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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 26, 2020

 

¨         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 ¨

Accelerated Filer x

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 February 2, 2021, the Registrant had 14,221,285 shares of Class A Common Stock, $0.05 par value per share, outstanding and 6,038,491 shares of Class B Common Stock, $0.05 par value per share, outstanding.

 


1


 

INGLES MARKETS, INCORPORATED

 

INDEX

 

 

  

Page

No.

 

Part I – Financial Information

  

 

    Item 1. Financial Statements (Unaudited)

  

 

Condensed Consolidated Balance Sheets as of December 26, 2020 and September 26, 2020

  

3

Condensed Consolidated Statements of Income and Comprehensive Income for the

  

Three Months Ended December 26, 2020 and December 28, 2019

4

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended December 26, 2020 and December 28, 2019

  

5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 26, 2020 and December 28, 2019

  

6

Notes to Unaudited Interim Financial Statements

  

7

    Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

12

    Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

18

Item 4. Controls and Procedures

18

Part II – Other Information

  

    Item 6. Exhibits

  

19

Signatures

  

20


2


Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

December 26,

September 26,

2020

2020

ASSETS

Current Assets:

Cash and cash equivalents

$

10,005,500

$

6,903,955

Receivables - net

100,947,940

81,358,357

Inventories

373,546,565

366,824,438

Other current assets

13,485,451

15,100,110

Total Current Assets

497,985,456

470,186,860

Property and Equipment - Net

1,354,607,356

1,354,489,690

Operating lease right of use assets

44,918,684

46,590,718

Other Assets

30,988,797

28,031,634

Total Assets

$

1,928,500,293

$

1,899,298,902

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Current portion of long-term debt

$

19,319,792

$

19,305,976

Current portion of operating lease liabilities

8,334,928

8,384,435

Accounts payable - trade

209,052,002

204,110,150

Accrued expenses and current portion of other long-term liabilities

81,664,333

92,012,346

Total Current Liabilities

318,371,055

323,812,907

Deferred Income Taxes

74,438,000

73,334,000

Long-Term Debt

568,627,694

586,198,360

Noncurrent operating lease liabilities

39,245,928

40,962,735

Other Long-Term Liabilities

55,825,985

55,659,943

Total Liabilities

1,056,508,662

1,079,967,945

Stockholders’ Equity

Preferred stock, $0.05 par value; 10,000,000 shares authorized; no shares issued

Common stocks:

Class A, $0.05 par value; 150,000,000 shares authorized;
14,220,535 shares issued and outstanding December 26, 2020;
14,212,360 shares issued and outstanding at September 26, 2020

711,027

710,618

Class B, convertible to Class A, $0.05 par value;
100,000,000 shares authorized;
6,039,241 shares issued and outstanding December 26, 2020;
6,047,416 shares issued and outstanding at September 26, 2020

301,962

302,371

Paid-in capital in excess of par value

12,311,249

12,311,249

Accumulated other comprehensive income

(8,162,558)

(10,251,296)

Retained earnings

866,829,951

816,258,015

Total Stockholders’ Equity

871,991,631

819,330,957

Total Liabilities and Stockholders’ Equity

$

1,928,500,293

$

1,899,298,902

See notes to unaudited condensed consolidated financial statements.


3


INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended

December 26,

December 28,

2020

2019

Net sales

$

1,190,443,141

$

1,078,354,937

Cost of goods sold

876,254,999

820,865,210

Gross profit

314,188,142

257,489,727

Operating and administrative expenses

238,199,077

221,978,850

Gain from sale or disposal of assets

451,719

2,964,484

Income from operations

76,440,784

38,475,361

Other income, net

692,017

197,487

Interest expense

6,400,714

11,949,286

Loss on early extinguishment of debt

3,719,209

Income before income taxes

70,732,087

23,004,353

Income tax expense

16,908,000

5,317,000

Net income

$

53,824,087

$

17,687,353

Other comprehensive income:

Change in fair value of interest rate swap

$

2,763,738

$

2,848,879

Income tax expense

675,000

696,986

Other comprehensive income, net of tax

2,088,738

2,151,893

Comprehensive income

$

55,912,825

$

19,839,246

Per share amounts:

Class A Common Stock

Basic earnings per common share

$

2.73

$

0.90

Diluted earnings per common share

$

2.66

$

0.87

Class B Common Stock

Basic earnings per common share

$

2.48

$

0.82

Diluted earnings per common share

$

2.48

$

0.82

Cash dividends per common share

Class A Common Stock

$

0.165

$

0.165

Class B Common Stock

$

0.150

$

0.150

4


INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

THREE MONTHS ENDED DECEMBER 26, 2020 AND DECEMBER 28, 2019

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 28, 2019

14,180,485 

  

$

709,024 

6,079,291 

$

303,965 

$

12,311,249 

$

(1,265,650)

$

650,664,018 

$

662,722,606 

Net income

17,687,353 

17,687,353 

Other comprehensive income, net of income tax

2,151,893 

2,151,893 

Cash dividends

(3,251,673)

(3,251,673)

Common stock conversions

12,500 

625 

(12,500)

(625)

Balance, December 28, 2019

14,192,985 

$

709,649 

6,066,791 

$

303,340 

$

12,311,249 

$

886,243 

$

665,099,698 

$

679,310,179 

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 

See notes to unaudited condensed consolidated financial statements.


5


INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  

  

Three Months Ended

  

December 26,

December 28,

2020

2019

Cash Flows from Operating Activities:

Net income

$

53,824,087

$

17,687,353

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense

29,878,689

28,434,454

Non cash operating lease cost

1,672,035

2,186,588

Gain from sale or disposal of assets

(451,719)

(2,964,484)

Loss on early extinguishment of debt

3,719,209

Receipt of advance payments on purchases contracts

250,000

500,000

Recognition of advance payments on purchases contracts

(753,511)

(870,015)

Deferred income taxes

429,000

552,014

Changes in operating assets and liabilities:

Receivables

(19,589,583)

(3,576,221)

Inventory

(6,722,127)

2,547,440

Other assets

(1,342,505)

(1,719,985)

Operating lease liabilities

(1,766,313)

(2,276,367)

Accounts payable and accrued expenses

2,346,228

(27,970,295)

Net Cash Provided by Operating Activities

57,774,281

16,249,691

Cash Flows from Investing Activities:

Proceeds from sales of property and equipment

593,245

5,223,283

Capital expenditures

(34,239,257)

(31,103,774)

Net Cash Used by Investing Activities

(33,646,012)

(25,880,491)

Cash Flows from Financing Activities:

Proceeds from short-term borrowings

248,719,275

Payments on short-term borrowings

(262,603,345)

Debt issuance costs

(822,412)

Proceeds from new long term debt

155,000,000

Principal payments on long-term borrowings

(3,890,502)

(157,422,326)

Prepayment penalties on debt extinguishment

(2,971,350)

Dividends paid

(3,252,152)

(3,251,673)

Net Cash Used by Financing Activities

(21,026,724)

(9,467,761)

Net Increase (Decrease) in Cash and Cash Equivalents

3,101,545

(19,098,561)

Cash and cash equivalents at beginning of period

6,903,955

42,125,105

Cash and Cash Equivalents at End of Period

$

10,005,500

$

23,026,544

See notes to unaudited condensed consolidated financial statements.


6


INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

Three Months Ended December 26, 2020 and December 28, 2019

 

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 26, 2020, and the results of operations and changes in stockholders’ equity and cash flows for the three months ended December 26, 2020 and December 28, 2019. 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 Annual Report on Form 10-K for the year ended September 26, 2020, filed by the Company under the Securities Exchange Act of 1934, as amended, on December 10, 2020.

 

The results of operations for the three months ended December 26, 2020 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. ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Receivables are presented net of an allowance for doubtful accounts of $325,000 at December 26, 2020 and at September 26, 2020.

D. 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.

E. 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 26,

September 26,

2020

2020

Property, payroll and other taxes payable

$

21,296,793

$

22,334,471

Salaries, wages and bonuses payable

30,016,704

44,975,510

Self-insurance liabilities

14,231,397

14,064,210

Interest payable

2,468,868

6,686,195

Income taxes payable

10,208,918

Other

3,441,653

3,951,960

$

81,664,333

$

92,012,346

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 $34.5 million and $34.1 million at December

7


26, 2020 and September 26, 2020, respectively. Of this amount, $14.2 million is accounted for as a current liability and $20.3 million as a long-term liability, which is inclusive of $4.8 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable at December 26, 2020. At September 26, 2020, $14.1 million was accounted for as a current liability and $20.0 million as a long-term liability, which is inclusive of $4.7 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 $12.3 million and $10.6 million for the three months ended December 26, 2020 and December 28, 2019, 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 26, 2020 and September 26, 2020.

F. LONG-TERM DEBT

 

In June 2013, the Company issued $700.0 million aggregate principal amount of senior notes due in 2023 (the “Notes”). The Notes bear an interest rate of 5.750% per annum and were issued at par.

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

2018

102.875%

2019

101.917%

2020

100.958%

2021 and thereafter

100.000%

In November 2019, the Company closed a $155 million ten year amortizing real estate loan (the “Loan”) and issued notice to redeem a like principal amount of the Notes. The Loan was funded and the Notes were redeemed thirty days after the redemption notice in December 2019. The Notes were redeemed at 101.917% of par value, and the Company recognized debt extinguishment costs of approximately $3.7 million during the quarter ended December 28, 2019. The Loan matures January 31, 2030 and has monthly principal payments of $0.65 million plus floating rate interest based on LIBOR.

In June 2020, the Company issued an irrevocable notice to redeem $150 million principal amount of the Notes. The Notes were redeemed at 100.958% of par value on July 9, 2020.

In July 2020 the Company issued an irrevocable notice to redeem $100 million principal amount of the Notes. The Notes were redeemed at 100.958% of par value on August 27, 2020. Following this redemption, there were $295.0 million aggregate principal amount of the Notes outstanding at December 26, 2020.

The Company has a $175.0 million line of credit (the “Line”) that matures in September 2022. 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 $20.0 million in unused letters of credit, of which $1.1 million of unused letters of credit were issued at December 26, 2020. The Company is not required to maintain compensating balances in connection with the Line. At December 26, 2020, the Company had $25.0 million of 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 September 2026, 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 $68.0 million as of December 26, 2020. The Company may redeem the Bonds without penalty or premium at any time prior to September 26, 2026.

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.

8


The Company has an interest rate swap agreement for a current notional amount of $