0000050493-18-000007.txt : 20180208 0000050493-18-000007.hdr.sgml : 20180208 20180208161619 ACCESSION NUMBER: 0000050493-18-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 54 CONFORMED PERIOD OF REPORT: 20171230 FILED AS OF DATE: 20180208 DATE AS OF CHANGE: 20180208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INGLES MARKETS INC CENTRAL INDEX KEY: 0000050493 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 560846267 STATE OF INCORPORATION: NC FISCAL YEAR END: 0928 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14706 FILM NUMBER: 18585961 BUSINESS ADDRESS: STREET 1: PO BOX 6676 CITY: ASHEVILLE STATE: NC ZIP: 28816 BUSINESS PHONE: 828-669-2941 MAIL ADDRESS: STREET 1: P O BOX 6676 CITY: ASHEVILLE STATE: NC ZIP: 28816 10-Q 1 imkt-20171230x10q.htm 10-Q 20171230 Q118 10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q



 

 

        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 30,  2017

 

         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

 

 

 

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     No .  



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes     No .  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

Non-accelerated filer (Do not check if a smaller reporting company.)

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  .

  

As of February 6, 2018, the Registrant had 14,118,244 shares of Class A Common Stock, $0.05 par value per share, outstanding and 6,141,532 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 30,  2017 and September 30, 2017 

  

3



 

Condensed Consolidated Statements of Income for the Three Months Ended December 30, 2017

  

 

and December 24, 2016

  

4



 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended December 30,  2017 and December 24,  2016

  

5



 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 30,  2017 and December 24,  2016

  



 

Notes to Unaudited Interim Financial Statements

  



 

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

  

11 



 

    Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

17 



 

   Item 4. Controls and Procedures

 

17 



 

Part II – Other Information

  

 



 

 

    Item 6. Exhibits

  

18 



 

Signatures

  

20 



2

 


 

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS 

 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)









 

 

 

 

 



 

 

 

 

 



December 30,

 

September 30,



2017

 

2017

ASSETS

  

 

  

 

 

Current Assets:

  

 

  

 

 

Cash and cash equivalents

$

13,755,373 

 

$

23,912,100 

Receivables - net

  

71,514,020 

  

 

66,329,164 

Inventories

  

361,626,877 

  

 

349,333,013 

Other current assets

  

8,680,581 

  

 

6,265,737 

Total Current Assets

  

455,576,851 

  

 

445,840,014 

Property and Equipment – Net

  

1,292,455,999 

  

 

1,265,112,350 

Other Assets

  

25,629,028 

  

 

22,353,410 

Total Assets

$

1,773,661,878 

  

$

1,733,305,774 



  

 

  

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

 

  

 

 

Current Liabilities:

  

 

  

 

 

Current portion of long-term debt

$

12,672,037 

  

$

12,210,571 

Accounts payable - trade

 

176,003,202 

 

 

150,901,051 

Accrued expenses and current portion of other long-term liabilities

  

63,366,998 

  

 

82,451,857 

Total Current Liabilities

  

252,042,237 

  

 

245,563,479 

Deferred Income Taxes

  

47,106,000 

  

 

69,918,000 

Long-Term Debt

  

877,868,771 

  

 

865,659,744 

Other Long-Term Liabilities

  

43,696,355 

  

 

41,112,548 

Total Liabilities

  

1,220,713,363 

  

 

1,222,253,771 

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; 14,118,244 shares issued and outstanding December 30, 2017;  14,084,044 shares issued and outstanding at September 30, 2017

  

705,912 

 

 

704,202 

Class B, convertible to Class A, $0.05 par value; 100,000,000 shares authorized; 6,141,532 shares issued and outstanding December 30, 2017;  6,175,732 shares issued and outstanding at September 30, 2017

  

307,077 

 

 

308,787 

Paid-in capital in excess of par value

  

12,311,249 

 

 

12,311,249 

Retained earnings

  

539,624,277 

 

 

497,727,765 

Total Stockholders’ Equity

  

552,948,515 

 

 

511,052,003 

Total Liabilities and Stockholders’ Equity

$

1,773,661,878 

 

$

1,733,305,774 



See notes to unaudited condensed consolidated financial statements.

3

 


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)









 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

December 30,

 

December 24,



 

2017

 

2016



 

 

 

 

 

 

Net sales

 

$

1,013,786,078 

 

$

982,758,339 

Cost of goods sold

 

  

769,126,450 

 

  

745,673,858 

Gross profit

 

  

244,659,628 

 

  

237,084,481 

Operating and administrative expenses

 

  

208,828,396 

 

  

206,296,215 

Gain from sale or disposal of assets

 

  

57,270 

 

  

1,378,117 

Income from operations

 

  

35,888,502 

 

  

32,166,383 

Other income, net

 

  

953,960 

 

  

663,135 

Interest expense

 

  

11,451,722 

 

  

11,312,631 

Income before income taxes

 

  

25,390,740 

 

  

21,516,887 

Income tax (benefit) expense

 

  

(19,756,000)

 

 

7,693,000 

Net income

 

$

45,146,740 

 

$

13,823,887 



 

  

 

 

  

 

Per share amounts:

 

  

 

 

  

 

Class A Common Stock

 

 

 

 

 

 

Basic earnings  per common share

 

$

2.29 

 

$

0.70 

Diluted earnings  per common share

 

$

2.23 

 

$

0.68 

Class B Common Stock

 

 

 

 

 

 

Basic earnings  per common share

 

$

2.08 

 

$

0.64 

Diluted earnings  per common share

 

$

2.08 

 

$

0.64 

Cash dividends per common share

 

 

 

 

 

 

Class A Common Stock

 

$

0.165 

 

$

0.165 

Class B Common Stock

 

$

0.150 

 

$

0.150 





See notes to unaudited condensed consolidated financial statements.

4

 


 

 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

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

 

THREE MONTHS ENDED DECEMBER 30,  2017 AND DECEMBER 24,  2016







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Paid-in

  

 

 

 

 

 



 

Class A

 

Class B

 

Capital in

 

 

 

 

 

 



 

Common Stock

 

Common Stock

 

Excess of

 

Retained

 

 

 



  

Shares

  

Amount

 

Shares

 

Amount

 

Par Value

  

Earnings

 

Total



  

 

  

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Balance, September 24, 2016

 

13,966,476 

  

$

698,324 

 

6,293,300 

 

$

314,665 

 

$

12,311,249 

 

$

456,851,372 

 

$

470,175,610 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

13,823,887 

 

 

13,823,887 

Cash dividends

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,248,464)

 

 

(3,248,464)

Common stock conversions

 

75 

 

 

 

(75)

 

 

(4)

 

 

 —

 

 

 —

 

 

 —

Balance, December 24, 2016

 

13,966,551 

 

$

698,328 

 

6,293,225 

 

$

314,661 

 

$

12,311,249 

 

$

467,426,795 

 

$

480,751,033 

Balance, September 30, 2017

 

14,084,044 

  

$

704,202 

 

6,175,732 

 

$

308,787 

 

$

12,311,249 

 

$

497,727,765 

 

$

511,052,003 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

45,146,740 

 

 

45,146,740 

Cash dividends

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,250,228)

 

 

(3,250,228)

Common stock conversions

 

34,200 

 

 

1,710 

 

(34,200)

 

 

(1,710)

 

 

 —

 

 

 —

 

 

 —

Balance, December 30, 2017

 

14,118,244 

 

$

705,912 

 

6,141,532 

 

$

307,077 

 

$

12,311,249 

 

$

539,624,277 

 

$

552,948,515 





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 30,

 

December 24,



 

2017

 

2016

Cash Flows from Operating Activities:

  

 

 

 

 

 

Net income

  

$

45,146,740 

 

$

13,823,887 

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

  

 

 

 

 

 

Depreciation and amortization expense

 

 

27,989,567 

 

 

27,079,917 

Gain from sale or disposal of assets

 

 

(57,270)

 

 

(1,378,117)

Receipt of advance payments on purchases contracts

  

 

1,000,000 

 

 

1,000,000 

Recognition of advance payments on purchases contracts

  

 

(498,746)

 

 

(820,158)

Deferred income taxes

  

 

(22,812,000)

 

 

(19,000)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables

  

 

(5,184,856)

 

 

(18,946,812)

Inventory

  

 

(12,293,863)

 

 

(8,715,364)

Other assets

 

 

(5,760,061)

 

 

(1,284,220)

Accounts payable and accrued expenses

 

 

9,859,803 

 

 

6,452,116 

Net Cash Provided by Operating Activities

  

 

37,389,314 

 

 

17,192,249 

Cash Flows from Investing Activities:

  

 

 

 

 

 

Proceeds from sales of property and equipment

  

 

64,713 

 

 

1,368,806 

Capital expenditures

  

 

(56,780,084)

 

 

(29,278,744)

Net Cash Used by Investing Activities

  

 

(56,715,371)

 

 

(27,909,938)

Cash Flows from Financing Activities:

  

 

 

 

 

 

Proceeds from short-term borrowings

 

 

65,519,466 

 

 

103,292,831 

Payments on short-term borrowings

 

 

(51,253,678)

 

 

(78,255,268)

Principal payments on long-term borrowings

  

 

(1,846,230)

 

 

(1,594,690)

Dividends paid

  

 

(3,250,228)

 

 

(3,248,464)

Net Cash Provided by Financing Activities

  

 

9,169,330 

 

 

20,194,409 

Net (Decrease) Increase in Cash and Cash Equivalents

  

 

(10,156,727)

 

 

9,476,720 

Cash and cash equivalents at beginning of period

  

 

23,912,100 

 

 

5,679,509 

Cash and Cash Equivalents at End of Period

  

$

13,755,373 

 

$

15,156,229 





See notes to unaudited condensed consolidated financial statements.

6

 


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS 

Three Months Ended December 30,  2017 and December 24,  2016 

 

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 30, 2017, and the results of operations, changes in stockholders’ equity and cash flows for the three months ended December 30, 2017 and December 24, 2016. 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 30,  2017, filed by the Company under the Securities Exchange Act of 1934 on December 6,  2017.

 

The results of operations for the three-month period ended December 30, 2017 are not necessarily indicative of the results to be expected for the full fiscal year.



B. NEW ACCOUNTING PRONOUNCEMENTS



In February 2016, the FASB issued Accounting Standards Update ASU 2016-02 “Leases” (ASU 2016-02).  ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases.  This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.



In May 2014, the FASB issued Accounting Standards Update ASU 2014-09 “Revenue from Contracts with Customers” (ASU 2014-09).  ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize or to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be revenue entitled in exchange for those goods and services.  In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of the ASU to fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption permitted.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.



C. ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Receivables are presented net of an allowance for doubtful accounts of $306,000 at December 30, 2017 and September 30, 2017, respectively.  



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.



On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act makes broad and complete changes to the U.S tax code that will affect the Company’s fiscal year ended September 29, 2018, including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, (2) creating a new limitation on deductible interest expense, and (3) bonus depreciation that will allow for full expensing of qualified property.



For the fiscal year ended September 29, 2018 the Company expects to have a blended federal corporate tax rate of 24.5% based on the effective date of the tax rate reduction.  As a result of the decrease in the federal rate, the Company has recorded in the current fiscal quarter a decrease in its net deferred tax liabilities of $26.7 million, with a corresponding reduction to deferred income tax expense. 



On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act.  SAB 118 allows registrants to record provisional amounts for reasonable estimates that require more subsequent analysis.  The Company has completed its analysis and does not have any provisional amounts subject to SAB 118 as of December 30, 2017.

 

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.



7

 


 

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 30,

 

September 30,



 

2017

 

2017

Property, payroll and other taxes payable

  

$

14,659,164 

 

$

21,261,924 

Salaries, wages and bonuses payable

  

 

23,145,905 

 

  

28,369,250 

Self-insurance liabilities

  

 

13,767,391 

 

  

13,326,110 

Interest payable

 

 

3,247,752 

 

 

13,175,382 

Other

  

 

8,546,786 

 

  

6,319,191 



 

$

63,366,998 

 

$

82,451,857 



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 insured for covered costs in excess of $750,000 per occurrence for workers’ compensation, $500,000 for general liability and $450,000 per covered person for medical care benefits for a policy year. The Company’s self-insurance reserves totaled $37.4 million and $35.5 million at December 30, 2017 and September 30, 2017, respectively.  Of this amount, $13.8 million is accounted for as a current liability and $23.6 million as a long-term liability, which is inclusive of $6.6 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable at December 30, 2017At September 30, 2017,  $13.7 million is accounted for as a current liability and $21.8 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.    Employee insurance expense, including workers’ compensation and medical care benefits, net of employee contributions, totaled $8.6 million and $9.3 million for the three-month periods ended December 30, 2017 and December 24, 2016, respectively. 

 

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 on or after June 15, 2018 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%



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 the London Interbank Offering Rate (“LIBOR”). The Line allows the Company to issue up to $20.0 million in unused letters of credit, of which $9.9 million of unused letters of credit were issued at December 30, 2017.  The Company is not required to maintain compensating balances in connection with the Line.  At December 30, 2017, the Company had $14.3 million of borrowings outstanding under the Line. 



On December 29, 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 June 30, 2021, 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 Company may redeem the Bonds without penalty or premium at any time prior to June 30, 2021.

 

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.  Effective January 1, 2018, the interest rate on the Bonds will be adjusted to reflect the reduction in the federal corporate tax rate under the Tax Act.



The Company’s obligation to repay the Bonds is collateralized by the Project.  Additional collateral was required in order to meet certain loan to value criteria in the Covenant Agreement.  The Covenant Agreement incorporates substantially all financial covenants included in the Line.

8

 


 



In September 2017, the Company refinanced approximately $60 million secured borrowing obligations that were scheduled to mature in fiscal years 2018-2020 with a LIBOR-based floating rate loan maturing in October 2027.  On December 19, 2017 the Company entered into an interest rate swap agreement for a notional amount of $58.5 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 the floating rate debt closed by the Company in September, 2017.  Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.  The fair market value of the interest rate swap is measured quarterly with adjustments recorded in other comprehensive income.  The difference between the notional amount and fair market value of the interest rate swap at December 30, 2017 was not significant.



The Notes, the Bonds and the Line 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 30, 2017.  



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.



G. 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 19, 2017 to stockholders of record on October 12, 2017



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 of the Annual Report on Form 10-K filed by the Company under the Securities Exchange Act of 1934 on December 6, 2017.



H. EARNINGS PER COMMON SHARE



The Company has two 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 timeEach share of Class A Common Stock has one vote per share and each share of Class B Common Stock has ten 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



 

December 30, 2017

 

December 24, 2016



 

Class A

 

Class B

 

Class A

 

Class B

Numerator: Allocated net income

 

 

               

 

 

 

 

 

 

 

 

 

Net income allocated, basic

 

$

32,317,668 

 

$

12,829,071 

 

$

9,806,717 

 

$

4,017,170 

Conversion of Class B to Class A shares

 

  

12,829,071 

 

 

 —

 

 

4,017,170 

 

 

 —

Net income allocated, diluted

 

$

45,146,739 

 

$

12,829,071 

 

$

13,823,887 

 

$

4,017,170 



 

  

 

 

 

 

 

 

 

 

 

 

Denominator: Weighted average shares outstanding

 

  

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

  

14,103,343 

 

 

6,156,433 

 

 

13,966,506 

 

 

6,293,270 

Conversion of Class B to Class A shares

 

  

6,156,433 

 

 

 —

 

 

6,293,270 

 

 

 —

Weighted average shares outstanding, diluted

 

  

20,259,776 

 

 

6,156,433 

 

 

20,259,776 

 

 

6,293,270 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.29 

 

$

2.08 

 

$

0.70 

 

$

0.64 

Diluted

 

$

2.23 

 

$

2.08 

 

$

0.68 

 

$

0.64 













9

 


 

I. SEGMENT INFORMATION

 

The Company operates one 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



  

December 30,

  

December 24,



 

2017

 

2016

Revenues from unaffiliated customers:

  

 

 

  

 

 

Grocery

 

$

363,325 

 

$

360,901 

Non-foods

 

 

217,744 

 

 

212,311 

Perishables

 

 

265,294 

 

 

255,849 

Gasoline

 

 

136,674 

 

 

118,523 

 Total retail

  

 

983,037 

  

 

947,584 

Other

  

 

30,749 

  

 

35,174 

Total revenues from unaffiliated customers

  

$

1,013,786 

  

$

982,758 



  

 

 

  

 

 

Income from operations:

  

 

 

  

 

 

Retail

  

$

32,903 

  

$

28,991 

Other

  

 

2,986 

  

 

3,175 

Total income from operations

  

$

35,889 

  

$

32,166 

  





 

 

 

 

 

 



 

 

 

 

 

 



  

December 30,

 

September 30,



 

2017

 

2017

Assets:

  

 

 

 

 

 

Retail

  

$

1,639,964 

 

$

1,600,699 

Other

  

 

135,538 

 

 

135,076 

Elimination of intercompany receivable

  

 

(1,839)

 

 

(2,469)

Total assets

  

$

1,773,662 

 

$

1,733,306 





The grocery category includes grocery, dairy, and frozen foods.

The non-foods include alcoholic beverages, tobacco, pharmacy, health and video.

The perishables category includes meat, produce, deli and bakery.



For the three-month periods ended December 30, 2017 and December 24, 2016, respectively, the fluid dairy operation had $11.3 million and $11.8 million in sales to the grocery sales segment. These sales have been eliminated in consolidation.



J. FAIR VALUES OF FINANCIAL INSTRUMENTS



The carrying amounts for cash and cash equivalents, 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 is 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.



10

 


 

The carrying amount and fair value of the Company’s debt at December 30, 2017 is as follows (in thousands):







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



  

Carrying

  

 

 

  

Fair Value



 

Amount

 

Fair Value

 

Measurements

Senior Notes

  

$

700,000 

  

$

700,000 

 

Level 2

Facility Bonds

  

 

81,620 

  

  

81,620 

 

Level 2

Secured notes payable and other

  

 

94,655 

  

  

94,655 

 

Level 2

Line of credit payable

 

 

14,266 

 

 

14,266 

 

Level 2

Total debt

  

$

890,541 

  

$

890,541 

 

 



The fair value of the interest rate swap, whch is a level 2 fair value measurement, was insignificant December 30, 2017. 



The fair values for Level 2 measurements were determined primarily using market yields and taking into consideration the underlying terms of the debt.



K. SUBSEQUENT EVENTS



We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the day the financial statements were issued.



Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                     



Overview

 

Ingles, a leading supermarket chain in the Southeast, operates 200 supermarkets in Georgia (70), North Carolina (71), South Carolina (36), 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 and beauty care 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 30,  2017, the Company operated 105  in-store pharmacies and 99 fuel centers. 



Ingles also operates a fluid dairy and earns shopping center rentals. The fluid dairy sells approximately 28%  of its products to the retail grocery segment and approximately 72%  of its products to third parties. Real estate ownership is an important component of the Company’s operations, providing both operational and economic benefits.  

 

Critical Accounting Policies

 

Critical accounting policies are those accounting policies that management believes are important to the portrayal 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 make estimates about 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 $750,000 per occurrence for workers’ compensation, $500,000 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 30, 2017 the Company’s self-insurance reserves totaled $37.4 million.  Of this amount, $13.8 million is accounted for as a current liability and $23.6 million as a long-term liability, which is inclusive of $6.6 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 Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 360. For assets to be held and used, the Company tests for impairment using

11

 


 

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-month period ended December 30, 2017.



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 comprised 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 vendor’s products. These allowances generally relate to short term arrangements with vendors, often relating to a period of a month or less, and are negotiated on a purchase-by-purchase or transaction-by-transaction basis.  Whenever possible, 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 system constraints 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 $31.8 million and $30.7 million for the fiscal quarters ended December 30, 2017 and December 24, 2016, respectively.  Vendor advertising allowances that represent a reimbursement of specific 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 $4.0 million and $3.9 million for the fiscal quarters ended December 30, 2017 and December 24, 2016, respectively. 



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, the Company is not able to assess the impact of vendor advertising allowances on creating 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. The Condensed Consolidated Statements of Income for the three-month periods ended December 30, 2017 and December 24,  2016 both include 13 weeks of operations. 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 new store that is opened to replace an existing nearby store that is closed. A major remodel entails substantial remodeling of an existing store and includes additional retail square footage. For both the three-month periods ended December 30, 2017 and December 24, 2016, comparable store sales include 197 and 199 stores, respectively. 



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 I “Segment Information” to the Condensed Consolidated Financial Statements.

 





 

 

 

 

 

 



  

Three Months Ended



  

December 30,

 

December 24,



 

2017

 

2016

Net sales

  

100.0 

%

 

100.0 

%

Gross profit

  

24.1 

%

 

24.1 

%

Operating and administrative expenses

  

20.6 

%

 

21.0 

%

Gain from sale or disposal of assets

 

 —

%

 

0.2 

%

Income from operations

  

3.5 

%

 

3.3 

%

Other income, net

  

0.1 

%

 

0.1 

%

Interest expense

  

1.1 

%

 

1.2 

%

Income tax expense

  

(2.0)

%

 

0.8 

%

Net income

  

4.5 

%

 

1.4 

%







12

 


 

Three Months Ended December 30,  2017 Compared to the Three Months Ended December 24,  2016 

 

Net income for the first quarter of fiscal 2018 totaled $45.1 million, compared with net income of $13.8 million earned for the first quarter of fiscal 2017.  Total revenues and gross margin increased to a greater extent than did operating expenses, resulting in increased pre-tax income.  Changes to federal tax law enacted on December 22, 2017 had a $26.7 million positive impact on the Company’s current tax expense and on deferred tax liabilities that will be settled at a lower rate in future periods. 



Net Sales. Net sales increased by $31.0 million, or 3.2%, to $1.01 billion for the three months ended December 30, 2017 compared with $982.8 million for the three months ended December 24, 2016Comparing the first quarter of fiscal 2018 with the first quarter of fiscal 2017, gasoline sales dollars increased due to a 15%  in gallons sold and a relatively flat retail sales price per gallon.  Excluding gasoline sales, total grocery comparable store sales increased 2.2%  over the comparative fiscal quarters.  Comparing the first quarters of fiscal years 2018 and 2017 (and excluding gasoline), the number of customer transactions decreased 0.1% and the average transaction size increased 2.2%. 



Ingles operated 200 and 202 stores at December 30, 2017 and December 24, 2016, respectively.  Retail square feet totaled 11.3 million square feet at December 30, 2017 and 11.2 million square feet at December 24, 2016 During the last twelve months the Company opened two stores, relocated one store into a new building and closed four stores, one of which was closed in fiscal 2017 and reopened in a new building during fiscal year 2018.    



Sales by product category (in thousands) are as follows:







 

 

 

 

 

 



  

Three Months Ended



  

December 30,

  

December 24,



 

2017

 

2016

Grocery

  

$

363,325 

  

$

360,901 

Non-foods

  

 

217,744 

  

 

212,311 

Perishables

 

 

265,294 

 

 

255,849 

Gasoline

  

 

136,674 

  

 

118,523 

Total retail grocery

  

$

983,037 

  

$

947,584 



The grocery category includes grocery, dairy, and frozen foods.

The non-foods include alcoholic beverages, tobacco, pharmacy, health and video.

The perishables category includes meat, produce, deli and bakery.



Changes in retail grocery sales for the quarter ended December 30, 2017 are summarized as follows (in thousands):









 

 

 

Total retail grocery sales for the three months ended December 24, 2016

  

$

947,584 

Comparable store sales increase (including gasoline)

  

 

33,090 

Impact of stores opened in fiscal 2017 and 2018

  

 

10,099 

Impact of stores closed in fiscal 2017

  

 

(6,183)

Other

 

 

(1,553)

Total retail grocery sales for the three months ended December 30, 2017

  

$

983,037 

 

Gross Profit. Gross profit for the three-month period ended December 30, 2017 totaled $244.7 million, an increase of $7.6 million, or 3.2%, compared with gross profit of $237.1 million for the three-month period ended December 24, 2016.  Gross profit as a percentage of sales was 24.1% for both the three months ended December 30, 2017and December 24, 2016.



The gross profit dollar increase is attributable to higher sales.    Gasoline gross profit dollars and margin were higher compared with the first quarter of last fiscal year.  Excluding gasoline sales, grocery gross profit as a percentage of sales for the first quarter of fiscal 2018 was unchanged compared with the same fiscal 2017 period.



In addition to the direct product cost, the cost of goods sold line item for the grocery segment includes inbound freight charges and the costs related to the Company’s distribution network.  Fluid dairy is a manufacturing process; therefore, the costs mentioned above as well as purchasing, production costs, and internal transfer costs incurred by the milk processing operation are included in the cost of goods sold line item, while these items are included in operating and administrative expenses in the grocery segment. 



Operating and Administrative Expenses. Operating and administrative expenses increased $2.5 million, or 1.2%, to $208.8 million for the three months ended December 30, 2017, from $206.3 million for the three months ended December 24, 2016.   As a percentage of sales, operating and administrative expenses were 20.6% and 21.0% for the December 2017 and December 2016 quarters, respectively.  Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 23.6% of sales for the first fiscal quarter of 2018 compared with 23.7% for the first fiscal quarter of 2017.

13

 


 

 

A breakdown of the major changes in operating and administrative expenses is as follows:

 





 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

Increase



 

Increase

 

(Decrease)



 

(Decrease)

 

as a % of



 

in millions

 

sales

Salaries and wages

  

$

2.4

 

0.24 

%

Insurance

  

$

(1.5)

 

(0.15)

%

Depreciation

 

$

1.2

 

0.12 

%

Bank charges

  

$

0.4

 

0.04 

%

Store supplies

  

$

0.4

 

0.04 

%

 

Salaries and wages increased in dollars due to additional labor hours required for the increased sales volume, including new stores opened in the past twelve months.  Competition for labor has also increased in the Company’s market area.



Insurance expense decreased due to favorable claims experience under the Company’s self-insurance programs.



Depreciation increased as a result of the Company’s capital expenditure programs, including new stores and remodeling projects.



Bank charges increased due to increased card usage compared with other forms of payment, and to increased charges implemented by card issuers and processors.



Store supplies increased from higher perishable sales and market increases in the cost of petroleum-based packaging.



Gain from Sale or Disposal of Assets. Gain from sale or disposal of assets was insignificant for the three months ended December 30, 2017 compared with $1.4 million for the comparable prior year period.  There were no individually significant transactions in either fiscal period.



Interest Expense. Interest expense totaled $11.5 million for the three-month period ended December 30, 2017 compared with $11.3 million for the three-month period ended December 24, 2016. Total debt at December 2017 was $890.5 million compared with $900.2 million at December 2016Over the past twelve months, the London Interbank Offering Rate (“LIBOR”) has increased, resulting in higher interest on the Company’s floating rate debt.  Somewhat offsetting this increase were fiscal year 2017 loan refinancings at more favorable terms. 



Income Taxes. Income tax benefit totaled $19.8 million for the three months ended December 30, 2017, an effective tax rate of (77.8%) of pretax incomeIncome tax expense totaled $7.7 million for the three months ended December 24, 2016, an effective tax rate of 35.9% of pretax income.



On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act makes broad and complete changes to the U.S tax code that will affect our fiscal year ended September 29, 2018, including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. (2) creating a new limitation on deductible interest expense, and (3) bonus depreciation that will allow for full expensing of qualified property.



For the fiscal year ended September 29, 2018 the Company will have a blended federal corporate tax rate of 24.5% based on the effective date of the tax rate reduction.  As a result of the decrease in the federal rate, the Company has recorded in the current fiscal quarter a decrease in its net deferred tax liabilities of $26.7 million, with a corresponding reduction to deferred income tax expense.

 

Net Income. Net income totaled $45.1 million for the three-month period ended December 30, 2017 compared with $13.8 million for the three-month period ended December 24, 2016.  Net income, as a percentage of sales, was 4.5%  and 1.4% for the December 2017 quarter and the December 2016 quarter, respectively.  Basic and diluted earnings per share for Class A Common Stock were $2.29 and $2.23,  respectively, for the December 2017 quarter, compared to $0.70 and $0.68, respectively, for the December 2016 quarter.    Basic and diluted earnings per share for Class B Common Stock were each $2.08 for the December 2017 quarter compared with $0.64 for the December 2016 quarter.



Liquidity and Capital Resources

 

Capital Expenditures

 

The Company believes that a key to its ability to continue to develop a loyal customer base is providing conveniently located, clean and modern stores which provide customers with good service and a broad selection of competitively priced products. As such, the Company has invested and will continue to invest significant amounts of capital toward the modernization of its store base. The Company’s modernization program includes the opening of new stores, the completion of major remodels and expansion of selected

14

 


 

existing stores, the relocation of selected existing stores to larger, more convenient locations and the completion of minor remodeling of its remaining existing stores.   The Company will also add fuel centers and other products complementary to grocery sales where market conditions and real estate considerations warrant.



Capital expenditures totaled $56.8 million for the three-month period ended December 30, 2017This is a higher than usual quarterly amount due to the purchase of two shopping centers where the Company operated leased stores, and the opening of two new store buildings during the quarter ended December 30, 2017.  These capital expenditures also focused on construction on stores scheduled to open later in fiscal 2018, 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. 

 

Ingles’ capital expenditure plans for fiscal 2018 include investments of approximately $120 to $160 million. The majority of the Company’s fiscal 2018 capital expenditures will be dedicated to continued improvement of its store base and also include investments in stores expected to open in fiscal 2018 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 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.  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.  Outstanding construction commitments totaled $10.9 million at December 30, 2017.

 

Liquidity

 

The Company generated $37.4 million net cash from operations in the December 2017 three-month period compared with  $17.2 million during the December 2016 three-month period. The increase is primarily attributable to higher net income, exclusive of the non-cash increase to net income resulting from certain aspects of the Tax Act.    Operating cash generation tends to be lower during the December quarter of each fiscal year due to seasonal inventory increases and semi-annual interest payments on Senior Notes obligations.

 

Cash used by investing activities for the three-month periods ended December 30, 2017 and December 24, 2016 totaled $56.7  million and $27.9 million, respectively, consisting primarily of capital expenditures offset by insignificant proceeds from property and equipment sales. 



Cash provided by financing activities totaled $9.2 million and $20.2 million for the fiscal quarters ended December 2017 and 2016, respectively.  Short term borrowings tend to increase during the December quarter of each fiscal year to finance seasonal inventory increases and the semi-annual Senior Note interest payment.

 

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 has a $175.0 million line of credit (the “Line”) that matures in September 2022The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or the London Interbank Offering Rate (“LIBOR”). The Line allows the Company to issue up to $20.0 million in unused letters of credit, of which $9.9 million of unused letters of credit were issued at December 30, 2017.  The Company is not required to maintain compensating balances in connection with the Line.  At December 30, 2017, the Company had $14.3 million of borrowings outstanding under the Line. 



On December 29, 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 June 30, 2021, 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 Company may redeem the Bonds without penalty or premium at any time prior to June 30, 2021. 



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.



15

 


 

The Notes, the Bonds and the Line 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 30, 2017, the Company was in compliance with these covenants.  Under the most restrictive of these covenants, the Company would be able to incur approximately $429 million of additional borrowings (including borrowings under the Line) as of December 30, 2017.  



The Company’s principal sources of liquidity are expected to be cash flow from operations, borrowings under the Line and long-term 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 and changing demographics, 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 material changes in contractual obligations and commercial commitments subsequent to September 30,  2017 other than as disclosed elsewhere in this Form 10-Q. 

 

Off Balance Sheet Arrangements

 

On December 19, 2017 the Company entered into an interest rate swap agreement for a notional amount of $58.5 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 $60 million of floating rate debt closed by the Company in September 2017.  Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.  The fair market value of the interest rate swap is measured quarterly, with adjustments, if significant, recorded on other comprehensive income.  The difference between the notional amount and fair market value of the interest rate swap at December 30, 2017 was not significant.   The Company is not a party to any other 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 loan 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.   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. 

16

 


 

 

Impact of Inflation

 

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 changes with general inflation.  Inflation or deflation in energy costs affects the Company’s gasoline sales, distribution expenses, utility expenses and plastic supply costs.







 

 

 

 

 

 



 

 

 

 

 

 



  

Three Months Ended



  

December 30,

 

December 24,



 

2017

 

2016

All items

  

0.2 

%

 

0.3 

%

Food and beverages

  

0.1 

%

 

 —

%

Energy

  

0.6 

%

 

2.1 

%



Forward Looking Statements

 

This Quarterly Report 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” 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 herein. 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, growth strategies, future profitability and operating results, or that otherwise could cause actual results to differ materially from those expressed in or implied by any forward-looking statement, include 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;  and changes in accounting policies, standards, guidelines or principles as may be adopted by regulatory agencies as well as the Financial Accounting Standards Board.

 

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. 



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As previously mentioned, the Company is party to an interest rate swap agreement for a notional amount of $58.5 million at a fixed rate of 3.92%.  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 30,  2017.  



Item 4.  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 30, 2017, 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 Form 10-K for fiscal 2017. 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 30, 2017.  

 

17

 


 

(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 2018.



No other change in internal control over financial reporting occurred during the Company’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.



Part II. OTHER INFORMATION







Item 6. EXHIBITS 

 

(a) Exhibits.





 

 

3.1 

 

Articles of Incorporation of Ingles Markets, Incorporated (included as Exhibit 3.1 to Ingles Markets, Incorporated’s Registration Statement on Form S-1, File No. 33-23919, previously filed with the Commission and incorporated herein by this reference).  (Filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T.)



















 

 

4.1 

 

Articles 4 and 9 of the Articles of Incorporation of Ingles Markets, Incorporated (included as Exhibit 3.1 to Ingles Markets, Incorporated’s Registration Statement on Form S-1, File No. 33-23919, (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T) and Exhibit 3.3 to Ingles Markets, Incorporated’s Annual Report on Form 10-K for the fiscal year ended September 25, 2004, File No. 0-14706, respectively, each of which were previously filed with the Commission and are incorporated herein by this reference).































 



 































 

 

31.1 

*

Rule 13a-14(a) Certification







 

 

31.2 

*

Rule 13a-14(a) Certification













 

 

101 

*

The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended December 30, 2017, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Statements of Earnings; (ii) the Consolidated Balance Sheets; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Comprehensive Income; and (v) the Notes to the Consolidated Financial Statements.





________

* Filed herewith.

19

 


 

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.

 



 

 



 

 

 

 

INGLES MARKETS, INCORPORATED



 

Date: February 8,  2018

 

/s/ James W. Lanning

 

 

 

James W. Lanning

 

 

Chief Executive Officer and President



 

Date: February 8,  2018

 

/s/ Ronald B. Freeman

 

 

 

Ronald B. Freeman

 

 

Vice President-Finance and Chief Financial Officer















20

 


EX-10.10 2 imkt-20171230xex10_10.htm EX-10.10 Exhibit 1010









Exhibit 10.10









Ingles Markets, Incorporated
Investment/Profit Sharing Plan

SUMMARY PLAN DESCRIPTION





















































 







 

TABLE OF CONTENTS



INTRODUCTION TO YOUR PLAN



 

What kind of Plan is this?

What information does this Summary provide?





 

ARTICLE I

PARTICIPATION IN THE PLAN



 

How do I participate in the Plan?

How is my service determined for purposes of Plan eligibility?

What service is counted for purposes of Plan eligibility?

What happens if I'm a participant, terminate employment and then I'm rehired?





 

ARTICLE II

EMPLOYEE CONTRIBUTIONS



 

What are elective deferrals and how do I contribute them to the Plan?

What are rollover contributions?

What are In-Plan Roth Rollover Contributions?

What are forfeitures and how are they allocated?





 

ARTICLE III

EMPLOYER CONTRIBUTIONS



 

What is the Employer matching contribution and how is it allocated?

What is the Employer nonelective contribution and how is it allocated?

How is my service determined for allocation purposes?

What are forfeitures and how are they allocated?





 

ARTICLE IV

COMPENSATION AND ACCOUNT BALANCE



 

What compensation is used to determine my Plan benefits?

Is there a limit on the amount of compensation which can be considered?

Is there a limit on how much can be contributed to my account each year?

How is the money in the Plan invested?

Will Plan expenses be deducted from my account balance?





 

ARTICLE V

VESTING



 

What is my vested interest in my account?

How is my service determined for vesting purposes?

What service is counted for vesting purposes?

What happens to my non‑vested account balance if I'm rehired?

What happens if the Plan becomes a "top-heavy plan"?





 

ARTICLE VI

DISTRIBUTIONS PRIOR TO TERMINATION OF EMPLOYMENT



 

Can I withdraw money from my account while working?

10 

Can I withdraw money from my account in the event of financial hardship?

10 





 

ARTICLE VII

DISTRIBUTIONS UPON TERMINATION OF EMPLOYMENT



 

When can I get money out of the Plan?

11 

What is Normal Retirement Age and what is the significance of reaching Normal Retirement Age?

12 

What is Early Retirement Age and what is the significance of reaching Early Retirement Age?

12 

What happens if I terminate employment due to disability?

12 

In what method and form will my benefits be paid to me?

12 







 

 

 


 

 

ARTICLE VIII

DISTRIBUTIONS UPON DEATH



 

What happens if I die while working for the Employer?

13 

Who is the beneficiary of my death benefit?

13 

How will the death benefit be paid to my beneficiary?

14 

When must the last payment be made to my beneficiary (required minimum distributions)?

14 

What happens if I terminate employment, commence payments and then die before receiving all of my benefits?

14 





 

ARTICLE IX

TAX TREATMENT OF DISTRIBUTIONS



 

What are my tax consequences when I receive a distribution from the Plan?

14 

Can I elect a rollover to reduce or defer tax on my distribution?

15 





 

ARTICLE X

LOANS



 

Is it possible to borrow money from the Plan?

15 





 

ARTICLE XI

PROTECTED BENEFITS AND CLAIMS PROCEDURES



 

Are my benefits protected?

16 

Are there any exceptions to the general rule?

16 

Can the Employer amend the Plan?

16 

What happens if the Plan is discontinued or terminated?

16 

How do I submit a claim for Plan benefits?

16 

What if my benefits are denied?

16 

What is the claims review procedure?

17 

What are my rights as a Plan participant?

18 

What can I do if I have questions or my rights are violated?

19 





 

ARTICLE XII

GENERAL INFORMATION ABOUT THE PLAN



 

Plan Name

19 

Plan Number

19 

Plan Effective Dates

19 

Other Plan Information

19 

Employer Information

19 

Plan Administrator Information

20 

Plan Trustee Information and Plan Funding Medium

20 

 

Ingles Markets, Incorporated
Investment/Profit Sharing Plan



SUMMARY PLAN DESCRIPTION



INTRODUCTION TO YOUR PLAN



What kind of Plan is this?



Ingles Markets, Incorporated Investment/Profit Sharing Plan ("Plan") has been adopted to provide you with the opportunity to save for retirement on a tax-advantaged basis. This Plan is a type of qualified retirement plan commonly referred to as a 401(k) Plan. As a participant under the Plan, you may elect to contribute a portion of your compensation to the Plan.



What information does this Summary provide?



This Summary Plan Description ("SPD") contains information regarding when you may become eligible to participate in the Plan, your Plan benefits, your distribution options, and many other features of the Plan. You should take the time to read this SPD to get a better understanding of your rights and obligations under the Plan.



In this SPD, the Employer has addressed the most common questions you may have regarding the Plan. If this SPD does not answer all of your questions, please contact the Plan Administrator or other plan representative. The Plan Administrator is responsible for responding to questions and making determinations related to the administration, interpretation, and application of the Plan. The name of the Plan Administrator can be found at the end of this SPD in the Article entitled "General Information about the Plan."



This SPD describes the Plan's benefits and obligations as contained in the legal Plan document, which governs the operation of the Plan. The Plan document is written in much more technical and precise language and is designed to comply with applicable legal requirements. If the non‑technical language in this SPD and the technical, legal language of the Plan document conflict, the Plan document always governs. If you wish to receive a copy of the legal Plan document, please contact the Plan Administrator.



The Plan and your rights under the Plan are subject to federal laws, such as the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, as well as some state laws. The provisions of the Plan are subject to revision due to a change in laws or due to pronouncements by the Internal Revenue Service (IRS) or Department of Labor (DOL). The Employer may also amend or terminate this Plan. If the provisions of the Plan that are described in this SPD change, the Employer will notify you.



ARTICLE I

PARTICIPATION IN THE PLAN



How do I participate in the Plan?



Provided you are not an Excluded Employee, you may begin participating under the Plan once you have satisfied the eligibility requirements and reached your Entry Date. The following describes Excluded Employees, if any, the eligibility requirements and Entry Dates that apply. You should contact the Plan Administrator if you have questions about the timing of your Plan participation.



All Contributions



Excluded Employees. If you are a member of a class of employees identified below, you are an Excluded Employee and you are not entitled to participate in the Plan. The Excluded Employees are:



union employees whose employment is governed by a collective bargaining agreement under which retirement benefits were the subject of good faith bargaining



certain nonresident aliens who have no earned income from sources within the United States



leased employees



reclassified employees (an employee who was previously not treated as an employee of the Employer but you are reclassified as being an employee)



Additional Excluded Employee provisions



Independent Contractors are excluded from all Contribution types. See the Plan Administrator for additional information if you are not sure if this affects you.



Eligibility Conditions. You will be eligible to participate in the Plan when you have completed one (1) Year of Service and have attained age 18. However, you will actually participate in the Plan once you reach the Entry Date as described below.

 

January 1, 2018

1


 

 

 



Additional Entry Date provisions



The Entry Date for all Contribution types is the 1st (first) day of the 3rd (third) month after meeting the Eligibility conditions. See the Plan Administrator for additional information if you are not sure if this affects you.



How is my service determined for purposes of Plan eligibility?



Year of Service. You will be credited with a Year of Service at the end of the twelve month period beginning on your date of hire if you have been credited with at least 1,000 Hours of Service during such period.



Additional Year of Service provisions



In the event the Employee fails to complete 1,000 Hours of Service during the initial Eligibility Computation Period described in Section 2.02(C)(2), the Subsequent Eligibility Computation Period means any twelve-consecutive-month period thereafter that begins on the first day of a month during which the Employee completes no less than 1,000 Hours of Service, including all such periods that occur during the Employee?s first year of employment or reemployment.



Hour of Service. You will be credited with your actual Hours of Service for:



(a)each hour for which you are directly or indirectly compensated by the Employer for the performance of duties during the Plan Year;



(b)each hour for which you are directly or indirectly compensated by the Employer for reasons other than the performance of duties (such as vacation, holidays, sickness, disability, lay‑off, military duty, jury duty or leave of absence during the Plan Year) but credit will not exceed 501 hours of service for any single continuous period during which you perform no duties; and



(c)each hour for back pay awarded or agreed to by the Employer.



You will not be credited for the same Hours of Service both under (a) or (b), as the case may be, and under (c).



What service is counted for purposes of Plan eligibility?



Service with the Employer. In determining whether you satisfy the minimum service requirements to participate under the Plan, all service you perform for the Employer will be counted.



Military Service. If you are a veteran and are reemployed under the Uniformed Services Employment and Reemployment Rights Act of 1994, your qualified military service may be considered service with the Employer. If you may be affected by this law, ask the Plan Administrator for further details.



What happens if I'm a participant, terminate employment and then I'm rehired?



If you are no longer a participant because of a termination of employment, and you are rehired, then you will be able to participate in the Plan on the date on which you are rehired if you are otherwise eligible to participate in the Plan.



ARTICLE II

EMPLOYEE CONTRIBUTIONS



What are elective deferrals and how do I contribute them to the Plan?



Elective Deferrals. As a participant under the Plan, you may elect to reduce your compensation by a specific percentage or dollar amount and have that amount contributed to the Plan as an elective deferral. There are two types of elective deferrals: pre‑tax deferrals and Roth deferrals. For purposes of this SPD, "elective deferrals" generally means both pre‑tax deferrals and Roth deferrals. Regardless of the type of deferral you make, the amount you defer is counted as compensation for purposes of Social Security taxes.



Pre-Tax Deferrals. If you elect to make pre-tax deferrals, then your taxable income is reduced by the deferral contributions so you pay less in federal income taxes. Later, when the Plan distributes the deferrals and earnings, you will pay the taxes on those deferrals and the earnings. Therefore, with a pre-tax deferral, federal income taxes on the deferral contributions and on the earnings are only postponed. Eventually, you will have to pay taxes on these amounts.



Roth Deferrals. If you elect to make Roth deferrals, the deferrals are subject to federal income taxes in the year of deferral. However, the deferrals and, in certain cases, the earnings on the deferrals are not subject to federal income taxes when distributed to you. In order for the earnings to be tax free, you must meet certain conditions. See "What are my tax consequences when I receive a distribution from the Plan?" below.



 

January 1, 2018

2


 

 

 

Deferral procedure. The amount you elect to defer will be deducted from your pay in accordance with a procedure established by the Plan Administrator. If you wish to defer, the procedure will require that you enter into a salary reduction agreement. You may elect to defer a portion of your compensation payable on or after your Entry Date. Such election will become effective as soon as administratively feasible after it is received by the Plan Administrator. Your election will remain in effect until you modify or terminate it.



Deferral modifications. You may revoke or make modifications to your salary deferral election in accordance with procedures that the Employer provides. See the Plan Administrator for further information.



Deferral Limit. As a participant, you may elect to defer not less than 1% of your payroll period compensation and not more than 50% of your payroll period compensation.



Deferral Limitations



Elective Deferral Contributions for Highly Compensated Employees (HCEs) are subject to a maximum limit of 3% of Compensation per Plan Year.



Annual dollar limit. Your total deferrals in any taxable year may not exceed a dollar limit which is set by law. The limit for 2017 is $18,000. After 2017, the dollar limit may increase for cost‑of‑living adjustments.



Deferrals limited by nondiscrimination testing. In addition to the annual dollar limit just described, the law requires testing of the deferrals to ensure that deferrals by HCEs do not exceed certain limits. If you are a highly compensated employee (generally more than 5% owners and certain family members (regardless of how much they earn),  or individuals receiving wages in excess of certain amounts established by law), a distribution of amounts attributable to your elective deferrals or certain excess contributions may be required to comply with the law. The Plan Administrator will notify you if and when a distribution of deferrals is required.



Catch‑up contributions. If you are at least age 50 or will attain age 50 before the end of a calendar year, then you may elect to defer additional amounts (called "catch‑up contributions") to the plan for that year. The additional amounts may be deferred regardless of any other limitations on the amount that you may defer to the plan. The maximum "catch‑up contribution" that you can make in 2017 is $6,000. After 2017, the maximum may increase for cost‑of‑living adjustments. Any "catch-up contributions" that you make will be taken into account in determining any Employer matching contribution made to the Plan.



You should be aware that each separately stated annual dollar limit on the amount you may defer (the annual deferral limit and the "catch‑up contribution" limit) is a separate aggregate limit that applies to all such similar elective deferral amounts and "catch‑up contributions" you may make under this Plan and any other cash or deferred arrangements (including tax‑sheltered 403(b) annuity contracts, simplified employee pensions or other 401(k) plans) in which you may be participating. Generally, if an annual dollar limit is exceeded, then the excess must be returned to you in order to avoid adverse tax consequences. For this reason, it is desirable to request in writing that any such excess elective deferral amounts be returned to you.



If you are in more than one plan, you must decide which plan or arrangement you would like to return the excess. If you decide that the excess should be distributed from this Plan, you must communicate this in writing to the Plan Administrator no later than the March 1st following the close of the calendar year in which such excess deferrals were made. However, if the entire dollar limit is exceeded in this Plan or any other plan the Employer maintains, then you will be deemed to have notified the Plan Administrator of the excess. The Plan Administrator will then return the excess deferral and any earnings to you by April 15th.



Automatic Escalation of Salary Reduction Agreement amount. Effective July 1, 2015, the Plan includes automatic escalation provisions. Accordingly, if you have completed a Salary Reduction Agreement specifying the amount to be withheld as an elective deferral from your pay each payroll period, the Employer will automatically increase the amount withheld from your pay as indicated below.



Participants affected. All Participants who have a Salary Reduction Agreement in place and the Elected Deferral is less than 10%.



The amount withheld from your pay each payroll period will be increased as follows: The Elective Deferral percentage will increase 1% each October 1st "Change Date" until the percentage reaches 10%.  However, the Participant's first Deferral Percentage increase will be on the first available Change Date that is at least 12 months following the day the Participant enters the Automatic Increase program unless the Participant makes a Contrary Election of 10% or more.



Contact the Plan Administrator if you have any questions concerning the application of the automatic escalation provisions.

 

January 1, 2018

3


 

 

 



What are rollover contributions?



Rollover contributions. At the discretion of the Plan Administrator, if you are an eligible employee, you may be permitted to deposit into the Plan distributions you have received from other plans and certain IRAs. Such a deposit is called a "rollover" and may result in tax savings to you. You may ask the Plan Administrator or Trustee of the other plan or IRA to directly transfer (a "direct rollover") to this Plan all or a portion of any amount that you are entitled to receive as a distribution from such plan. Alternatively, you may elect to deposit any amount eligible to be rolled over within 60 days of your receipt of the distribution. You should consult qualified counsel to determine if a rollover is in your best interest.



Rollover account. Your rollover will be accounted for in a "rollover account." You will always be 100% vested in your "rollover account" (see the Article in this SPD entitled "Vesting"). This means that you will always be entitled to all amounts in your rollover account. Rollover contributions will be affected by any investment gains or losses.



Withdrawal of rollover contributions. You may withdraw the amounts in your "rollover account" at any time. You should see the Articles in this SPD entitled "Distributions Prior to Termination of Employment," "Distributions upon Termination of Employment," and "Distributions upon Death" for an explanation of how benefits (including your "rollover account") are paid from the Plan.



What are In-Plan Roth Rollover Contributions?



In-Plan Roth Rollover Contributions. Effective May 1, 2016, if you are eligible for a distribution from an account, you may elect to roll over the distribution to a designated Roth contribution account in the Plan (referred to as an In-Plan Roth Rollover Contribution). You may only roll over the distribution directly. However, loans may not be rolled over as an In-Plan Roth Rollover Contribution.



Taxation and Irrevocable election. You do not pay taxes on the contributions or earnings of your pre‑tax accounts (including accounts attributable to Employer matching contributions and accounts attributable to Employer nonelective contributions) until you receive an actual distribution. In other words, the taxes on the contributions and earnings in your pre‑tax accounts are deferred until a distribution is made. Roth accounts, however, are the opposite. With a Roth account you pay current taxes on the amounts contributed. When a distribution is made to you from the Roth account, you do not pay taxes on the amounts you had contributed. In addition, if you have a "qualified distribution" (explained below), you do not pay taxes on the earnings that are attributable to the contributions.



If you elect an In‑Plan Roth Rollover Contribution, then the contribution will be included in your income for the year. Once you make an election, it cannot be changed. It's important that you understand the tax effects of making the election and ensure you have adequate resources outside of the plan to pay the additional taxes. The In‑Plan Roth Rollover Contribution does not affect the timing of when a distribution may be made to you under the Plan; the contribution only changes the tax character of your account. You should consult with your tax advisor prior to making such a rollover.



Qualified Distribution. As explained above, a distribution of the earnings on your Roth account will not be subject to tax if the distribution is a "qualified distribution." A "qualified distribution" is one that is made after you have attained age 59 1/2 or is made on account of your death or disability. In addition, in order to be a "qualified distribution," the distribution cannot be made prior to the expiration of a 5‑year participation period. The 5‑year participation period is the 5‑year period beginning on the calendar year in which you first make the Roth rollover and ending on the last day of the calendar year that is 5‑years later. See "What are my tax consequences when I receive a distribution from the Plan?" later in this SPD.



The law restricts any in‑service distributions from certain accounts which are maintained for you under the Plan before you reach age 59 1/2. These accounts are the ones set up to receive your salary deferral contributions and other Employer contributions which are used to satisfy special rules for 401(k) plans. Ask the Plan Administrator if you need more details.



What are In‑Plan Roth Transfers?



In‑Plan Roth Transfers. Effective May 1 ,2016, as a participant under the Plan, you may make an In‑Plan Roth Transfer. An In‑Plan Roth Transfer allows you to elect to change the tax treatment of all or some of the vested portion of your pre-tax accounts, as explained below.



Taxation and Irrevocable election. You do not pay taxes on the contributions or earnings of your pre‑tax accounts (including accounts attributable to Employer matching contributions and accounts attributable to Employer nonelective contributions) until you receive an actual distribution. In other words, the taxes on the contributions and earnings in your pre‑tax accounts are deferred until a distribution is made. Roth accounts, however, are the opposite. With a Roth account you pay current taxes on the amounts contributed. When a distribution is made to you from the Roth account, you do not pay taxes on the amounts you had contributed. In addition, if you have a "qualified distribution" (explained below), you do not pay taxes on the earnings that are attributable to the contributions.



The In‑Plan Roth Transfer allows you to transfer amounts from the vested portion of your pre‑tax accounts to an In‑Plan Roth Transfer Account. If you elect to make such a transfer, then the amount transferred will be included in your income for the year. Once you make an election, it cannot be changed. It's important that you understand the tax effects of making the election and ensure you have adequate resources outside of the plan to pay the additional taxes. The In‑Plan Roth Transfer does not affect the timing of when a distribution may be

 

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made to you under the Plan; the transfer only changes the tax character of your account. You should consult with your tax advisor prior to making a transfer election.



Qualified Distribution. As explained above, a distribution of the earnings on your Roth account will not be subject to tax if the distribution is a "qualified distribution." A "qualified distribution" is one that is made after you have attained age 59 1/2 or is made on account of your death or disability. In addition, in order to be a "qualified distribution," the distribution cannot be made prior to the expiration of a 5‑year participation period. The 5‑year participation period is the 5‑year period beginning on the calendar year in which you first make the Roth transfer and ending on the last day of the calendar year that is 5‑years later. See "What are my tax consequences when I receive a distribution from the Plan?" later in this SPD.



Account restrictions. You may elect an In‑Plan Roth Transfer only from the vested portion of the following accounts:



From all Accounts, however, loans may not be rolled over as an In-plan Roth Transfer.





ARTICLE III

EMPLOYER CONTRIBUTIONS



In addition to any deferrals you elect to make, the Employer may make additional contributions to the Plan. This Article describes Employer contributions that may be made to the Plan and how your share of the contributions is determined.



What is the Employer matching contribution and how is it allocated?



Matching Contribution. The Employer may make a discretionary matching contribution equal to a uniform percentage or dollar amount of your elective deferrals each payroll period.  The Employer will not match your elective deferrals in excess of 5% of your Compensation each payroll period.



The Plan will include catch-up deferrals in the elective deferral amount used to determine the amount of your matching contributions.



Allocation conditions. You will always share in the matching contribution regardless of the amount of service you complete during the Plan Year.



What is the Employer nonelective contribution and how is it allocated?



Nonelective contribution. Each year, the Employer may make a discretionary nonelective contribution to the Plan. Your share of any contribution is determined below.



Allocation conditions. In order to share in the nonelective contribution you must satisfy the following conditions:



If you are employed on the last day of the Plan Year, you will share if you completed at least 1,000 Hours of Service during the Plan Year.



Waiver of allocation conditions



In certain cases, the Plan's allocation conditions may be waived, or waived as to certain participants, in a particular Plan Year. If this waiver applies to you, the Plan Administrator will advise you that you are entitled to an allocation of the Employer nonelective contributions for that year, even though you have not satisfied the Plan's allocation conditions for that year.



Your share of the contribution. The nonelective contribution will be "allocated" or divided among participants eligible to share in the contribution for the Plan Year.



Your share of the nonelective contribution is determined by the following fraction:





 

 

Nonelective Contribution

X

Your Compensation



 

Total Compensation of All



 

Participants Eligible to Share



For example: Suppose the nonelective contribution for the Plan Year is $20,000. Employee A's compensation for the Plan Year is $25,000. The total compensation of all participants eligible to share, including Employee A, is $250,000. Employee A's share will be:





 

 

 

 

$20,000

X

$25,000

or

$2,000



 

$250,000

 

 



 

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How is my service determined for allocation purposes?



Hour of Service. You will be credited with your actual Hours of Service for:



(a)each hour for which you are directly or indirectly compensated by the Employer for the performance of duties during the Plan Year;



(b)each hour for which you are directly or indirectly compensated by the Employer for reasons other than the performance of duties (such as vacation, holidays, sickness, disability, lay‑off, military duty, jury duty or leave of absence during the Plan Year) but credit will not exceed 501 hours of service for any single continuous period during which you perform no duties; and



(c)each hour for back pay awarded or agreed to by the Employer.



You will not be credited for the same Hours of Service both under (a) or (b), as the case may be, and under (c).



What are forfeitures and how are they allocated?



Definition of forfeitures. In order to reward employees who remain employed with the Employer for a long period of time, the law permits a "vesting schedule" to be applied to certain contributions that the Employer makes to the Plan. This means that you will not be entitled to ("vested" in) all of the contributions until you have been employed with the Employer for a specified period of time (see the Article in this SPD entitled "Vesting"). If a participant terminates employment before being fully vested, then the non‑vested portion of the terminated participant's account balance remains in the Plan and is called a forfeiture. Forfeitures may be used by the Plan for several purposes.



Allocation of forfeitures. Forfeitures will be allocated as follows:



Forfeitures may be used to pay plan expenses, used to reduce any nonelective contribution or used to reduce any matching contribution.





ARTICLE IV

COMPENSATION AND ACCOUNT BALANCE



What compensation is used to determine my Plan benefits?



All Contributions



Definition of compensation. Compensation is defined as your total compensation that is subject to income tax and paid to you by the Employer. If you are a self-employed individual, your compensation will be equal to your earned income. The following describes the adjustments to compensation that apply for the contributions noted above.



Adjustments to compensation. The following adjustments to compensation will be made:



elective deferrals to this Plan and to any other plan or arrangement (such as a cafeteria plan) will be included.



compensation paid while not a Participant in the component of the Plan for which compensation is being used will be excluded.



compensation paid by a related employer that is not a participating employer will be excluded.



compensation paid after you terminate is generally excluded for Plan purposes. However, the following amounts will be included in compensation even though they are paid after you terminate employment, provided these amounts would otherwise have been considered compensation as described above and provided they are paid within 2 1/2 months after you terminate employment, or if later, the last day of the Plan Year in which you terminate employment:



compensation paid for services performed during your regular working hours, or for services outside your regular working hours (such as overtime or shift differential), or other similar payments that would have been made to you had you continued employment.



compensation paid for unused accrued bona fide sick, vacation or other leave, if such amounts would have been included in compensation if paid prior to your termination of employment and you would have been able to use the leave if employment had continued.



nonqualified unfunded deferred compensation if the payment is includible in gross income and would have been paid to you had you continued employment.



 

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Additional compensation adjustment provisions



Distributions from the Ingles Market, Inc. Executive Nonqualified Excess Plan will be excluded from Compensation for all Contribution types.



Is there a limit on the amount of compensation which can be considered?



The Plan, by law, cannot recognize annual compensation in excess of a certain dollar limit. The limit for the Plan Year beginning in 2017 is $270,000. After 2017, the dollar limit may increase for cost‑of‑living adjustments.



Is there a limit on how much can be contributed to my account each year?



Generally, the law imposes a maximum limit on the amount of contributions including elective deferrals (excluding catch-up contributions) that may be made to your account and any other amounts allocated to any of your accounts during the Plan Year, excluding earnings. Beginning in 2017, this total cannot exceed the lesser of $54,000 or 100% of your annual compensation (as limited under the previous question). After 2017, the dollar limit may increase for cost‑of‑living adjustments.



How is the money in the Plan invested?



The Trustee of the Plan has been designated to hold the assets of the Plan for the benefit of Plan participants and their beneficiaries in accordance with the terms of this Plan. The trust fund established by the Plan's Trustee will be the funding medium used for the accumulation of assets from which Plan benefits will be distributed.



Participant direction of investments. You will be able to direct the investment of certain portions of your interest in the Plan. The Plan Administrator will provide you with information on the investment choices available to you, the procedures for making investment elections, the frequency with which you can change your investment choices and other important information. You need to follow the procedures for making investment elections and you should carefully review the information provided to you before you give investment directions. If you do not direct the investment of your applicable Plan accounts, then your accounts will be invested in accordance with the default investment alternatives established under the Plan.



Earnings or losses. When you direct investments, your accounts are segregated for purposes of determining the earnings or losses on these investments. Your Participant-directed Account does not share in the investment performance of other participants who have directed their own investments. You should remember that the amount of your benefits under the Plan will depend in part upon your choice of investments. Gains as well as losses can occur and the Employer, the Plan Administrator, and the Trustee will not provide investment advice or guarantee the performance of any investment you choose.



Account limitations. You may only direct the investment of amounts in the following accounts:



elective deferral accounts



account(s) attributable to Employer matching contributions



rollover and transfer accounts



Periodically, you will receive a benefit statement that provides information on your account balance and your investment returns. It is your responsibility to notify the Plan Administrator of any errors you see on any statements within 30 days after the statement is provided or made available to you.



Will Plan expenses be deducted from my account balance?



The Plan will pay some or all Plan related expenses except for a limited category of expenses, known as "settlor expenses," which the law requires the employer to pay. Generally, settlor expenses relate to the design, establishment or termination of the Plan. See the Plan Administrator for more details. The expenses charged to the Plan may be charged pro rata to each Participant in relation to the size of each Participant's account balance or may be charged equally to each Participant. In addition, some types of expenses may be charged only to some Participants based upon their use of a Plan feature or receipt of a plan distribution. Finally, the Plan may charge expenses in a different manner as to Participants who have terminated employment with the Employer versus those Participants who remain employed with the Employer.





 

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ARTICLE V

VESTING



What is my vested interest in my account?



In order to reward employees who remain employed with the Employer for a long period of time, the law permits a "vesting schedule" to be applied to certain contributions that the Employer makes to the Plan. This means that you will not be entitled to ("vested in") all of the contributions until you have been employed with the Employer for a specified period of time.





elective deferrals including Roth 401(k) deferrals and catch-up contributions



rollover contributions



Vesting schedules. Your "vested percentage" for certain Employer contributions is based on vesting Years of Service. This means at the time you stop working, your account balance attributable to contributions subject to a vesting schedule is multiplied by your vested percentage. The result, when added to the amounts that are always 100% vested as shown above, is your vested interest in the Plan, which is what you will actually receive from the Plan.



Nonelective Contributions



Your "vested percentage" in your account attributable to nonelective contributions is determined under the following schedule. You will always, however, be 100% vested in your nonelective contributions if you are employed on or after your Early or Normal Retirement Age or if you terminate employment on account of your death, or if you terminate employment as a result of becoming disabled.





 

Vesting Schedule

Nonelective Contributions

Years of Service

Percentage