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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 June 26, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 6676, Asheville, NC 28816
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(Address of principal executive offices) (Zip Code)
(828) 669-2941
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 2, 1999, the Registrant had 9,685,516 shares of Class A
Common Stock, $.05 par value per share, outstanding and 12,692,223 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
June 26, 1999 and September 26, 1998....................... 3
Condensed Consolidated Statements of Income
Three Months Ended June 26, 1999 and June 27, 1998.......... 5
Nine Months Ended June 26, 1999 and June 27, 1998........... 6
Condensed Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended June 26, 1999 and June 27, 1998........... 7
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 26, 1999 and June 27, 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 6. Exhibits and Reports on Form 8-K................................... 21
Signatures..................................................................... 22
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Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 26, SEPTEMBER 26,
1999 1998
(UNAUDITED) (NOTE)
------------ ------------
CURRENT ASSETS:
Cash $ 19,448,378 $ 19,121,409
Receivables 25,430,027 20,671,972
Inventories 159,911,845 151,222,136
Refundable income taxes -- 1,000,000
Other 4,434,795 4,023,916
------------ ------------
Total Current Assets 209,225,045 196,039,433
PROPERTY AND EQUIPMENT - Net 648,564,907 661,772,182
OTHER ASSETS 4,566,588 4,975,350
------------ ------------
TOTAL ASSETS $862,356,540 $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
JUNE 26, SEPTEMBER 26,
1999 1998
(UNAUDITED) (NOTE)
------------ ------------
CURRENT LIABILITIES:
Short-term loans and current portion of long-term debt $ 94,292,693 $ 55,759,283
Accounts payable, accrued expenses and current portion
of other long-term liabilities 125,357,813 121,209,027
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Total Current Liabilities 219,650,506 176,968,310
DEFERRED INCOME TAXES 25,634,578 24,934,578
LONG-TERM DEBT 375,486,857 427,414,169
OTHER LONG-TERM LIABILITIES 20,417,193 15,234,165
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TOTAL LIABILITIES 641,189,134 644,551,222
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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; 9,685,516 shares issued and outstanding
June 26, 1999; 9,581,641 shares issued and
outstanding September 26, 1998 484, 276 479,082
Class B, $.05 par value; 100,000,000 shares authorized;
12,692,223 shares issued and outstanding June 26,
1999; 12,784,098 shares issued and outstanding
September 26, 1998 634,611 639,205
Paid-in capital in excess of par value 95,866,133 95,765,167
Retained earnings 124,182,386 121,352,289
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Total Stockholders' Equity 221,167,406 218,235,743
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $862,356,540 $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
----------------------------------
JUNE 26, JUNE 27,
1999 1998
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Net sales $452,878,199 $417,660,466
Cost of goods sold 339,277,000 313,446,729
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Gross profit 113,601,199 104,213,737
Operating and administrative expenses 98,839,986 91,246,054
Rental income, net 2,381,210 2,117,132
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Income from operations 17,142,423 15,084,815
Other income, net 747,748 566,827
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Income before interest and income taxes 17,890,171 15,651,642
Interest expense 9,643,909 10,651,217
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Income before income taxes 8,246,262 5,000,425
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Income taxes:
Current 2,200,000 615,000
Deferred 900,000 1,235,000
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3,100,000 1,850,000
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Net income $ 5,146,262 $ 3,150,425
============ ============
Per share amounts:
Basic earnings per common share $ 0.23 $ 0.14
============ ============
Diluted earnings per common share $ 0.23 $ 0.14
============ ============
Cash dividends per common share:
Class A Common Stock $ 0.165 $ 0.165
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Class B Common Stock $ 0.150 $ 0.150
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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
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JUNE 26, JUNE 27,
1999 1998
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Net sales $1,348,396,606 $1,214,221,918
Cost of goods sold 1,014,959,558 915,432,877
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Gross profit 333,437,048 298,789,041
Operating and administrative expenses 290,432,744 262,009,372
Rental income, net 6,999,321 5,064,191
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Income from operations 50,003,625 41,843,860
Other income, net 1,659,805 2,384,168
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Income before interest and income taxes 51,663,430 44,228,028
Interest expense 30,332,384 29,406,139
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Income before income taxes 21,331,046 14,821,889
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Income taxes:
Current 7,300,000 3,200,000
Deferred 700,000 2,300,000
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8,000,000 5,500,000
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Net income $ 13,331,046 $ 9,321,889
============== ==============
Per share amounts:
Basic earnings per common share $ 0.59 $ 0.42
============== ==============
Diluted earnings per common share $ 0.59 $ 0.42
============== ==============
Cash dividends per common share:
Class A Common Stock $ 0.495 $ 0.495
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Class B Common Stock $ 0.450 $ 0.450
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See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED JUNE 26, 1999 AND JUNE 27, 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 -- -- -- -- -- 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
========= ======== =========== ========= =========== ============= =============
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 -- -- -- -- -- 13,331,046 13,331,046
Cash dividends -- -- -- -- -- (10,500,949) (10,500,949)
Exercise of stock options 12,000 600 -- -- 100,966 -- 101,566
Common stock conversions 91,875 4,594 (91,875) (4,594) -- -- --
--------- -------- ----------- --------- ----------- ------------- -------------
BALANCE, JUNE 26, 1999 9,685,516 $484,276 12,692,223 $ 634,611 $95,866,133 $ 124,182,386 $ 221,167,406
========= ======== =========== ========= =========== ============= =============
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
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JUNE 26, JUNE 27,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,331,046 $ 9,321,889
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 31,546,121 33,288,937
Amortization of deferred gain on sale/leasebacks (596,172) --
Gains on disposals of property and equipment (204,782) (1,526,037)
Receipt of advance payments on purchases contracts 7,248,750 --
Recognition of advance payments on purchases contracts (2,780,763) (1,961,225)
Deferred income taxes 700,000 2,300,000
Increase in receivables (3,729,990) (875,799)
Increase in inventory (8,689,709) (8,849,449)
(Increase) decrease in other assets (253,894) 93,523
Increase in accounts payable and accrued expenses 5,967,603 20,071,896
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NET CASH PROVIDED BY OPERATING ACTIVITIES 42,538,210 51,863,735
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 299,111 3,653,843
Capital expenditures (37,088,149) (140,403,772)
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NET CASH (USED) BY INVESTING ACTIVITIES (36,789,038) (136,749,929)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 56,843,729 114,293,241
Proceeds from short-term borrowings, net 5,000,000 20,000,000
Proceeds from sale/leaseback transactions 18,371,082 --
Principal payments on long-term debt (75,237,631) (42,958,383)
Proceeds from exercise of stock options 101,566 3,866,375
Dividends paid (10,500,949) (10,277,944)
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NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (5,422,203) 84,923,289
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NET INCREASE IN CASH 326,969 37,095
Cash at beginning of period 19,121,409 25,389,386
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CASH AT END OF PERIOD $ 19,448,378 $ 25,426,481
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See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Nine Months Ended June 26, 1999 and 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 26, 1999, and the results of operations, changes
in stockholders' equity and cash flows for the three month and nine month
periods ended June 26, 1999 and June 27, 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 nine month periods ended
June 26, 1999 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 27, 1998
have been reclassified for comparative purposes.
B. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of $230,000
and $159,000 at June 26, 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:
JUNE 26, September 26,
1999 1998
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Accounts payable-trade $ 85,988,331 $ 82,057,508
Property, payroll, and other taxes payable 10,582,531 11,304,982
Salaries, wages and bonuses payable 8,963,522 9,613,336
Self-insurance reserves 4,870,000 4,600,000
Other 14,953,429 13,633,201
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$125,357,813 $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 $3.6 million and $2.8 million for the three
month periods ended June 26, 1999 and June 27, 1998, respectively. For the nine
month periods ended June 26, 1999 and June 27, 1998, employee insurance expense
totaled $10.5 million and $7.4 million, respectively.
D. LONG-TERM DEBT
During the nine month period ended June 26, 1999, the Company obtained $56.8
million in long-term funding secured by equipment. The proceeds of the loans
were used to fund capital expenditures and for general corporate purposes.
During the year, the Company completed several equipment sale/leaseback
transactions that netted proceeds of $18.4 million. The proceeds were used to
reduce unsecured lines of credit.
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 12, 1999, January 18,
1999 and on October 12, 1998 to stockholders of record on April 2, 1999, January
8, 1999 and October 2, 1998, respectively.
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F. 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
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JUNE 26, June 27,
1999 1998
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BASIC:
Net income $ 5,146,262 $ 3,150,425
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Weighted average number of common shares
outstanding 22,377,739 22,186,619
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Basic earnings per common share $ .23 $ .14
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DILUTED:
Net income $ 5,146,262 $ 3,150,425
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Weighted average number of common shares and
common stock equivalent shares outstanding 22,544,220 22,287,386
=========== ===========
Diluted earnings per common share $ .23 $ .14
=========== ===========
The following table sets forth the computation of basic and diluted earnings per
share for the nine month period indicated:
NINE MONTHS ENDED
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JUNE 26, June 27,
1999 1998
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BASIC:
Net income $ 13,331,046 $ 9,321,889
============ ===========
Weighted average number of common shares
outstanding 22,375,636 22,001,381
============ ===========
Basic earnings per common share $ .59 $ .42
============ ===========
DILUTED:
Net income $ 13,331,046 $ 9,321,889
============ ===========
Weighted average number of common shares and
common stock equivalent shares outstanding 22,481,785 22,209,947
============ ===========
Diluted earnings per common share $ .59 $ .42
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Ingles, a leading supermarket chain in the Southeast, operates 206 supermarkets
in Georgia (83), North Carolina (63), 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 39 weeks of operations included in the unaudited
condensed consolidated statements of income for the three and nine-month
periods, respectively, ended June 26, 1999 and June 27, 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 NINE MONTHS ENDED
--------------------------------------------
JUNE 26, June 27, JUNE 26, June 27,
1999 1998 1999 1998
--------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 25.1% 25.0% 24.7% 24.6%
Operating and administrative
expenses 21.8% 21.8% 21.5% 21.6%
Rental income, net 0.5% 0.5% 0.5% 0.4%
Other income, net 0.1% 0.1% 0.1% 0.2%
Income before interest and
income taxes 3.9% 3.8% 3.8% 3.6%
Interest expense 2.1% 2.6% 2.2% 2.4%
Income before income taxes 1.8% 1.2% 1.6% 1.2%
Income taxes 0.7% 0.4% 0.6% 0.4%
Net income 1.1% 0.8% 1.0% 0.8%
EBITDA margin(1) 6.3% 6.6% 6.2% 6.4%
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(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 JUNE 26, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 27,
1998
Net Sales
Net sales for the three months ended June 26, 1999 increased 8.4% to $452.9
million, compared to $417.7 million for the three months ended June 27, 1998.
The fiscal year 1999 trend of strong comparable store sales growth continued in
the June 1999 quarter with an increase of 7.2% over the prior year period.
Sales increases were achieved through a combination of effective marketing,
highly visible community involvement and a focus on improving store conditions
and customer service, as well as from rising sales in maturing new stores,
remodeled stores and stores that have been replaced.
Gross Profit
Gross profit for the three months ended June 26, 1999 increased 9.0% to $113.6
million, or 25.1% of sales, compared to $104.2 million, or 25.0% of sales, for
the three months ended June 27, 1998. Gross profit margins were not sacrificed,
but slightly improved while achieving solid sales growth. This was accomplished
by focusing on category management and from economies achieved in purchasing.
Operating and Administrative Expenses
Operating and administrative expenses increased 8.3% to $98.8 million for the
three months ended June 26, 1999, from $91.2 million for the three months ended
June 27, 1998. For the same period, operating and administrative expenses
remained constant at 21.8% of sales. Due to increased sales and cost controls,
reductions were achieved in many operating and administrative expense
categories, as a percentage of sales. However, rent expense associated with the
sale/leaseback of store equipment in September 1998 and in fiscal 1999 offset
these reductions as rent expense replaced interest expense and depreciation.
Warehouse expense grew due to a combination of increases in diesel fuel prices
and employee benefit costs. A breakdown of the major increases (decreases) as a
percentage of sales in operating and administrative expense categories is as
follows:
Payroll (.09)%
Real estate rent expense (.10)%
Utilities (.17)%
Depreciation (.45)%
Warehouse expense .12 %
Equipment rent expense .77 %
Rental Income, Net
Rental income, net increased to $ 2.4 million for the June 1999 quarter from
$2.1 million for the June 1998 quarter, primarily as a result of increases in
gross rental income.
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Other Income, Net
Other income, net increased $.1 million to $.7 million for the three months
ended June 26, 1999 from $.6 million for the three months ended June 27, 1998.
Interest Expense
Interest expense decreased $1.0 million to $9.6 million for the three months
ended June 26, 1999 from $10.6 million for the three months ended June 27, 1998.
The reduction is mainly a result of the previously mentioned sale/leaseback
transactions.
Income Taxes
Income tax expense as a percentage of pre-tax income increased to 37.6% in the
June 1999 quarter compared to 37.0% in the June 1998 quarter. This increase is
attributable to higher state income taxes in the June 1999 quarter.
Net Income
Net income for the June 1999 quarter increased 63.4% to $5.1 million, or 1.1% of
sales, compared to $3.2 million, or .8% of sales, for the June 1998 quarter.
Basic and diluted earnings per common share were $.23 for the June 1999 quarter
compared to $.14 for the June 1998 quarter.
NINE MONTHS ENDED JUNE 26, 1999 COMPARED TO THE NINE MONTHS ENDED JUNE 27, 1998
Net Sales
Net sales for the nine months ended June 26, 1999 increased 11.1% to $1.348
billion, compared to $1.214 billion for the nine months ended June 27, 1998.
Comparable store sales increased 7.9%.
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 nine months ended June 26, 1999 increased 11.6% to $ 333.4
million, or 24.7% of sales, compared to $298.8 million, or 24.6% of sales, for
the nine months ended June 27, 1998.
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Operating and Administrative Expenses
Operating and administrative expenses increased 10.8% to $290.4 million for the
nine months ended June 26, 1999, from $262.0 million for the nine months ended
June 27, 1998. As a percentage of sales for the same period, operating and
administrative expenses were 21.5% and 21.6% for June 26, 1999 and June 27,
1998, respectively. The breakdown of increases (decreases) as a percentage of
sales in significant categories is as follows:
Payroll (.16)%
Utilities (.12)%
Depreciation (.39)%
Equipment rent expense .66 %
Rental Income, Net
Rental income, net increased $1.9 million to $7.0 million for the June 1999
nine-month period from $5.1 million for the June 1998 nine-month period. The
improvement is a result of gross rental income increases of $2.5 million, net of
operating cost increases of $.6 million. The increase in gross rental income
resulted primarily from the purchase of seven shopping centers during the first
half of fiscal 1998.
Other Income, Net
Other income, net decreased $.7 million to $1.7 million for the nine months
ended June 26, 1999 from $2.4 million for the nine months ended June 27, 1998,
primarily due to gains on the sales of assets in the June 1998 period.
Interest Expense
Interest expense increased $.9 million to $30.3 million for the nine months
ended June 26, 1999 from $29.4 million for the nine months ended June 27, 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 37.5% in the
June 1999 nine-month period compared to 37.1% in the June 1998 nine-month
period.
Net Income
Net income for the June 1999 nine-month period grew 43.0% to $13.3 million, or
1.0% of sales, compared to $9.3 million, or .8% of sales, for the June 1998
nine-month period. Basic and diluted earnings per common share were $.59 for the
June 1999 nine-month period compared to $.42 for the June 1998 nine-month
period.
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LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures
The Company believes that a key to its ability to continue to develop a loyal
customer base is providing conveniently located, clean and modern stores which
provide customers with good service and a broad selection of competitively
priced products. As such, the Company has invested and will continue to invest
significant amounts of capital toward the modernization of its store base. The
Company's modernization program includes the opening of new stores, the
completion of major remodels and expansion of selected existing stores, the
relocation of selected existing stores to larger, more convenient locations and
the completion of minor remodeling of its remaining existing stores.
Capital expenditures totaled $37.1 million for the nine months ended June 26,
1999, including expenditures related to the opening of three stores, replacement
of two older stores, major remodeling and expansion of one store and minor
remodeling of nine stores, all of which were completed during the nine-month
period. Capital expenditures also included costs related to new stores to be
opened and remodels to be completed during the remainder of fiscal 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 remainder
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 $55
million. The Company plans to perform minor remodels of four stores during the
remainder 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 $42.5 million of cash from operations for the nine months
ended June 26, 1999. Increases of $3.7 million in receivables are the product of
vendor rebates resulting from higher sales volume. Inventory increased $8.7
million and accounts payable increased $6.0 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 $36.8 million. The primary use of this
cash was the $37.1 million of capital expenditures during the period, which were
partially offset by $.3 million of proceeds from the sale of assets.
During the June 1999 nine-month period, the Company's financing activities used
$5.4 million in cash, the net result of dividend payments, long- and short-term
borrowings and sale/leaseback transactions. Proceeds from long-term debt totaled
$56.8 million, while payments on long-term debt were $75.2 million. Proceeds
from the sale/leaseback of store and transportation equipment totaled $18.4
million.
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At June 26, 1999, the Company had lines of credit with seven banks totaling $125
million. Of this amount, $65 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 June 26, 1999, the Company had unencumbered real property and
equipment with a net book value of approximately $227 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 $19.5 million at June 26, 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
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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.
Impact of Inflation
Inflation in food prices during the first three 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
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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.
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 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 26, 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 June 26, 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: August 9, 1999 /s/ Robert P. Ingle
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Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: August 9, 1999 /s/ Brenda S. Tudor
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Brenda S. Tudor
Vice President-Finance and
Chief Financial Officer
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