
condensed consolidated statements of income for the three and six-month periods
ended March 27, 1999 and March 28, 1998. 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 SIX MONTHS ENDED
----------------------------------------------
MARCH 27, March 28, MARCH 27, March 28,
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 24.7% 24.7% 24.6% 24.4%
Operating and administrative
expenses 21.6% 21.7% 21.4% 21.4%
Rental income, net 0.6% 0.4% 0.5% 0.4%
Other income, net 0.1% 0.4% 0.1% 0.2%
Income before interest and
income taxes 3.8% 3.8% 3.8% 3.6%
Interest expense 2.3% 2.5% 2.3% 2.4%
Income before income taxes 1.5% 1.3% 1.5% 1.2%
Income taxes 0.6% 0.4% 0.6% 0.4%
Net income 0.9% 0.9% 0.9% 0.8%
EBITDA margin(1) 6.2% 6.6% 6.1% 6.3%
- ---------------------------------------
(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 because it allows for a means of comparing Ingles with
other companies that operate supermarkets, many of which do not own
the real property on which the supermarkets are located. EBITDA is
unaffected by the debt and equity structure of Ingles. 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 MARCH 27, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 28,
1998
Net Sales
Net sales for the three months ended March 27, 1999 increased 12.4% to $442.2
million, compared to $393.5 million for the three months ended March 28, 1998.
Comparable store sales increased 9.1%.
Sales increases were achieved through increased marketing efforts, increased
community involvement and improvements in store conditions, as well as from
maturing new stores, remodeled stores and stores that have been replaced. The
9.1% comparable store sales increase is the highest comparable store sales
increase the Company has experienced in over five years.
Gross Profit
Gross profit for the three months ended March 27, 1999 increased 12.6% to
$109.2 million, or 24.7% of sales, compared to $97.1 million, or 24.7% of
sales, for the three months ended March 28, 1998. Through careful planning of
purchasing and promotional strategies, Ingles maintained gross profit as a
percentage of sales, while aggressively increasing its marketing efforts.
Operating and Administrative Expenses
Operating and administrative expenses increased 11.8% to $95.3 million for the
three months ended March 27, 1999, from $85.3 million for the three months
ended March 28, 1998. For the same period, operating and administrative
expenses decreased slightly as a percentage of sales to 21.6% from 21.7%.
Economies achieved through increased sales resulted in reductions in payroll,
utilities and depreciation expense, as a percentage of sales. These reductions
were partially offset by rent expense associated with the sale/leaseback of
equipment in September 1998 and March 1999. The breakdown of increases
(decreases) as a percentage of sales in these categories is as follows:
Payroll (.2)%
Utilities (.1)%
Depreciation (.4)%
Equipment rent expense .6 %
Rental Income, Net
Rental income, net increased to $2.4 million for the March 1999 quarter from
$1.5 million for the March 1998 quarter. The improvement is a result of gross
rental income increases of $1.1 million, net of operating cost increases of $.2
million. The increase in gross rental income resulted primarily from the
purchase of seven shopping centers in fiscal 1998 and the receipt of $.2
million for the early termination of two tenant leases in fiscal 1999.
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Other Income, Net
Other income, net decreased $1.1 million to $.5 million for the three months
ended March 27, 1999 from $1.6 million for the three months ended March 28,
1998, primarily due to $1.3 million in gains on the sales of assets in the
March 1998 quarter.
Interest Expense
Interest expense increased $.5 million to $10.3 million for the three months
ended March 27, 1999 from $9.7 million for the three months ended March 28,
1998. The increase is mainly a result of additional debt incurred to fund
expansion and renovation, net of decreases in interest expense resulting from
the previously mentioned sale/leaseback transactions.
Income Taxes
Income tax expense as a percentage of pre-tax income increased to 37.8% in the
March 1999 quarter compared to 36.0% in the March 1998 quarter. This increase
can be attributed to higher state income taxes in the March 1999 quarter.
Net Income
Net income for the March 1999 quarter was $4.1 million, or .9% of sales,
compared to $3.3 million, or .9% of sales, for the March 1998 quarter. Basic
and diluted earnings per common share were $.18 for the March 1999 quarter
compared to $.15 for the March 1998 quarter.
SIX MONTHS ENDED MARCH 27, 1999 COMPARED TO THE SIX MONTHS ENDED MARCH 28, 1998
Net Sales
Net sales for the six months ended March 27, 1999 increased 12.4% to $895.5
million, compared to $796.6 million for the six months ended March 28, 1998.
Comparable store sales increased 8.3%.
Enhanced marketing efforts in all media, 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 six months ended March 27, 1999 increased 13.0% to $219.8
million, or 24.6% of sales, compared to $194.6 million, or 24.4% of sales, for
the six months ended March 28, 1998. Increased sales distribution in the higher
margin perishable departments, as well as effective purchasing and promotional
strategies, accounted for the increase.
Operating and Administrative Expenses
Operating and administrative expenses increased 12.2% to $191.6 million for the
six months ended March 27, 1999, from $170.8 million for the six months ended
March 28, 1998. As a percentage of sales for the same period, operating and
administrative expenses remained
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constant at 21.4%. The breakdown of increases (decreases) as a percentage of
sales in significant categories is as follows:
Payroll (.2)%
Utilities (.1)%
Depreciation (.4)%
Equipment rent expense .6 %
Rental Income, Net
Rental income, net increased $1.7 million to $4.6 million for the March 1999
six-month period from $2.9 million for the March 1998 six-month period. The
improvement is a result of gross rental income increases of $2.2 million, net
of operating cost increases of $.5 million. The increase in gross rental income
resulted primarily from the purchase of seven shopping centers in fiscal 1998.
Other Income, Net
Other income, net decreased $.9 million to $.9 million for the six months ended
March 27, 1999 from $1.8 million for the six months ended March 28, 1998,
primarily due to $1.3 million in gains on the sales of assets in the March 1998
period.
Interest Expense
Interest expense increased $1.9 million to $20.7 million for the six months
ended March 27, 1999 from $18.8 million for the six months ended March 28,
1998. The increase is mainly a result of additional debt incurred to fund
expansion and renovation, net of decreases in interest expense resulting from
the previously mentioned sale/leaseback transactions. Retail square footage
increased 7.2% to 8.3 million square feet at March 27, 1999 compared to 7.8
million square feet at March 28, 1998.
Income Taxes
Income tax expense as a percentage of pre-tax income increased to 37.4% in the
March 1999 six-month period compared to 37.2% in the March 1998 six-month
period.
Net Income
Net income for the March 1999 six-month period was $8.2 million, or .9% of
sales, compared to $6.2 million, or .8% of sales, for the March 1998 six-month
period. Basic and diluted earnings per common share were $.36 for the March
1999 six-month period compared to $.28 for the March 1998 six-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
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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 $23.9 million for the six months ended March 27,
1999, including expenditures related to the opening of two new stores,
replacement of two older stores, major remodeling and expansion of one store
and minor remodeling of six stores all of which were completed during the
six-month period. Capital expenditures also included costs related to new
stores to be opened and remodels to be completed during the balance of fiscal
1999 and in fiscal 2000, 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.
The Company plans to continue to moderate its growth somewhat for the balance
of fiscal 1999, as compared to fiscal 1998, and concentrate on improving
existing operations through modernized facilities and technology. Ingles
capital expenditure plans for fiscal year 1999 include investments of
approximately $75 million. The Company plans to perform minor remodels of six
stores for the balance of fiscal 1999. Expenditures will also include
investments in stores to open in fiscal 2000 as well as technology
improvements, upgrading and replacing existing store equipment and warehouse
and transportation equipment and improvements to the Company's milk processing
plant.
Liquidity
The Company generated $23.7 million of cash from operations for the six months
ended March 27, 1999. Increases of $3.5 million in receivables are the product
of vendor rebates resulting from higher sales volume. Inventory increased $10.1
million to support the higher sales volume. The Company received $7.2 million
in advance payments on purchase contracts.
Cash used by investing activities totaled $23.7 million. The primary use of
this cash was the $23.9 million of capital expenditures during the period,
which were partially offset by $.2 million of proceeds from the sale of assets.
During the March 1999 six-month period, the Company's financing activities
provided $2.4 million in cash, the net result of dividend payments, long- and
short-term borrowings and sale/leaseback transactions. Proceeds from long-term
debt totaled $25 million, while payments on long-term debt were $48.4 million.
Proceeds from the sale/leaseback of store and transportation equipment totaled
$16.2 million.
At March 27, 1999, the Company had lines of credit with eight banks totaling
$135.0 million; of this amount $39.5 million was unused. 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 finances its
expansion and renovation program primarily with cash provided from operations
and from borrowings under its credit facilities. The Company typically replaces
such financing, as necessary, with long-term financing secured by equipment and
real estate. As of March
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27, 1999 the Company had unencumbered real property and equipment with a net
book value of approximately $230 million.
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 dividends to approximately $17.9 million at March 27, 1999.
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 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.
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Impact of Inflation
Inflation in food prices during the first and second quarters of fiscal 1999
and during fiscal 1998 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.
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
In 1996, Ingles began evaluating both its information technology systems and
other systems and equipment in order to identify and correct date sensitive
systems for Year 2000 compliance. As part of this undertaking, the Company
appointed a Year 2000 Project Manager from the Information Systems department
to address and manage the issues related to Year 2000 compliance.
The Company identified certain proprietary programs that would have to be
updated, and certain hardware and third party software both at the corporate
level and in the stores that would have to be upgraded or replaced. The Company
began making changes to corporate proprietary programs in 1996, completing and
testing the changes in 1998. The Company will be upgrading and replacing
equipment and software in our stores throughout the year 1999, both for year
2000 compliance and as part of an unrelated project to replace our current
in-store systems with an expanded suite of back office products. The estimated
costs of the new technology of approximately $8 million will be capitalized as
incurred and is included in the capital budget for fiscal 1999. In addition to
replacing store technology, other expenditures will be required to make
remaining hardware and software Year 2000 compliant. These expenditures, which
the Company estimates will be approximately $1 million, will be expensed as
incurred. The Company fully expects to be compliant before October 31, 1999.
As part of the Year 2000 Project, the Company has identified relationships with
third parties, including vendors, suppliers, and service providers, whom the
Company believes are critical to its business operations. Although the Company
considered several factors in identifying these critical relationships, the
Company has concentrated its communication efforts with suppliers and vendors
from whom the company makes annual purchases in excess of $500 thousand. The
Company is in the process of communicating with these third parties through
letters and interviews in an effort to determine the extent to which they are
addressing their Year 2000 compliance issues. The Company has received
responses from its critical suppliers, the majority of which have indicated
they anticipate being Year 2000 compliant. A small percentage of these critical
suppliers have indicated they are Year 2000 compliant.
The Company cannot assure that there will not be an adverse impact on the
Company if third parties do not appropriately address their Year 2000 issues in
a timely manner. Possible consequences in such event include, but are not
limited to, loss of communications with stores, loss of electric power, the
inability of vendors to supply timely delivery of inventory and an inability to
process customer transactions or otherwise engage in similar normal business
activities. The Company will continue to communicate with, assess and monitor
the progress of these third parties in resolving Year 2000 issues.
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Although the Company does not believe the actual impact of any system failures
related to the century change will be material, the Company is developing
various contingency plans with its critical suppliers and certain other vendors
in order to assure the timely delivery of inventory and continuance of normal
business activities following the year change. The Company is also developing
contingency plans to respond to unexpected system failures in the stores. The
Company will continue to develop and finalize the implementation of its
contingency plans internally and with third parties throughout 1999.
The above assessment is based on management's best estimates and may be updated
from time to time as additional information becomes available.
Forward Looking Statements
This Quarterly Report contains certain forward-looking statements relating to,
among other things, capital expenditures, cost reduction, operating
improvements and expected results. 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 26, 1998.
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Part II. Other Information.
Item 1. LEGAL PROCEEDINGS
On April 15, 1999, a Consent Decree was entered in the case of Weddington, et
al. v. Ingles Markets, Incorporated, wherein the Court approved the settlement
previously reached by the parties in the class action litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Annual Meeting of Stockholders of Ingles Markets, Incorporated was held
Tuesday, February 16, 1999. Matters submitted to a vote of the stockholders at
this meeting were as follows: Election of nine directors for the ensuing year.
John O. Pollard and J. Alton Wingate were elected by the holders of Class A
Common Stock by the following vote: (a) Mr. Pollard: 7,907,897 votes for,
71,132 votes withheld, 0 abstentions and 0 broker nonvotes and (b) Mr. Wingate:
7,910,077 votes for, 68,952 votes withheld, 0 abstentions and 0 broker
nonvotes. Robert P. Ingle, Vaughn C. Fisher, Anthony S. Federico, Ralph H.
Gardner, Robert P. Ingle, II, Laura Ingle Sharp and Brenda S. Tudor were
elected by the holders of Class B Common Stock by the following vote: (a) Mr.
Robert P. Ingle: 12,357,951 votes for, 225 votes withheld, 0 abstentions and 0
broker nonvotes; (b) Mr. Fisher: 12,357,951 votes for, 225 votes withheld, 0
abstentions and 0 broker nonvotes; (c) Mr. Federico: 12,357,951 votes for, 225
votes withheld, 0 abstentions and 0 broker nonvotes; (d) Mr. Gardner:
12,357,951 votes for, 225 votes withheld, 0 abstentions and 0 broker nonvotes;
(e) Mr. Robert P. Ingle, II: 12,357,951 votes for, 225 votes withheld, 0
abstentions and 0 broker nonvotes; (f) Ms. Sharp: 12,357,951 votes for, 225
votes withheld, 0 abstentions and 0 broker nonvotes; (g) Ms. Tudor: 12,357,951
votes for, 225 votes withheld, 0 abstentions and 0 broker nonvotes.
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 March 27,
1999 (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 March 27, 1999.
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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: May 7, 1999 /s/ Robert P. Ingle
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Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: May 7, 1999 /s/ Brenda S. Tudor
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Brenda S. Tudor
Vice President-Finance and
Chief Financial Officer
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