UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 26, 2020

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

For the transition period from                  to                 

Commission file number 0-14706.

INGLES MARKETS, INCORPORATED

(Exact name of registrant as specified in its charter)

North Carolina	56-0846267
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
P.O. Box 6676, Asheville NC	28816
(Address of principal executive offices)	(Zip Code)

(828) 669-2941

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, $0.05 par value per share	IMKTA	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x    No ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ¨	Accelerated Filer x
Non-Accelerated Filer ¨	Smaller Reporting Company ¨
	Emerging Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.

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

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INGLES MARKETS, INCORPORATED

INDEX

	Page No.
Part I – Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 26, 2020 and September 26, 2020	3
Condensed Consolidated Statements of Income and Comprehensive Income for the
Three Months Ended December 26, 2020 and December 28, 2019	4
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended December 26, 2020 and December 28, 2019	5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 26, 2020 and December 28, 2019	6
Notes to Unaudited Interim Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3. Quantitative and Qualitative Disclosures About Market Risk	18
Item 4. Controls and Procedures	18
Part II – Other Information
Item 6. Exhibits	19
Signatures	20

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Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	December 26,		September 26,
	2020		2020
ASSETS
Current Assets:
Cash and cash equivalents	$	10,005,500	$	6,903,955
Receivables - net		100,947,940		81,358,357
Inventories		373,546,565		366,824,438
Other current assets		13,485,451		15,100,110
Total Current Assets		497,985,456		470,186,860
Property and Equipment - Net		1,354,607,356		1,354,489,690
Operating lease right of use assets		44,918,684		46,590,718
Other Assets		30,988,797		28,031,634
Total Assets	$	1,928,500,293	$	1,899,298,902
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt	$	19,319,792	$	19,305,976
Current portion of operating lease liabilities		8,334,928		8,384,435
Accounts payable - trade		209,052,002		204,110,150
Accrued expenses and current portion of other long-term liabilities		81,664,333		92,012,346
Total Current Liabilities		318,371,055		323,812,907
Deferred Income Taxes		74,438,000		73,334,000
Long-Term Debt		568,627,694		586,198,360
Noncurrent operating lease liabilities		39,245,928		40,962,735
Other Long-Term Liabilities		55,825,985		55,659,943
Total Liabilities		1,056,508,662		1,079,967,945
Stockholders’ Equity
Preferred stock, $0.05 par value; 10,000,000 shares authorized; no shares issued		—		—
Common stocks:
Class A, $0.05 par value; 150,000,000 shares authorized; ‎14,220,535 shares issued and outstanding December 26, 2020; ‎14,212,360 shares issued and outstanding at September 26, 2020		711,027		710,618
Class B, convertible to Class A, $0.05 par value; ‎100,000,000 shares authorized; ‎6,039,241 shares issued and outstanding December 26, 2020; ‎6,047,416 shares issued and outstanding at September 26, 2020		301,962		302,371
Paid-in capital in excess of par value		12,311,249		12,311,249
Accumulated other comprehensive income		(8,162,558)		(10,251,296)
Retained earnings		866,829,951		816,258,015
Total Stockholders’ Equity		871,991,631		819,330,957
Total Liabilities and Stockholders’ Equity	$	1,928,500,293	$	1,899,298,902

See notes to unaudited condensed consolidated financial statements.

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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended
	December 26,		December 28,
	2020		2019
Net sales	$	1,190,443,141	$	1,078,354,937
Cost of goods sold		876,254,999		820,865,210
Gross profit		314,188,142		257,489,727
Operating and administrative expenses		238,199,077		221,978,850
Gain from sale or disposal of assets		451,719		2,964,484
Income from operations		76,440,784		38,475,361
Other income, net		692,017		197,487
Interest expense		6,400,714		11,949,286
Loss on early extinguishment of debt		—		3,719,209
Income before income taxes		70,732,087		23,004,353
Income tax expense		16,908,000		5,317,000
Net income	$	53,824,087	$	17,687,353
Other comprehensive income:
Change in fair value of interest rate swap	$	2,763,738	$	2,848,879
Income tax expense		675,000		696,986
Other comprehensive income, net of tax		2,088,738		2,151,893
Comprehensive income	$	55,912,825	$	19,839,246
Per share amounts:
Class A Common Stock
Basic earnings per common share	$	2.73	$	0.90
Diluted earnings per common share	$	2.66	$	0.87
Class B Common Stock
Basic earnings per common share	$	2.48	$	0.82
Diluted earnings per common share	$	2.48	$	0.82
Cash dividends per common share
Class A Common Stock	$	0.165	$	0.165
Class B Common Stock	$	0.150	$	0.150

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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

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

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

							Paid-in		Accumulated
	Class A			Class B			Capital in		Other
	Common Stock			Common Stock			Excess of		Comprehensive		Retained
	Shares	Amount		Shares	Amount		Par Value		Income (Loss)		Earnings		Total
Balance, September 28, 2019	14,180,485	$	709,024	6,079,291	$	303,965	$	12,311,249	$	(1,265,650)	$	650,664,018	$	662,722,606
Net income	—		—	—		—		—		—		17,687,353		17,687,353
Other comprehensive income, net of income tax	—		—	—		—		—		2,151,893		—		2,151,893
Cash dividends	—		—	—		—		—		—		(3,251,673)		(3,251,673)
Common stock conversions	12,500		625	(12,500)		(625)		—		—		—		—
Balance, December 28, 2019	14,192,985	$	709,649	6,066,791	$	303,340	$	12,311,249	$	886,243	$	665,099,698	$	679,310,179
Balance, September 26, 2020	14,212,360	$	710,618	6,047,416	$	302,371	$	12,311,249	$	(10,251,296)	$	816,258,015	$	819,330,957
Net income	—		—	—		—		—		—		53,824,087		53,824,087
Other comprehensive income, net of income tax	—		—	—		—		—		2,088,738		—		2,088,738
Cash dividends	—		—	—		—		—		—		(3,252,151)		(3,252,151)
Common stock conversions	8,175		409	(8,175)		(409)		—		—		—		—
Balance, December 26, 2020	14,220,535	$	711,027	6,039,241	$	301,962	$	12,311,249	$	(8,162,558)	$	866,829,951	$	871,991,631

See notes to unaudited condensed consolidated financial statements.

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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  

	Three Months Ended
	December 26,		December 28,
	2020		2019
Cash Flows from Operating Activities:
Net income	$	53,824,087	$	17,687,353
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		29,878,689		28,434,454
Non cash operating lease cost		1,672,035		2,186,588
Gain from sale or disposal of assets		(451,719)		(2,964,484)
Loss on early extinguishment of debt		—		3,719,209
Receipt of advance payments on purchases contracts		250,000		500,000
Recognition of advance payments on purchases contracts		(753,511)		(870,015)
Deferred income taxes		429,000		552,014
Changes in operating assets and liabilities:
Receivables		(19,589,583)		(3,576,221)
Inventory		(6,722,127)		2,547,440
Other assets		(1,342,505)		(1,719,985)
Operating lease liabilities		(1,766,313)		(2,276,367)
Accounts payable and accrued expenses		2,346,228		(27,970,295)
Net Cash Provided by Operating Activities		57,774,281		16,249,691
Cash Flows from Investing Activities:
Proceeds from sales of property and equipment		593,245		5,223,283
Capital expenditures		(34,239,257)		(31,103,774)
Net Cash Used by Investing Activities		(33,646,012)		(25,880,491)
Cash Flows from Financing Activities:
Proceeds from short-term borrowings		248,719,275		—
Payments on short-term borrowings		(262,603,345)		—
Debt issuance costs		—		(822,412)
Proceeds from new long term debt		—		155,000,000
Principal payments on long-term borrowings		(3,890,502)		(157,422,326)
Prepayment penalties on debt extinguishment		—		(2,971,350)
Dividends paid		(3,252,152)		(3,251,673)
Net Cash Used by Financing Activities		(21,026,724)		(9,467,761)
Net Increase (Decrease) in Cash and Cash Equivalents		3,101,545		(19,098,561)
Cash and cash equivalents at beginning of period		6,903,955		42,125,105
Cash and Cash Equivalents at End of Period	$	10,005,500	$	23,026,544

See notes to unaudited condensed consolidated financial statements.

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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

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

A. BASIS OF PREPARATION

In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to present fairly the Company’s financial position as of December 26, 2020, and the results of operations and changes in stockholders’ equity and cash flows for the three months ended December 26, 2020 and December 28, 2019. The adjustments made are of a normal recurring nature. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. It is suggested that these unaudited interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended September 26, 2020, filed by the Company under the Securities Exchange Act of 1934, as amended, on December 10, 2020.

The results of operations for the three months ended December 26, 2020 are not necessarily indicative of the results to be expected for the full fiscal year.

B. NEW ACCOUNTING PRONOUNCEMENTS

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting in response to the risk of cessation of the London Interbank Offered Rate (“LIBOR”). This amendment provides for optional expedients and exceptions for applying generally accepted accounting principles to contracts and hedging relationships that are affected by LIBOR and other reference rates. The ASU generally allows for hedge accounting to continue if the hedge was highly effective or met other standards prior to reference rate reform. Entities are permitted to apply the amendments to all contracts, cash flow and net investment hedge relationships that exist as of March 12, 2020. The relief provided in this ASU is only available for a limited time, generally through December 31, 2022. The Company’s debt agreements and interest rate swaps that utilize LIBOR have not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. To the extent our debt and interest rate swap arrangements change to another accepted rate, we will utilize the relief in this ASU to continue hedge accounting.

C. ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

D. INCOME TAXES

The Company’s effective tax rate differs from the federal statutory rate primarily as a result of state income taxes and tax credits.

The Company has unrecognized tax benefits and could incur interest and penalties related to uncertain tax positions. These amounts are insignificant and are not expected to significantly increase or decrease within the next twelve months.

E. ACCRUED EXPENSES AND CURRENT PORTION OF OTHER LONG-TERM LIABILITIES

Accrued expenses and current portion of other long-term liabilities consist of the following:

	December 26,		September 26,
	2020		2020
Property, payroll and other taxes payable	$	21,296,793	$	22,334,471
Salaries, wages and bonuses payable		30,016,704		44,975,510
Self-insurance liabilities		14,231,397		14,064,210
Interest payable		2,468,868		6,686,195
Income taxes payable		10,208,918		—
Other		3,441,653		3,951,960
	$	81,664,333	$	92,012,346

Self-insurance liabilities are established for general liability claims, workers’ compensation and employee group medical and dental benefits based on claims filed and estimates of claims incurred but not reported. The Company is currently insured for covered costs in excess of $1.0 million per occurrence for workers’ compensation and for general liability and $450,000 per covered person for medical care benefits for a policy year. The Company’s self-insurance reserves totaled $34.5 million and $34.1 million at December

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

Employee insurance expense, including workers’ compensation and medical care benefits, net of employee contributions, totaled $12.3 million and $10.6 million for the three months ended December 26, 2020 and December 28, 2019, respectively.

The Company’s fuel operations contain underground tanks for the storage of gasoline and diesel fuel. The Company reviewed FASB Accounting Standards Codification Topic 410 (“FASB ASC 410”) and determined we have a legal obligation to remove tanks at a point in the future and accordingly determined we have met the requirements of an asset retirement obligation. The Company followed the FASB ASC 410 model for determining the asset retirement cost and asset retirement obligation. The amounts recorded are immaterial for each fuel center as well as in the aggregate at December 26, 2020 and September 26, 2020.

F. LONG-TERM DEBT

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

The Company may redeem all or a portion of the Notes at any time at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning June 15 of the years indicated below:

Year
2018	102.875%
2019	101.917%
2020	100.958%
2021 and thereafter	100.000%

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

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

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

The Company has a $175.0 million line of credit (the “Line”) that matures in September 2022. The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or LIBOR. The Line allows the Company to issue up to $20.0 million in unused letters of credit, of which $1.1 million of unused letters of credit were issued at December 26, 2020. The Company is not required to maintain compensating balances in connection with the Line. At December 26, 2020, the Company had $25.0 million of borrowings outstanding under the Line.

In December 2010, the Company completed the funding of $99.7 million of bonds (the “Bonds”) for construction of new warehouse and distribution space adjacent to its existing space in Buncombe County, North Carolina (the “Project”). The final maturity date of the Bonds is January 1, 2036.

Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between certain financial institutions and the Company, the financial institutions would hold the Bonds until September 2026, subject to certain events. Mandatory redemption of the Bonds by the Company in the annual amount of $4.5 million began on January 1, 2014. The outstanding balance of the Bonds is $68.0 million as of December 26, 2020. The Company may redeem the Bonds without penalty or premium at any time prior to September 26, 2026.

Interest earned by bondholders on the Bonds is exempt from Federal and North Carolina income taxation. The interest rate on the Bonds is equal to one-month LIBOR (adjusted monthly) plus a credit spread, adjusted to reflect the income tax exemption.

The Company’s obligation to repay the Bonds is collateralized by the Project. The Covenant Agreement incorporates substantially all financial covenants included in the Line.

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