UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 25, 2021March 26, 2022
¨ 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 incorporation or organization) |
| (I.R.S. Employer 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Common Stock, $0.05 par value per share | IMKTA | The NASDAQ Global Select Market |
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 ¨.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x | Accelerated Filer ¨ |
Non-Accelerated Filer ¨ | Smaller Reporting Company ¨ |
Emerging Growth Company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
As of January 31,May 2, 2022, the Registrant had 14,324,93514,355,235 shares of Class A Common Stock, $0.05 par value per share, outstanding and 4,669,4414,639,141 shares of Class B Common Stock, $0.05 par value per share, outstanding.
INGLES MARKETS, INCORPORATED
INDEX
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| Page No.
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Part I – Financial Information |
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Item 1. Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets as of |
| 3 |
Condensed Consolidated Statements of Income and Comprehensive Income for the |
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Three Months Ended | 4 | |
Six Months Ended March 26, 2022 and March 27, 2021 | 5 | |
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months and Six Months Ended |
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Condensed Consolidated Statements of Cash Flows for the |
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Notes to Unaudited Interim Financial Statements |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. Controls and Procedures |
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Part II – Other Information |
| |
Item 6. Exhibits |
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Signatures |
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 25, | September 25, | March 26, | September 25, | |||||||||
2021 | 2021 | 2022 | 2021 | |||||||||
ASSETS | ||||||||||||
Current Assets: | ||||||||||||
Cash and cash equivalents | $ | 27,644,219 | $ | 70,313,350 | $ | 65,624,291 | $ | 70,313,350 | ||||
Short term investments | 115,007,106 | 5,000,000 | 115,007,106 | 5,000,000 | ||||||||
Receivables - net | 103,033,744 | 95,082,014 | 98,010,655 | 95,082,014 | ||||||||
Inventories | 389,467,377 | 389,953,456 | 397,891,256 | 389,953,456 | ||||||||
Other current assets | 14,032,928 | 15,091,595 | 24,906,417 | 15,091,595 | ||||||||
Total Current Assets | 649,185,374 | 575,440,415 | 701,439,725 | 575,440,415 | ||||||||
Property and Equipment - Net | 1,358,098,133 | 1,370,769,432 | 1,343,410,698 | 1,370,769,432 | ||||||||
Operating lease right of use assets | 38,109,698 | 40,145,098 | 41,667,691 | 40,145,098 | ||||||||
Other Assets | 32,604,498 | 31,989,010 | 37,658,397 | 31,989,010 | ||||||||
Total Assets | $ | 2,077,997,703 | $ | 2,018,343,955 | $ | 2,124,176,511 | $ | 2,018,343,955 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Current portion of long-term debt | $ | 17,595,785 | $ | 17,600,739 | $ | 17,618,760 | $ | 17,600,739 | ||||
Current portion of operating lease liabilities | 8,303,132 | 8,635,998 | 8,395,245 | 8,635,998 | ||||||||
Accounts payable - trade | 204,197,268 | 189,432,027 | 188,102,503 | 189,432,027 | ||||||||
Accrued expenses and current portion of other long-term liabilities | 77,753,280 | 90,428,567 | 73,872,036 | 90,428,567 | ||||||||
Total Current Liabilities | 307,849,465 | 306,097,331 | 287,988,544 | 306,097,331 | ||||||||
Deferred Income Taxes | 72,122,000 | 72,768,000 | 73,964,000 | 72,768,000 | ||||||||
Long-Term Debt | 568,532,952 | 571,913,204 | 560,832,573 | 571,913,204 | ||||||||
Noncurrent operating lease liabilities | 32,090,620 | 33,887,935 | 35,461,720 | 33,887,935 | ||||||||
Other Long-Term Liabilities | 49,607,450 | 50,418,947 | 45,078,425 | 50,418,947 | ||||||||
Total Liabilities | 1,030,202,487 | 1,035,085,417 | 1,003,325,262 | 1,035,085,417 | ||||||||
Stockholders’ Equity | ||||||||||||
Preferred stock, $0.05 par value; 10,000,000 shares authorized; 0 shares issued | — | — | — | — | ||||||||
Common stocks: | ||||||||||||
Class A, $0.05 par value; 150,000,000 shares authorized; | 715,232 | 713,567 | ||||||||||
Class B, convertible to Class A, $0.05 par value; | 234,487 | 236,152 | ||||||||||
Class A, $0.05 par value; 150,000,000 shares authorized; | 716,262 | 713,567 | ||||||||||
Class B, convertible to Class A, $0.05 par value; | 233,457 | 236,152 | ||||||||||
Paid-in capital in excess of par value | — | — | — | — | ||||||||
Accumulated other comprehensive income | (2,015,253) | (3,426,140) | 5,463,160 | (3,426,140) | ||||||||
Retained earnings | 1,048,860,750 | 985,734,959 | 1,114,438,370 | 985,734,959 | ||||||||
Total Stockholders’ Equity | 1,047,795,216 | 983,258,538 | 1,120,851,249 | 983,258,538 | ||||||||
Total Liabilities and Stockholders’ Equity | $ | 2,077,997,703 | $ | 2,018,343,955 | $ | 2,124,176,511 | $ | 2,018,343,955 | ||||
See notes to unaudited condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended | Three Months Ended | |||||||||||
December 25, | December 26, | March 26, | March 27, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||||
Net sales | $ | 1,391,529,510 | $ | 1,190,443,141 | $ | 1,377,118,668 | $ | 1,184,554,737 | ||||
Cost of goods sold | 1,040,985,244 | 876,254,999 | 1,028,556,135 | 874,054,346 | ||||||||
Gross profit | 350,544,266 | 314,188,142 | 348,562,533 | 310,500,391 | ||||||||
Operating and administrative expenses | 260,085,404 | 238,199,077 | 254,739,175 | 236,850,173 | ||||||||
(Loss) gain from sale or disposal of assets | (56,028) | 451,719 | ||||||||||
Gain from sale or disposal of assets | 1,265,254 | 663,278 | ||||||||||
Income from operations | 90,402,834 | 76,440,784 | 95,088,612 | 74,313,496 | ||||||||
Other income, net | 1,592,055 | 692,017 | 1,344,269 | 645,287 | ||||||||
Interest expense | 5,413,871 | 6,400,714 | 5,425,534 | 6,194,790 | ||||||||
Income before income taxes | 86,581,018 | 70,732,087 | 91,007,347 | 68,763,993 | ||||||||
Income tax expense | 20,392,000 | 16,908,000 | 22,366,000 | 16,575,000 | ||||||||
Net income | $ | 66,189,018 | $ | 53,824,087 | $ | 68,641,347 | $ | 52,188,993 | ||||
Other comprehensive income: | ||||||||||||
Change in fair value of interest rate swap | $ | 1,866,887 | $ | 2,763,738 | $ | 9,896,413 | $ | 6,755,876 | ||||
Income tax expense | 456,000 | 675,000 | (2,418,000) | (1,650,000) | ||||||||
Other comprehensive income, net of tax | 1,410,887 | 2,088,738 | 7,478,413 | 5,105,876 | ||||||||
Comprehensive income | $ | 67,599,905 | $ | 55,912,825 | $ | 76,119,760 | $ | 57,294,869 | ||||
Per share amounts: | ||||||||||||
Class A Common Stock | ||||||||||||
Basic earnings per common share | $ | 3.57 | $ | 2.73 | $ | 3.70 | $ | 2.65 | ||||
Diluted earnings per common share | $ | 3.48 | $ | 2.66 | $ | 3.61 | $ | 2.58 | ||||
Class B Common Stock | ||||||||||||
Basic earnings per common share | $ | 3.24 | $ | 2.48 | $ | 3.36 | $ | 2.41 | ||||
Diluted earnings per common share | $ | 3.24 | $ | 2.48 | $ | 3.36 | $ | 2.41 | ||||
Cash dividends per common share | ||||||||||||
Class A Common Stock | $ | 0.165 | $ | 0.165 | $ | 0.165 | $ | 0.165 | ||||
Class B Common Stock | $ | 0.150 | $ | 0.150 | $ | 0.150 | $ | 0.150 | ||||
See notes to unaudited condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
Six Months Ended | ||||||
March 26, | March 27, | |||||
2022 | 2021 | |||||
Net sales | $ | 2,768,648,179 | $ | 2,374,997,878 | ||
Cost of goods sold | 2,069,541,379 |
| 1,750,309,345 | |||
Gross profit | 699,106,800 | 624,688,533 | ||||
Operating and administrative expenses | 514,824,580 | 475,049,250 | ||||
Gain from sale or disposal of assets | 1,209,226 | 1,114,997 | ||||
Income from operations | 185,491,446 | 150,754,280 | ||||
Other income, net | 2,936,323 | 1,337,304 | ||||
Interest expense | 10,839,405 | 12,595,503 | ||||
Income before income taxes | 177,588,364 | 139,496,081 | ||||
Income tax expense | 42,758,000 | 33,483,000 | ||||
Net income | $ | 134,830,364 | $ | 106,013,081 | ||
Other comprehensive income: | ||||||
Change in fair value of interest rate swap | $ | 11,763,300 | $ | 9,519,614 | ||
Income tax expense | (2,874,000) | (2,325,000) | ||||
Other comprehensive income, net of tax | 8,889,300 | 7,194,614 | ||||
Comprehensive income | $ | 143,719,664 | $ | 113,207,695 | ||
Per share amounts: | ||||||
Class A Common Stock | ||||||
Basic earnings per common share | $ | 7.26 | $ | 5.38 | ||
Diluted earnings per common share | $ | 7.10 | $ | 5.24 | ||
Class B Common Stock | ||||||
Basic earnings per common share | $ | 6.60 | $ | 4.89 | ||
Diluted earnings per common share | $ | 6.60 | $ | 4.89 | ||
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 condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
THREE AND SIX MONTHS ENDED DECEMBER 25,MARCH 26, 2022 AND MARCH 27, 2021 AND DECEMBER 26, 2020
Paid-in | Accumulated | |||||||||||||||||||||
Class A | Class B | Capital in | Other | |||||||||||||||||||
Common Stock | Common Stock | Excess of | Comprehensive | Retained | ||||||||||||||||||
| Shares |
| Amount | Shares | Amount | Par Value | Income (Loss) |
| Earnings | Total | ||||||||||||
Balance, September 26, 2020 | 14,212,360 |
| $ | 710,618 | 6,047,416 | $ | 302,371 | $ | 12,311,249 | $ | (10,251,296) | $ | 816,258,015 | $ | 819,330,957 | |||||||
Net income | — | — | — | — | — | — | 53,824,087 | 53,824,087 | ||||||||||||||
Other comprehensive income, net of income tax | — | — | — | — | — | 2,088,738 | — | 2,088,738 | ||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,252,151) | (3,252,151) | ||||||||||||||
Common stock conversions | 8,175 | 409 | (8,175) | (409) | — | — | — | — | ||||||||||||||
Balance, December 26, 2020 | 14,220,535 | $ | 711,027 | 6,039,241 | $ | 301,962 | $ | 12,311,249 | $ | (8,162,558) | $ | 866,829,951 | $ | 871,991,631 | ||||||||
Balance, September 25, 2021 | 14,271,335 |
| $ | 713,567 | 4,723,041 | $ | 236,152 | $ | — | $ | (3,426,140) | $ | 985,734,959 | $ | 983,258,538 | |||||||
Net income | — | — | — | — | — | — | 66,189,018 | 66,189,018 | ||||||||||||||
Other comprehensive income, net of income tax | — | — | — | — | — | 1,410,887 | — | 1,410,887 | ||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,063,227) | (3,063,227) | ||||||||||||||
Common stock conversions | 33,300 | 1,665 | (33,300) | (1,665) | — | — | — | — | ||||||||||||||
Balance, December 25, 2021 | 14,304,635 | $ | 715,232 | 4,689,741 | $ | 234,487 | $ | — | $ | (2,015,253) | $ | 1,048,860,750 | $ | 1,047,795,216 | ||||||||
See notes to unaudited condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| ||||||
Three Months Ended | ||||||
| December 25, | December 26, | ||||
2021 | 2020 | |||||
Cash Flows from Operating Activities: | ||||||
Net income | $ | 66,189,018 | $ | 53,824,087 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization expense | 29,297,267 | 29,878,689 | ||||
Non cash operating lease cost | 2,035,400 | 1,672,035 | ||||
Loss (gain) from sale or disposal of assets | 56,028 | (451,719) | ||||
Receipt of advance payments on purchases contracts | 250,000 | 250,000 | ||||
Recognition of advance payments on purchases contracts | (746,529) | (753,511) | ||||
Deferred income taxes | (1,102,000) | 429,000 | ||||
Changes in operating assets and liabilities: | ||||||
Receivables | (7,951,730) | (19,589,583) | ||||
Inventory | 486,079 | (6,722,127) | ||||
Other assets | 233,187 | (1,342,505) | ||||
Operating lease liabilities | (2,130,181) | (1,766,313) | ||||
Accounts payable and accrued expenses | 8,361,969 | 2,346,228 | ||||
Net Cash Provided by Operating Activities | 94,978,508 | 57,774,281 | ||||
Cash Flows from Investing Activities: | ||||||
Purchase of short term investments | (110,007,106) | — | ||||
Proceeds from sales of property and equipment | 215,289 | 593,245 | ||||
Capital expenditures | (21,333,456) | (34,239,257) | ||||
Net Cash Used by Investing Activities | (131,125,273) | (33,646,012) | ||||
Cash Flows from Financing Activities: | ||||||
Proceeds from short-term borrowings | — | 248,719,275 | ||||
Payments on short-term borrowings | — | (262,603,345) | ||||
Principal payments on long-term borrowings | (3,459,139) | (3,890,502) | ||||
Dividends paid | (3,063,227) | (3,252,152) | ||||
Net Cash Used by Financing Activities | (6,522,366) | (21,026,724) | ||||
Net (Decrease) Increase in Cash and Cash Equivalents | (42,669,131) | 3,101,545 | ||||
Cash and cash equivalents at beginning of period | 70,313,350 | 6,903,955 | ||||
Cash and Cash Equivalents at End of Period | $ | 27,644,220 | $ | 10,005,500 | ||
Paid-in | Accumulated | |||||||||||||||||||||
Class A | Class B | Capital in | Other | |||||||||||||||||||
Common Stock | Common Stock | Excess of | Comprehensive | Retained | ||||||||||||||||||
| Shares |
| Amount | Shares | Amount | Par Value | Income (Loss) |
| Earnings | Total | ||||||||||||
Balance, September 26, 2020 | 14,212,360 |
| $ | 710,618 | 6,047,416 | $ | 302,371 | $ | 12,311,249 | $ | (10,251,296) | $ | 816,258,015 | $ | 819,330,957 | |||||||
Net income | — | — | — | — | — | — | 53,824,087 | 53,824,087 | ||||||||||||||
Other comprehensive income, net of income tax | — | — | — | — | — | 2,088,738 | — | 2,088,738 | ||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,252,151) | (3,252,151) | ||||||||||||||
Common stock conversions | 8,175 | 409 | (8,175) | (409) | — | — | — | — | ||||||||||||||
Balance, December 26, 2020 | 14,220,535 | $ | 711,027 | 6,039,241 | $ | 301,962 | $ | 12,311,249 | $ | (8,162,558) | $ | 866,829,951 | $ | 871,991,631 | ||||||||
Net income | — | — | — | — | — | — | 52,188,993 | 52,188,993 | ||||||||||||||
Other comprehensive income, net of income tax | — | — | — | — | — | 5,105,876 | — | 5,105,876 | ||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,252,276) | (3,252,276) | ||||||||||||||
Stock repurchases, at cost | — | — | (1,265,400) | (63,270) | (12,311,249) | — | (67,624,069) | (79,998,588) | ||||||||||||||
Common stock conversions | 32,750 | 1,638 | (32,750) | (1,638) | — | — | — | — | ||||||||||||||
Balance, March 27, 2021 | 14,253,285 | $ | 712,665 | 4,741,091 | $ | 237,054 | $ | — | $ | (3,056,682) | $ | 848,142,599 | $ | 846,035,636 | ||||||||
Balance, September 25, 2021 | 14,271,335 |
| $ | 713,567 | 4,723,041 | $ | 236,152 | $ | — | $ | (3,426,140) | $ | 985,734,959 | $ | 983,258,538 | |||||||
Net income | — | — | — | — | — | — | 66,189,018 | 66,189,018 | ||||||||||||||
Other comprehensive income, net of income tax | — | — | — | — | — | 1,410,887 | — | 1,410,887 | ||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,063,227) | (3,063,227) | ||||||||||||||
Common stock conversions | 33,300 | 1,665 | (33,300) | (1,665) | — | — | — | — | ||||||||||||||
Balance, December 25, 2021 | 14,304,635 | $ | 715,232 | 4,689,741 | $ | 234,487 | $ | — | $ | (2,015,253) | $ | 1,048,860,750 | $ | 1,047,795,216 | ||||||||
Net income | — | — | — | — | — | — | 68,641,347 | 68,641,347 | ||||||||||||||
Other comprehensive income, net of income tax | — | — | — | — | — | 7,478,413 | — | 7,478,413 | ||||||||||||||
Cash dividends | — | — | — | — | — | — | (3,063,727) | (3,063,727) | ||||||||||||||
Common stock conversions | 20,600 | 1,030 | (20,600) | (1,030) | — | — | — | — | ||||||||||||||
Balance, March 26, 2022 | 14,325,235 | $ | 716,262 | 4,669,141 | $ | 233,457 | $ | — | $ | 5,463,160 | $ | 1,114,438,370 | $ | 1,120,851,249 | ||||||||
See notes to unaudited condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| ||||||
Six Months Ended | ||||||
| March 26, | March 27, | ||||
2022 | 2021 | |||||
Cash Flows from Operating Activities: | ||||||
Net income | $ | 134,830,364 | $ | 106,013,081 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization expense | 59,264,873 | 60,205,801 | ||||
Non cash operating lease cost | 3,493,003 | 4,011,403 | ||||
Gain from sale or disposal of assets | (1,209,226) | (1,114,997) | ||||
Receipt of advance payments on purchases contracts | 1,147,709 | 775,000 | ||||
Recognition of advance payments on purchases contracts | (1,494,340) | (1,511,486) | ||||
Deferred income taxes | (1,678,000) | 858,000 | ||||
Changes in operating assets and liabilities: | ||||||
Receivables | (2,928,641) | (7,442,313) | ||||
Inventory | (7,937,800) | (19,763,979) | ||||
Other assets | (8,462,044) | (1,415,060) | ||||
Operating lease liabilities | (3,682,564) | (4,199,960) | ||||
Accounts payable and accrued expenses | (15,861,984) | (21,731,932) | ||||
Net Cash Provided by Operating Activities | 155,481,350 | 114,683,558 | ||||
Cash Flows from Investing Activities: | ||||||
Purchase of short term investments | (110,007,106) | — | ||||
Proceeds from sales of property and equipment | 1,509,285 | 1,356,964 | ||||
Capital expenditures | (34,096,602) | (69,444,630) | ||||
Net Cash Used by Investing Activities | (142,594,423) | (68,087,666) | ||||
Cash Flows from Financing Activities: | ||||||
Proceeds from short-term borrowings | — | 600,674,373 | ||||
Payments on short-term borrowings | — | (546,496,281) | ||||
Principal payments on long-term borrowings | (11,449,032) | (12,317,464) | ||||
Stock repurchases | — | (79,998,588) | ||||
Dividends paid | (6,126,954) | (6,504,427) | ||||
Net Cash Used by Financing Activities | (17,575,986) | (44,642,387) | ||||
Net (Decrease) Increase in Cash and Cash Equivalents | (4,689,059) | 1,953,505 | ||||
Cash and cash equivalents at beginning of period | 70,313,350 | 6,903,955 | ||||
Cash and Cash Equivalents at End of Period | $ | 65,624,291 | $ | 8,857,460 | ||
See notes to unaudited condensed consolidated financial statements.
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Three Months and Six Months Ended December 25,March 26, 2022 and March 27, 2021 and December 26, 2020
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 December 25, 2021March 26, 2022, and the results of operations and changes in stockholders’ equity for the three-month and six-month periods ended March 26, 2022 and March 27, 2021, and cash flows for the threesix months ended December 25, 2021March 26, 2022 and December 26, 2020.March 27, 2021. The adjustments made are of a normal recurring nature. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. 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 Company’s Annual Report on Form 10-K for the year ended September 25, 2021, filed by the Company with the Securities and Exchange Commission on November 24, 2021.
The results of operations for the three monthsthree-month and six-month periods ended December 25, 2021March 26, 2022 are not necessarily indicative of the results to be expected for the full fiscal year.
B. NEW ACCOUNTING PRONOUNCEMENTS
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting in response to the risk of cessation of the London Interbank Offered Rate (“LIBOR”). This amendment provides for optional expedients and exceptions for applying generally accepted accounting principles to contracts and hedging relationships that are affected by LIBOR and other reference rates. The ASU generally allows for hedge accounting to continue if the hedge was highly effective or met other standards prior to reference rate reform. Entities are permitted to apply the amendments to all contracts, cash flow and net investment hedge relationships that exist as of March 12, 2020. The relief provided in this ASU is only available for a limited time, generally through December 31, 2022. The Company’s debt agreements and interest rate swaps that utilize LIBOR have not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. To the extent our debt and interest rate swap arrangements change to another accepted rate, we will utilize the relief in this ASU to continue hedge accounting.
C. SHORT TERM INVESTMENTS
The Company purchases financial products that can be readily converted into cash, and the Company accounts for such financial products as short-term investments. The financial products include money market funds, bonds and mutual funds. The carrying values of the Company’s short-term investments approximate fair value because of their liquidity.
D. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of $302,000$602,000 at December 25, 2021March 26, 2022 and $157,000 at September 25, 2021.
E. INCOME TAXES
The Company’s effective tax rate differs from the federal statutory rate primarily as a result of state income taxes and tax credits.
The Company has unrecognized tax benefits and could incur interest and penalties related to uncertain tax positions. These amounts are insignificant and are not expected to significantly increase or decrease within the next twelve months.
F. ACCRUED EXPENSES AND CURRENT PORTION OF OTHER LONG-TERM LIABILITIES
Accrued expenses and current portion of other long-term liabilities consist of the following:
December 25, | September 25, | March 26, | September 25, | |||||||||
2021 | 2021 | 2022 | 2021 | |||||||||
Property, payroll and other taxes payable | $ | 11,182,431 | $ | 22,621,486 | $ | 14,013,131 | $ | 22,621,486 | ||||
Salaries, wages and bonuses payable | 31,341,874 | 45,890,517 | 38,052,944 | 45,890,517 | ||||||||
Self-insurance liabilities | 13,421,539 | 13,319,556 | 13,346,387 | 13,319,556 | ||||||||
Interest payable | 994,024 | 4,481,104 | 4,411,506 | 4,481,104 | ||||||||
Income taxes payable | 16,797,341 | — | ||||||||||
Other | 4,016,071 | 4,115,904 | 4,048,068 | 4,115,904 | ||||||||
$ | 77,753,280 | $ | 90,428,567 | $ | 73,872,036 | $ | 90,428,567 | |||||
Self-insurance liabilities are established for general liability claims, workers’ compensation and employee group medical and dental benefits based on claims filed and estimates of claims incurred but not reported. The Company is currently insured for covered costs in excess of $1.0 million per occurrence for workers’ compensation and for general liability and $450,000 per covered person for medical care benefits for a policy year. The Company’s self-insurance reserves totaled $32.3 million and $32.1 million at both December 25, 2021March 26, 2022 and September 25, 2021.2021, respectively. Of this amount, $13.4$13.3 million is accounted for as a current liability and $18.7$19.0 million as a long-term liability, which is inclusive of $4.2 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable at December 25, 2021.March 26, 2022. At September 25, 2021, $13.3 million was accounted for as a current liability and $18.8 million as a long-term liability, which is inclusive of $4.2 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable.
Employee insurance expense, including workers’ compensation and medical care benefits, net of employee contributions, totaled $13.4$7.0 million and $12.3$8.2 million for the three monthsthree-month periods ended December 25,March 26, 2022 and March 27, 2021, respectively. For the six-month periods ended March 26, 2022 and December 26, 2020,March 27, 2021, employee insurance expense, net of employee contributions totaled $20.3 million and $20.5 million, respectively.
The Company’s fuel operations contain underground tanks for the storage of gasoline and diesel fuel. The Company reviewed FASB Accounting Standards Codification Topic 410 (“FASB ASC 410”) and determined we have a legal obligation to remove tanks at a point in the future and accordingly determined we have met the requirements of an asset retirement obligation. The Company followed the FASB ASC 410 model for determining the asset retirement cost and asset retirement obligation. The amounts recorded are immaterial for each fuel center as well as in the aggregate at December 25, 2021March 26, 2022 and September 25, 2021.
G. LONG-TERM DEBT
In June 2021, the Company issued at par $350.0 million aggregate principal amount of 4.00% senior notes due in 2031 (the “Notes”). The Company may redeem all or a portion of the Notes at any time at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning June 15 of the years indicated below:
Year | |
2026 | 102.000% |
2027 | 101.333% |
2028 | 100.667% |
2029 and thereafter | 100.000% |
The Company had a $175.0 million line of credit that was scheduled to mature in September 2022.2022. In June 2021, the Company replaced that line by entering into a $150.0 million line of credit (the “Line”) that matures in June 2026. The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or LIBOR. The Line allows the Company to issue up to $10.0 million in letters of credit, of which NaNnone were issued at December 25, 2021.March 26, 2022. The Company is not required to maintain compensating balances in connection with the Line. At December 25, 2021,March 26, 2022, the Company had 0no borrowings outstanding under the Line.
In December 2010, the Company completed the funding of $99.7 million of bonds (the “Bonds”) for construction of new warehouse and distribution space adjacent to its existing space in Buncombe County, North Carolina (the “Project”). The final maturity date of the Bonds is January 1, 2036.
Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between certain financial institutions and the Company, the financial institutions would hold the Bonds until December 2029, subject to certain events. Mandatory redemption of the Bonds by the Company in the annual amount of $4.5 million began on January 1, 2014. The outstanding balance of the Bonds was $63.5$59.0 million as of December 25, 2021.March 26, 2022. The Company may redeem the Bonds without penalty or premium at any time prior to December 17, 2029. The Covenant Agreement was amended during the quarter ended December 25, 2021 to extend the holding period and reduce the interest rate on the Bonds.
Interest earned by bondholders on the Bonds is exempt from Federal and North Carolina income taxation. The interest rate on the Bonds is equal to one-month LIBOR (adjusted monthly) plus a credit spread, adjusted to reflect the income tax exemption.
The Company’s obligation to repay the Bonds is collateralized by the Project. The Covenant Agreement incorporates substantially all financial covenants included in the Line.
In September 2017, the Company refinanced approximately $60 million secured borrowing obligations with a LIBOR-based amortizing floating rate loan secured by real estate maturing in October 2027. The Company has an interest rate swap agreement for a current notional amount of $35.0$33.5 million at a fixed rate of 3.92%. Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.
In December 2019, the Company closed a $155 million LIBOR-based amortizing floating rate loan secured by real estate maturing in January 2030. The Company has an interest rate swap agreement for a current notional amount of $138.2$136.3 million at a fixed rate of 2.95%. Under this agreement, the Company pays monthly the fixed rate of 2.95% and receives the one-month LIBOR plus 1.50%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.65 million and mature in fiscal year 2030.
The Company recognizes differences between the variable rate interest payments and the fixed interest rate settlements with the swap counterparties as an adjustment to interest expense each period over the life of the swaps. The Company has designated the swaps as cash flow hedges and records the changes in the estimated fair value of the swaps to other comprehensive income each period. For the three monthsthree- and six-month periods ended December 25,March 26, 2022, the Company recorded $7.5 million and $8.9 million of other comprehensive income, respectively, net of income taxes, in its Consolidated Statements of Comprehensive Income. Unrealized gains of $7.2 million were recorded as an asset at fair value in the line “Other Assets” on the Consolidated Balance Sheet as of March 26, 2022. For the three- and six-month periods ended March 27, 2021, the Company recorded $1.4$5.1 million and $7.2 million of other comprehensive income, respectively, net of income taxes, in its Consolidated Statements of Comprehensive Income. Unrealized losses of $2.7$4.0 million are includedwere recorded as a liability at fair value in the line “Other Long Term Liabilities” on the Consolidated Balance Sheet as of December 25,March 27, 2021. For the three-month period ended December 26, 2020, the Company recorded $2.1 million of other comprehensive income, net of income taxes, in its Consolidated Statements of Comprehensive Income.
The Company’s long-term debt agreements generally contain provisions that under certain circumstances would permit lending institutions to terminate or withdraw their respective extensions of credit to the Company. Included among the triggering factors permitting the termination or withdrawal of the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents. The Company was in compliance with all financial covenants at December 25, 2021.March 26, 2022.
The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under all long-term debt agreements in the event of default under any one instrument.
At December 25, 2021,March 26, 2022, property and equipment with an undepreciated cost of approximately $277.4$274.4 million werewas pledged as collateral for long-term debt. Long-term debt and Line agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios. At December 25, 2021,March 26, 2022, the Company had excess net worth totaling $267.1$305.9 million calculated under covenants in the Notes, the Bonds, the Loan, and the Line. This amount is available to pay dividends; however, certain loan agreements containing provisions outlining minimum tangible net worth requirements restrict the ability of the Company to pay cash dividends in excess of the current annual per share dividends paid on the Company’s Class A and Class B Common Stock. Further, the Company is prevented from paying cash dividends at any time that it is in default under the indenture governing the Notes. In addition, the terms of the indenture may restrict the ability of the Company to pay additional cash dividends based on certain financial parameters.
H. DIVIDENDS
The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on October 14, 2021 to stockholders of record on October 7, 2021.
The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on January 13, 2022 to stockholders of record on January 6, 2022.
For additional information regarding the dividend rights of the Class A Common Stock and Class B Common Stock, please see Note 8, “Stockholders’ Equity” to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on November 24, 2021.
I. EARNINGS PER COMMON SHARE
The Company has 2 classes of common stock: Class A, which is publicly traded, and Class B, which has no public market. The Class B Common Stock has restrictions on transfer; however, each share is convertible into one share of Class A Common Stock at any time. Each share of Class A Common Stock has 1 vote per share and each share of Class B Common Stock has 10 votes per share. Each share of Class A Common Stock is entitled to receive cash dividends equal to 110% of any cash dividend paid on Class B Common Stock.
The Company calculates earnings per share using the two-class method in accordance with FASB ASC Topic 260.
The two-class method of computing basic earnings per share for each period reflects the cash dividends declared per share for each class of stock, plus allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock. Diluted earnings per share is calculated assuming the conversion of all shares of Class B Common Stock to shares of Class A Common Stock on a share-for-share basis. The tables below reconcile the numerators and denominators of basic and diluted earnings per share for current and prior periods.
Three Months Ended | Three Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
December 25, 2021 | December 26, 2020 | March 26, 2022 | March 26, 2022 | |||||||||||||||||||||
Class A | Class B | Class A | Class B | Class A | Class B | Class A | Class B | |||||||||||||||||
Numerator: Allocated net income | ||||||||||||||||||||||||
Net income allocated, basic | $ | 50,899,553 | $ | 15,289,465 | $ | 38,813,986 | $ | 15,010,101 | $ | 52,934,311 | $ | 15,707,036 | $ | 103,831,190 | $ | 30,999,174 | ||||||||
Conversion of Class B to Class A shares | 15,289,465 | — | 15,010,101 | — | 15,707,036 | — | 30,999,174 | — | ||||||||||||||||
Net income allocated, diluted | $ | 66,189,018 | $ | 15,289,465 | $ | 53,824,087 | $ | 15,010,101 | $ | 68,641,347 | $ | 15,707,036 | $ | 134,830,364 | $ | 30,999,174 | ||||||||
Denominator: Weighted average shares outstanding | ||||||||||||||||||||||||
Weighted average shares outstanding, basic | 14,277,211 | 4,717,165 | 14,213,562 | 6,046,214 | 14,320,981 | 4,673,395 | 14,299,096 | 4,695,280 | ||||||||||||||||
Conversion of Class B to Class A shares | 4,717,165 | — | 6,046,214 | — | 4,673,395 | — | 4,695,280 | — | ||||||||||||||||
Weighted average shares outstanding, diluted | 18,994,376 | 4,717,165 | 20,259,776 | 6,046,214 | 18,994,376 | 4,673,395 | 18,994,376 | 4,695,280 | ||||||||||||||||
Earnings per share | ||||||||||||||||||||||||
Basic | $ | 3.57 | $ | 3.24 | $ | 2.73 | $ | 2.48 | $ | 3.70 | $ | 3.36 | $ | 7.26 | $ | 6.60 | ||||||||
Diluted | $ | 3.48 | $ | 3.24 | $ | 2.66 | $ | 2.48 | $ | 3.61 | $ | 3.36 | $ | 7.10 | $ | 6.60 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||
March 27, 2021 | March 27, 2021 | |||||||||||
Class A | Class B | Class A | Class B | |||||||||
Numerator: Allocated net income | ||||||||||||
Net income allocated, basic | $ | 37,772,564 | $ | 14,416,429 | $ | 76,588,658 | $ | 29,424,423 | ||||
Conversion of Class B to Class A shares | 14,416,429 | — | 29,424,423 | — | ||||||||
Net income allocated, diluted | $ | 52,188,993 | $ | 14,416,429 | $ | 106,013,081 | $ | 29,424,423 | ||||
Denominator: Weighted average shares outstanding | ||||||||||||
Weighted average shares outstanding, basic | 14,233,200 | 5,970,954 | 14,223,381 | 6,008,584 | ||||||||
Conversion of Class B to Class A shares | 5,970,954 | — | 6,008,584 | — | ||||||||
Weighted average shares outstanding, diluted | 20,204,154 | 5,970,954 | 20,231,965 | 6,008,584 | ||||||||
Earnings per share | ||||||||||||
Basic | $ | 2.65 | $ | 2.41 | $ | 5.38 | $ | 4.89 | ||||
Diluted | $ | 2.58 | $ | 2.41 | $ | 5.24 | $ | 4.89 | ||||
J. LEASES
Leases as Lessee
The Company conducts part of its retail operations from leased facilities. The initial terms of the leases are generally 20 years. The majority of the leases includeincludes one or more renewal options and provide that the Company pay property taxes, utilities, repairs and certain other costs incidental to occupation of the premises. Several leases contain clauses calling for percentage rentals based upon gross sales of the supermarket occupying the leased space. Step rent provisions, escalation clauses and lease incentives are taken into account in computing minimum lease payments.
Operating lease cost for all operating leases totaled $2.6$3.0 million for the three months ended December 25, 2021.March 26, 2022 and $5.6 million for the six months ended March 26, 2022. This amount includes short-term (less than one year) leases, common area expenses, and variable lease costs, all of which are insignificant. Cash paid for lease liabilities in operating activities approximates operating lease cost.
Maturities of operating lease liabilities as of December 25, 2021 areMarch 26, 2022 were as follows:
Fiscal Year | ||||
Remainder of 2022 | $ | 7,493,701 | $ | 4,996,500 |
2023 | 8,300,557 | 9,547,692 | ||
2024 | 5,516,257 | 6,763,393 | ||
2025 | 4,715,550 | 5,962,685 | ||
2026 | 2,983,602 | 4,230,737 | ||
Thereafter | 22,905,731 | 24,152,866 | ||
Total lease payments | $ | 51,915,398 | $ | 55,653,873 |
Less amount representing interest | 11,521,646 | 11,796,908 | ||
Present value of lease liabilities | $ | 40,393,752 | $ | 43,856,965 |
On the Condensed Consolidated Balance Sheets, lease extensions exercised during fiscal year 2022 increased the line items “Operating lease right of use assets” and “Noncurrent operating lease liabilities” by $5.0 million each during the six months ended March 26, 2022. The weighted average remaining lease term for the Company’s operating leases is 13.412.7 years. The weighted average discount rate used to determine lease liability balances as of December 25, 2021 isMarch 26, 2022 was 3.51%, based on recent Company financings collateralized by store properties.
Leases as Lessor
At December 25, 2021,March 26, 2022, the Company owned and operated 83 shopping centers in conjunction with its supermarket operations. The Company leases to others a portion of its shopping center properties. The leases are non-cancelable operating lease agreements for periods ranging up to 20 years.
Rental income is included in the line item “Net sales” on the Consolidated Statements of Income. Depreciation on owned properties leased to others and other shopping center expenses are included in the line item “Cost of goods sold” on the Consolidated Statements of Income.
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Three Months Ended | Six Months Ended | ||||
March 26, 2022 | March 26, 2022 | ||||
Rents earned on owned and subleased properties: | |||||
Base rentals | $ | 4,773,104 | $ | 9,670,462 | |
Variable rentals | 67,892 | 135,784 | |||
Total | 4,840,996 | 9,806,246 | |||
Depreciation on owned properties leased to others | (1,463,937) | (2,927,875) | |||
Other shopping center expenses | (670,365) | (1,318,152) | |||
Total | $ | 2,706,694 | $ | 5,560,219 |
Future minimum operating lease receipts at December 25, 2021 areMarch 26, 2022 were as follows:
Fiscal Year | ||||
Remainder of 2022 | $ | 15,000,268 | $ | 7,530,608 |
2023 | 13,606,495 | 13,805,776 | ||
2024 | 12,389,010 | 12,605,769 | ||
2025 | 11,000,293 | 11,241,965 | ||
2026 | 7,992,449 | 8,353,538 | ||
Thereafter | 32,810,154 | 34,011,392 | ||
Total minimum future rental income | $ | 92,798,669 | $ | 87,549,048 |
K. SEGMENT INFORMATION
The Company operates 1 primary business segment, retail grocery sales. “Other” includes our remaining operations - fluid dairy and shopping center rentals. Information about the Company’s operations by lines of business (amounts in thousands) is as follows:
Three Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||
December 25, | December 26, | March 26, | March 27, | March 26, | March 27, | |||||||||||||
2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenues from unaffiliated customers: | ||||||||||||||||||
Grocery | $ | 488,407 | $ | 442,121 | $ | 482,179 | $ | 427,219 | $ | 970,585 | $ | 869,339 | ||||||
Non-foods | 304,672 | 279,688 | 289,419 | 268,799 | 594,091 | 548,487 | ||||||||||||
Perishables | 364,350 | 321,263 | 355,651 | 320,493 | 720,001 | 641,756 | ||||||||||||
Gasoline | 190,832 | 110,469 | 200,192 | 130,679 | 391,025 | 241,148 | ||||||||||||
Total Retail | $ | 1,348,261 | $ | 1,153,541 | $ | 1,327,441 | $ | 1,147,190 | $ | 2,675,702 | $ | 2,300,730 | ||||||
Other | 43,269 | 36,902 | 49,678 | 37,365 | 92,946 | 74,268 | ||||||||||||
Total revenues from unaffiliated customers | $ | 1,391,530 | $ | 1,190,443 | $ | 1,377,119 | $ | 1,184,555 | $ | 2,768,648 | $ | 2,374,998 | ||||||
Income from operations: | ||||||||||||||||||
Retail | $ | 85,499 | $ | 71,519 | $ | 88,663 | $ | 67,645 | $ | 174,162 | $ | 139,164 | ||||||
Other | 4,904 | 4,922 | 6,426 | 6,668 | 11,329 | 11,590 | ||||||||||||
Total income from operations | $ | 90,403 | $ | 76,441 | $ | 95,089 | $ | 74,313 | $ | 185,491 | $ | 150,754 | ||||||
December 25, | September 25, | March 26, | September 25, | |||||||||
2021 | 2021 | 2022 | 2021 | |||||||||
Assets: | ||||||||||||
Retail | $ | 1,847,898 | $ | 1,794,160 | $ | 1,893,939 | $ | 1,794,160 | ||||
Other | 232,141 | 226,762 | 233,375 | 226,762 | ||||||||
Elimination of intercompany receivable | (2,041) | (2,578) | (3,137) | (2,578) | ||||||||
Total assets | $ | 2,077,998 | $ | 2,018,344 | $ | 2,124,177 | $ | 2,018,344 | ||||
The grocery category includes grocery, dairy, and frozen foods.
The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.
The perishables category includes meat, produce, deli and bakery.
For the three-month periods ended December 25, 2021 and December 26, 2020, respectively, theThe fluid dairy operation had $12.6$13.1 million and $12.3 million in sales to the retail grocery segment for the three-month periods ended March 26, 2022 and March 27, 2021, respectively. The fluid dairy had $25.6 million and $23.7 million in sales segment.to the retail grocery segment for the six-month periods ended March 26, 2022 and March 27, 2021, respectively. These sales have been eliminated in consolidation and are excluded from the amounts in the table above.
L. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, short term investments, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.
The fair value of the Company’s debt and interest rate swaps are estimated using valuation techniques under the accounting guidance related to fair value measurements based on observable and unobservable inputs. Observable inputs reflect readily available data from independent sources, while unobservable inputs reflect the Company’s market assumptions. These inputs are classified into the following hierarchy:
Level 1 Inputs – | Quoted prices for identical assets or liabilities in active markets. |
Level 2 Inputs – | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
Level 3 Inputs – | Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation. |
The carrying amount and fair value of the Company’s debt, interest rate swaps, and non-qualified retirement plan assets at December 25, 2021 areMarch 26, 2022 were as follows (in thousands):
Carrying |
| Fair Value | Carrying |
| Fair Value | |||||||||||
Amount | Fair Value | Measurements | Amount | Fair Value | Measurements | |||||||||||
Senior Notes | $ | 350,000 | $ | 349,125 | Level 2 | $ | 350,000 | $ | 327,250 | Level 2 | ||||||
Facility Bonds | 63,500 | 63,500 | Level 2 | 58,970 | 58,970 | Level 2 | ||||||||||
Secured notes payable and other | 172,629 | 172,585 | Level 2 | 169,481 | 169,462 | Level 2 | ||||||||||
Interest rate swap derivative contracts | 2,664 | 2,664 | Level 2 | |||||||||||||
Interest rate swap derivative contracts asset | (7,232) | (7,232) | Level 2 | |||||||||||||
Non-qualified retirement plan assets | 22,060 | 22,060 | Level 2 | 19,702 | 19,702 | Level 2 | ||||||||||
The fair values for Level 2 measurements were determined primarily using market yields and taking into consideration the underlying terms of the instrument.
M. COMMITMENTS AND CONTINGENCIES
Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims is not expected to materially affect the Company’s financial position, the results of its operations, or its cash flows.
N. RELATED PARTY TRANSACTIONS
The Company will from time to time make short-term non-interest bearing loans to the Company’s Investment/Profit Sharing Plan to allow the plan to meet distribution obligations during a time when the plan was prohibited from selling shares of the Company’s Class A Common Stock. During the three months ended December 25, 2021,March 26, 2022, there were no such loans made, repaid or outstanding.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Ingles, a leading supermarket chain in the Southeast, operates 198 supermarkets in North Carolina (75), Georgia (65), South Carolina (35), Tennessee (21), Virginia (1) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and rural communities. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products. Non-food products include fuel centers, pharmacies, health/beauty/cosmetic products and general merchandise, as well as quality private label items. In addition, the Company focuses on selling high-growth, high-margin products to its customers through the development of certified organic products, bakery departments and prepared foods including delicatessen sections. As of December 25, 2021,March 26, 2022, the Company operated 111 in-store pharmacies and 107 fuel centers.
Coronavirus (COVID-19) Pandemic Impact
The COVID-19 pandemic which began in March 2020 and has continued through the threesix months ended December 25, 2021,March 26, 2022, has impacted supermarket operations, as the Company implemented several enhanced cleaning and social distancing protocols designed to keep our customers and our associates safe. Since March 2020, the Company’s stores have experienced increased customer traffic and have had experienced occasional product shortages due to supply chain issues. Recently, an extremely tight labor market has impacted the Company’s ability to attract and retain qualified store personnel, but these impacts have not materially affected our operations. Finally, as the economy recovers,has been recovering from the effects of the pandemic, inflation has reached levels not seen in decades. Inflation impacts product costs, labor costs and the cost of other goods used by the Company.Company, which could negatively impact our results of operation.
At the present time, we do not know how long and to what extent the pandemic could impact our sales and financial performance.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those accounting policies and estimates that management believes are important to the presentation of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. Estimates are based on historical experience and other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management estimates, by their nature, involve judgments regarding future uncertainties, and actual results may therefore differ materially from these estimates.
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 coverage of $1.0 million per occurrence for workers’ compensation and for general liability, and $450,000 per covered person for medical care benefits for a policy year. Self-insurance liabilities 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. These estimates can fluctuate if historical trends are not predictive of the future. The majority of the Company’s properties are self-insured for casualty losses and business interruption; however, liability coverage is maintained. At December 25, 2021March 26, 2022 the Company’s self-insurance reserves totaled $32.1$32.3 million. This amount is inclusive of $4.2 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable.
Asset Impairments
The Company accounts for the impairment of long-lived assets in accordance with FASB ASC Topic 360. For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal associates. Estimates of future cash flows and expected sales prices are judgments based upon the Company’s experience and knowledge of local operations and cash flows that are projected for several years into the future. These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital spending decisions and inflation. The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether any indicators of impairment have occurred. There were no asset impairments during the three-monthsix-month period ended December 25, 2021.March 26, 2022.
Vendor Allowances
The Company receives funds for a variety of merchandising activities from the many vendors whose products the Company buys for resale in its stores. These incentives and allowances are primarily composed of volume or purchase based incentives, advertising allowances, slotting fees, and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs incurred by the Company for stocking, advertising, promoting and selling the applicable vendor’s products. These allowances generally relate to short term arrangements with vendors, often relating to a period of a monthone-month or less, and are negotiated on a purchase-by-purchase or transaction-by-transaction basis. Whenever practical,practicable, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a component of item cost in inventory and recognized in merchandise costs when the item is sold. Due to the use of the retail method of store inventory and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the vendor consideration received is sold. Vendor allowances applied as a reduction of merchandise costs totaled $31.9$26.2 million and $29.7$28.9 million for the fiscal quarters ended December 25,March 26, 2022 and March 27, 2021, respectively. For the six-month periods ended March 26, 2022 and December 26, 2020,March 27, 2021, vendor allowances applied as a reduction of merchandise costs totaled $58 million and $58.6 million, respectively. Vendor advertising allowances that represent a reimbursement of specificspecifically identifiable incremental
costs of advertising the vendor’s specific products are recorded as a reduction to the related expense in the period in which the related expense is incurred. Vendor advertising allowances recorded as a reduction of advertising expense totaled $2.1$1.7 million and $1.9$2.1 million for the fiscal quarters ended December 25,March 26, 2022 and March 27, 2021, respectively. For the six-month periods ended March 26, 2022 and December
26, 2020,March 27, 2021, vendor advertising allowances recorded as a reduction of advertising expense totaled $3.7 million and $4.0 million, respectively. Overall, vendor allowances decreased significantly at the onset ofhave been lower since the COVID-19 pandemic as vendors reduced support for promotional activities. Vendor promotional support subsequently increased, but has not reached pre-pandemic levels.began.
If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising, as well as the volume and frequency of the Company’s product advertising, which could increase or decrease the Company’s expenditures.
Similarly,Additionally, the Company is not able to assess the impact of vendor advertising allowances on creatingthe creation of additional revenue, as such allowances do not directly generate revenue for the Company’s stores.
Results of Operations
Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in September. TheThere are 13 and 26 weeks of operations included in the Unaudited Condensed Consolidated Statements of Income for the three-monththree- and six-month periods ended December 25,March 26, 2022 and March 27, 2021, and December 26, 2020 both include 13 weeks of operations.respectively. Comparable store sales are defined as sales by retail stores in operation for five full fiscal quarters. Sales from replacement stores, major remodels and the addition of fuel stations to existing stores are included in the comparable store sales calculation from the date thereof. A replacement store is a newly-opened store that replaces an existing nearby store that is closed. A major remodel entails substantial remodeling of an existing store and includes additional retail square footage. For the three-month periodthree- and six-month periods ended December 25, 2021,March 26, 2022, comparable store sales included 196 stores. For the three-month periodthree- and six-month periods ended December 26, 2020,March 27, 2021, comparable store sales included 197 stores.
The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the various segments of the business, see Note KI “Segment Information” to the Condensed Consolidated Financial Statements.
Three Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||
December 25, | December 26, | March 26, | March 27, | March 26, | March 27, | |||||||||||||
2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Gross profit | 25.2 | % | 26.4 | % | 25.3 | % | 26.2 | % | 25.3 | % | 26.3 | % | ||||||
Operating and administrative expenses | 18.7 | % | 20.0 | % | 18.5 | % | 20.0 | % | 18.6 | % | 20.0 | % | ||||||
Gain from sale or disposal of assets | — | % | 0.1 | % | — | % | — | % | ||||||||||
Income from operations | 6.5 | % | 6.4 | % | 6.9 | % | 6.3 | % | 6.7 | % | 6.3 | % | ||||||
Other income, net | 0.1 | % | — | % | 0.1 | % | 0.1 | % | 0.1 | % | 0.1 | % | ||||||
Interest expense | 0.4 | % | 0.5 | % | 0.4 | % | 0.5 | % | 0.4 | % | 0.5 | % | ||||||
Income tax expense | 1.4 | % | 1.4 | % | 1.6 | % | 1.4 | % | 1.5 | % | 1.4 | % | ||||||
Net income | 4.8 | % | 4.5 | % | 5.0 | % | 4.5 | % | 4.9 | % | 4.5 | % | ||||||
Three Months Ended December 25, 2021March 26, 2022 Compared to the Three Months Ended December 26, 2020March 27, 2021
Net income for the firstsecond quarter of fiscal 2022 totaled $66.2$68.6 million, compared with net income of $53.8$52.2 million earned for the firstsecond quarter of fiscal 2021. At2021.While the beginning of the COVID-19 pandemic in March 2020, there were widespread stay-at-home measures, as well as the closing of most schoolsCompany has incurred significant inventory cost increases and restaurants. While such orders and mass closures have lessened, the emergence of the Delta and Omicron COVID-19 variants resulted in the return, to some extent of these type of measures, which were still in place throughout the three months ended December 25, 2021. As a result, retail grocery sales have benefited and continued to increase almost two years into the pandemic. Corresponding operatingvolatility, expenses did not increase as much as sales, resulting in higher pre-tax income.
Net Sales. Net sales increased by $201.1$193.0 million, or 16.9%16.3%, to $1.39$1.38 billion for the three months ended December 25, 2021March 26, 2022 compared with $1.19$1.18 billion for the three months ended December 26, 2020.March 27, 2021. Comparing the firstsecond quarter of fiscal 2022 with the firstsecond quarter of fiscal 2021, gasoline sales dollars and gallons sold were higher due to increased holiday travel and a substantialan increase in market prices for fuel. Excluding gasoline sales, total grocery comparable store sales increased 10.0%10.1% over the comparative fiscal quarter. Comparing the firstsecond quarters of fiscal years 2022 and 2021 (and excluding gasoline), the number of customer transactions increased 7.3%5.3% and the average transaction size increased 3.4%5.0%. As noted above, the COVID-19 pandemic has resulted in more meals consumed at home due in part to school closures and customers limiting their dining out. Overall, food and gasoline inflation has also impacted the dollar amount of sales.
Ingles operated 198 stores at December 25, 2021both March 26, 2022 and 197 stores at December 26, 2020.March 27, 2021. Retail square feet totaled approximately 11.3 million square feet at December 25, 2021both March 26, 2022 and 11.3 million square feet at December 26, 2020.March 27, 2021. During the twelve months ended December 25, 2021,March 26, 2022, the Company opened two new storesone store and closed one store.
Sales by product category (in thousands) were as follows:
Three Months Ended | Three Months Ended | |||||||||||
December 25, | December 26, | March 26, | March 27, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||||
Grocery | $ | 488,407 | $ | 442,121 | $ | 482,179 | $ | 427,219 | ||||
Non-foods | 304,672 | 279,688 | 289,419 | 268,799 | ||||||||
Perishables | 364,350 | 321,263 | 355,651 | 320,493 | ||||||||
Gasoline | 190,832 | 110,469 | 200,192 | 130,679 | ||||||||
Total retail grocery | $ | 1,348,261 | $ | 1,153,541 | $ | 1,327,441 | $ | 1,147,190 | ||||
The grocery category includes grocery, dairy, and frozen foods.
The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.
The perishables category includes meat, produce, deli and bakery.
Changes in retail grocery sales for the quarter ended December 25, 2021March 26, 2022 are summarized as follows (in thousands):
|
| |||||
Total retail sales for the three months ended December 26, 2020 | $ | 1,153,541 | ||||
Total retail sales for the three months ended March 27, 2021 | $ | 1,147,190 | ||||
Comparable store sales increase (including gasoline) | 181,232 | 170,752 | ||||
Impact of stores opened in fiscal 2021 | 14,800 | 13,976 | ||||
Impact of stores closed in fiscal 2021 | (2,573) | (2,507) | ||||
Other | 1,261 | (1,970) | ||||
Total retail sales for the three months ended December 25, 2021 | $ | 1,348,261 | ||||
Total retail sales for the three months ended March 26, 2022 | $ | 1,327,441 | ||||
Gross Profit. Gross profit for the three-month period ended December 25, 2021March 26, 2022 totaled $350.5$348.6 million, an increase of $36.3$38.1 million, or 11.6%12.3%, compared with gross profit of $314.2$310.5 million for the three-month period ended December 26, 2020.March 27, 2021. Gross profit as a percentage of sales was 25.2%25.3% and 26.4%26.2% for the three months ended December 25,March 26, 2022 and March 27, 2021, and December 26, 2020, respectively. The gross margin for gasoline was lower during the current year quarter due to a sharply higher per gallon cost and sales price. Retail segment gross profit, excluding gasoline increased 18 basis points for the quarter ended December 25, 2021, as compared with the quarter ended December 26, 2020.
Operating and Administrative Expenses. Operating and administrative expenses increased $21.9$17.8 million, or 9.2%7.6%, to $260.1$254.7 million for the three months ended December 25, 2021,March 26, 2022, from $238.2$236.9 million for the three months ended December 26, 2020.March 27, 2021. As a percentage of sales, operating and administrative expenses were 18.7%18.5% and 20.0% for the DecemberMarch 2022 and March 2021 and December 2020 quarters, respectively. Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 21.5% of sales for the firstsecond fiscal quarter of 2022 compared with 21.9%22.3% for the firstsecond fiscal quarter of 2021. The fiscal 2022 first quarter expense percentages are lower due to additional pandemic-related sales during the first fiscal quarter of 2022.
A breakdown of the major changes in operating and administrative expenses is as follows:
Increase | Increase | |||||||||||
Increase | as a % of | Increase | as a % of | |||||||||
in millions | sales | in millions | sales | |||||||||
Salaries and wages | $ | 9.4 | 0.68 | % | $ | 10.1 | 0.73 | % | ||||
Store supplies | $ | 2.5 | 0.18 | % | ||||||||
Insurance | $ | 1.9 | 0.13 | % | ||||||||
Depreciation and amortization | $ | 1.7 | 0.13 | % | ||||||||
Bank charges | $ | 1.7 | 0.12 | % | $ | 2.2 | 0.16 | % | ||||
Professional fees | $ | 1.7 | 0.12 | % | $ | 1.4 | 0.10 | % | ||||
Salaries and wages increased in dollars due to higher sales volume requiring additional hours, as well as increased wages due to labor market competition.
Depreciation expense increased due to equipment purchased for store improvements, technology improvements and the distribution network.
Bank charges increased as a result of increased sales and higher card usage compared with cash or checks.
Professional fees increased in conjunction with improvements to the Company’s information technology platforms.
Gain from Sale or Disposal of Assets. Gain from the sale or disposal of assets totaled $1.3 million during the three months ended March 26, 2022, primarily from the sale of rolling stock. During the quarter ended March 27, 2021, the gain from the sale or disposal of assets totaled $0.7 million.
Interest Expense. Interest expense totaled $5.4 million for the three-month period ended March 26, 2022 compared with $6.2 million for the three-month period ended March 27, 2021. Total debt at March 2022 was $578.5 million compared with $647.8 million at March 2021. Over the past twelve months, the Company has reduced or refinanced higher rate debt to lower rates.
Income Taxes. Income tax expense totaled $22.4 million for the three months ended March 26, 2022, an effective tax rate of 24.6% of pretax income. Income tax expense totaled $16.6 million for the three months ended March 27, 2021, an effective tax rate of 24.1% of pretax income.
Net Income. Net income totaled $68.6 million for the three-month period ended March 26, 2022 compared with $52.2 million for the three-month period ended March 27, 2021. Basic and diluted earnings per share for Class A Common Stock were $3.70 and $3.61, respectively, for the March 2022 quarter, compared to $2.65 and $2.58, respectively, for the March 2021 quarter. Basic and diluted earnings per share for Class B Common Stock were each $3.36 for the March 2022 quarter compared with $2.41 for the March 2021 quarter.
Six Months Ended March 26, 2022 Compared to the Six Months Ended March 27, 2021
Net income for the first half of fiscal 2022 totaled $134.8 million, compared with net income of $106.0 million earned for the first half of fiscal 2021. Retail grocery sales increased due to continued consumer trends seen since the beginning of the COVID 19 pandemic as well as the effects of inflation. Corresponding operating expenses did not increase as much, resulting in higher pre-tax income.
Net Sales. Net sales increased by $393.7 million, or 16.6%, to $2.77 billion for the six months ended March 26, 2022 compared with $2.37 billion for the six months ended March 27, 2021. Comparing the first half of fiscal 2022 with the first half of fiscal 2021, gasoline sales dollars and gallons sold were higher. Excluding gasoline sales, total grocery comparable store sales increased 10.2% over the comparative six-month period. Comparing the first halves of fiscal years 2022 and 2021 (and excluding gasoline), the number of customer transactions increased 6.3% and the average transaction size increased 4.2%.
Sales by product category (in thousands) are as follows:
| Six Months Ended | |||||
March 26, | March 27, | |||||
2022 | 2021 | |||||
Grocery | $ | 970,585 | $ | 869,339 | ||
Non-foods | 594,091 | 548,487 | ||||
Perishables | 720,001 | 641,756 | ||||
Gasoline | 391,025 | 241,148 | ||||
Total retail grocery | $ | 2,675,702 | $ | 2,300,730 | ||
Changes in retail grocery sales for the quarter ended March 26, 2022 are summarized as follows (in thousands):
| |||
Total retail sales for the six months ended March 27, 2021 | $ | 2,300,730 | |
Comparable store sales increase (including gasoline) | 351,984 | ||
Impact of stores opened in fiscal 2021 | 28,776 | ||
Impact of stores closed in fiscal 2021 | (5,080) | ||
Other | (708) | ||
Total retail sales for the six months ended March 26, 2022 | $ | 2,675,702 |
The grocery category includes grocery, dairy, and frozen foods.
The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.
The perishables category includes meat, produce, deli and bakery.
Gross Profit. Gross profit for the six-month period ended March 26, 2022 totaled $699.1 million, an increase of $74.4 million, or 11.9%, compared with gross profit of $624.7 million for the six-month period ended March 27, 2021. Gross profit as a percentage of sales was 25.3% and 26.3% for the six months ended March 26, 2022 and March 27, 2021, respectively. Inflation and supply chain pressures have increased the cost of goods sold.
Operating and Administrative Expenses. Operating and administrative expenses increased $39.8 million, or 8.4%, to $514.8 million for the six months ended March 26, 2022, from $475.0 million for the six months ended March 27, 2021. As a percentage of sales, operating and administrative expenses were 18.6% and 20.0% for the March 2022 and March 2021 six-month periods, respectively. Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 21.5% of sales for the first six months of 2022 compared with 22.1% for the first six months of 2021. The fiscal 2022 first half expense percentages are lower due to additional pandemic-related sales during the first half of 2022.
A breakdown of the major changes in operating and administrative expenses is as follows:
Increase | ||||||
Increase | as a % of | |||||
in millions | sales | |||||
Salaries and wages | $ | 19.6 | 0.71 | % | ||
Depreciation and amortization | $ | 4.3 | 0.15 | % | ||
Bank charges | $ | 3.9 | 0.14 | % | ||
Professional fees | $ | 3.0 | 0.11 | % | ||
Salaries and wages increased in dollars due to additional labor hours required for the increased sales volume including extraand continued labor needed in response to the COVID-19 pandemic.market pressures.
Store suppliesDepreciation expense increased due to equipment purchased for store improvements, technology and the distribution network.
Bank charges increased as a result of increased sales and market costs of certain supplies. The COVID-19 pandemic has resulted in higher card usage of cleaning and packaging products to maintain product safety and the safety of our employees and customers.
Insurance expense increased due to increased claims under the Company’s self-insurance programs.
Bank charges increased due to increased sales and a greater portion of sales settledcompared with credit/debit cards instead of cash or check.checks.
Professional fees increased in conjunction with improvements to the Company’s information technology platforms.
Other Income.Gain from Sale or Disposal of Assets. Other incomeGain from the sale or disposal of assets totaled $1.6$1.2 million forduring the threesix months ended December 25,March 26, 2022. During the six-months ended March 27, 2021, compared with $0.7 million for the three months ended December 26, 2020. The increase is attributable to higher salesgain from the sale or disposal of waste paper and other recyclables.
assets totaled $1.1 million.
Interest Expense. Interest expense totaled $5.4$10.8 million for the three-monthsix-month period ended December 25, 2021March 26, 2022 compared with $6.4$12.6 million for the three-monthsix-month period ended December 26, 2020.March 27, 2021. Total debt at December 25, 2021March 2022 was $586.1$578.5 million compared with $587.9$647.8 million at December 26, 2020.March 2021. Over the past twelve months, the Company has reduced or refinanced higher rate debt.debt to lower rates.
Income Taxes. Income tax expense totaled $20.4$42.8 million for the threesix months ended December 25, 2021,March 26, 2022, an effective tax rate of 23.6%24.1% of pretax income. Income tax expense totaled $16.9$33.5 million for the threesix months ended December 26, 2020,March 27, 2021, an effective tax rate of 23.9%24.0% of pretax income.
Net Income. Net income totaled $66.2$134.8 million for the three-monthsix-month period ended December 25, 2021March 26, 2022 compared with $53.8$106.0 million for the three-monthsix-month period ended December 26, 2020.March 27, 2021. Basic and diluted earnings per share for Class A Common Stock were $3.57$7.26 and $3.48,$7.10, respectively, for the December 2021 quarter,six months ended March 26, 2022, compared to $2.73$5.38 and $2.66,$5.24, respectively, for the December 2020 quarter.six months ended March 27, 2021. Basic and diluted earnings per share for Class B Common Stock were each $3.24$6.60 for the December 2021 quartersix-months ended March 26, 2022 compared with $2.48$4.89 for the December 2020 quarter.six months ended March 27, 2021.
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 an increasingly diverse selection of competitively priced products. Therefore, the Company has invested and plans to 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 $21.3$34.1 million for the three-monthsix-month period ended December 25, 2021.March 26, 2022. These capital expenditures focused on construction ofon stores opened or scheduled to open later in fiscal 2022, site acquisition, and smaller-scale remodeling projects in a number of the Company’s stores. Capital expenditures also included the costs of upgrading and replacing store equipment, technology investments, rolling stock, and capital expenditures related to the Company’s milk processing plant. Capital expenditures were lower this quarter as compared to the same quarter in 2021 due to both increased costs and reduced availability of labor and materials. The Company expects to increase capital expenditures when labor and material costs normalize.
The Company’sIngles’ capital expenditure plans for fiscal 2022 currently include investments of approximately $100 to $120 million. At this time the Company does not anticipate that the COVID-19 pandemic will have an adverse impact on its long-term capital expenditure plans. The Company currently plans to dedicate the majority of its fiscal 2022 capital expenditures to continued improvement of its store base and also include investments in stores expected to open in fiscal 2022, 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.
The Company currently expects that its annual capital expenditures will be in the range of approximately $100 to $160 million going forward in order to maintain a modern store base. Among other things, planned expenditures for any given future fiscal year will be affected by the availability of financing, which can affect both the number of projects pursued at any given time and the cost of those projects. The number of projects may also fluctuate due to the varying costs of the types of projects pursued including new stores and
major remodel/expansions. The Company makes decisions on the allocation of capital expenditure dollars based on many factors including the competitive environment, other Company capital initiatives and its financial condition.
The Company does not generally enter into commitments for capital expenditures other than on a store-by-store basis at the time it begins construction on a new store or begins a major or minor remodeling project. The Company had no outstandingOutstanding construction commitments totaled $15.6 million at December 25, 2021.March 26, 2022.
Liquidity
The Company generated $95.0$155.5 million net cash from operations in the December 2021 three-monthMarch 2022 six-month period compared with $57.8$114.7 million during the December 2020 three-monthMarch 2021 six-month period. The increase is primarily attributableCash from operations increased by $40.1 million due to higher net income as a result of increased sales due toand less working capital needs during the COVID-19 pandemic.March 2022 six-month period compared with the March 2021 six-month period.
Cash used by investing activities for the three-monthsix-month periods ended December 25,March 26, 2022 and March 27, 2021 and December 26, 2020 totaled $131.1$142.6 million and $33.6$68.1 million, respectively. Excess cashrespectively, consisting primarily of approximately $110 million has been investedcapital expenditures offset by proceeds from property and equipment sales. Lower current year capital expenditures and increased purchases of short term investments as compared to the prior year period account for the difference in short-term financial instruments.investing activities between the two six-month periods.
Cash used by financing activities totaled $6.5$17.6 million for the three-monthsix-month period ended December 25, 2021,March 26, 2022, compared with $21.0$44.6 million for the three-monthsix-month period ended December 26, 2020.March 27, 2021. The decrease is primarily related to the repaymentrepurchase of common stock during the prior fiscal year, part of which was funded with borrowings under the Line (as defined below) during the quarter ended December 26, 2020.Line.
In June 2021, the Company issued $350.0 million aggregate principal amount of senior notes due 2031 (the “Notes”). The Notes bear an interest rate of 4.00% per annum and were issued at par. Upon issuance of the Notes, the Company issued an irrevocable notice to redeem the remaining $295.0 million principalaggregate principle amount of the Company’s 5.75% senior notes due 2023, which the Company redeemed at par value on July 16, 2021.
The Company has a $150.0 million line of credit (the “Line”) that matures in June 2026. The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or LIBOR. The Line allows the Company to issue up to $10.0 million in letters of credit, of which noneno letters of credit were issued at December 25, 2021.March 26, 2022. The Company is not required to maintain compensating balances in connection with the Line. At December 25, 2021,March 26, 2022, the Company had no borrowings outstanding under the Line.
In December 2010, the Company completed the funding of $99.7 million of Bonds (the “Bonds”) for the construction of new warehouse and distribution space adjacent to its existing space in Buncombe County, North Carolina (the “Project”). The final maturity date of the Bonds is January 1, 2036.
Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between certain financial institutions and the Company, the financial institutions would hold the Bonds until December 17, 2029, subject to certain events. Mandatory redemption of the Bonds by the Company in the annual amount of $4.5 million began on January 1, 2014. The outstanding balance of the Bonds is $63.5$59.0 million as of December 25, 2021.March 26, 2022. The Company may redeem the Bonds without penalty or premium at any time prior to December 17, 2029. The Covenant Agreement was amended during the three months ended December 25, 2021, to extend the holding period and reduce the interest rate on the Bonds.
In September 2017, the Company refinanced approximately $60 million secured borrowing obligations with a LIBOR-based amortizing floating rate loan secured by real estate maturing in October 2027. The Company has an interest rate swap agreement for a current notional amount of $35.0$33.5 million at a fixed rate of 3.92%. Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest rate swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.
In December 2019, the Company closed a $155 million LIBOR-based amortizing floating rate loan secured by real estate maturing in January 2030. The Company has an interest rate swap agreement for a current notional amount of $138.2$136.3 million at a fixed rate of 2.95%. Under this agreement, the Company pays monthly the fixed rate of 2.95% and receives the one-month LIBOR plus 1.50%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.65 million and mature in fiscal year 2030.
The fair market value of the interest rate swaps are measured quarterly with adjustments recorded in other comprehensive income.
The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under the Company’s Line, Bonds and Notes indenture in the event of default under any one instrument.
The Company’s long-term debt agreements generally contain provisions that under certain circumstances would permit lending institutions to terminate or withdraw their respective extensions of credit to the Company. Included among the triggering factors permitting the termination or withdrawal of the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents. As of December 25, 2021,March 26, 2022, the Company was in compliance with these covenants. Under the most restrictive of these covenants, the Company would be able to incur approximately $2.1$2.3 billion of additional borrowings (including borrowings under the Line) as of December 25, 2021.March 26, 2022.
The Company’s principal sources of liquidity are expected to be cash flow from operations, borrowings under the Line and long-term debt financing. The Company believes, based on its current results of operations and financial condition, that its financial resources, including the Line, 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 is no assurance that any such sources of financing will be available to the Company when needed on acceptable terms, or at all.
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 factors. These factors may include, among others, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery, changing demographics, and the impact of the COVID-19 pandemic, as well as the additional factors discussed below under “Forward Looking Statements.” It is also possible, for such reasons, that the results of operations from the 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.
Contractual Obligations and Commercial Commitments
There have been no other material changes in contractual obligations and commercial commitments subsequent to September 25, 2021 other than as described elsewhere in this Form 10-Q.
Off Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Quarterly Cash Dividends
Since December 27, 1993, the Company has paid regular quarterly cash dividends of $0.165 (sixteen and one-half cents) per share on its Class A Common Stock and $0.15 (fifteen cents) per share on its Class B Common Stock for an annual rate of $0.66 and $0.60 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, the Notes, the Bonds, the Line, and other debt agreements contain provisions that, based on certain financial parameters, restrict the ability of the Company to pay additional cash dividends in excess of current quarterly per share amounts. Further, the Company is prevented from declaring dividends at any time that it is in default under the indenture governing the Notes.
Seasonality
Grocery sales are subject to a slight seasonal variance due to holiday related sales and due to sales in areas where seasonal homes are located. Sales are traditionally higher in the Company’s first fiscal quarter due to the inclusion of sales related to Thanksgiving and Christmas. The Company’s second fiscal quarter traditionally has the lowest sales of the year, unless Easter falls in that quarter. In the third and fourth quarter, sales are affected by the return of customers to seasonal homes in our market area. The Company’s fluid dairy operations have slight seasonal variation to the extent of its sales into the grocery industry. The Company’s real estate activities are not subject to seasonal variations.
Impact of Inflation
As the economy recovers from the initial impact of the COVID-19 pandemic, inflation has recently reached levels not experienced in decades. Food and energy costs have increased, reflecting a tight labor market and supply chain/chain and transportation disruptions.
The following table from the United States Bureau of Labor Statistics lists annualized changes in the Consumer Price Index that could have an effect on the Company’s operations. One of the Company’s significant costs is labor, which increases with general increases in inflation. Inflation or deflation in energy costs affects the Company’s gasoline sales, distribution expenses and plastic supply costs. During the past twelve months, inflation has reached its highest level in a number of years, impacting food costs, transportation costs, and labor costs.
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Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect”, “anticipate”, “intend”, “plan”, “likely”, “goal”, “believe”, “seek”, “will”, “may”, “would”, “should” and similar expressions are intended to identify forward-looking statements. While these forward-looking statements and the related assumptions are made in good faith and reflect the Company’s current judgment regarding the direction of the Company’s business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested or described by such forward-looking statements. Such statements are based upon a number of assumptions and estimates which are inherently subject to significant risks and uncertainties many of which are beyond the Company’s control. 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 affect the Company’s revenues, financial position, growth strategies, 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 potential continued impact of the COVID-19 pandemic on our business and economic conditions generally in the Company’s operating area; the Company’s ability to successfully implement its expansion and operating strategies and to manage rapid expansion; pricing pressures and other competitive factors; reduction in per gallon retail gasoline prices; the maturation of new and expanded stores; the Company’s ability to reduce costs and achieve
improvements in operating results; the availability and terms of financing; increases in labor and utility costs; success or failure in the ownership and development of real estate; changes in the laws and government regulations applicable to the Company; disruptions in the efficient distribution of food products; changes in accounting policies, standards, guidelines or principles as may be adopted by regulatory agencies as well as the Financial Accounting Standards Board; and those factors contained under the heading “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K.
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. The Company does not undertake and specifically denies any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments, except to the extent required by applicable law.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As disclosed elsewhere in this Quarterly Report on Form 10-Q, the Company is a party to interest rate swap agreements for a current aggregate notional amount of $173.2$169.8 million. Otherwise, the Company does not typically utilize financial instruments for trading or other speculative purposes, nor does it typically utilize leveraged financial instruments. There have been no other material changes in the market risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended September 25, 2021.
Item 4. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission. Disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that the Company’s system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of December 25, 2021,March 26, 2022, the end of the period covered by this report. In making this evaluation, it considered matters previously identified and disclosed in connection with the filing of its Annual Report on Form 10-K for fiscal 2021. After consideration of the matters discussed above and the changes in internal control over financial reporting discussed below, the Company has concluded that its controls and procedures were effective as of December 25, 2021.March 26, 2022.
(b) Changes in Internal Control over Financial Reporting
The Company is currently planning and performing tests of internal controls over financial reporting for fiscal year 2022.
No changes in internal control over financial reporting occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. OTHER INFORMATION
Item 6. EXHIBITS
(a) Exhibits.
101 | * | The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended |
104 | * | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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*Filed herewith.
**Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
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| INGLES MARKETS, INCORPORATED |
Date: |
| /s/ James W. Lanning
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| James W. Lanning |
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| Chief Executive Officer and President |
Date: |
| /s/
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| Vice President-Finance and Chief Financial Officer |