Attached files
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EX-32.2 - EX-32.2 - INGLES MARKETS INC | imkt-20170624xex32_2.htm |
EX-32.1 - EX-32.1 - INGLES MARKETS INC | imkt-20170624xex32_1.htm |
EX-31.2 - EX-31.2 - INGLES MARKETS INC | imkt-20170624xex31_2.htm |
EX-31.1 - EX-31.1 - INGLES MARKETS INC | imkt-20170624xex31_1.htm |
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 June 24, 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 emerging growth company. See the 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 ☐ |
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 July 31, 2017, the Registrant had 14,073,594 shares of Class A Common Stock, $0.05 par value per share, outstanding and 6,186,182 shares of Class B Common Stock, $0.05 par value per share, outstanding.
1
INGLES MARKETS, INCORPORATED
INDEX
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Page No.
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Part I — Financial Information |
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Item 1. Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets as of June 24, 2017 and September 24, 2016 |
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3 |
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Condensed Consolidated Statements of Income for the |
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Three Months Ended June 24, 2017 and June 25, 2016 |
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4 |
Nine Months Ended June 24, 2017 and June 25, 2016 |
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5 |
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Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended June 24, 2017 and June 25, 2016 |
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6 |
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Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 24, 2017 and June 25, 2016 |
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7 |
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Notes to Unaudited Interim Financial Statements |
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8 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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12 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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20 |
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Item 4. Controls and Procedures |
21 | |
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Part II — Other Information |
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Item 6. Exhibits |
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21 |
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Signatures |
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24 |
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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June 24, |
September 24, |
|||
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2017 |
2016 |
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ASSETS |
|||||
Current Assets: |
|||||
Cash and cash equivalents |
$ |
8,019,291 |
$ |
5,679,509 | |
Receivables - net |
63,506,903 | 61,735,387 | |||
Inventories |
348,284,592 | 343,881,078 | |||
Other current assets |
11,619,689 | 7,191,465 | |||
Total Current Assets |
431,430,475 | 418,487,439 | |||
Property and Equipment – Net |
1,252,736,772 | 1,247,881,773 | |||
Other Assets |
21,895,019 | 20,109,087 | |||
Total Assets |
$ |
1,706,062,266 |
$ |
1,686,478,299 | |
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|||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||
Current Liabilities: |
|||||
Current portion of long-term debt |
$ |
37,113,397 |
$ |
10,000,629 | |
Accounts payable - trade |
167,090,891 | 155,288,402 | |||
Accrued expenses and current portion of other long-term liabilities |
61,069,611 | 76,315,606 | |||
Total Current Liabilities |
265,273,899 | 241,604,637 | |||
Deferred Income Taxes |
71,537,000 | 71,449,000 | |||
Long-Term Debt |
833,625,300 | 866,473,465 | |||
Other Long-Term Liabilities |
40,695,534 | 36,775,587 | |||
Total Liabilities |
1,211,131,733 | 1,216,302,689 | |||
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; 14,073,594 shares issued and outstanding June 24, 2017; 13,966,476 shares issued and outstanding at September 24, 2016 |
|
703,680 |
|
|
698,324 |
Class B, convertible to Class A, $0.05 par value; 100,000,000 shares authorized; 6,186,182 shares issued and outstanding June 24, 2017; 6,293,300 shares issued and outstanding at September 24, 2016 |
|
309,309 |
|
|
314,665 |
Paid-in capital in excess of par value |
12,311,249 | 12,311,249 | |||
Retained earnings |
481,606,295 | 456,851,372 | |||
Total Stockholders’ Equity |
494,930,533 | 470,175,610 | |||
Total Liabilities and Stockholders’ Equity |
$ |
1,706,062,266 |
$ |
1,686,478,299 |
See notes to unaudited condensed consolidated financial statements.
3
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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Three Months Ended |
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June 24, |
June 25, |
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2017 |
2016 |
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Net sales |
$ |
984,397,728 |
$ |
957,177,645 | ||
Cost of goods sold |
747,263,567 | 724,323,504 | ||||
Gross profit |
237,134,161 | 232,854,141 | ||||
Operating and administrative expenses |
207,595,217 | 199,433,998 | ||||
Gain (loss) from sale or disposal of assets |
125,031 | (1,555,179) | ||||
Income from operations |
29,663,975 | 31,864,964 | ||||
Other income, net |
1,030,236 | 512,356 | ||||
Interest expense |
11,729,505 | 11,190,865 | ||||
Income before income taxes |
18,964,706 | 21,186,455 | ||||
Income tax expense |
7,438,000 | 8,518,000 | ||||
Net income |
$ |
11,526,706 |
$ |
12,668,455 | ||
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Per share amounts: |
||||||
Class A Common Stock |
||||||
Basic earnings per common share |
$ |
0.58 |
$ |
0.64 | ||
Diluted earnings per common share |
$ |
0.57 |
$ |
0.63 | ||
Class B Common Stock |
||||||
Basic earnings per common share |
$ |
0.53 |
$ |
0.59 | ||
Diluted earnings per common share |
$ |
0.53 |
$ |
0.59 | ||
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 INCOME (UNAUDITED)
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Nine Months Ended |
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June 24, |
June 25, |
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2017 |
2016 |
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Net sales |
$ |
2,913,308,035 |
$ |
2,832,603,557 | ||
Cost of goods sold |
2,211,004,100 | 2,145,391,994 | ||||
Gross profit |
702,303,935 | 687,211,563 | ||||
Operating and administrative expenses |
616,914,673 | 589,654,137 | ||||
Gain (loss) from sale or disposal of assets |
1,493,009 | (934,039) | ||||
Income from operations |
86,882,271 | 96,623,387 | ||||
Other income, net |
2,469,684 | 1,652,297 | ||||
Interest expense |
34,761,917 | 34,393,394 | ||||
Income before income taxes |
54,590,038 | 63,882,290 | ||||
Income tax expense |
20,088,000 | 23,876,000 | ||||
Net income |
$ |
34,502,038 |
$ |
40,006,290 | ||
|
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Per share amounts: |
||||||
Class A Common Stock |
||||||
Basic earnings per common share |
$ |
1.75 |
$ |
2.03 | ||
Diluted earnings per common share |
$ |
1.70 |
$ |
1.98 | ||
Class B Common Stock |
||||||
Basic earnings per common share |
$ |
1.59 |
$ |
1.85 | ||
Diluted earnings per common share |
$ |
1.59 |
$ |
1.85 | ||
Cash dividends per common share |
||||||
Class A Common Stock |
$ |
0.495 |
$ |
0.495 | ||
Class B Common Stock |
$ |
0.450 |
$ |
0.450 |
See notes to unaudited condensed consolidated financial statements.
5
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
NINE MONTHS ENDED JUNE 24, 2017 AND JUNE 25, 2016
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Paid-in |
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Class A |
Class B |
Capital in |
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Common Stock |
Common Stock |
Excess of |
Retained |
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Shares |
Amount |
Shares |
Amount |
Par Value |
Earnings |
Total |
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Balance, September 26, 2015 |
13,924,651 |
$ |
696,233 | 6,335,125 |
$ |
316,756 |
$ |
12,311,249 |
$ |
415,654,162 |
$ |
428,978,400 | |||||||
Net income |
— |
— |
— |
— |
— |
40,006,290 | 40,006,290 | ||||||||||||
Cash dividends |
— |
— |
— |
— |
— |
(9,744,056) | (9,744,056) | ||||||||||||
Common stock conversions |
24,250 | 1,212 | (24,250) | (1,212) |
— |
— |
— |
||||||||||||
Balance, June 25, 2016 |
13,948,901 |
$ |
697,445 | 6,310,875 |
$ |
315,544 |
$ |
12,311,249 |
$ |
445,916,396 |
$ |
459,240,634 | |||||||
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 |
— |
— |
— |
— |
— |
34,502,038 | 34,502,038 | ||||||||||||
Cash dividends |
— |
— |
— |
— |
— |
(9,747,115) | (9,747,115) | ||||||||||||
Common stock conversions |
107,118 | 5,356 | (107,118) | (5,356) |
— |
— |
— |
||||||||||||
Balance, June 24, 2017 |
14,073,594 |
$ |
703,680 | 6,186,182 |
$ |
309,309 |
$ |
12,311,249 |
$ |
481,606,295 |
$ |
494,930,533 |
See notes to unaudited condensed consolidated financial statements.
6
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Nine Months Ended |
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June 24, |
June 25, |
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2017 |
2016 |
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Cash Flows from Operating Activities: |
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Net income |
$ |
34,502,038 |
$ |
40,006,290 | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||
Depreciation and amortization expense |
82,748,225 | 79,343,688 | ||||
(Gain) loss from sale or disposal of assets |
(1,493,009) | 934,039 | ||||
Receipt of advance payments on purchases contracts |
3,736,862 | 3,195,887 | ||||
Recognition of advance payments on purchases contracts |
(1,719,541) | (2,454,998) | ||||
Deferred income taxes |
88,000 | 7,322,000 | ||||
Changes in operating assets and liabilities: |
||||||
Receivables |
(1,771,516) | (6,224,510) | ||||
Inventory |
(4,403,514) | (3,201,948) | ||||
Other assets |
(6,214,157) | 1,988,751 | ||||
Accounts payable and accrued expenses |
1,174,389 | (17,322,748) | ||||
Net Cash Provided by Operating Activities |
106,647,777 | 103,586,451 | ||||
Cash Flows from Investing Activities: |
||||||
Proceeds from sales of property and equipment |
2,150,638 | 686,480 | ||||
Capital expenditures |
(90,010,736) | (107,823,914) | ||||
Net Cash Used by Investing Activities |
(87,860,098) | (107,137,434) | ||||
Cash Flows from Financing Activities: |
||||||
Proceeds from short-term borrowings |
354,457,462 | 577,982,521 | ||||
Payments on short-term borrowings |
(351,649,625) | (556,186,709) | ||||
Principal payments on long-term borrowings |
(9,508,619) | (10,570,808) | ||||
Dividends paid |
(9,747,115) | (9,744,056) | ||||
Net Cash (Used) Provided by Financing Activities |
(16,447,897) | 1,480,948 | ||||
Net Increase (Decrease) in Cash and Cash Equivalents |
2,339,782 | (2,070,035) | ||||
Cash and cash equivalents at beginning of period |
5,679,509 | 7,505,040 | ||||
Cash and Cash Equivalents at End of Period |
$ |
8,019,291 |
$ |
5,435,005 |
See notes to unaudited condensed consolidated financial statements.
7
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Nine Months Ended June 24, 2017 and June 25, 2016
A. BASIS OF PREPARATION
In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to present fairly the financial position of Ingles Markets, Incorporated and Subsidiaries (the “Company”) as of June 24, 2017, the results of operations for the three-month and nine-month periods ended June 24, 2017 and June 25, 2016, and the changes in stockholders’ equity and cash flows for the nine-month periods ended June 24, 2017 and June 25, 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 24, 2016 filed by the Company under the Securities Exchange Act of 1934 on December 16, 2016.
The results of operations for the three-month and nine-month periods ended June 24, 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 revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be 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 $508,000 at June 24, 2017 and $358,000 at September 24, 2016.
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:
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June 24, |
September 24, |
||||
|
2017 |
2016 |
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Property, payroll and other taxes payable |
$ |
15,696,394 |
$ |
18,883,819 | ||
Salaries, wages and bonuses payable |
26,257,817 | 28,159,164 | ||||
Self-insurance liabilities |
13,319,201 | 14,083,047 | ||||
Interest payable |
2,380,892 | 12,406,614 | ||||
Other |
3,415,307 | 2,782,962 | ||||
|
$ |
61,069,611 |
$ |
76,315,606 |
8
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 liabilities totaled $35.3 million and $35.9 million at June 24, 2017 and September 24, 2016, respectively. Of this amount, $13.3 million is accounted for as a current liability and $22.0 million as a long-term liability, which is inclusive of $5.1 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable at June 24, 2017. At September 24, 2016, $14.1 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 $8.0 million and $7.7 million for the three-month periods ended June 24, 2017 and June 25, 2016, respectively. For the nine-month periods ended June 24, 2017 and June 25, 2016, employee insurance expense, net of employee contributions, totaled $24.4 million and $26.8 million, 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”) in a private placement. The Notes bear an interest rate of 5.75% per annum and were issued at par.
The Company filed a registration statement with the Securities and Exchange Commission to exchange the private placement notes with registered notes. The exchange has been completed.
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:
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|
Year |
|
2018 |
102.875% |
2019 |
101.917% |
2020 |
100.958% |
2021 and thereafter |
100.000% |
The Company has $175.0 million line of credit (the “Line”) that matures June 2018. 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 $30.0 million in unused letters of credit, of which $9.6 million of unused letters of credit were issued at June 24, 2017. The Company is not required to maintain compensating balances in connection with the Line. At June 24, 2017, the Company had $2.8 million of borrowings outstanding under the line.
In December 2010, the Company completed the funding of $99.7 million of Recovery Zone Facility Bonds (the “Bonds”) for construction of new warehouse and distribution space in Buncombe County, North Carolina (the “Project”). The final maturity date of the Bonds is January 1, 2036.
The Bonds were issued by the Buncombe County Industrial Facilities and Pollution Control Financing Authority and were purchased by certain financial institutions. Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between the 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 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.
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.
The Line and approximately $25.1 million of secured borrowing mature in June 2018. The Company is in the process of renewing or refinancing these obligations and expects to complete the process well before the contractual maturity dates.
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
9
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 related to its borrowings at June 24, 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, Bond 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 14, 2016 to stockholders of record on October 6, 2016.
The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on January 12, 2017 to stockholders of record on January 6, 2017.
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 April 13, 2017 to stockholders of record on April 6, 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 16, 2016.
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 time. Each 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 Accounting Standards Codification ("FASB ASC”) Topic 260.
The two-class method of computing basic earnings per share for each period reflects the cash dividends paid per share for each class of stock, plus the amount of 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 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 |
Nine Months Ended |
||||||||||
|
June 24, 2017 |
June 24, 2017 |
||||||||||
|
Class A |
Class B |
Class A |
Class B |
||||||||
Numerator: Allocated net income |
||||||||||||
Net income allocated, basic |
$ |
8,234,965 |
$ |
3,291,741 |
$ |
24,563,248 |
$ |
9,938,790 | ||||
Conversion of Class B to Class A shares |
3,291,741 |
— |
9,938,790 |
— |
||||||||
Net income allocated, diluted |
$ |
11,526,706 |
$ |
3,291,741 |
$ |
34,502,038 |
$ |
9,938,790 | ||||
|
||||||||||||
Denominator: Weighted average shares outstanding |
||||||||||||
Weighted average shares outstanding, basic |
14,072,598 | 6,187,178 | 14,025,733 | 6,234,043 | ||||||||
Conversion of Class B to Class A shares |
6,187,178 |
— |
6,234,043 |
— |
||||||||
Weighted average shares outstanding, diluted |
20,259,776 | 6,187,178 | 20,259,776 | 6,234,043 | ||||||||
|
||||||||||||
Earnings per share |
||||||||||||
Basic |
$ |
0.58 |
$ |
0.53 |
$ |
1.75 |
$ |
1.59 | ||||
Diluted |
$ |
0.57 |
$ |
0.53 |
$ |
1.70 |
$ |
1.59 |
10
The per share amounts for the third quarter of fiscal 2016 and the nine months ended June 25, 2016 are based on the following amounts:
|
||||||||||||
|
Three Months Ended |
Nine Months Ended |
||||||||||
|
June 25, 2016 |
June 25, 2016 |
||||||||||
|
Class A |
Class B |
Class A |
Class B |
||||||||
Numerator: Allocated net income |
||||||||||||
Net income allocated, basic |
$ |
8,973,689 |
$ |
3,694,766 |
$ |
28,317,738 |
$ |
11,688,552 | ||||
Conversion of Class B to Class A shares |
3,694,766 |
— |
11,688,552 |
— |
||||||||
Net income allocated, diluted |
$ |
12,668,455 |
$ |
3,694,766 |
$ |
40,006,290 |
$ |
11,688,552 | ||||
|
||||||||||||
Denominator: Weighted average shares outstanding |
||||||||||||
Weighted average shares outstanding, basic |
13,944,818 | 6,314,958 | 13,932,356 | 6,327,420 | ||||||||
Conversion of Class B to Class A shares |
6,314,958 |
— |
6,327,420 |
— |
||||||||
Weighted average shares outstanding, diluted |
20,259,776 | 6,314,958 | 20,259,776 | 6,327,420 | ||||||||
|
||||||||||||
Earnings per share |
||||||||||||
Basic |
$ |
0.64 |
$ |
0.59 |
$ |
2.03 |
$ |
1.85 | ||||
Diluted |
$ |
0.63 |
$ |
0.59 |
$ |
1.98 |
$ |
1.85 |
I. SEGMENT INFORMATION
The Company operates one primary business segment, retail grocery sales. The “Other” activities include 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 |
Nine Months Ended |
||||||||||
|
June 24, |
June 25, |
June 24, |
June 25, |
||||||||
|
2017 |
2016 |
2017 |
2016 |
||||||||
Revenues from unaffiliated customers: |
||||||||||||
Grocery |
$ |
341,442 |
$ |
337,030 |
$ |
1,044,531 |
$ |
1,046,616 | ||||
Non-foods |
212,322 | 207,575 | 625,890 | 608,601 | ||||||||
Perishables |
265,828 | 257,799 | 770,350 | 753,027 | ||||||||
Gasoline |
129,569 | 120,347 | 366,175 | 321,049 | ||||||||
Total Retail |
949,161 | 922,751 | 2,806,946 | 2,729,293 | ||||||||
Other |
35,237 | 34,427 | 106,362 | 103,311 | ||||||||
Total revenues from unaffiliated customers |
$ |
984,398 |
$ |
957,178 |
$ |
2,913,308 |
$ |
2,832,604 | ||||
|
||||||||||||
Income from operations: |
||||||||||||
Retail |
$ |
25,350 |
$ |
28,031 |
$ |
74,947 |
$ |
84,669 | ||||
Other |
4,314 | 3,834 | 11,935 | 11,954 | ||||||||
Total income from operations |
$ |
29,664 |
$ |
31,865 |
$ |
86,882 |
$ |
96,623 |
|
||||||
|
June 24, |
September 24, |
||||
|
2017 |
2016 |
||||
Assets: |
||||||
Retail |
$ |
1,574,392 |
$ |
1,555,319 | ||
Other |
133,293 | 133,574 | ||||
Elimination of intercompany receivable |
(1,623) | (2,415) | ||||
Total assets |
$ |
1,706,062 |
$ |
1,686,478 |
11
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 June 24, 2017 and June 25, 2016, respectively, the fluid dairy operation had $10.6 million and $10.1 million in sales to the grocery sales operation. The fluid dairy operation had $33.9 million and $32.4 million in sales to the grocery sales operation for the nine-month periods ended June 24, 2017 and June 25, 2016, respectively. These sales have been eliminated in consolidation and are excluded from the amounts in the table above.
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. |
The carrying amount and fair value of the Company’s debt at June 24, 2017 is as follows (in thousands):
|
||||||||
|
Carrying |
Fair Value |
||||||
|
Amount |
Fair Value |
Measurements |
|||||
Senior Notes |
$ |
700,000 |
$ |
686,000 |
Level 2 |
|||
Facility Bonds |
81,620 | 81,620 |
Level 2 |
|||||
Secured notes payable and other |
86,311 | 86,311 |
Level 2 |
|||||
Line of credit payable |
2,808 | 2,808 |
Level 2 |
|||||
Total debt |
$ |
870,739 |
$ |
856,739 |
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 199 supermarkets in Georgia (70), North Carolina (70), 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. 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 June 24, 2017, the Company operated 103 in-store pharmacies and 97 fuel centers.
12
Ingles also operates a fluid dairy and earns shopping center rentals. The fluid dairy processing operation sells approximately 25% of its products to the retail grocery operation and approximately 75% 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 June 24, 2017 the Company’s self-insurance liabilities totaled $35.3 million. Of this amount, $13.3 million is accounted for as a current liability and $22.0 million as a long-term liability, which is inclusive of $5.1 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable at June 24, 2017.
Asset Impairments
The Company accounts for the impairment of long-lived assets in accordance with FASB ASC Topic 360. For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal associates. Estimates of future cash flows and expected sales prices are judgments based upon the Company’s experience and knowledge of local operations and cash flows that are projected for several years into the future. These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital spending decisions and inflation. The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether any indicators of impairment have occurred. There were no asset impairments during the nine-month period ended June 24, 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 $27.4 million and $29.5 million for the fiscal quarters ended June 24, 2017 and June 25, 2016, respectively. For the nine-month periods ended June 24, 2017 and June 25, 2016, vendor allowances applied as a reduction of merchandise costs totaled $87.1 million and $88.0 million, 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 $3.2 million and $3.4 million for the fiscal quarters ended June 24, 2017 and June 25, 2016, respectively. For the nine-month periods ended June 24, 2017 and June 25, 2016, vendor advertising allowances recorded as a reduction of advertising expense totaled $10.3 million and $10.2 million, respectively.
13
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. There are 13 and 39 weeks of operations included in the unaudited Condensed Consolidated Statements of Income for the three and nine-month periods ended June 24, 2017 and June 25, 2016. Comparable store sales are defined as sales by grocery stores in operation for five full fiscal quarters. Sales from replacement stores, major remodels, minor 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 may include additional retail square footage. For the three and nine-month periods ended June 24, 2017 and June 25, 2016, comparable store sales include 196 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 |
Nine Months Ended |
||||||||||
|
June 24, |
June 25, |
June 24, |
June 25, |
||||||||
|
2017 |
2016 |
2017 |
2016 |
||||||||
Net sales |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
||||
Gross profit |
24.1 |
% |
24.3 |
% |
24.1 |
% |
24.3 |
% |
||||
Operating and administrative expenses |
21.1 |
% |
20.8 |
% |
21.2 |
% |
20.8 |
% |
||||
Gain (loss) from sale or disposal of assets |
— |
% |
(0.2) |
% |
0.1 |
% |
(0.1) |
% |
||||
Income from operations |
3.0 |
% |
3.3 |
% |
3.0 |
% |
3.4 |
% |
||||
Other income, net |
0.1 |
% |
0.1 |
% |
0.1 |
% |
— |
% |
||||
Interest expense |
1.2 |
% |
1.2 |
% |
1.2 |
% |
1.2 |
% |
||||
Income tax expense |
0.7 |
% |
0.9 |
% |
0.7 |
% |
0.8 |
% |
||||
Net income |
1.2 |
% |
1.3 |
% |
1.2 |
% |
1.4 |
% |
Three Months Ended June 24, 2017 Compared to the Three Months Ended June 25, 2016
Net income for the third quarter of fiscal 2017 totaled $11.5 million compared with $12.7 million for the third quarter of fiscal 2016. Comparing the quarters, fiscal 2017 had higher sales and gross profit that were offset by higher expenses.
Net Sales. Net sales increased by $27.2 million, or 2.8% to $984.4 million for the three months ended June 24, 2017 from $957.2 million for the three months ended June 25, 2016. Sales increased in each retail product category and in non-retail operations. Comparing the third quarter of fiscal 2017 with the third quarter of fiscal 2016, gasoline sales dollars and gallons sold both increased approximately 3.8%. Easter occurred in the third quarter of the current fiscal year, but occurred in the second quarter of fiscal 2016. Excluding gasoline sales and the effect of extra Easter sales in this year’s third quarter, grocery comparable store sales increased 0.8% over the comparative fiscal quarters. Comparing the third quarters of fiscal year 2017 and 2016 (and excluding gasoline), the number of customer transactions was level and the average transaction size increased 2.0%.
Ingles operated 199 stores at June 24, 2017 and 201 stores at June 25, 2016. Retail square footage was approximately 11.2 million at June 24, 2017 and 11.1 million at June 25, 2016.
14
Sales by product category (amounts in thousands) are as follows:
|
||||||
|
Three Months Ended |
|||||
|
June 24, |
June 25, |
||||
|
2017 |
2016 |
||||
Grocery |
$ |
341,442 |
$ |
337,030 | ||
Non-foods |
212,322 | 207,575 | ||||
Perishables |
265,828 | 257,799 | ||||
Gasoline |
129,569 | 120,347 | ||||
Total retail |
$ |
949,161 |
$ |
922,751 |
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 grocery segment sales for the quarter ended June 24, 2017 are summarized as follows (dollars in thousands):
|
|||
Total retail sales for the three months ended June 25, 2016 |
$ |
922,751 | |
Comparable store sales increase (including gasoline) |
13,030 | ||
Effect of Easter in second quarter of fiscal 2016 |
7,084 | ||
Impact of stores opened in fiscal 2016 and 2017 |
11,473 | ||
Impact of stores closed in fiscal 2016 and 2017 |
(4,505) | ||
Other |
(672) | ||
Total retail sales for the three months ended June 24, 2017 |
$ |
949,161 |
Gross Profit. Gross profit for the three-month period ended June 24, 2017 increased $4.2 million, or 1.8%, to $237.1 million, or 24.1% of sales, compared with $232.9 million, or 24.3% of sales, for the three-month period ended June 25, 2016.
Excluding gasoline sales, grocery segment gross profit as a percentage of sales decreased 64 basis points in the third quarter of fiscal 2017 compared with the same fiscal 2016 period. Gasoline gross profit dollars were higher for the quarter ended June 24, 2017 compared with the quarter ended June 25, 2016.
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. The milk processing operation 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 $8.2 million, or 4.1%, to $207.6 million for the three months ended June 24, 2017, from $199.4 million for the three months ended June 25, 2016. As a percentage of sales, operating and administrative expenses were 21.1% for the three months ended June 24, 2017 compared with 20.8% for the three months ended June 25, 2016. Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 24.1% and 23.6% of sales for the third fiscal quarter of 2017 and 2016, respectively.
A breakdown of the major increases in operating and administrative expenses is as follows:
|
||||||
|
Increase |
|||||
|
Increase |
as a % of |
||||
|
in millions |
sales |
||||
Salaries and wages |
$ |
3.6 |
0.37 |
% |
||
Repairs and maintenance |
$ |
1.3 |
0.14 |
% |
||
Depreciation and amortization |
$ |
1.0 |
0.10 |
% |
||
Store supplies |
$ |
0.9 |
0.09 |
% |
15
Salaries and wages increased due to the additional labor hours required in part to accommodate in-store merchandising changes. Competition for labor has also increased in the Company’s market area.
Repairs and maintenance increased due to more sophisticated equipment and updated lighting in our stores, and due also to a higher level of building maintenance.
Depreciation and amortization increased as a result of the Company’s capital expenditure programs, including new stores and remodeling projects.
Store supplies increased due to stocking of new stores and changes in the mix of products sold.
Gain or Loss from Sale or Disposal of Assets. Gain from Sale or Disposal of Assets was $0.1 million for the June 2017 quarter compared with a loss of $1.6 million for the June 2016 quarter. During the June 2016 quarter, the Company demolished certain buildings for redevelopment into larger and improved store or tenant space.
Interest Expense. Interest expense increased $0.5 million for the three-month period ended June 24, 2017 to $11.7 million from $11.2 million for the three-month period ended June 25, 2016. Total debt at June 2017 was $870.7 million compared to $898.2 million at June 2016. The London Interbank Offering Rate (“LIBOR”) has increased over the past twelve months, resulting in higher interest expense on the Company’s floating rate debt.
Income Taxes. Income tax expense as a percentage of pre-tax income was 39.2% for the June 2017 quarter, compared with 40.2% for the June 2016 quarter. During the third quarter of each fiscal year, the Company reconciles estimated prior year tax expense to actual tax returns filed during the quarter. This process increased tax expense during both the current fiscal quarter and last year’s third fiscal quarter.
Net Income. Net income totaled $11.5 million and $12.7 million for the three-month periods ended June 24, 2017 and June 25, 2016, respectively. Basic and diluted earnings per share for Class A Common Stock were $0.58 and $0.57, respectively for the June 2017 quarter. Basic and diluted earnings per share for Class B Common Stock were each $0.53 for the June 2017 quarter. Basic and diluted earnings per share for Class A Common Stock were $0.64 and $0.63, respectively for the June 2016 quarter. Basic and diluted earnings per share for Class B Common Stock were each $0.59 for the June 2016 quarter.
Nine Months Ended June 24, 2017 Compared to the Nine Months Ended June 25, 2016
Net income for the first nine months of fiscal 2017 totaled $34.5 million compared with net income of $40.0 million for the nine-month fiscal 2016 period. Total sales and gross profit increased, but expenses increased to a higher degree.
Net Sales. Net sales totaled $2.91 billion and $2.83 billion for the nine month periods ended June 24, 2017 and June 25, 2016, respectively. The sales increase was broad-based across the Company’s retail product categories and non-retail operations. Retail gasoline prices, gallons sold, and sales dollars were higher in the June 2017 nine-month period compared with the same period last year.
Grocery segment comparable store sales, excluding the effect of gasoline increased 0.8%. The number of customer transactions (excluding gasoline) increased 0.8%, while the average transaction size (excluding gasoline) increased by 0.5%.
Sales by product category (amounts in thousands) are as follows:
|
||||||
|
Nine Months Ended |
|||||
|
June 24, |
June 25, |
||||
|
2017 |
2016 |
||||
Grocery |
$ |
1,044,531 |
$ |
1,046,616 | ||
Non-foods |
625,890 | 608,601 | ||||
Perishables |
770,350 | 753,027 | ||||
Gasoline |
366,175 | 321,049 | ||||
Total retail |
$ |
2,806,946 |
$ |
2,729,293 |
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.
16
Changes in grocery segment sales for the nine months ended June 24, 2017 can be summarized as follows (dollars in thousands):
|
|||
Total retail sales for the nine months ended June 25, 2016 |
$ |
2,729,293 | |
Comparable store sales increase (including gasoline) |