Annual Statements Open main menu

INGLES MARKETS INC - Annual Report: 2009 (Form 10-K)

Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

 

FORM 10-K

 

 

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

 

For the fiscal year ended September 26, 2009

 

¨ 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.)

2913 U.S. Hwy. 70 West, Black Mountain, NC   28711
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number including area code: (828) 669-2941

 

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

Title of each class

  

Name of each exchange on
        which registered        

Class A Common Stock, $0.05 par value    The NASDAQ Global Market LLC

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

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨     NO  x.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x.

 

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 and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨    NOT APPLICABLE   x

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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

 

Large accelerated filer  ¨

   Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company   ¨ 
      (Do not check if a smaller reporting company)   

 

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 March 28, 2009, the aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing sales price of the Class A Common Stock on The NASDAQ Global Select Market on March 28, 2009, was approximately $199.9 million. As of November 30, 2009, the registrant had 12,888,608 shares of Class A Common Stock outstanding and 11,623,651 shares of Class B Common Stock outstanding.

 

Certain information required in Part III hereof is incorporated by reference to the Proxy Statement for the registrant’s 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A no later than 120 days after the end of the fiscal year covered by this report.

 

 

 


Table of Contents

Ingles Markets, Incorporated

 

Annual Report on Form 10-K

 

September 26, 2009

 

          Page
   PART I   

Item 1.

   Business    4

Item 1A.

   Risk Factors    11

Item 1B.

   Unresolved Staff Comments    14

Item 2.

   Properties    14

Item 3.

   Legal Proceedings    16

Item 4.

   Submission of Matters to Vote of Security Holders    16
   PART II   

Item 5.

   Market for Registrant’s Common Equity and Related Stockholder Matters    17

Item 6.

   Selected Financial Data    19

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    20

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risks    34

Item 8.

   Financial Statements and Supplementary Data    35

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    35

Item 9A.

   Controls and Procedures    35

Item 9B.

   Other Information    36
   PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance    36

Item 11.

   Executive Compensation    37

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    37

Item 13.

   Certain Relationships and Related Transactions, and Director Independence    37

Item 14.

   Principal Accountant Fees and Services    37
   PART IV   

Item 15.

   Exhibits and Financial Statement Schedules    37

 

2


Table of Contents

This Annual Report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact included in this Annual Report, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere regarding the Company’s strategy, future operations, financial position, estimated revenues, projected costs, projections, prospects and plans and objectives of management, are forward-looking statements. 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 our expansion and operating strategies and to manage rapid expansion;

 

   

pricing pressures and other competitive factors;

 

   

sudden or significant changes in the availability of gasoline and retail gasoline prices;

 

   

the maturation of new and expanded stores;

 

   

general concerns about food safety;

 

   

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;

 

   

other risks and uncertainties, including those described under the caption “Risk Factors.”

 

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 Annual Report or contemplated or implied by statements in this Annual Report. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Annual Report are made only as of the date hereof. The Company does not undertake and specifically declines any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.

 

3


Table of Contents

PART I

 

Item 1. BUSINESS

 

General

 

Ingles Markets, Incorporated (“Ingles” or the “Company”), a leading supermarket chain in the southeast United States, operates 200 supermarkets in Georgia (73), North Carolina (68), South Carolina (36), Tennessee (20), Virginia (2) and Alabama (1).

 

The Company’s strategy is to locate its supermarkets primarily in suburban areas, small towns and neighborhood shopping centers. The Company remodels, expands and relocates stores in these communities and builds stores in new locations to retain and grow its customer base with an enhanced “one stop” product offering while retaining a high level of customer service and convenience. 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. The Company also offers quality private label items.

 

The Company believes that customer service and convenience, modern stores and competitive prices on a broad selection of quality merchandise are essential to developing and retaining a loyal customer base. The Company’s new and remodeled supermarkets provide an enhanced level of customer convenience in order to accommodate the lifestyle of today’s shoppers. Design features of the Company’s modern stores focus on selling high-growth, high-margin products including perishable departments featuring organic and home meal replacement items, in-store pharmacies, on-premises fuel centers, and an expanded selection of food and non-food items to provide a “one-stop” shopping experience.

 

The Company has an ongoing renovation and expansion plan to add stores in its target markets and to modernize the appearance and layout of its existing stores. Over the past five fiscal years, the Company has spent approximately $605 million to modernize and remodel its existing stores, relocate older stores to larger, more convenient locations and construct new stores in order to maintain the quality shopping experience that its customers expect. As part of the Company’s renovation and expansion plan, the Company generally includes full-service pharmacies and gas stations at both new and expanded store properties and at selected existing store properties.

 

Substantially all of the Company’s stores are located within 280 miles of its 919,000 square foot warehouse and distribution facilities, near Asheville, North Carolina, from which the Company distributes grocery, produce, meat and dairy products to all Ingles stores. The warehouse supplies the stores with approximately 50% of the goods the Company sells and the remaining 50% is purchased from third parties. The close proximity of the Company’s purchasing and distribution operations to its stores facilitates the timely distribution of consistently high quality meat, produce and other perishable items.

 

To further ensure product quality, the Company also owns and operates a milk processing and packaging plant that supplies approximately 86% of the milk products sold by the Company’s supermarkets as well as a variety of organic milk, fruit juices and bottled water products. In addition, the milk processing and packaging plant sells approximately 66% of its products to other retailers, food service distributors and grocery warehouses in 17 states, which provides the Company with an additional source of revenue.

 

Real estate ownership is an important component of the Company’s operations. The Company owns and operates 72 shopping centers, of which 56 contain an Ingles supermarket, and owns 92 additional properties that contain a free-standing Ingles store. Shopping center ownership provides tenant income and can enhance store traffic through the presence of additional products and services that complement grocery store operations. The Company also owns 12 undeveloped sites suitable for a free-standing store. The Company’s owned real estate is generally located in the same geographic region as its supermarkets.

 

4


Table of Contents

The Company was founded by Robert P. Ingle, the Company’s Chief Executive Officer. As of September 26, 2009, Mr. Ingle owned beneficially approximately 86% of the combined voting power and 47% of the total number of shares of the Company’s outstanding Class A and Class B Common Stock (in each case excluding stock held by the Company’s Investment/Profit Sharing Plan and Trust of which Mr. Ingle serves as one of the trustees). The Company became a publicly traded company in September 1987. The Company’s Class A Common Stock is traded on The NASDAQ Global Select Market under the symbol “IMKTA.”

 

The Company was incorporated in 1965 under the laws of the State of North Carolina. Its principal mailing address is P.O. Box 6676, Highway 70, Asheville, North Carolina 28816, and its telephone number is 828-669-2941. The Company’s website is www.ingles-markets.com. Information on the Company’s website is not a part of and is not incorporated by reference into this Annual Report on Form 10-K. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments and supplements to these reports are available on the Company’s website as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission.

 

Business

 

The Company operates three lines of business: retail grocery sales, shopping center rentals and a fluid dairy processing plant. Information about the Company’s operations by lines of business (in millions) is as follows (for information regarding the Company’s industry segments, see Note 11, “Lines of Business” to the Consolidated Financial Statements of this Annual Report on Form 10-K):

 

     Fiscal Year Ended September  
     2009     2008     2007  

Revenues from unaffiliated customers:

               

Grocery sales

   $ 3,143.6    96.4   $ 3,107.3    95.6   $ 2,729.0    95.3

Shopping center rentals

     10.5    0.3     11.3    0.4     12.3    0.4

Fluid dairy

     107.3    3.3     130.8    4.0     122.6    4.3
                                       
   $ 3,261.4    100.0   $ 3,249.4    100.0   $ 2,863.9    100.0
                                       

Income from operations:

               

Grocery sales

   $ 98.2    86.7   $ 109.1    88.4   $ 115.8    86.7

Shopping center rentals

     2.4    2.2     3.4    2.7     4.4    3.3

Fluid dairy

     12.6    11.1     11.0    8.9     13.3    10.0
                                       
     113.2    100.0     123.5    100.0     133.5    100.0
                           

Other income, net

     2.3        3.1        3.0   

Interest expense

     59.1        46.9        46.7   

Loss on early extinguishment of debt

     10.2        —          —     
                           

Income before income taxes

   $ 46.2      $ 79.7      $ 89.8   
                           

 

Sales by product category for fiscal years 2009, 2008 and 2007, respectively, are as follows:

 

     Fiscal Year Ended September
     2009    2008    2007

Grocery

   $ 1,358,030,265    $ 1,295,946,749    $ 1,182,907,566

Non-foods

     664,376,193      624,957,153      589,204,228

Perishables

     768,604,794      727,072,477      670,206,118

Gasoline

     352,621,331      459,287,398      286,665,352
                    

Total grocery segment

   $ 3,143,632,583    $ 3,107,263,777    $ 2,728,983,264
                    

 

5


Table of Contents

The grocery category includes grocery, dairy and frozen foods.

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

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

 

Supermarket Operations

 

The Company’s strategy is to locate its supermarkets primarily in suburban areas, small towns and rural communities. At September 26, 2009, the Company operated 193 supermarkets under the name “Ingles,” and 7 supermarkets under the name “Sav-Mor” with locations in western North Carolina, western South Carolina, northern Georgia, eastern Tennessee, southwestern Virginia and northeastern Alabama. The “Sav-Mor” store concept accommodates smaller shopping areas and carries a limited line of dry groceries, fresh meat and produce, all of which are displayed in a modern, readily accessible environment.

 

The following table sets forth certain information with respect to the Company’s supermarket operations.

 

     Number of Supermarkets
at Fiscal

Year Ended September
   Percentage of Total
Net Sales for Fiscal
Year Ended September
 
     2009    2008    2007    2009     2008     2007  

North Carolina

   68    66    65    38   38   38

South Carolina

   36    36    36    19   20   19

Georgia

   73    72    73    34   33   34

Tennessee

   20    20    20    9   9   9

Virginia

   2    2    2    —        —        —     

Alabama

   1    1    1    —        —        —     
                                 
   200    197    197    100   100   100
                                 

 

The Company believes that today’s supermarket customers are focused on convenience, quality and value in an attractive store environment. As a result, the Company’s “one-stop” shopping experience combines a high level of customer service, convenience-oriented quality product offerings and low overall pricing. The Company’s modern stores provide products and services such as home meal replacement items, delicatessens, bakeries, floral departments, video rental departments, greeting cards and broad selections of organic, beverage and health-related items. At September 26, 2009, the Company operated 69 pharmacies and 66 fuel stations. The Company plans to continue to incorporate these departments in substantially all future new and remodeled stores. The Company trains its employees to provide friendly service and to actively address the needs of customers. These employees reinforce the Company’s distinctive service oriented image.

 

Selected statistics on the Company’s supermarket operations are presented below:

 

     Fiscal Year Ended September
     2009    2008    2007    2006    2005

Weighted Average Sales Per Store (000’s) (1)

   $ 15,744    $ 15,806    $ 13,870    $ 12,701    $ 11,040

Total Square Feet at End of Year (000’s)

     10,686      10,196      9,728      9,585      9,468

Average Total Square Feet per Store

     53,432      51,756      49,382      48,657      48,058

Average Square Feet of Selling Space per Store (2)

     37,403      36,229      34,567      34,060      33,641

Weighted Average Sales per Square Foot of Selling Space (1) (2)

     425      448      405      375      331

 

(1) Weighted average sales per store include the effects of increases in square footage due to the opening of replacement stores and the expansion of stores through remodeling during the periods indicated, and includes gasoline sales.
(2) Selling space is estimated to be 70% of total interior store square footage.

 

6


Table of Contents

Merchandising

 

The Company’s merchandising strategy is designed to create a comprehensive and satisfying shopping experience that blends value and customer service with variety, quality and convenience. Management believes that this strategy fosters a loyal customer base by establishing a reputation for providing high quality products and a variety of specialty departments.

 

The Company’s stores carry broad selections of quality meats, produce and other perishables. The Company offers a wide variety of fresh and non-perishable organic products, including organic milk produced by the Company’s fluid dairy plant. Management believes that supermarkets offering a broad array of products and time-saving services are perceived by customers as part of a solution to today’s lifestyle demands. Accordingly, a principal component of the Company’s merchandising strategy is to design stores that offer a “one-stop” shopping experience.

 

A selection of prepared foods and home meal replacements are featured throughout Ingles’ deli, bakery and meat departments to provide customers with easy meal alternatives that they can eat at home. Many stores offer daily selections of home meal replacement items, such as rotisserie chicken and pork, Italian foods, fried chicken, meat loaf and other entrees, sandwiches, pre-packaged salads, sushi and prepared fresh vegetables. The bakery offers an expanded selection of baked goods and self-service selections. Ingles bakes most of its items on site, including bread baked daily, cakes made to order in various sizes, donuts and other pastries. The deli offers a salad bar, an expanded offering of cheeses, olives, gourmet items and home meal replacement items. The Company also provides its customers with an expanded selection of frozen food items (including organics) to meet the increasing demands of its customers.

 

The Company operates fuel stations at 66 of its store locations. The Company believes fuel stations give customers a competitive fuel choice and increase store traffic by allowing customers to consolidate trips. Most new and expanded stores are designed to include a fuel station on the store property. The Company also adds fuel stations at existing stores based on its evaluation of local competition, the potential effect on overall store profitability and the availability of space on the existing property or an adjacent outparcel.

 

Ingles intends to continue to increase sales of its private label brands, which typically carry higher margins than comparable branded products. Ingles’ private labels cover a broad range of products throughout the store, such as milk, bread, organic products, soft drinks and canned goods. In addition to increasing margins, Ingles believes that private label sales help promote customer loyalty.

 

The Company seeks to maintain a reputation for providing friendly service, quality merchandise and customer value and for its commitment to community involvement. The Company employs various advertising and promotional strategies to reinforce the quality and value of its products. The Company promotes these attributes using all of the traditional advertising vehicles including radio, television, direct mail and newspapers. The Ingles Advantage Card program, introduced at the beginning of fiscal year 2004, is designed to foster customer loyalty by providing information to better understand the Company’s customers’ shopping patterns.

 

Purchasing and Distribution

 

The Company supplies approximately 50% of its supermarkets’ inventory requirements from its modern 919,000 square foot warehouse and distribution facilities, from which the Company distributes groceries, produce, meat and dairy products to all Ingles stores. The Company believes that its warehouse and distribution facilities contain sufficient capacity for the continued expansion of its store base for the foreseeable future. The Company owns 46 acres of land adjacent to its distribution facilities for possible future expansion.

 

The Company’s centrally managed purchasing and distribution operations provide several advantages, including the ability to negotiate and reduce the cost of merchandise, decrease overhead costs and better manage its inventory at both the warehouse and store level. From time to time, the Company engages in advance

 

7


Table of Contents

purchasing on high-turnover inventory items to take advantage of special prices offered by manufacturers for limited periods. The Company’s ability to take advantage of advance purchasing is limited by several factors including carrying costs and warehouse space.

 

Approximately 10% of the Company’s other inventory requirements, primarily frozen food and slower moving items that the Company prefers not to stock are purchased from Merchant Distributors, Inc. (“MDI”), a wholesale grocery distributor with which the Company has had a continuing relationship since its inception. Purchases from MDI were approximately $271 million in fiscal 2009, $258 million in fiscal 2008 and $241 million in fiscal 2007. Additionally, MDI purchases product from Milkco, Inc., the Company’s fluid dairy subsidiary, and these purchases totaled approximately $36 million in fiscal 2009, $44 million in fiscal 2008 and $40 million in fiscal 2007. The Company purchases items from MDI based on cost plus a handling charge. MDI owned approximately 2% of the Company’s Class A Common Stock and approximately 1% of the Company’s Class B Common Stock at September 26, 2009, which equals 1.4% of the total voting power. The Company believes that alternative sources of supply are readily available from other third parties.

 

The remaining 40% of the Company’s inventory requirements, primarily beverages, gasoline, bread and snack foods, are supplied directly to Ingles supermarkets by local distributors and manufacturers.

 

Goods from the warehouse and distribution facilities and the milk processing and packaging plant are distributed to the Company’s stores by a fleet of 106 tractors and 439 trailers that the Company operates and maintains, including tractors and trailers that the Company leases. The Company invests on an ongoing basis in the maintenance, upgrade and replacement of its tractor and trailer fleet. The Company also operates truck servicing and fuel storage facilities at its warehouse and distribution facilities. The Company reduces its overall distribution costs by capitalizing on back-haul opportunities (contracting to transport merchandise on trucks that would otherwise be empty).

 

Store Development, Expansion and Remodeling

 

The Company believes that the appearance and design of its stores are integral components of its customers’ shopping experience and aims to develop one of the most modern supermarket chains in the industry. The ongoing modernization of the Company’s store base involves (i) the construction of new stores of continuously updated designs, and (ii) the replacement or complete remodeling and expansion of existing stores. The Company’s goal is to maintain clean, well-lit stores with attractive architectural features that enhance the image of its stores as catering to the changing lifestyle needs of quality-conscious consumers who demand increasingly diverse product offerings.

 

The Company is focused primarily on developing owned stores. Management believes that owning stores provides the Company with flexible, lower all-in occupancy costs. The construction of new stores by independent contractors is closely monitored and controlled by the Company.

 

The Company renovates and remodels stores in order to increase customer traffic and sales, respond to existing customer demand, compete effectively against new stores opened by competitors and support its quality image merchandising strategy. The Company decides to complete a major remodel of an existing store based on its evaluation of the competitive landscape of the local marketplace. A major remodel and expansion provides the quality of facilities and product offerings identical to that of a new store, capitalizing upon the existing customer base. The Company retains the existing customer base by keeping the store in operation during the entire remodeling process. The Company may elect to relocate, rather than remodel, certain stores where relocation provides a more convenient location for its customers and is more economical.

 

8


Table of Contents

The following table sets forth, for the periods indicated, the Company’s new store development and store remodeling activities and the effect this program has had on the average size of its stores.

 

     2009    2008    2007    2006    2005

Number of Stores:

              

Opened (1)

   4    2    2    1    4

Closed (1)

   1    2    2    1    3

Major remodels and replacements

   6    10    5    3    2

Stores open at end of period

   200    197    197    197    197

Size of Stores:

              

Less than 30,000 sq. ft.

   13    14    16    16    15

30,000 up to 41,999 sq. ft.

   41    42    46    48    52

42,000 up to 51,999 sq. ft.

   27    28    31    31    31

At least 52,000 sq. ft.

   119    113    104    102    99

Average store size (sq. ft.)

   53,432    51,756    49,382    48,657    48,058

 

(1) Excludes new stores opened to replace existing stores.

 

The Company has historically expanded its store base by acquiring or leasing supermarket sites and constructing stores to its specifications. From time to time, however, the Company may consider the acquisition of existing supermarkets as such opportunities become available.

 

The Company’s ability to open new stores is subject to many factors, including the acquisition of satisfactory sites and the successful negotiation of new leases, and may be limited by zoning and other governmental regulation. In addition, the Company’s expansion, remodeling and replacement plans are continually reviewed and are subject to change. See the “Liquidity and Capital Resources” section included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s capital expenditures.

 

Competition

 

The supermarket industry is highly competitive and characterized by narrow profit margins. The degree of competition the Company’s stores encounter varies by location, primarily based on the size of the community in which the store is located and its proximity to other communities. The Company’s principal competitors are, in alphabetical order, Aldi, Inc., Bi-Lo, LLC., Food City (K-VA-T Food Stores, Inc.), Food Lion (Delhaize America, Inc.), The Kroger Co., Publix Super Markets, Inc., Target Corporation, and Wal-Mart Stores, Inc. Increasingly over the last few years, competition for consumers’ food dollars has intensified due to the addition of, or increase in, food sections by many types of retailers such as specialty grocers, drug and convenience stores, national general merchandisers and discount retailers, membership clubs, warehouse stores and super centers. Restaurants are another significant competitor for food dollars.

 

Supermarket chains generally compete on the basis of location, quality of products, service, price, convenience, product variety and store condition.

 

The Company believes its competitive advantages include convenient locations, the quality of service it provides its customers, competitive pricing, product variety and quality and a pleasant shopping environment, which is enhanced by its ongoing modernization program.

 

By concentrating its operations within a relatively small geographic region, the Company is also positioned to more carefully monitor its markets, and the needs of its customers within those markets. The Company’s senior executives live and work in the Company’s operating region, thereby allowing management to quickly identify changes in needs and customer preference. Because of the Company’s size, store managers have direct

 

9


Table of Contents

access to corporate management and are able to receive quick decisions regarding requested changes in operations. The Company can then move quickly to make adjustments in its business in response to changes in the market and customer needs.

 

The Company’s large national and international competitors’ primary advantages are related to their size. These larger organizations may have an advantage through stronger buying power and more significant capital resources.

 

The Company’s management monitors competitive activity and regularly reviews and periodically adjusts the Company’s marketing and business strategies as management deems appropriate in light of existing conditions in the Company’s region. The Company’s ability to remain competitive in its changing markets will depend in part on its ability to pursue its expansion and renovation programs and its response to remodeling and new store openings by its competitors.

 

Seasonality

 

Sales in the grocery segment of the Company’s business are subject to a slight seasonal variance due to holiday related sales and due to sales in areas where seasonal homes are located. Sales are traditionally higher in the Company’s first fiscal quarter due to the inclusion of sales related to Thanksgiving and Christmas. The Company’s second fiscal quarter traditionally has the lowest sales of the year, unless Easter falls in that quarter. In the third and fourth quarters, sales are affected by the return of customers to seasonal homes in the Company’s market area. The fluid dairy segment of the Company’s business has slight seasonal variation to the extent of its sales into the grocery industry. The Company’s real estate segment is not subject to seasonal variations.

 

Employees and Labor Relations

 

At September 26, 2009, the Company had approximately 18,600 non-union employees, of which 91% were supermarket personnel. Approximately 57% of these employees work on a part-time basis. Management considers employee relations to be good. The Company values its employees and believes that employee loyalty and enthusiasm are key elements of its operating performance.

 

Trademarks and Licenses

 

The Company employs various trademarks and service marks in its business, the most important of which are its own “Laura Lynn” private label trademark, “The Ingles Advantage” service mark, and the “Ingles” service mark. These service marks and the trademark are federally registered in the United States pursuant to applicable intellectual property laws and are the property of Ingles. In addition, the Company uses the “Sealtest,” “Pet,” “Biltmore” and “Light N’ Lively” trademarks pursuant to agreements entered into in connection with its fluid dairy processing plant segment. The Company believes it has all material licenses and permits necessary to conduct its business.

 

The current expiration dates for significant trade and service marks are as follows: “Ingles” —December 9, 2015; “Laura Lynn” —March 13, 2014; and “The Ingles Advantage” —August 30, 2015. Each registration may be renewed for an additional ten-year term prior to its expiration. The Company intends to file all renewals timely. Each of the Company’s trademark license agreements has a one year term which, with respect to one license, is automatically renewed annually, unless the owner of the trademark provides notice of termination prior to the then expiration date and, with respect to the other licenses, are renewed periodically by letter from the licensor. The Company currently has four pending applications for additional trademarks or service marks.

 

Environmental Matters

 

Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities relating to its stores and other buildings and the land on

 

10


Table of Contents

which such stores and other buildings are situated (including responsibility and liability related to its operation of its gas stations and the storage of gasoline in underground storage tanks), regardless of whether the Company leases or owns the stores, other buildings or land in question and regardless of whether such environmental conditions were created by the Company or by a prior owner or tenant. The Company’s liabilities may also include costs and judgments resulting from lawsuits brought by private litigants. The presence of contamination from hazardous or toxic substances, or the failure to properly remediate such contaminated property, may adversely affect the Company’s ability to sell or rent such real property or to borrow using such real property as collateral. Although the Company typically conducts an environmental review prior to acquiring or leasing new stores, other buildings or raw land, there can be no assurance that environmental conditions relating to prior, existing or future stores, other buildings or the real properties on which such stores or other buildings are situated will not have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Federal, state and local governments could enact laws or regulations concerning environmental matters that affect the Company’s operations or facilities or increase the cost of producing or distributing the Company’s products. The Company believes that it currently conducts its operations, and in the past has conducted its operations, in substantial compliance with applicable environmental laws. The Company, however, cannot predict the environmental liabilities that may result from legislation or regulations adopted in the future, the effect of which could be retroactive. Nor can the Company predict how existing or future laws and regulations will be administered or interpreted or what environmental conditions may be found to exist at its facilities or at other properties where the Company or its predecessors have arranged for the disposal of hazardous substances. The enactment of more stringent laws or regulations or stricter interpretation of existing laws and regulations could require expenditures by the Company, some of which could have a material adverse effect on its business, financial condition and results of operations.

 

The Company strives to employ sound environmental operating policies, including recycling cardboard packaging, recycling wooden pallets, and re-circulating some water used in its car washes. The Company offers reusable shopping bags to its customers and will pack groceries in bags brought in by its customers.

 

Government Regulation

 

The Company is subject to regulation by a variety of governmental agencies, including, but not limited to, the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the Occupational Health and Safety Administration and other federal, state and local agencies. The Company’s stores are also subject to local laws regarding zoning, land use and the sale of alcoholic beverages. The Company believes that its locations are in material compliance with such laws and regulations.

 

Item 1A. RISK FACTORS

 

Below is a series of risk factors that may affect the Company’s business, financial condition and/or results of operations. Other risk factors are contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. These and such other risk factors may not be exhaustive. The Company operates in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of these risk factors on the Company’s business, financial condition and/or results of operations or the extent to which any factor or combination of factors may impact of any of these areas.

 

The Company’s expansion and renovation plans may not be successful which may adversely affect the Company’s business and financial condition due to the capital expenditures and management resources required to carry out the Company’s plans.

 

The Company has spent, and intends to continue to spend, significant capital and management resources on the development and implementation of the Company’s expansion and renovation plans. These plans, if

 

11


Table of Contents

implemented, may not be successful, may not improve operating results and may have an adverse effect on cash flow and management resources due to the significant amount of capital invested and management time expended.

 

The level of sales and profit margins in the Company’s existing stores may not be duplicated in the Company’s new stores, depending on factors such as prevailing competition, development cost, and the Company’s market position in the surrounding community. These factors could have an adverse effect on the Company’s business, financial condition and/or results of operations.

 

The Company’s warehouse and distribution center and milk processing and packaging plant, as well as all of the Company’s stores, are concentrated in the Southeastern United States, which makes it vulnerable to economic downturns, natural disasters and other adverse conditions or other catastrophic events in this region.

 

The Company operates in the Southeastern United States, and its performance is therefore heavily influenced by economic developments in the Southeast region. The Company’s headquarters, warehouse and distribution center and milk processing and packaging plant are located in North Carolina and all of the Company’s stores are located in the Southeast region. As a result, the Company’s business may be more susceptible to regional factors than the operations of more geographically diversified competitors. These factors include, among others, changes in the economy, weather conditions, demographics and population.

 

The Company has, and expects to continue to have, a significant amount of indebtedness.

 

At September 26, 2009, the Company had total consolidated indebtedness for borrowed money of $849.3 million and we had $190.0 million of availability under its lines of credit. A portion of the Company’s cash flow is used to service such indebtedness. The Company owns a significant amount of real estate, which has been and will continue to be a factor in the Company’s overall level of indebtedness. Real estate can be used as collateral for indebtedness and can be sold to reduce indebtedness. The Company’s significant indebtedness could have important consequences, including the following:

 

   

It may be difficult for the Company to satisfy its obligations under its existing credit facilities and its other indebtedness and commitments;

 

   

The Company is required to use a portion of its cash flow from operations to pay interest on its current and future indebtedness, which may require the Company to reduce funds available for other purposes;

 

   

The Company may have a limited ability to obtain additional financing, if needed, to fund additional projects, working capital requirements, capital expenditures, debt service, general corporate or other obligations; and

 

   

The Company may be placed at a competitive disadvantage to its competitors that are not as highly leveraged.

 

Disruptions in the capital markets, as have been experienced during 2009, could adversely affect the Company’s ability to fund its short-term liquidity needs and its expansion and renovation plans.

 

Disruptions in the capital markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect the Company’s access to liquidity needed for its business. Any disruption could limit the Company’s access to capital and raise its cost of capital to the extent available and require the Company to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for its business needs can be arranged. Such measures could include deferring capital expenditures, dividend payments or other discretionary uses of cash.

 

The Company’s principal stockholder, Robert P. Ingle, has the ability to elect a majority of the Company’s directors, appoint new members of management and approve many actions requiring stockholder approval.

 

Mr. Ingle’s share ownership represents approximately 86% of the combined voting power of all classes of the Company’s capital stock as of September 26, 2009. As a result, Mr. Ingle has the power to elect a majority of

 

12


Table of Contents

the Company’s directors and approve any action requiring the approval of the holders of the Company’s Class A Common Stock and Class B Common Stock, including adopting certain amendments to the Company’s charter and approving mergers or sales of substantially all of the Company’s assets. Currently, three of the Company’s nine directors are members of the Ingle family.

 

If the Company loses the services of its key personnel, the Company’s business could suffer.

 

The Company’s continued success depends upon the availability and performance of the Company’s executive officers, including Robert P. Ingle and Robert P. Ingle, II, who possess unique and extensive industry knowledge and experience. The loss of the services of any of the Company’s executive officers or other key employees could adversely affect the Company’s business.

 

Various aspects of the Company’s business are subject to federal, state and local laws and regulations. The Company’s compliance with these regulations may require additional capital expenditures and could adversely affect the Company’s ability to conduct the Company’s business as planned.

 

The Company is subject to federal, state and local laws and regulations relating to zoning, land use, work place safety, public health, community right-to-know, beer and wine sales, country of origin labeling of food products, pharmaceutical sales and gasoline station operations. Furthermore, the Company’s business is regulated by a variety of governmental agencies, including, but not limited to, the U.S. Food and Drug Administration, the U.S. Department of Agriculture, and the Occupational Health and Safety Administration. A number of states and local jurisdictions regulate the licensing of supermarkets, including beer and wine license grants. In addition, under certain local regulations, the Company is prohibited from selling beer and wine in certain of the Company’s stores. Employers are also subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working conditions, disabled access and work permit requirements. Compliance with, or changes in, these laws could reduce the revenue and profitability of the Company’s supermarkets and could otherwise adversely affect the Company’s business, financial condition or results of operations. A number of federal, state and local laws exist which impose burdens or restrictions on owners with respect to access by disabled persons. The Company’s compliance with these laws may result in modifications to the Company’s properties, or prevent the Company from performing certain further renovations, with respect to access by disabled persons.

 

The Company is also subject to various state and federal environmental laws relating to the Company’s stores, gas stations, distribution facilities and use of hazardous or toxic substances. As a result of these laws, the Company could be responsible for remediation of environmental conditions and may be subject to associated liabilities.

 

The Company is affected by certain operating costs which could increase or fluctuate considerably.

 

The Company depends on qualified employees to operate the Company’s stores and may be affected by future tight labor markets. A shortage of qualified employees could require the Company to enhance the Company’s wage and benefit package in order to better compete for and retain qualified employees, and the Company may not be able to recover these increased labor costs through price increases charged to customers, which could significantly increase the Company’s operating costs.

 

Finally, interchange fees charged to us for accepting debit and credit cards have increased substantially and may continue to increase as more customer transactions are settled with debit and credit cards.

 

The Company is affected by the availability and wholesale price of gasoline and retail gasoline prices, all of which can fluctuate quickly and considerably.

 

The Company operates fuel stations at 66 of its store locations. While the Company obtains gasoline and diesel fuel from a number of different suppliers, long-term disruption in the availability and wholesale price of gasoline for resale could have a material adverse effect on the Company’s business, financial condition and/or results of operations.

 

13


Table of Contents

Fluctuating fuel costs adversely affect the Company’s operating costs which depend on fuel for the Company’s fleet of tractors and trailers which distribute goods from the Company’s distribution facility and for the Company’s fluid dairy operations. In addition, operations at the Company’s stores are sensitive to rising utility fuel costs due to the amount of electricity and gas required to operate the stores and the influence of petroleum costs on plastic bags and wraps.

 

Furthermore, fluctuating fuel costs could have an adverse effect on the Company’s total gasoline sales (both in terms of dollars and gallons sold), the profitability of gasoline sales, or the Company’s plans to develop additional fuel centers. Also, retail gas price volatility could diminish customer usage of fueling centers and, thus, adversely affect customer traffic at the Company’s stores.

 

The Company’s industry is highly competitive. If the Company is unable to compete effectively, the Company’s financial condition and results of operations could be materially affected.

 

The supermarket industry is highly competitive and continues to be characterized by intense price competition, aggressive supercenter expansion, increasing fragmentation of retail formats, entry of non-traditional competitors and market consolidation. Furthermore, some of the Company’s competitors have greater financial resources and could use these financial resources to take measures, such as altering product mix or reducing prices, which could adversely affect the Company’s competitive position.

 

The Company also faces competition from restaurants and fast food chains due to the increasing proportion of household food expenditures for food prepared outside the home. In addition, certain of the Company’s stores also compete with local video stores, florists, book stores, pharmacies and gas stations.

 

Disruptions in the efficient distribution of food products to the Company’s warehouse and stores may adversely affect the Company’s business.

 

The Company’s business could be adversely affected by disruptions in the efficient distribution of food products to the Company’s warehouse and to the Company’s stores. Such disruptions could be caused by, among other things, adverse weather conditions, fuel availability, food contamination recalls and civil unrest in foreign countries in which the Company’s suppliers do business.

 

The Company’s operations are subject to economic conditions that impact consumer spending.

 

The Company’s results of operations are sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending. Future economic conditions such as employment levels, business conditions, interest rates, energy and fuel costs and tax rates could reduce consumer spending or change consumer purchasing habits. A general reduction in the level of consumer spending or the Company’s inability to respond to shifting consumer attitudes regarding products, store location and other factors could adversely affect the Company’s business, financial condition and/or results of operations.

 

Item 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

Item 2. PROPERTIES

 

Owned Properties

 

The Company owns and operates 72 shopping centers, 56 of which contain an Ingles supermarket, and owns 92 additional properties that contain a free-standing Ingles store. The Company also owns 12 undeveloped sites which are suitable for a free-standing store or shopping center development. Ingles owns numerous outparcels and other acreage located adjacent to the shopping centers and supermarkets it owns. Real estate owned by the Company is generally located in the same geographic regions as its supermarkets.

 

14


Table of Contents

The shopping centers owned by the Company contain an aggregate of 6.1 million square feet of leasable space, of which 2.9 million square feet is used by the Company’s supermarkets. The remainder of the leasable space in these shopping centers is leased or held for lease by the Company to third party tenants. A breakdown by size of the shopping centers owned and operated by the Company is as follows:

 

Size

   Number

Less than 50,000 square feet

   20

50,000 – 100,000 square feet

   27

More than 100,000 square feet

   25
    

Total

   72
    

 

The Company owns an 810,000 square foot facility, which is strategically located between Interstate 40 and Highway 70 near Asheville, North Carolina, as well as the 73 acres of land on which it is situated. The facility includes the Company’s headquarters and its 780,000 square foot warehouse and distribution facility. The property also includes truck servicing and fuel storage facilities. The Company also owns a 139,000 square foot warehouse on 21 acres of land approximately one mile from its main warehouse and distribution facility that is used to store seasonal and overflow items. The Company also owns a 46 acre site adjacent to its warehouse and distribution facility for possible future expansion.

 

The Company’s milk processing and packaging subsidiary, Milkco, Inc., owns a 116,000 square foot manufacturing and storage facility in Asheville, North Carolina. In addition to the plant, the 20-acre property includes truck cleaning and fuel storage facilities.

 

Certain long-term debt of the Company is secured by the owned properties. See Note 6, “Long-Term Debt and Short-Term Loans” to the Consolidated Financial Statements of this Annual Report on Form 10-K for further details.

 

Leased Properties

 

The Company operates supermarkets at 52 locations leased from various unaffiliated third parties. The Company also leases 10 supermarket facilities in which it is not currently operating, five of which are subleased to third parties and the remainder are held for lease by the Company. Certain of the leases give the Company the right of first refusal to purchase the entire shopping center in which the supermarkets are located. The majority of these leases require the Company to pay property taxes, utilities, insurance, repairs and certain other expenses incidental to occupation of the premises. In addition to base rent, most leases contain provisions that require the Company to pay additional percentage rent (ranging from 0.75% to 1.5%) if sales exceed a specified amount.

 

Rental rates generally range from $1.67 to $8.18 per square foot. During fiscal years 2009, 2008 and 2007, the Company paid a total of $14.6 million, $13.6 million and $16.3 million, respectively, in supermarket rent, exclusive of property taxes, utilities, insurance, repairs and other expenses. The following table summarizes lease expiration dates as of September 26, 2009, with respect to the initial and any renewal option terms of leased supermarkets:

 

Year of Expiration

(Including Renewal Terms)

   Number of
Leases Expiring

2010 – 2023

   5

2024 – 2038

   7

2039 or after

   50

 

Management believes that the long-term rent stability provided by these leases is a valuable asset of the Company.

 

15


Table of Contents
Item 3. LEGAL PROCEEDINGS

 

Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims would not materially affect the Company’s business, financial condition and/or the results of operations.

 

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of the Company’s security holders during the fourth quarter of the fiscal year covered by this report.

 

16


Table of Contents

PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

The Company has two classes of Common Stock: Class A and Class B. Class A Common Stock is traded on The NASDAQ Global Select Market under the symbol IMKTA. There is no public market for the Company’s Class B Common Stock. However, under the terms of the Company’s Articles of Incorporation, any holder of Class B Common Stock may convert any portion or all of the holder’s shares of Class B Common Stock into an equal number of shares of Class A Common Stock at any time. For additional information regarding the voting powers, preferences and relative rights of the Class A Common Stock and Class B Common Stock, please see Note 7, “Stockholders’ Equity” to the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

As of November 30, 2009, there were approximately 626 holders of record of the Company’s Class A Common Stock and 163 holders of record of the Company’s Class B Common Stock. The following table sets forth the reported high and low closing sales price for the Class A Common Stock during the periods indicated as reported by NASDAQ. The quotations reflect actual inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

2009 Fiscal Year

   High    Low

First Quarter (ended December 27, 2008)

   $ 22.83    $ 11.67

Second Quarter (ended March 28, 2009)

   $ 18.07    $ 11.09

Third Quarter (ended June 27, 2009)

   $ 17.23    $ 14.04

Fourth Quarter (ended September 26, 2009)

   $ 17.28    $ 14.85

2008 Fiscal Year

   High    Low

First Quarter (ended December 29, 2007)

   $ 30.02    $ 20.83

Second Quarter (ended March 29, 2008)

   $ 26.77    $ 21.35

Third Quarter (ended June 28, 2008)

   $ 26.43    $ 21.88

Fourth Quarter (ended September 27, 2008)

   $ 26.19    $ 23.33

 

On November 30, 2009, the closing sales price of the Company’s Class A Common Stock on The NASDAQ Global Select Market was $15.61 per share.

 

Dividends

 

The Company has paid cash dividends on its Common Stock in each of the past twenty-seven fiscal years, except for the 1984 fiscal year when the Company paid a 3% stock dividend. During both fiscal 2009 and fiscal 2008 the Company paid annual dividends totaling $0.66 per share of Class A Common Stock and $0.60 per share of Class B Common Stock, paid in quarterly installments of $0.165 and $0.15 per share, respectively. The Company’s last dividend payment was made on October 22, 2009 to common stockholders of record on October 8, 2009. For additional information regarding the dividend rights of the Class A Common Stock and Class B Common Stock, please see Note 7, “Stockholders’ Equity” to the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

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. 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. The payment of cash dividends is also subject to restrictions contained in certain financing arrangements. Such restrictions are summarized in Note 6, “Long-Term Debt and Short-Term Loans” to the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

17


Table of Contents

Equity Compensation Plan Information

 

The Company had a nonqualified stock option plan pursuant to which an aggregate of 8,000,000 shares of the Company’s Class A Common Stock were reserved for issuance to the Company’s officers and other key employees until January 1, 2007. Accordingly, as of September 26, 2009, no shares of the Company’s Class A Common Stock were available for future issuance under the plan and all remaining unexercised options had expired.

 

The Company does not have any equity compensation plans not approved by its stockholders.

 

Stock Performance Graph

 

Set forth below are a graph and accompanying table comparing the five-year cumulative total stockholder return on the Class A Common Stock with the five-year cumulative total return of (i) the S&P 500 Comprehensive-Last Trading Day Index and (ii) an expanded peer group of companies in the Company’s line of business. The peer group consists of the following companies: Royal Ahold N.V., Delhaize S.A., Pathmark Stores, Inc., The Kroger Co., Safeway Inc., Supervalu Inc., Whole Foods Market, Inc. and The Great Atlantic & Pacific Tea Company, Inc.

 

The comparisons cover the five-years ended September 26, 2009 and assume that $100 was invested after the close of the market on September 25, 2004, and that dividends were reinvested quarterly. Returns of the companies included in the peer group reflected below have been weighted according to each company’s stock market capitalization at the beginning of each section for which a return is presented.

 

INGLES MARKETS, INCORPORATED

COMPARATIVE RETURN TO STOCKHOLDERS

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Ingles Markets, Inc., The S&P 500 Index

And A Peer Group

 

LOGO

 

* $100 invested on 9/25/04 in stock or 9/30/04 in index, including reinvestment of dividends.
     Index calculated on month-end basis.

 

Copyright © 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

 

18


Table of Contents

INDEXED RETURNS OF INITIAL $100 INVESTMENT*

 

Company/Index

   2005    2006    2007    2008    2009

Ingles Markets, Incorporated Class A Common Stock

   $ 126.87    $ 232.47    $ 257.62    $ 221.26    $ 153.49

S&P 500 Comprehensive—Last Trading Day Index

   $ 112.25    $ 124.37    $ 144.81    $ 112.99    $ 105.18

Expanded Peer Group

   $ 127.87    $ 150.58    $ 174.21    $ 134.19    $ 117.08

 

* Assumes $100 invested in the Class A Common Stock of Ingles Markets, Incorporated after the close of the market on September 25, 2004.

 

The foregoing stock performance information, including the graph, shall not be deemed to be “soliciting material” or to be filed with the Securities and Exchange Commission nor shall this information be incorporated by reference into any of the Company’s filings under the Securities Act of 1933 or the Exchange Act.

 

Item 6. SELECTED FINANCIAL DATA

 

The selected financial data set forth below has been derived from the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. This financial data should be read in conjunction with “Item 7. “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and the Consolidated Financial Statements and Notes thereto.

 

     Selected Income Statement Data for the Year Ended September
     2009    2008    2007    2006    2005
     (in thousands, except per share amounts)

Net Sales

   $ 3,250,933    $ 3,238,046    $ 2,851,593    $ 2,612,233    $ 2,273,941

Net Income

     28,828      52,123      58,638      42,582      26,570

Diluted Earnings per Common Share

              

Class A

   $ 1.18    $ 2.13    $ 2.39    $ 1.74    $ 1.10

Class B

     1.12      2.02      2.28      1.66      1.05

Cash Dividends per Common Share

              

Class A

   $ 0.66    $ 0.66    $ 0.66    $ 0.66    $ 0.66

Class B

     0.60      0.60      0.60      0.60      0.60
     Selected Balance Sheet Data at September
     2009    2008    2007    2006    2005
     (in thousands)

Current Assets

   $ 423,720    $ 334,763    $ 293,127    $ 275,608    $ 283,115

Property and Equipment, net

     1,072,937      1,030,023      839,732      771,628      744,162

Total Assets

     1,517,609      1,375,004      1,142,806      1,064,764      1,044,663

Current Liabilities, including Current Portion of Long-Term Debt

     228,562      253,273      217,423      208,651      179,534

Long-Term Liabilities, net of Current Portion (1)

     823,660      686,393      539,063      528,767      557,035

Stockholders’ Equity

     398,164      384,814      348,144      304,673      276,849

 

(1) Excludes long-term deferred income tax liability.

 

19


Table of Contents
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Ingles, a leading supermarket chain in the Southeast United States, operates 200 supermarkets in Georgia (73), North Carolina (68), South Carolina (36), Tennessee (20), Virginia (2) 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 September 26, 2009, the Company operated 69 in-store pharmacies and 66 fuel centers.

 

Ingles also operates two other lines of business, fluid dairy processing and shopping center rentals. The fluid dairy processing segment sells approximately 34% of its products to the retail grocery segment and approximately 66% of its products to third parties. Real estate ownership (including the shopping center rental segment) is an important component of the Company’s operations, providing both operational and economic benefit.

 

Critical Accounting Policies

 

Critical accounting policies are those accounting policies that management believes are important to the portrayal of Ingles’ 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 and $300,000 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 September 26, 2009, the Company’s self insurance reserves totaled $14.2 million for employee group insurance, workers’ compensation insurance and general liability insurance.

 

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 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

 

20


Table of Contents

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.

 

Closed Store Accrual

 

For closed properties under long-term lease agreements, a liability is recognized and expensed based on the difference between the present value of any remaining liability under the lease and the present value of the estimated market rate at which the Company expects to be able to sublease the properties, in accordance with FASB ASC Topic 420. The Company’s estimates of market rates are based on its experience, knowledge and third-party advice or market data. If the real estate and leasing markets change, sublease recovery could vary significantly from the recoveries originally assumed, resulting in a material change in the Company’s recorded liability. The closed store accrual is included in the line item “Accrued expenses and current portion of other long-term liabilities” on the Consolidated Balance Sheets.

 

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 $101.0 million, $97.5 million, and $91.6 million for the fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007, 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 that the related expense is incurred. Vendor advertising allowances recorded as a reduction of advertising expense totaled $14.3 million, $11.8 million, and $10.4 million for the fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007, 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.

 

Uncertain Tax Positions

 

Despite the Company’s belief that its tax positions are consistent with applicable tax laws, the Company believes that certain positions are likely to be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. Significant judgment is required in evaluating the Company’s tax positions. The Company’s positions are evaluated in light of changing facts and circumstances, such as the progress of its tax audits as well as

 

21


Table of Contents

evolving case law. Income tax expense includes the impact of position provisions for and changes to uncertain tax positions as the Company considers appropriate. Unfavorable settlement of any particular position would require use of cash. Favorable resolution would be recognized as a reduction to income tax expense at the time of resolution.

 

During the quarter ended March 31, 2007 the Company settled a tax position under an initiative offered by one of the states in which the Company conducts its operations. As a result of this settlement, the Company reduced its reserve for uncertain income tax positions by $3.2 million. This reduction is reflected as a reduction of income tax expense for the fiscal year ended September 29, 2007.

 

Results of Operations

 

Ingles operates on a 52- or 53-week fiscal year ending on the last Saturday in September. The consolidated statements of income for the fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007, all consisted of 52 weeks of operations.

 

Comparable store sales are defined as sales by grocery stores in operation for the entire duration of the previous and current fiscal years. The Company has an ongoing renovation and expansion plan to modernize the appearance and layout of its existing stores. Over the past five fiscal years, the Company has spent approximately $605 million to modernize and remodel its existing stores, relocate older stores to larger, more convenient locations and to construct new stores in order to maintain the quality shopping experience that its customers expect. 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 of completion of the replacement, remodel or addition. 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. Gasoline sales from the addition of fuel stations to existing stores during the measurement period are included in comparable store sales. For the fiscal years ended September 26, 2009 and September 27, 2008 comparable store sales include 194 and 193 stores, respectively. Weighted average retail square footage added to comparable stores due to replacement and remodeled stores totaled approximately 730,000 and 614,000 for the fiscal years ended September 26, 2009 and September 27, 2008, 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, reference is made to Note 10 “Lines of Business” to the Consolidated Financial Statements.

 

     Fiscal Years Ended  
     2009     2008     2007  

Net sales

   100.0   100.0   100.0

Gross profit

   22.9      21.8      22.8   

Operating and administrative expenses

   19.5      18.1      18.5   

Rental income, net

   0.1      0.1      0.2   

Gain (loss) on sale or disposal of assets

   —        —        0.2   

Income from operations

   3.5      3.8      4.7   

Other income, net

   0.1      0.1      0.1   

Interest expense

   1.8      1.5      1.6   

Loss on early extinguishment of debt

   0.3      —        —     

Income before income taxes

   1.4      2.5      3.2   

Income taxes

   0.5      0.9      1.1   

Net income

   0.9      1.6      2.1   

 

22


Table of Contents

Fiscal Year Ended September 26, 2009 Compared to the Fiscal Year Ended September 27, 2008

 

The Company achieved record sales for the 45th consecutive year for the fiscal year ended September 26, 2009, despite average per gallon prices for gasoline and milk that were 36.5% and 28.1% lower, respectively, than the previous fiscal year. Excluding gasoline revenues and despite lower milk revenue, both comparable store and total grocery revenues increased.

 

The continued economic recession resulted in an extremely competitive environment, cost deflation in a number of key items, and more frugal customer behavior. The recession also resulted in a longer time to achieve sales and profitability targets for stores developed and remodeled in fiscal years 2008 and 2009.

 

In May 2009, the Company issued $575.0 million aggregate principal amount of senior notes due in 2017 (the “Notes”) in a private placement. Note proceeds were used to pay off $349.8 million aggregate principal amount of senior subordinated debt maturing in 2011, pay off $45.3 million of indebtedness outstanding under the Company’s committed lines of credit, pay off $77.7 million of secured indebtedness, and pay costs related to the offering of the Notes. As a result, the Company’s total interest expense increased and the Company incurred $10.2 million of debt extinguishment costs.

 

The above factors contributed to net income for the fiscal year ended September 26, 2009 of $28.8 million, compared with $52.1 million for the fiscal year ended September 27, 2008.

 

Net Sales. Net sales for the fiscal year ended September 26, 2009 increased 0.4% to $3.25 billion, compared to $3.24 billion for the fiscal year ended September 27, 2008. Excluding gasoline, net sales increased 4.3%.

 

For the comparative fiscal year 2009 and 2008 periods, total grocery segment sales excluding gasoline increased $143.9 million, or 5.4% to $2.79 billion. Grocery segment comparable store sales excluding gasoline increased $93.2 million, or 3.5%. The average retail price of gasoline decreased approximately $0.96 per gallon during fiscal year 2009, while the number of gallons sold increased. The number of customer transactions (excluding gasoline) increased 7.9%, while the average transaction size (excluding gasoline) decreased by approximately 53 cents. The Company believes this transaction data may reflect cost-conscious customers dining out less and changing purchasing habits towards lower priced items.

 

Sales by product category for the fiscal years ended September 26, 2009 and September 27, 2008, respectively, were as follows:

 

     Fiscal Year Ended September
     2009    2008

Grocery

   $ 1,358,030,265    $ 1,295,946,749

Non-foods

     664,376,193      624,957,153

Perishables

     768,604,794      727,072,477

Gasoline

     352,621,331      459,287,398
             

Total grocery segment

   $ 3,143,632,583    $ 3,107,263,777
             

 

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

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

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

 

23


Table of Contents

Changes in grocery segment sales for the fiscal year ended September 26, 2009 are summarized as follows (in thousands):

 

Total grocery sales for the fiscal year ended September 27, 2008

   $ 3,107,264   

Comparable store sales decrease (including gasoline)

     (30,650

Impact of stores opened in fiscal 2008 and 2009

     74,596   

Impact of stores closed in fiscal 2008 and 2009

     (7,572

Other

     (5
        

Total grocery sales for the fiscal year ended September 26, 2009

   $ 3,143,633   
        

 

In general, grocery segment sales increases (excluding gasoline) during fiscal 2009 were driven by effective promotions, service execution and expanded product selections. The Company believes it is important to aggressively protect market share and customer traffic during difficult economic conditions and increased unemployment in its market area. Fuel stations and pharmacies have been effective in giving customers a competitive choice and allowing them to consolidate shopping trips at Company supermarkets. The Company believes recent economic uncertainty has resulted in growth in private label sales and meal replacement items sold in the Company’s deli and produce departments. The Ingles Advantage Savings and Rewards Card (the “Ingles Advantage Card”) also contributes to the increase in net sales and comparable store sales. Information obtained from holders of the Ingles Advantage Card assists the Company in optimizing product offerings and promotions specific to customer shopping patterns.

 

Net sales to outside parties for the Company’s milk processing subsidiary decreased $23.5 million or 18.0% in fiscal year 2009 compared with fiscal year 2008. The sales decrease is primarily attributable to an approximately 28% decrease in raw milk costs which are typically passed on to customers in the pricing of milk products. The volume of gallons sold increased slightly over the comparable fiscal year periods.

 

The Company expects continued sales growth in the 2010 fiscal year. The magnitude of expected growth could vary significantly due to overall economic and competitive conditions, and due to volatility in the retail price of gasoline, milk and other commodity-type food products. The Company expects that the maturation of new and expanded stores that enhance “one-stop” shopping and contain numerous convenience and value-oriented products will also drive future sales growth.

 

Gross Profit. Gross profit for the year ended September 26, 2009 increased $36.7 million or 5.2% to $743.1 million compared to $706.3 million, for the year ended September 27, 2008. As a percentage of sales, gross profit totaled 22.9% for the year ended September 26, 2009 and 21.8% for the year ended September 27, 2008.

 

The increase in grocery segment gross profit dollars was primarily due to the higher sales volume. Grocery segment gross profit as a percentage of total sales (excluding gasoline) was 25.3% for fiscal year 2009 compared with 25.5% for the comparable fiscal 2008 period. The Company has responded to the current competitive environment by keeping prices as low as possible in order to grow sales and market share.

 

Gross profit for the Company’s milk processing subsidiary for the year ended September 26, 2009 increased $1.0 million or 4.6% to $21.6 million, or 13.4% of sales, compared to $20.6 million, or 10.6% of sales for the year ended September 27, 2008. Raw milk prices were significantly lower during fiscal 2009, which increased gross profit as a percentage of sales, as relatively stable per-gallon milk profit margins were applied to the lower sales price.

 

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 segment is a manufacturing process; therefore, the costs mentioned above as well as purchasing and receiving costs, production costs, inspection costs, warehousing costs, internal transfer costs, and other costs of distribution incurred by the milk processing segment are included in the cost of sales line item, while these items are included in operating and administrative expenses for the grocery segment.

 

24


Table of Contents

The Company’s gross margins may not be comparable to those of other retailers, since some retailers exclude all of the costs related to their distribution network from cost of goods sold and others, like the Company, include a portion of the costs in gross profit.

 

Operating and Administrative Expenses. Operating and administrative expenses increased $47.5 million, or 8.1%, to $632.4 million for the year ended September 26, 2009, from $584.9 million for the year ended September 27, 2008. As a percentage of sales, operating and administrative expenses were 19.5% for the fiscal year ended September 26, 2009, compared to 18.1% for the fiscal year ended September 27, 2008. Excluding gasoline, which does not have significant direct operating expenses, the ratio of operating expenses to sales was 21.7% for fiscal year 2009 compared with 20.9% for fiscal year 2008.

 

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

 

     (in millions)    Increase
as a % of
sales
 

Salaries and wages

   $ 21.9    0.67

Depreciation and amortization

   $ 10.8    0.33

Utility and fuel expenses

   $ 5.5    0.17

Taxes and licenses

   $ 3.9    0.12

Store supplies

   $ 2.3    0.07

Bank charges

   $ 1.5    0.05

 

Salaries and wages increased due to the addition of labor hours required for the increased sales volume and for the additional square footage operated during fiscal year 2009.

 

Depreciation and amortization expense increased as a result of the Company’s increased capital expenditures to improve its store base.

 

Utility and fuel expenses increased due to the additional square footage operated during fiscal year 2009.

 

Taxes and licenses increased primarily due to increased property taxes on new and redeveloped stores completed in fiscal years 2009 and 2008.

 

Store supplies increased due to upgraded packaging used in perishables departments and for the additional square footage operated during fiscal year 2009.

 

Bank charges rose primarily due to increased fees for processing debit and credit cards. The increase is a result of both increased usage of cards and increased transaction fees related to the usage.

 

Rental Income, Net. Rental income, net decreased $0.9 million to $2.4 million for fiscal year 2009, from $3.3 million for fiscal year 2008. Third party tenant occupancy rates have been decreasing in many of the Company’s shopping centers as the Company intends to expand and upgrade existing supermarkets into former tenant space. In addition, the Company intends to maximize supermarket sales by limiting space leased to companies that offer competing products. Finally, current economic conditions have resulted in a higher tenant vacancy rate.

 

Gain (Loss) From Sale or Disposal of Assets. Gains from the sale or disposal of assets totaled $0.1 million for the year ended September 26, 2009 compared with a loss of $1.3 million for the comparable fiscal 2008 period. During the March 2009 quarter, the Company sold an outparcel at a gain of approximately $1.0 million, offset by losses on the disposal of equipment resulting from store redevelopment activities.

 

Other Income, Net. Other income, net totaled $2.3 million and $3.1 million for the fiscal years ended September 26, 2009, and September 27, 2008, respectively. Other income consists primarily of sales of waste paper and packaging. Unit sales prices for these items have been generally lower during fiscal 2009.

 

25


Table of Contents

Interest Expense. Interest expense increased $12.2 million for the year ended September 26, 2009 to $59.1 million from $46.9 million for the year ended September 27, 2008. Total debt was $849.3 million at the end of fiscal year 2009 compared with $717.2 million at the end of fiscal year 2008. The increased interest expense is primarily attributable to an increase in total debt. Interest capitalized as a component of store construction cost totaled $2.6 million for the year ended September 26, 2009 compared with $4.6 million for the year ended September 27, 2008. The decrease is attributable to a lower number of store construction projects during fiscal year 2009.

 

Loss on Early Extinguishment of Debt. In conjunction with the payoff of the Company’s $349.8 million aggregate principal amount of senior subordinated debt and $77.7 million of secured indebtedness, the Company incurred call premiums and prepayment penalties totaling $6.8 million and wrote off $3.4 million of unamortized capitalized loan issuance costs associated with the paid off debt.

 

Income Taxes. Income tax expense as a percentage of pre-tax income increased to 37.6% for the 2009 fiscal year compared to 34.6% for the 2008 fiscal year due to a higher provision for deferred taxes. Various governmental economic policies (such as accelerated tax depreciation and tax credits) have reduced the portion of the Company’s tax liability that must be paid currently.

 

Net Income. Net income decreased $23.3 million, or 44.7%, for the fiscal year ended September 26, 2009 to $28.8 million from $52.1 million for the fiscal year ended September 27, 2008. Basic and diluted earnings per share for Class A Common Stock were $1.23 and $1.18, respectively, for the fiscal year ended September 26, 2009 compared to $2.22 and $2.13, respectively, for the fiscal year ended September 27, 2008. Basic and diluted earnings per share for Class B Common Stock were each $1.12 for the fiscal year ended September 26, 2009 compared to $2.02 of basic and diluted earnings per share for the fiscal year ended September 27, 2008.

 

Fiscal Year Ended September 27, 2008 Compared to the Fiscal Year Ended September 29, 2007

 

The Company achieved record sales and gross profit for the fiscal year ended September 27, 2008. Net income for fiscal year 2008 was lower than fiscal year 2007 due to (i) a favorable income tax settlement and the sale of a shopping center in fiscal year 2007, (ii) higher operating expenses in fiscal year 2008 and (iii) the effect of hurricanes on gasoline sales and gross profit during the fourth quarter of fiscal year 2008.

 

Net Sales. Fiscal 2008 was the 44th consecutive year Ingles achieved an increase in net sales. Net sales increased 13.6% to $3.238 billion for the fiscal year ended September 27, 2008, from $2.852 billion for the fiscal year ended September 29, 2007. Excluding gasoline sales, sales increased $214.1 million or 8.3% for the fiscal year ended September 27, 2008.

 

Grocery segment comparable store sales increased $366.5 million, or 13.5%, for the fiscal year ended September 27, 2008. Excluding gasoline sales, comparable store sales increased $194.3 million, or 8.0%, for the fiscal year ended September 27, 2008. During fiscal 2008, Ingles opened two new stores, closed two older stores, completed ten major remodeled or replacement stores and added eleven fuel centers. Retail square footage increased 4.8% to 10.2 million square feet at September 27, 2008, compared to 9.7 million square feet at September 29, 2007. Sales by product category for the fiscal years ended September 27, 2008 and September 29, 2007, respectively, were as follows:

 

     Fiscal Year Ended September
     2008    2007

Grocery

   $ 1,295,946,749    $ 1,182,907,566

Non-foods

     624,957,153      589,204,228

Perishables

     727,072,477      670,206,118

Gasoline

     459,287,398      286,665,352
             

Total grocery segment

   $ 3,107,263,777    $ 2,728,983,264
             

 

26


Table of Contents

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

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

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

 

Changes in grocery segment sales for the fiscal year ended September 27, 2008 are summarized as follows (in thousands):

 

Total grocery sales for the fiscal year ended September 29, 2007

   $ 2,728,983   

Comparable store sales increase (including gasoline)

     366,488   

Impact of stores opened in fiscal 2007 and 2008

     17,386   

Impact of stores closed in fiscal 2007 and 2008

     (5,595

Other

     2   
        

Total grocery sales for the fiscal year ended September 27, 2008

   $ 3,107,264   
        

 

In general, net sales increases during fiscal 2008 were driven by effective promotions, service execution and expanded product selections. Fuel stations and pharmacies have been effective in giving customers a competitive choice and allowing them to consolidate shopping trips at Company supermarkets. The Company believes recent economic uncertainty has resulted in growth in private label sales and meal replacement items sold in the Company’s deli and produce departments. The Ingles Advantage Savings and Rewards Card (the “Ingles Advantage Card”) also contributes to the increase in net sales and comparable store sales as approximately 72% of grocery segment sales are to holders of the Ingles Advantage Card. Information obtained from holders of the Ingles Advantage Card assists the Company in optimizing product offerings and promotions specific to customer shopping patterns.

 

Net sales to outside parties for the Company’s milk processing subsidiary increased 6.7% to $130.9 million for fiscal year 2008, compared to $122.6 million for fiscal year 2007. Much of the sales increase was attributable to an approximately $0.38 per gallon increase in the average cost of raw milk, which was generally passed through to higher sales prices. Case volume sales decreased by approximately 2% during fiscal 2008 compared to fiscal 2007.

 

The Company expects continued sales growth in the 2009 fiscal year. The magnitude of expected growth could vary significantly due to overall economic conditions, volatility in the retail price of gasoline, overall food price inflation and changes in the mix of products sold by the Company. The Company expects that the maturation of new and expanded stores that enhance “one-stop” shopping and contain numerous convenience-oriented products will also drive future sales growth.

 

Gross Profit. Gross profit for the fiscal year ended September 27, 2008 increased $56.9 million, or 8.8%, to $706.3 million, or 21.8% of sales, compared with $649.4 million, or 22.8% of sales, for the fiscal year ended September 29, 2007.

 

The increase in grocery segment gross profit dollars was primarily due to the higher sales volume. Grocery segment gross profit as a percentage of total sales is affected by lower margin gasoline sales, which had the largest increase in dollar sales during fiscal 2008. Excluding gasoline sales, fiscal 2008 grocery segment gross profit was 25.5% of sales, compared with 25.3% for fiscal 2007. Increased sales of private label and meal replacement items also contributed to the increase in gross margin, as these products have higher gross margins.

 

Gross profit for the Company’s milk processing subsidiary totaled $20.7 million for fiscal year 2008, compared with $23.6 million for fiscal year 2007. Per gallon margins decreased in response to cost and competitive factors, even as the sales price per gallon increased. These factors resulted in a lower gross profit as a percentage of sales during fiscal 2008.

 

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

 

27


Table of Contents

segment is a manufacturing process; therefore, the costs mentioned above as well as purchasing and receiving costs, production costs, inspection costs, warehousing costs, internal transfer costs, and other costs of distribution incurred by the milk processing segment are included in the cost of sales line item, while these items are included in operating and administrative expenses for the grocery segment.

 

The Company’s gross margins may not be comparable to those of other retailers, since some retailers exclude all of the costs related to their distribution network from cost of goods sold and others, like the Company, include a portion of the costs in gross profit.

 

Operating and Administrative Expenses. Operating and administrative expenses increased $62.4 million, or 11.1%, to $626.4 million for the year ended September 27, 2008, from $564.0 million for the year ended September 29, 2007. As a percentage of sales, operating and administrative expenses decreased to 19.4% for the fiscal year ended September 27, 2008, compared to 19.8% for the fiscal year ended September 29, 2007. Excluding gasoline, which does not have significant direct operating expenses, the ratio of operating expenses to sales was 22.4% for fiscal year 2008 compared with 21.9% for fiscal year 2007.

 

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

 

     (in millions)    Increase
as a % of
sales
 

Salaries and wages

   $ 28.0    0.86

Depreciation and amortization

   $ 6.4    0.20

Insurance expenses

   $ 4.8    0.15

Utility and fuel expenses

   $ 4.7    0.15

Bank charges

   $ 4.2    0.13

Store supplies

   $ 4.0    0.12

 

Salaries and wages increased due to the addition of labor hours required for the increased sales volume and for the additional square footage operated during fiscal year 2008.

 

Depreciation and amortization expense increased as a result of the Company’s increased capital expenditures to improve its store base.

 

Insurance expense increased due to increased employee health insurance and workers’ compensation claims and a related increase in self-insurance reserves for claims that will be resolved in the future.

 

Utility and fuel expenses increased due to increases in market energy prices and the additional square footage operated during fiscal year 2008.

 

Bank charges rose primarily due to increased fees for processing debit and credit cards. The increase is a result of both increased usage of cards and increased transaction fees related to the usage.

 

Store supplies increased due to upgraded packaging used in perishables departments and the higher cost of plastic used in bags and wrapping materials.

 

Rental Income, Net. Rental income, net decreased $1.1 million to $3.3 million for fiscal year 2008, from $4.4 million for fiscal year 2007. Third party tenant occupancy rates have been decreasing in many of the Company’s shopping centers as the Company intends to expand and upgrade existing supermarkets into former tenant space. In addition, the Company intends to maximize supermarket sales by limiting space leased to companies that offer competing products.

 

28


Table of Contents

Gain (Loss) From Sale or Disposal of Assets. Losses from sale or disposal of assets totaled $1.3 million compared with a gain of $6.9 million in fiscal 2007. During fiscal year 2007 the Company sold a shopping center in which it no longer operated a store at a pre-tax gain of approximately $7.9 million.

 

Other Income, Net. Other income, net increased $0.1 million to $3.1 million for the year ended September 27, 2008 from net other income of $3.0 million for the year ended September 29, 2007. Increased waste paper and packaging sales contributed to the increase during fiscal year 2008.

 

Interest Expense. Interest expense increased $0.2 million for the year ended September 27, 2008 to $46.9 million from $46.7 million for the year ended September 29, 2007. Total debt was $717.2 million at the end of fiscal year 2008 compared with $543.3 million at the end of fiscal year 2007. New debt incurred during fiscal year 2008 was generally at lower interest rates than existing or repaid debt. At September 27, 2008, the weighted average interest rate on new and refinanced borrowings was 5.40%. In addition, $4.6 million of interest was capitalized as a component of store construction cost during fiscal year 2008, compared with $2.0 million for fiscal year 2007.

 

Income Taxes. Income tax expense as a percentage of pre-tax income decreased to 34.6% for the 2008 fiscal year compared to 34.7% for the 2007 fiscal year. State income tax credits and a lower deferred tax expense rate accounted for much of the decrease. During fiscal year 2007 the Company settled a tax position under an initiative offered by one of the states in which the Company conducts its operations. As a result of this settlement, the Company reduced its reserve for contingent income tax liabilities by $3.2 million. This reduction is reflected as a reduction of income tax expense for the year ended September 29, 2007.

 

Net Income. Net income decreased $6.5 million, or 11.1%, for the fiscal year ended September 27, 2008 to $52.1 million from $58.6 million for the fiscal year ended September 29, 2007. Basic and diluted earnings per share for Class A Common Stock were $2.22 and $2.13, respectively, for the fiscal year ended September 27, 2008 compared to $2.51 and $2.39, respectively, for the fiscal year ended September 29, 2007. Basic and diluted earnings per share for Class B Common Stock were each $2.02 for the fiscal year ended September 27, 2008 compared to $2.28 of basic and diluted earnings per share for the fiscal year ended September 29, 2007.

 

Liquidity and Capital Resources

 

The Company believes that a key to its ability to continue to increase sales and develop a loyal customer base is providing conveniently located, clean and modern stores which provide customers with good service and an increasingly diverse selection of competitively priced products. 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 existing stores, and the relocation of selected existing stores to larger, more convenient locations.

 

Capital expenditures totaled $141.0 million and $248.8 million for fiscal years 2009 and 2008, respectively. Major capital expenditures include the following:

 

     2009    2008     

New stores

   4    2   

Replacement/remodeled stores

   6    10   

Store sites/land parcels purchased

   2    12   

Stores closed

   1    2   

Fuel stations added

   11    11    (including those added at new or replacement stores)

 

Capital expenditures also included the costs of upgrading and replacing store equipment, technology investments, capital expenditures related to the Company’s distribution operation and its milk processing plant, and expenditures for stores to open in subsequent fiscal years.

 

29


Table of Contents

Ingles’ capital expenditure plans for fiscal year 2010 include investments of approximately $120 to $150 million. The Company has reduced its expected capital expenditures for fiscal year 2010 in recognition that economic conditions may not improve rapidly and to allow maturation of the historically larger number of store redevelopment projects undertaken in fiscal years 2008 and 2009. For fiscal year 2010 the Company plans to open ten new, replacement or remodeled stores and add three fuel stations either at existing stores or in conjunction with its new, replacement and remodeled stores. Most of the projects are already in progress, with some expenditures included in fiscal year 2009 capital expenditures. Fiscal year 2010 capital expenditures will also include investments in stores expected to open in fiscal year 2011 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 net annual capital expenditures will be in the range of approximately $120 to $170 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 is currently limited. This 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, major remodel/expansions or minor remodels. 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. Construction commitments at September 26, 2009 totaled $28.5 million.

 

Liquidity

 

The Company generated $102.9 million of cash from operations in fiscal year 2009 compared with $89.6 million for fiscal year 2008. The increase is primarily attributable to increased non-cash depreciation and less cash used for working capital and tax payments.

 

Cash used by investing activities for fiscal year 2009 totaled $139.9 million compared with $248.3 million for fiscal year 2008. Investing activities were comprised almost exclusively of capital expenditures, reduced by net proceeds from sales of property and equipment.

 

During fiscal year 2009, the Company’s net financing activities provided $109.9 million in cash. In May 2009, the Company issued $575.0 million aggregate principal amount of senior notes due in 2017 (the “Notes”) in a private placement. The Notes bear an interest rate of 8.875% per annum and were issued at a discount to yield 9.5% per annum. Note proceeds were used to pay off $349.8 million aggregate principal amount of senior subordinated debt maturing in 2011, pay off $45.3 million outstanding indebtedness under the Company’s committed lines of credit, pay off $77.7 million of secured indebtedness, and pay costs related to the offering of the Notes. Remaining Note proceeds will be used for general corporate purposes, including future capital expenditures. As a result of these transactions, the Company has extended the average maturity of its total debt outstanding. The Company believes that availability of suitable financing may be sporadic in the future, and opportunistically accessed the capital markets.

 

In connection with the offering of the Notes, the Company entered into a new three-year $175.0 million line of credit and terminated three other lines of credit. After giving effect to these transactions, the Company has $190.0 million of total commitments under lines of credit.

 

The lines of credit provide the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or the London Interbank Offering Rate. The lines allow the Company to issue up to $30.0 million in unused letters of credit, of which $8.2 million of unused letters of credit were issued at September 26, 2009. The Company is not required to maintain compensating balances in connection with these lines of credit. There are no amounts outstanding under the lines of credit at September 26, 2009.

 

30


Table of Contents

The Notes and the lines of credit 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 lines of credit 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 related to these lines of credit at September 26, 2009.

 

For a further description of the other material terms of the Notes and the new $175.0 million line of credit, reference is made to the Company’s Current Report on Form 8-K dated May 12, 2009, as filed with the Securities and Exchange Commission on May 15, 2009.

 

Long-term debt and lines of credit agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios. These covenants have the effect of restricting certain types of transactions, including the payment of cash dividends in excess of current quarterly per share amounts. As of September 26, 2009, the Company was in compliance with these covenants.

 

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 lines of credit and Notes indenture in the event of default under any one instrument.

 

The Company’s principal sources of liquidity are expected to be cash flow from operations, borrowings under its lines of credit and long-term financing. As of September 26, 2009, the Company had $190.0 million available for borrowing under its committed lines of credit and unencumbered real property and equipment with a net book value of approximately $702 million. During the latter part of fiscal year 2009, various financing sources reduced the availability of credit, including some financial instruments that have been used by the Company. The Company believes, based on its current results of operations and financial condition, that its financial resources, including cash balances, existing bank lines of credit, 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 can be no assurance that any such sources of financing will be available to the Company 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 intangible 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 above and elsewhere under “Item 1A. Risk Factors.” 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.

 

31


Table of Contents

Contractual Obligations and Commercial Commitments

 

The Company has assumed various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements, such as debt and lease arrangements. The following table represents the scheduled maturities of the Company’s long-term contractual obligations as of September 26, 2009.

 

Payment Due by Period

 

Contractual Obligations

(amounts in thousands)

   Total    Less than
1 year
   1-3 years    3-5 years    More than
5 years

Long-term debt and lines of credit

   $ 849,314    $ 31,315    $ 136,871    $ 68,455    $ 612,673

Scheduled interest on long-term debt

     448,566      67,027      120,703      110,559      150,277

Upfront vendor allowances

     1,302      1,302      —        —        —  

Operating leases

     145,338      15,299      25,278      20,038      84,723

Construction commitments

     28,484      28,484      —        —        —  
                                  

Total

   $ 1,473,004    $ 143,427    $ 282,852    $ 199,052    $ 847,673
                                  

 

Amounts available to the Company under commercial commitments as of September 26, 2009, were as follows:

 

Amount of Commitment Expiration per Period

 

Other Commercial Commitments

(amounts in thousands)

   Total    Less than
1 year
   1-3 years    3-5 years    More than
5 years

Available lines of credit

   $ 190,000    $ 15,000    $ 175,000      

Letters of credit-standby

     8,203      1,903      6,300      
                              

Potential commercial commitments

   $ 198,203    $ 16,903    $ 181,300      
                              

 

Off Balance Sheet Arrangements

 

The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Quarterly Cash Dividends

 

Since December 27, 1993, the Company has paid regular quarterly cash dividends of $0.165 per share on its Class A Common Stock and $0.15 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, certain loan agreements containing provisions outlining minimum tangible net worth requirements restrict the ability of the Company to pay cash dividends to approximately $184 million based on tangible net worth at September 26, 2009. Further, the Company is prevented from paying cash dividends at any time that it is in default under the indenture governing the Notes. In addition, the terms of the indenture may restrict the ability of the Company to pay additional cash dividends based on certain financial parameters.

 

32


Table of Contents

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 increases with general inflation. Inflation in energy costs affects both the Company’s gasoline sales and distribution expenses.

 

      Twelve Months Ended  
     September 26,
2009
    September 27,
2008
 

All items

   (1.3 )%    4.9

Food and beverages

   (0.2 )%    6.0

Energy

   (21.6 )%    23.1

 

New Accounting Pronouncements

 

For new accounting pronouncements, see Note 1 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

 

Outlook and Trends in the Company’s Markets

 

The Company confronted many challenges in fiscal year 2009, most of which were driven by poor economic conditions, volatile costs for food and energy, and reduced credit availability. The Company continually assesses and develops its business model in light of these factors and to meet the changing needs and expectations of its customers. In connection with this review, the Company assesses the trends present in the markets in which it competes. Generally, it is difficult to predict whether a trend will continue for a period of time and it is possible that new trends will develop which will affect an existing trend. The Company believes that the following trends are likely to continue for at least the next fiscal year:

 

   

The supermarket industry will remain highly competitive and will be characterized by industry consolidation and continued competition from supercenters and other non-supermarket operators.

 

   

Uncertain economic conditions will continue to affect customer behavior towards meal replacement items in lieu of restaurant dining and increased private label purchases instead of national brands. Customers may also continue to purchase less expensive product varieties and purchase a higher degree of sale and promotional items.

 

   

The Company and its customers will continue to become more environmentally aware, evidenced by the Company’s increased recycled waste paper and pallets and customers’ increased usage of reusable shopping bags.

 

   

Volatile petroleum costs will impact utility and distribution costs, plastic supplies cost and may change customer shopping and dining behavior.

 

   

Bank charges will continue to increase as more customer transactions will be settled with debit and credit cards. Interchange fees charged to retailers, such as the Company, have been increasing. The Company does not know if this trend will continue and the impact it will have on the Company’s costs.

 

The Company plans to continue to focus on balancing sales growth and gross margin maintenance (excluding the effect of gasoline sales), and will carefully monitor its product mix and customer trends. In addition, the Company believes the following plans and business-specific trends will have an impact on its business during its next fiscal year:

 

   

The Company plans to build new stores and remodel existing consistent with the Company’s “one-stop” shopping experience.

 

   

The Company will focus on decreasing operating expenses as a percentage of sales.

 

   

The Company will continue to broaden its product offering in perishable and specialty areas.

 

33


Table of Contents
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

The Company is exposed to changes in financial market conditions in the normal course of its business as a result of its use of financial institution debt and the Company’s outstanding 8 7/8% Senior Notes due 2017, each of which have been used to finance the Company’s retail grocery and real estate lines of business.

 

The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which include borrowings under lines of credit, real estate and equipment financing and the Company’s 8 7/8% Senior Notes due 2017. The lines of credit, along with cash flow from operations, are used to maintain liquidity and fund business operations. The Company typically replaces borrowings under its variable rate lines of credit, as necessary, with both long-term secured and unsecured financing. The nature and amount of the Company’s debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of the Company’s interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements, but the Company does not believe such risk is material. The Company may consider the use of derivative instruments to adjust the Company’s interest rate risk profile.

 

The table below presents principal amounts and related weighted average rates by year of maturity for the Company’s debt obligations at September 26, 2009 and September 27, 2008, respectively (in thousands):

 

September 26, 2009

  2010     2011     2012     2013     2014     Thereafter     Total     Fair Value

Lines of credit

    —          —          —          —          —          —          —          —  

Average variable interest rate

    —          —          —          —          —          —          —       

Long-term debt, variable interest rate

  $ 4,588     $ 27,737     $ 11,533     $ 31,056       —          —        $ 74,914     $ 74,914

Average interest rate

    2.47     3.04     2.64     2.11     —          —          2.56  

Long-term debt, fixed interest rate

  $ 29,207     $ 66,623     $ 35,939     $ 29,840     $ 12,521     $ 44,163     $ 218,293     $ 218,498

Average interest rate

    6.50     7.07     6.45     6.20     7.14     6.40     6.64  

Bonds payable, fixed interest rate

    —          —          —          —          —        $ 556,107      $ 556,107     $ 590,813

Average interest rate

    —          —          —          —          —          9.18     9.18  

September 27, 2008

  2009     2010     2011     2012     2013     Thereafter     Total     Fair Value

Lines of credit

    —        $ 27,755       —          —          —          —        $ 27,755     $ 27,755

Average variable interest rate

    —          5.20     —          —          —          —          5.20  

Long-term debt, variable interest rate

  $ 10,634     $ 1,842     $ 26,656     $ 1,330     $ 37,506       —        $ 77,968     $ 77,968

Average interest rate

    6.26     3.83     4.35     3.48     3.48     —          4.17  

Long-term debt, fixed interest rate

  $ 25,608     $ 27,718     $ 65,308     $ 31,567     $ 39,334     $ 72,414      $ 261,949     $ 249,383

Average interest rate

    7.37     7.39     7.49     7.44     7.22     7.54     7.43  

Bonds payable, fixed interest rate

    —          —          —        $ 349,484       —          —        $ 349,484     $ 354,538

Average interest rate

    —          —          —          8.88     —          —          8.88  

 

The Company has not typically utilized financial or derivative instruments for trading or other speculative purposes, nor has it typically utilized leveraged financial instruments. Following the comprehensive refinancing undertaken by the Company during the third quarter of fiscal year 2009, the Company may consider derivative instruments such as interest rate swaps to manage its overall interest rate risk. On the basis of the fair value of the Company’s market sensitive instruments at September 26, 2009, the Company does not consider the potential near-term losses in future earnings, fair values and cash flows from reasonable possible near-term changes in interest rates and exchange rates to be material.

 

34


Table of Contents
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The Company’s financial statements required by this item are set forth as a separate section of this Annual Report on Form 10-K. See Part IV, Item 15 of this Annual Report on Form 10-K.

 

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

Item 9A. CONTROLS AND PROCEDURES

 

Conclusion Regarding Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures designed to provide reasonable assurance to achieve 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 and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.

 

As required by Rule 13a-15(b) under the Exchange Act, 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 September 26, 2009, the end of the period covered by this report.

 

Based on this evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of September 26, 2009.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

 

  (i) pertain to the maintenance of records that, in a reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

 

  (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and

 

  (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material adverse effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that

 

35


Table of Contents

controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company has assessed the effectiveness of its internal control over financial reporting as of September 26, 2009 using the criteria described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

Based on its assessment of the design and related testing of the Company’s internal control over financial reporting, management has concluded that, as of September 26, 2009, the Company maintained effective internal control over financial reporting based on the criteria set forth in the COSO framework.

 

The Company’s independent auditors, Ernst & Young LLP, a registered public accounting firm, are appointed by the Audit Committee of the Company’s Board of Directors, subject to ratification by our Company’s shareowners. Ernst & Young LLP has audited and reported on the consolidated financial statements of the Company and the Company’s internal control over financial reporting. The reports of the independent auditors are contained in this Annual Report.

 

The effectiveness of the Company’s internal control over financial reporting has been audited by the Company’s independent auditor, Ernst & Young LLP, a registered public accounting firm, as stated in their report at page 35 herein.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change during the Company’s fiscal year ended September 26, 2009 in the Company’s internal control over financial reporting that was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) which has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

As noted above, management has concluded that the Company’s disclosure controls and procedures were effective as of September 26, 2009.

 

Item 9B. OTHER INFORMATION

 

None.

 

PART III

 

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by this Item, including the information concerning the Company’s directors and officers, audit committee, and compliance with Section 16 of the Exchange Act, is incorporated herein by reference to the information to be contained in the Company’s definitive Proxy Statement to be used in connection with the solicitation of proxies for the Company’s 2010 annual meeting of stockholders. The definitive Proxy Statement will be filed with the Securities and Exchange Commission (the “Commission”) pursuant to Regulation 14A not later than 120 days after September 26, 2009.

 

The Company has adopted a Code of Ethics that applies to its senior financial officers, including without limitation, its Chief Executive Officer, Chief Financial Officer and Controller. The full text of the Code of Ethics is published on the Company’s website at www.ingles-markets.com under the caption “Corporate Information.” In the event that the Company makes any amendments to, or grants any waivers of, a provision of the Code of Ethics applicable to its principal executive officer, principal financial officer or principal accounting officer, the Company intends to disclose such amendment or waiver on its website. Information on the Company’s website, however, does not form a part of this Annual Report on Form 10-K.

 

36


Table of Contents
Item 11. EXECUTIVE COMPENSATION

 

The information required by this Item is incorporated herein by reference to the information to be contained in the Company’s definitive Proxy Statement referred to above in “Item 10. Directors, Executive Officers and Corporate Governance.”

 

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this Item is incorporated herein by reference to the information to be contained in the definitive Proxy Statement referred to above in “Item 10. Directors, Executive Officers and Corporate Governance.”

 

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this Item is incorporated herein by reference to the information to be contained in the definitive Proxy Statement referred to above in “Item 10. Directors, Executive Officers and Corporate Governance.”

 

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information required by this Item is incorporated herein by reference to the information to be contained in the definitive Proxy Statement referred to above in “Item 10. Directors, Executive Officers and Corporate Governance.”

 

PART IV

 

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

  (a) Documents filed as part of this report:

 

1. The following financial statements of the Registrant are included in response to Item 8 of this Annual Report on Form 10-K:

 

   

Consolidated Balance Sheets as of September 26, 2009 and September 27, 2008;

 

   

Consolidated Statements of Income for the years ended September 26, 2009, September 27, 2008, and September 29, 2007;

 

   

Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 26, 2009, September 27, 2008, and September 29, 2007;

 

   

Consolidated Statements of Cash Flows for the years ended September 26, 2009, September 27, 2008, and September 29, 2007;

 

   

Notes to Consolidated Financial Statements.

 

2. Financial statement schedules:

 

   

Schedule II—Supplemental schedule of valuation and qualifying accounts.

 

3. Exhibits

 

37


Table of Contents

EXHIBIT NUMBER AND DESCRIPTION

 

  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).
  3.2    Articles of Amendment to Articles of Incorporation of Ingles Markets, Incorporated (included as 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, previously filed with the Commission and incorporated herein by this reference).
  3.3    Amended and Restated By-Laws of Ingles Markets, Incorporated (included as Exhibit 99.1 to Ingles Markets, Incorporated’s Current Report on Form 8-K, File No. 0-14706, previously filed with the Commission on August 30, 2007 and incorporated herein by this reference).
  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, 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).
  4.2    Articles 2, 3, 10, 11 and 14 of the Amended and Restated By-Laws of Ingles Markets, Incorporated (included as Exhibit 99.1 to Ingles Markets, Incorporated’s Current Report on Form 8-K, File No. 0-14706, previously filed with the Commission on August 30, 2007 and incorporated herein by this reference).
  4.3    Indenture, dated as of May 12, 2009, between Ingles Markets, Incorporated and U.S. Bank, National Association, as Trustee, governing the 8 7/8% Senior Notes Due 2017, including the form of unregistered 8 7/8% Senior Note Due 2017 (included as Exhibit 4.1 to Ingles Markets, Incorporated’s Current Report on Form 8-K, File No. 0-14706, previously filed with the Commission on May 15, 2009 and incorporated herein by this reference).
  4.4    Registration Rights Agreement, dated May 12, 2009, among the Company and Banc of America Securities LLC, Wachovia Capital Markets, LLC and BB&T, a division of Scott & Stringfellow, LLC (included as Exhibit 4.3 to Ingles Markets, Incorporated’s Current Report on Form 8-K, File No. 0-14706, previously filed with the Commission on May 15, 2009 and incorporated herein by this reference).
10.1    Credit Agreement, dated as of May 12, 2009, among the Company and the lenders party thereto, Bank of America, as administrative agent, swing line lender and l/c issuer, Branch Banking and Trust Company, as syndication agent, Wachovia Bank, National Association, as documentation agent, and Banc of America Securities LLC, Branch Banking and Trust Company and Wachovia Capital Markets, LLC, as joint lead arrangers and joint book managers (included as Exhibit 10.1 to Ingles Markets, Incorporated’s Current Report on Form 8-K, File No. 0-14706, previously filed with the Commission on May 15, 2009 and incorporated herein by this reference).
10.2    Amended and Restated Ingles Markets, Incorporated Investment/Profit Sharing Plan effective September 29, 2002 (included as Exhibit 10.11 to Ingles Markets, Incorporated’s Annual Report on Form 10-K for the fiscal year ended September 28, 2002, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference).
   (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) of Form 10-K.)

 

38


Table of Contents
10.3    First Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan (included as Exhibit 10.3 to Ingles Markets, Incorporated’s Annual Report on Form 10-K for the fiscal year ended September 27, 2003, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference).
   (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) of Form 10-K.)
10.4    Ingles Markets, Incorporated Non-qualified Plan (included as Exhibit 10.5 to Ingles Markets, Incorporated’s Annual Report on Form 10-K for the fiscal year ended September 24, 2005, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference).
   (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) of Form 10-K.)
21.1    Subsidiaries of Ingles Markets, Incorporated.
23.1    Consent of Independent Registered Public Accounting Firm.
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1    Certification by Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32.2    Certification by Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

 

39


Table of Contents

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Ingles Markets, Incorporated

 

We have audited the accompanying consolidated balance sheets of Ingles Markets, Incorporated and subsidiaries as of September 26, 2009 and September 27, 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 26, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ingles Markets, Incorporated and subsidiaries at September 26, 2009 and September 27, 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 26, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Ingles Markets, Incorporated’s internal control over financial reporting as of September 26, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 7, 2009 expressed an unqualified opinion thereon.

 

/s/ ERNST & YOUNG LLP

 

Greenville, South Carolina

December 7, 2009

 

40


Table of Contents

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Ingles Markets, Incorporated

 

We have audited Ingles Markets, Incorporated’s internal control over financial reporting as of September 26, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Ingles Markets, Incorporated’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Ingles Markets, Incorporated maintained, in all material respects, effective internal control over financial reporting as of September 26, 2009, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Ingles Markets, Incorporated and subsidiaries as of September 26, 2009 and September 27, 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 26, 2009 of Ingles Markets, Incorporated and subsidiaries and our report dated December 7, 2009 expressed an unqualified opinion thereon.

 

/s/ ERNST & YOUNG LLP

 

Greenville, South Carolina

December 7, 2009

 

41


Table of Contents

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 26, 2009 AND SEPTEMBER 27, 2008

 

     2009    2008

ASSETS

     

CURRENT ASSETS:

     

Cash and cash equivalents

   $ 77,035,848    $ 4,178,897

Receivables (less allowance for doubtful accounts of $638,615—2009 and $752,267—2008)

     50,401,639      47,272,285

Inventories

     271,744,736      258,676,790

Other

     24,537,514      24,635,404
             

Total current assets

     423,719,737      334,763,376

PROPERTY AND EQUIPMENT:

     

Land

     292,607,374      284,280,459

Construction in progress

     25,969,526      83,331,272

Buildings

     793,940,186      688,470,780

Store, office and warehouse equipment

     599,976,745      567,727,987

Transportation equipment

     40,562,522      39,519,773

Leasehold improvements

     58,168,016      61,548,830
             

Total

     1,811,224,369      1,724,879,101

Less accumulated depreciation and amortization

     738,287,020      694,855,860
             

Property and equipment—net

     1,072,937,349      1,030,023,241

OTHER ASSETS

     20,951,979      10,217,540
             

TOTAL ASSETS

   $ 1,517,609,065    $ 1,375,004,157
             

 

See Notes to Consolidated Financial Statements.

 

42


Table of Contents

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 26, 2009 AND SEPTEMBER 27, 2008

 

     2009    2008

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

CURRENT LIABILITIES:

     

Current portion of long-term debt

   $ 31,314,776    $ 36,155,472

Accounts payable—trade

     118,378,264      145,237,791

Accrued expenses and current portion of other long-term liabilities

     78,868,836      71,879,501
             

Total current liabilities

     228,561,876      253,272,764

DEFERRED INCOME TAXES

     67,223,000      50,523,000

LONG-TERM DEBT

     817,999,569      681,000,630

OTHER LONG-TERM LIABILITIES

     5,660,664      5,393,318
             

Total liabilities

     1,119,445,109      990,189,712
             

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; issued and outstanding, 12,888,608 shares in 2009, 12,818,608 shares in 2008

     644,430      640,930

Class B, convertible to Class A, $0.05 par value; 100,000,000 shares authorized; issued and outstanding, 11,623,651 shares in 2009, 11,693,651 shares in 2008

     581,183      584,683

Paid-in capital in excess of par value

     118,184,132      118,184,132

Retained earnings

     278,754,211      265,404,700
             

Total stockholders’ equity

     398,163,956      384,814,445
             

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,517,609,065    $ 1,375,004,157
             

 

See Notes to Consolidated Financial Statements

 

43


Table of Contents

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

FISCAL YEARS ENDED SEPTEMBER 26, 2009,

SEPTEMBER 27, 2008 AND SEPTEMBER 29, 2007

 

     2009    2008     2007

Net sales

   $ 3,250,933,154    $ 3,238,046,448      $ 2,851,592,508

Cost of goods sold

     2,507,852,294      2,531,710,651        2,202,190,629
                     

Gross profit

     743,080,860      706,335,797        649,401,879

Operating and administrative expenses

     632,409,707      584,881,364        527,190,181

Rental income, net

     2,431,904      3,321,873        4,419,273

Gain (loss) from sale or disposal of assets

     120,054      (1,330,891     6,879,906
                     

Income from operations

     113,223,111      123,445,415        133,510,877

Other income, net

     2,310,348      3,122,909        3,012,904

Interest expense

     59,059,348      46,885,930        46,675,085

Loss on early extinguishment of debt

     10,240,667      —          —  
                     

Income before income taxes

     46,233,444      79,682,394        89,848,696
                     

Income taxes:

       

Current

     602,000      16,603,000        16,092,000

Deferred

     16,803,000      10,956,000        15,119,000
                     
     17,405,000      27,559,000        31,211,000
                     

Net income

   $ 28,828,444    $ 52,123,394      $ 58,637,696
                     

Per-share amounts:

       

Class A Common Stock

       

Basic earnings per common share

   $ 1.23    $ 2.22      $ 2.51
                     

Diluted earnings per common share

   $ 1.18    $ 2.13      $ 2.39
                     

Class B Common Stock

       

Basic earnings per common share

   $ 1.12    $ 2.02      $ 2.28
                     

Diluted earnings per common share

   $ 1.12    $ 2.02      $ 2.28
                     

Cash dividends per common share:

       

Class A

   $ 0.66    $ 0.66      $ 0.66
                     

Class B

   $ 0.60    $ 0.60      $ 0.60
                     

 

See Notes to Consolidated Financial Statements.

 

44


Table of Contents

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FISCAL YEARS ENDED SEPTEMBER 26, 2009,

SEPTEMBER 27, 2008 AND SEPTEMBER 29, 2007

 

    CLASS A   CLASS B     PAID-IN
CAPITAL

IN EXCESS
OF PAR
VALUE
  RETAINED
EARNINGS
    TOTAL  
    COMMON STOCK   COMMON STOCK        
    SHARES   AMOUNT   SHARES     AMOUNT        

Balance, September 30, 2006

  12,176,485   $ 608,824   12,321,774      $ 616,089      $ 117,911,423   $ 185,536,551      $ 304,672,887   

Net income

  —       —     —          —          —       58,637,696        58,637,696   

Cash dividends

  —       —     —          —          —       (15,440,016     (15,440,016

Exercise of stock options

  14,000     700   —          —          272,709     —          273,409   

Common stock conversions

  165,298     8,265   (165,298     (8,265     —       —          —     
                                             

Balance, September 29, 2007

  12,355,783   $ 617,789   12,156,476      $ 607,824      $ 118,184,132   $ 228,734,231      $ 348,143,976   

Net income

  —       —     —          —          —       52,123,394        52,123,394   

Cash dividends

  —       —     —          —          —       (15,452,925     (15,452,925

Common stock conversions

  462,825     23,141   (462,825     (23,141     —       —          —     
                                             

Balance, September 27, 2008

  12,818,608   $ 640,930   11,693,651      $ 584,683      $ 118,184,132   $ 265,404,700      $ 384,814,445   

Net income

  —       —     —          —          —       28,828,444        28,828,444   

Cash dividends

  —       —     —          —          —       (15,478,933     (15,478,933

Common stock conversions

  70,000     3,500   (70,000     (3,500     —       —          —     
                                             

Balance, September 26, 2009

  12,888,608   $ 644,430   11,623,651      $ 581,183      $ 118,184,132   $ 278,754,211      $ 398,163,956   
                                             

 

See Notes to Consolidated Financial Statements.

 

45


Table of Contents

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FISCAL YEARS ENDED SEPTEMBER 26, 2009,

SEPTEMBER 27, 2008 AND SEPTEMBER 29, 2007

 

     2009     2008     2007  

Cash Flows From Operating Activities:

      

Net income

   $ 28,828,444      $ 52,123,394      $ 58,637,696   

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

      

Depreciation and amortization expense

     79,679,419        69,098,196        60,944,055   

Loss on extinguishment of debt

     10,240,667        —          —     

(Gain) loss from sale or disposal of assets

     (120,054     1,330,891        (6,879,906

Receipt of advance payments on purchases contracts

     2,252,413        1,775,000        5,155,322   

Recognition of advance payments on purchases contracts

     (4,153,080     (3,740,813     (3,962,205

Deferred income taxes

     16,803,000        10,956,000        15,119,000   

Changes in operating assets and liabilities

      

Receivables

     (3,129,354     (2,631,625     (1,047,007

Inventory

     (13,067,946     (25,211,931     (18,096,343

Other assets

     (16,856,589     (14,337,062     5,212,095   

Accounts payable and accrued expenses

     2,429,857        257,400        24,010,900   
                        

Net Cash Provided By Operating Activities

     102,906,777        89,619,450        139,093,607   
                        

Cash Flows From Investing Activities:

      

Proceeds from sales of property and equipment

     1,117,045        519,782        14,022,414   

Capital expenditures

     (141,020,762     (248,779,607     (127,848,809
                        

Net Cash Used In Investing Activities

     (139,903,717     (248,259,825     (113,826,395
                        

Cash Flows From Financing Activities:

      

Proceeds from short-term borrowings

     528,069,000        673,233,502        483,672,400   

Payments on short-term borrowings

     (555,824,000     (666,057,502     (467,038,400

Proceeds from issuance of bonds

     555,151,000        —          —     

Bond issuance costs

     (11,787,356     —          —     

Proceeds from other long-term debt

     75,399,480        182,216,914        —     

Principal payments on long-term debt

     (458,849,882     (15,493,894     (29,691,955

Prepayment penalties on debt extinguishment

     (6,825,418     —          —     

Proceeds from exercise of stock options

     —          —          273,409   

Dividends paid

     (15,478,933     (15,452,925     (15,440,016
                        

Net Cash Provided By (Used In) Financing Activities

     109,853,891        158,446,095        (28,224,562
                        

Net Decrease in Cash and Cash Equivalents

     72,856,951        (194,280     (2,957,350

Cash and Cash Equivalents at Beginning of Year

     4,178,897        4,373,177        7,330,527   
                        

Cash and Cash Equivalents at End of Year

   $ 77,035,848      $ 4,178,897      $ 4,373,177   
                        

 

See Notes to Consolidated Financial Statements.

 

46


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

1. Summary of Significant Accounting Policies

 

Business—Ingles Markets, Incorporated (“Ingles” or the “Company”), is a leading supermarket chain in the southeast United States, operates 200 supermarkets in Georgia (73), North Carolina (68), South Carolina (36), Tennessee (20), Virginia (2) and Alabama (1).

 

Principles of Consolidation—The consolidated financial statements include the accounts of Ingles Markets, Incorporated and its wholly-owned subsidiaries, Sky King, Inc., Ingles Markets Investments, Inc., Milkco, Inc., Shopping Center Financing, LLC, and Shopping Center Financing II, LLC. All significant inter-company balances and transactions are eliminated in consolidation.

 

Fiscal Year—The Company’s fiscal year ends on the last Saturday in September. Fiscal years 2009, 2008 and 2007 consisted of 52 weeks each.

 

New Accounting Pronouncements—In June 2009 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Standard No. 162” (“SFAS 168”). SFAS 168 replaces the Generally Accepted Accounting Principles (“GAAP”) with two levels of GAAP: authoritative and non-authoritative. On July 1, 2009, the FASB Accounting Standards Codification (“FASB ASC”) became the single source of authoritative nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission. All other non-grandfathered accounting literature became non-authoritative. The adoption of SFAS 168 did not have a material impact on the Company’s consolidated financial statements. As a result of the adoption of SFAS 168, all references to GAAP now refer to the codified FASB ASC topic.

 

In September 2006, FASB ASC Topic 820 was issued which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. FASB ASC Topic 820 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. FASB ASC Topic 820 was effective for the Company as of the year ending September 26, 2009. The adoption of FASB ASC Topic 820 did not have a significant impact on the Company’s consolidated financial statements.

 

In April 2009, FASB ASC Topic 855 was issued which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. The Company adopted FASB ASC Topic 855 for the quarter ending June 27, 2009. The adoption did not have a material impact on the Company’s consolidated financial statements.

 

Cash Equivalents—All highly liquid investments with a maturity of three months or less when purchased are considered cash. Interest income of $0.3 million, $0.1 million, and $0.3 million for fiscal years 2009, 2008 and 2007, respectively, is included in the line item “Other income, net” on the Consolidated Statements of Income. Outstanding checks in excess of bank balances of $6.3 million as of September 27, 2008 are classified as accounts payable.

 

Financial Instruments—The Company has short-term investments and certificates of deposit included in cash. The Company’s policy is to invest its excess cash either in money market accounts, reverse repurchase agreements or in certificates of deposit. Money market accounts and commercial paper are not secured; reverse repurchase agreements are secured by government obligations. At September 26, 2009, before consideration of checks issued yet to be processed, the Company had $23.5 million invested in certificates of deposit, and $63.6 million invested in money market accounts, reverse repurchase agreements, or commercial paper. Demand deposits of approximately $33.5 million in 10 banks exceed the $250,000 insurance limit per bank.

 

47


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

Allowance for Doubtful Accounts—Accounts receivable are stated net of an allowance for uncollectible accounts, which is determined through analysis of the aging of accounts receivable at the date of the consolidated financial statements and assessments of the collectibility based upon historical collection activity adjusted for current conditions.

 

Inventories—Substantially all of the Company’s inventory consists of finished goods. Warehouse inventories are valued at the lower of average cost or market. Store inventories are valued using the retail method under which inventories at cost (and the resulting gross margins) are determined by applying a calculated cost-to-retail ratio to the retail value of inventories. As an integral part of valuing inventory at cost, management makes certain judgments and estimates for standard gross margins, allowances for vendor consideration, markdowns and shrinkage. Warehousing and distribution costs are not included in the valuation of inventories. The Company reviews its judgments and estimates regularly and makes adjustments where facts and circumstances dictate. Period to period adjustments for vendor allowances, markdowns and shrinkage have historically not been significant.

 

Property, Equipment and Depreciation—Property and equipment are stated at cost and depreciated over the estimated useful lives by the straight-line method. Buildings are generally depreciated over 30 years. Store, office and warehouse equipment is generally depreciated over three to 10 years. Transportation equipment is generally depreciated over three to five years. Leasehold improvements are depreciated over the shorter of the subject lease term or the useful life of the asset, generally from three to 30 years. Depreciation expense totaled $76.2 million, $67.4 million and $59.6 million for fiscal years 2009, 2008 and 2007, respectively.

 

During fiscal year 2007 the Company sold a shopping center in which it no longer operated a store at a pre-tax gain of approximately $7.9 million. Gains and losses are included in the line item “Gain (loss) from sale or disposal of assets” on the Consolidated Statements of Income.

 

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.

 

Capitalized Loan and Leasehold Costs—Other assets include capitalized loan and leasehold costs of $14.5 million (net of $12.2 million accumulated amortization) and $6.9 million (net of $9.4 million accumulated amortization) at September 26, 2009 and September 27, 2008, respectively. These costs are amortized over the life of the underlying debt instrument or lease at approximately $4.4 million per year. During the year ended September 26, 2009 the Company accelerated the amortization of $3.4 million of capitalized loan costs in conjunction with the early repayment of certain outstanding debt. This amount is included in the line item “Loss on early extinguishment of debt” on the Consolidated Statements of Income.

 

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 and

 

48


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

$300,000 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. At September 26, 2009, the Company’s self insurance reserves totaled $14.2 million for employee group insurance, workers’ compensation insurance and general liability insurance. The Company is required in certain cases to obtain letters of credit to support its self-insured status. At fiscal year end 2009, the Company’s self-insured liabilities were supported by $7.7 million of undrawn letters of credit which expire between January 2010 and November 2010. The Company carries casualty insurance only on those properties where it is required to do so. The Company has elected to self-insure its other properties.

 

Closed Store Accrual—For closed properties under long-term lease agreements, a liability is recognized and expensed based on the difference between the present value of any remaining liability under the lease and the present value of the estimated market rate at which the Company expects to be able to sublease the properties, in accordance with FASB ASC Topic 420. The Company’s estimates of market rates are based on its experience, knowledge and third-party advice or market data. If the real estate and leasing markets change, sublease recovery could vary significantly from the recoveries originally assumed, resulting in a material change in the Company’s recorded liability. The closed store accrual is included in the line item “Accrued expenses and current portion of other long-term liabilities” on the Consolidated Balance Sheets.

 

Income Taxes—The Company accounts for income taxes under FASB ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates. The Company accounts for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return.

 

The Company had gross unrecognized tax benefits of $344,000, $542,000 and $818,000 as of September 26, 2009, September 27, 2008 and September 30, 2007, respectively. These benefits, if recognized, would affect the effective tax rate. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

 

The Company files income tax returns with federal and various state jurisdictions. With few exceptions, the Company is no longer subject to state income tax examinations by tax authorities for the years before 2004. Additionally, the Internal Revenue Service (“IRS”) has completed its examination of the Company’s U.S. Federal income tax returns filed through fiscal year 2005. Examinations may challenge certain of the Company’s tax positions. Actual results could materially differ from these estimates and could significantly affect the effective tax rate and cash flows in the future years.

 

The Company’s continuing practice is to recognize interest and penalties related to uncertain tax positions and related matters in income tax expense. As of September 26, 2009, the Company had approximately $162,000 accrued for interest and penalties.

 

Pre-Opening Costs—Costs associated with the opening of new stores are expensed when incurred.

 

Reclassifications—Beginning with the fiscal year ended September 26, 2009 the Company began including the costs of its distribution network in the line item “Cost of goods sold” on the Consolidated Statements of Income. These costs previously were included in the line item “Operating and administrative expenses” on the Consolidated Statements of Income. While this is an accounting policy election, management believes the new presentation is more closely aligned with industry practice. The amounts for fiscal years 2008 and 2007 have

 

49


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

been reclassified to conform to the current year presentation in the accompanying consolidated financial statements. The Company incurred approximately $46.1 million, $41.5 million and $36.8 million of grocery segment distribution, shipping and handling costs during fiscal years 2009, 2008 and 2007, respectively.

 

Per-Share Amounts—The Company calculates earnings per share using the two-class method in accordance with FASB ASC Topic 260.

 

Advertising—The Company expenses the costs of advertising as incurred. Advertising and promotion expenses, net of vendor allowances, totaled $17.0 million, $17.9 million and $17.5 million for fiscal years 2009, 2008 and 2007, respectively.

 

Use of Estimates—The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

 

Cost of Goods Sold—In addition to the direct product cost, cost of goods sold for the grocery segment includes inbound freight charges and costs of the Company’s distribution network. The milk processing segment is a manufacturing process. Therefore, cost of goods sold include direct product and production costs, inbound freight, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and other costs of distribution.

 

Operating and Administrative Expenses—Operating and administrative expenses include costs incurred for store and administrative labor, occupancy, depreciation, insurance and general administration.

 

Revenue Recognition—The Company recognizes revenues from grocery sales at the point of sale to its customers. Sales taxes collected from customers are not included in reported revenues. Discounts provided to customers by the Company at the point of sale, including discounts provided in connection with loyalty cards, are recognized as a reduction in sales as the products are sold. Product returns are not significant.

 

The Company recognizes fluid dairy revenues at the time the risk of loss shifts to the customer pursuant to our terms of sale. Therefore, approximately 70% of fluid dairy revenues are recognized when the product is picked up by the customer at our facility. The remaining fluid dairy revenues are recognized when the product is received at the customer’s facility upon delivery via transportation arranged by the Company.

 

Rental income, including contingent rentals, is recognized on the accrual basis. Upfront consideration paid by either the Company as lessor or by the lessee is recognized as an adjustment to net rental income using the straight line method over the term of the lease.

 

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 vendors’ 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

 

50


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

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 $101.0 million, $97.5 million, and $91.6 million for the fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007, 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 that the related expense is incurred. Vendor advertising allowances recorded as a reduction of advertising expense totaled $14.3 million, $11.8 million, and $10.4 million for the fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007, 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 its product advertising, which could increase or decrease its expenditures.

 

Similarly, the Company is not able to assess the impact of vendor advertising allowances on the creation of additional revenue, as such allowances do not directly generate revenue for its stores.

 

2. Income Taxes

 

Deferred Income Tax Liabilities and Assets—Significant components of the Company’s deferred tax liabilities and assets are as follows:

 

     2009     2008

Deferred tax liabilities:

    

Property and equipment tax/book differences

   $ 70,185,000      $ 54,289,000

Property tax method

     1,668,000        1,081,000

Asset retirement obligation

     (12,000     4,000
              

Total deferred tax liabilities

     71,841,000        55,374,000
              

Deferred tax assets:

    

Insurance reserves

     613,000        679,000

Advance payments on purchases contracts

     504,000        1,214,000

Vacation accrual

     2,020,000        1,849,000

Closed store accrual

     1,288,000        1,995,000

Inventory

     944,000        1,371,000

Other

     6,075,000        4,672,000
              

Total deferred tax assets

     11,444,000        11,780,000
              

Net deferred tax liabilities

   $ 60,397,000      $ 43,594,000
              

 

Current deferred income tax benefits of $6.8 million and $6.9 million at September 26, 2009 and September 27, 2008, respectively, included in other current assets, result from timing differences arising from deferred vendor income, vacation pay, bad debt and self-insurance reserves, and from capitalization of certain overhead costs in inventory for tax purposes.

 

At September 26, 2009 and September 27, 2008 refundable current income taxes totaling $12.5 million and $14.2 million, respectively, are included in the line item “Other current assets” on the Consolidated Balance Sheets.

 

51


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

Income Tax Expense—Income tax expense differs from the amounts computed by applying the statutory federal rates to income before income taxes. The reasons for the differences are as follows:

 

     2009     2008     2007  

Federal tax at statutory rate

   $ 16,182,000      $ 27,889,000      $ 31,447,000   

State income tax, net of federal tax benefits

     931,000        1,856,000        3,269,000   

Settlement of tax contingency

     —          —          (3,426,000

Adjustment to deferred income tax rates

     945,000        (939,000     —     

Other

     (653,000     (1,247,000     (79,000
                        

Total

   $ 17,405,000      $ 27,559,000      $ 31,211,000   
                        

 

Current and deferred income tax expense (benefit) is as follows:

 

     2009     2008    2007

Current:

       

Federal

   $ (176,000   $ 13,848,000    $ 15,355,000

State

     778,000        2,755,000      737,000
                     

Total current

     602,000        16,603,000      16,092,000
                     

Deferred:

       

Federal

     14,443,000        9,234,000      14,549,000

State

     2,360,000        1,722,000      570,000
                     

Total deferred

     16,803,000        10,956,000      15,119,000
                     

Total expense

   $ 17,405,000      $ 27,559,000    $ 31,211,000
                     

 

Uncertain Tax Positions—A reserve for uncertain tax positions, including interest and penalties of $0.5 million and $0.8 million are included in the Company’s income taxes payable at September 26, 2009 and September 27, 2008, respectively. The reserve for uncertain tax positions has been recorded because based on management’s estimates, it is likely that certain tax positions will be successfully challenged by taxing authorities.

 

During the fiscal year 2007, the Company settled a tax position under an initiative offered by one of the states in which the Company conducts its operations. As a result of this settlement, the Company reduced its reserve for contingent income tax liabilities by $3.2 million. This reduction is reflected as a reduction of income tax expense for the year ended September 29, 2007.

 

52


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

3. Property Held for Lease and Rental Income

 

At September 26, 2009, the Company owned and operated 72 shopping centers in conjunction with its supermarket operations. The Company leases to others a portion of its shopping center properties. The leases are non-cancelable operating lease agreements for periods ranging up to 25 years.

 

Rental income, net consists of the following:

 

     2009     2008     2007  

Rents earned on owned and subleased properties:

      

Base rentals including lease termination payments

   $ 9,978,252      $ 10,721,665      $ 11,430,054   

Contingent rentals

     520,345        539,642        874,912   
                        

Total

     10,498,597        11,261,307        12,304,966   

Depreciation on owned properties leased to others

     (5,706,415     (5,753,527     (5,436,582

Other shopping center expenses

     (2,360,278     (2,185,907     (2,449,111
                        

Total

   $ 2,431,904      $ 3,321,873      $ 4,419,273   
                        

 

Owned properties leased or held for lease to others under operating leases by major classes are summarized as follows:

 

     September 26,
2009
    September 27,
2008
 

Land

   $ 44,323,997      $ 44,661,690   

Buildings

     164,106,534        160,568,222   
                

Total

     208,430,531        205,229,912   

Less accumulated depreciation

     (81,577,877     (79,756,502
                

Total

   $ 126,852,654      $ 125,473,410   
                

 

The above amounts are included on the Consolidated Balance Sheet in the caption “Property and equipment.”

 

The following is a schedule of minimum future rental income on non-cancelable operating leases as of September 26, 2009:

 

Fiscal Year

    

2010

   $ 5,995,004

2011

     4,900,434

2012

     3,364,544

2013

     2,049,613

2014

     1,192,961

Thereafter

     1,914,962
      

Total minimum future rental income

   $ 19,417,518
      

 

53


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

4. Leases and Rental Expense

 

The Company conducts part of its retail operations from leased facilities. The initial terms of the leases are generally 20 years. The majority of the leases include one or more renewal options and provide that the Company pay property taxes, utilities, repairs and certain other costs incidental to occupation of the premises. Several leases contain clauses calling for percentage rentals based upon gross sales of the supermarket occupying the leased space. The Company also leases a portion of its equipment under operating leases, including leases derived from sale/leaseback transactions, with initial terms of three to five years. Step rent provisions, escalation clauses, capital improvements and other lease concessions are taken into account in computing minimum lease payments, which are recognized on a straight-line basis over the minimum lease term.

 

Operating Leases—Rent expense for all operating leases of $15.4 million, $14.5 million and $17.7 million for fiscal years 2009, 2008 and 2007, respectively, is included in operating and administrative expenses. Sub-lease rental income of $0.9 million, $1.3 million and $1.3 million for fiscal years 2009, 2008 and 2007, respectively, is included as a reduction of rental expense.

 

The components of aggregate minimum rental commitments under non-cancelable operating leases as of September 26, 2009 are as follows:

 

Fiscal Year

   Minimum
Rental
Commitment
   Sub-Lease
Income
    Net
Rental
Commitment

2010

   $ 15,298,943    $ (754,200   $ 14,544,743

2011

     13,196,501      (215,000     12,981,501

2012

     12,081,200      (203,000     11,878,200

2013

     10,784,763      (211,000     10,573,763

2014

     9,252,883      (219,000     9,033,883

Thereafter

     84,723,391        84,723,391
                     

Total minimum future rental commitments

   $ 145,337,681    $ (1,602,200   $ 143,735,481
                     

 

5. Supplementary Balance Sheet Information

 

Accrued Expenses and Current Portion of Other Long-Term Liabilities—Accrued expenses and current portion of other long-term liabilities are summarized as follows:

 

     2009    2008

Property, payroll, and other taxes payable

   $ 15,783,416    $ 13,752,520

Salaries, wages, and bonuses payable

     22,203,640      23,026,857

Self-insurance liabilities:

     

Employee group insurance

     4,465,635      4,294,737

Workers’ compensation insurance

     6,818,745      7,133,894

General liability insurance

     2,872,163      2,786,008

Interest

     20,414,995      11,883,580

Other

     6,310,242      9,001,904
             

Total

   $ 78,868,836    $ 71,879,501
             

 

54


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

Self-insurance liabilities are established for workers’ compensation and employee group medical and dental benefits based on claims filed and claims incurred but not reported. The Company is insured for covered costs in excess of $750,000 per occurrence for workers’ compensation and $300,000 per covered person for medical care benefits for a policy year.

 

Employee insurance expense, including workers’ compensation and medical care benefits, net of employee contributions, totaled $25.2 million, $25.8 million and $21.6 million for fiscal years 2009, 2008 and 2007, respectively.

 

Other Long-Term Liabilities—Other long-term liabilities are summarized as follows:

 

     2009    2008

Advance payments on purchases contracts

   $ 1,301,758    $ 3,202,424

Deferred gain-sale/leasebacks

     621,736      672,129

Deferred lease expense

     1,625,649      1,551,980

Nonqualified investment plan liability

     3,033,798      2,059,556

Other

     483,858      368,586
             

Total other long-term liabilities

     7,066,799      7,854,675

Less current portion

     1,406,135      2,461,357
             
   $ 5,660,664    $ 5,393,318
             

 

Advance Payments on Purchases Contracts—The Company has entered into agreements with suppliers whereby payment is received in advance and earned based on purchases of product from these suppliers in the future. The unearned portion, included in other long-term liabilities, will be recognized in the results of operations in accordance with the terms of the contract.

 

6. Long-Term Debt and Short-Term Loans

 

Long-term debt and short-term loans are summarized as follows:

 

     2009     2008  

Bonds payable:

    

Senior notes, interest rate of 8.875%, maturing 2017

   $ 575,000,000      $ —     

Unamortized original issue discount on senior notes

     (18,892,804     —     

Senior subordinated debt, interest rate of 8.875%, maturing 2011

     —          349,750,000   

Unamortized original issue discount and premium on senior subordinated debt

     —          (265,776

Outstanding line of credit at LIBOR plus a credit spread

     —          27,755,000   

Notes payable:

    

Real estate and equipment maturing 2010-2028:

    

Due to banks, weighted average interest rate of 4.74% for 2009 and 5.16% for 2008

     144,169,565        146,107,301   

Due to other financial institutions, weighted average interest rate of 6.43% for 2009 and 7.84% for 2008

     149,037,584        193,809,577   
                

Total long-term debt and short-term loans

     849,314,345        717,156,102   

Less current portion

     31,314,776        36,155,472   
                

Long-term debt, net of current portion

   $ 817,999,569      $ 681,000,630   
                

 

55


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

In May 2009, the Company issued $575.0 million aggregate principal amount of senior notes due in 2017 (the “Notes”) in a private placement. The Notes bear an interest rate of 8.875% per annum and were issued at a discount to yield 9.5% per annum. Note proceeds were used to pay off $349.8 million aggregate principal amount of senior subordinated debt maturing in 2011, pay off $45.3 million of indebtedness outstanding under the Company’s committed lines of credit, pay off $77.7 million of secured indebtedness, and pay costs related to the offering of the Notes. Remaining Note proceeds will be used for general corporate purposes, including future capital expenditures. In connection with the issuance of the Notes, the Company paid $6.8 million in debt extinguishment costs and expensed $3.4 million of unamortized loan costs.

 

The Company may redeem all or a portion of the Notes at any time on or after May 15, 2013 at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning May 15 of the years indicated below:

 

Year

      

2013

   104.438

2014

   102.219

2015 and thereafter

   100.000

 

In connection with the offering of the Notes, the Company entered into a new three-year $175.0 million line of credit and terminated three other lines of credit. After giving effect to these transactions, the Company has $190.0 million of total commitments under lines of credit.

 

The lines of credit provide the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or the London Interbank Offering Rate. The lines allow the Company to issue up to $30.0 million in unused letters of credit, of which $8.2 million of unused letters of credit were issued at September 26, 2009. The Company is not required to maintain compensating balances in connection with these lines of credit.

 

The Notes and the lines of credit 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 lines of credit 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 related to the Notes and the lines of credit at September 26, 2009.

 

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 lines of credit and Notes indenture in the event of default under any one instrument.

 

At September 26, 2009, property and equipment with an undepreciated cost of approximately $702.4 million was pledged as collateral for long-term debt. Long-term debt and lines of credit agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios. In addition, certain loan agreements containing provisions outlining minimum tangible net worth requirements restrict the ability of the Company to pay cash dividends to approximately $184 million, based on tangible net worth at September 26, 2009. Further, the Company is prevented from paying cash dividends at any time that it is in default under the indenture governing the Notes. In addition, the terms of the indenture may restrict the ability of the Company to pay additional cash dividends based on certain financial parameters.

 

56


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

Components of interest costs are as follows:

 

     2009     2008     2007  

Total interest costs

   $ 61,643,076      $ 51,482,592      $ 48,664,536   

Interest capitalized

     (2,583,728     (4,596,662     (1,989,451
                        

Interest expense

   $ 59,059,348      $ 46,885,930      $ 46,675,085   
                        

 

Maturities of long-term debt at September 26, 2009 are as follows:

 

Fiscal Year

    

2010

   $ 31,314,776

2011

     91,879,464

2012

     44,991,683

2013

     58,414,671

2014

     10,040,122

Thereafter

     612,673,629
      

Total

   $ 849,314,345
      

 

7. Stockholders’ Equity

 

The Company has two classes of Common Stock: Class A and Class B. Class A Common Stock is traded on The NASDAQ Global Select Market under the symbol IMKTA. There is no public market for the Company’s Class B Common Stock. However, each share of Class B Common Stock is convertible at any time, at the option of the holder, into one share of Class A Common Stock. Upon any transfers of Class B Common Stock (other than to immediate family members and the Investment/Profit Sharing Plan), such stock is automatically converted into Class A Common Stock.

 

The holders of the Class A Common Stock and Class B Common Stock are entitled to dividends and other distributions when declared out of assets legally available therefore, subject to the dividend rights of any preferred stock that may be issued in the future. Each share of Class A Common Stock is entitled to receive a cash dividend and liquidation payment in an amount equal to 110% of any cash dividend or liquidation payment on Class B Common Stock. Any stock dividend must be paid in shares of Class A Common Stock with respect to Class A Common Stock and in shares of Class B Common Stock with respect to Class B Common Stock.

 

The voting powers, preferences and relative rights of Class A Common Stock and Class B Common Stock are identical in all respects, except that the holders of Class A Common Stock have one vote per share and the holders of Class B Common Stock have ten votes per share. In addition, holders of Class A Common Stock, as a separate class, are entitled to elect 25% of all directors constituting the Board of Directors (rounded to the nearest whole number). As long as the Class B Common Stock represents at least 12.5% of the total outstanding Common Stock of both classes, holders of Class B Common Stock, as a separate class, are entitled to elect the remaining directors. The Company’s Articles of Incorporation and Bylaws provide that the Board of Directors can set the number of directors between five and eleven.

 

57


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

8. Earnings Per Common Share

 

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 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 the exercise of dilutive stock options outstanding and 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.

 

     Year Ended
September 26, 2009
     Class A    Class B

Numerator: Allocated net income

     

Net income allocated, basic

   $ 15,786,185    $ 13,042,259

Conversion of Class B to Class A shares

     13,042,259   
             

Net income allocated, diluted

   $ 28,828,444    $ 13,042,259
             

Denominator: Weighted average shares outstanding

     

Weighted average shares outstanding, basic

     12,844,927      11,667,332

Conversion of Class B to Class A shares

     11,667,332   
             

Weighted average shares outstanding, diluted

     24,512,259      11,667,332
             

Earnings per share

     

Basic

   $ 1.23    $ 1.12
             

Diluted

   $ 1.18    $ 1.12
             

 

     Year Ended
September 27, 2008
   Year Ended
September 29, 2007
 
     Class A    Class B    Class A    Class B  

Numerator: Allocated net income

           

Net income allocated, basic

   $ 27,695,297    $ 24,428,097    $ 30,785,005    $ 27,852,691   

Conversion of Class B to Class A shares

     24,428,097      —        27,850,707      —     

Effect of assumed stock options exercised on allocated net income

     —        —        1,984      (1,984
                             

Net income allocated, diluted

   $ 52,123,394    $ 24,428,097    $ 58,637,696    $ 27,850,707   
                             

Denominator: Weighted average shares outstanding

           

Weighted average shares outstanding, basic

     12,447,681      12,064,580      12,273,292      12,234,120   

Conversion of Class B to Class A shares

     12,064,580      —        12,234,120      —     
                             

Weighted average shares outstanding, diluted

     24,512,261      12,064,580      24,507,412      12,234,120   
                             

Earnings per share

           

Basic

   $ 2.22    $ 2.02    $ 2.51    $ 2.28   
                             

Diluted

   $ 2.13    $ 2.02    $ 2.39    $ 2.28   
                             

 

58


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

9. Employee Benefit Plans

 

Investment/Profit Sharing Plan—The purpose of the qualified investment/profit sharing plan is to provide retirement benefits to eligible employees. Assets of the plan, including the Company’s Class B Common Stock, are held in trust for employees and distributed upon retirement, death, disability or other termination of employment. Company contributions are discretionary and are determined quarterly by the Board of Directors. The plan includes a 401(k) feature. Company contributions to the plan, included in operating and administrative expenses, were approximately $1,095,000, $1,181,000 and $598,000 for fiscal years 2009, 2008 and 2007, respectively. Additional Company contributions totaling $511,000 were made to the plan during fiscal year 2007 from accumulated forfeitures under the plan.

 

Nonqualified Investment Plan—The Company adopted an Executive Nonqualified Excess Plan to provide benefits similar to the Company’s Investment/Profit Sharing Plan to certain of the Company’s management employees who are otherwise subject to limited participation in the 401(k) feature of the Company’s Investment/Profit Sharing Plan. Company contributions to the plan, included in operating and administrative expenses, were approximately $61,000 and $54,000 and $44,000 for fiscal years 2009, 2008 and 2007, respectively.

 

Cash Bonuses—The Company pays monthly bonuses to various managerial personnel based on performance of the operating units managed by these personnel. The Company pays discretionary annual bonuses to certain employees who do not receive monthly performance bonuses. The Company pays discretionary bonuses to certain executive officers based on Company performance. Operating and administrative expenses include bonuses of approximately $8.8 million, $10.8 million and $10.6 million for fiscal years 2009, 2008 and 2007, respectively.

 

1997 Nonqualified Stock Option Plan—The Company had a nonqualified stock option plan under which an aggregate of 8,000,000 shares of the Company’s Class A Common Stock could have been issued to officers and other key employees until January 1, 2007. Accordingly, as of September 26, 2009 and September 27, 2008 no shares of the Company’s Class A Common Stock were available for future issuance under the plan and all remaining unexercised options had expired.

 

There have been no options granted during each of the three fiscal years ended September 26, 2009, therefore no compensation expense has been recognized during those periods.

 

Medical Care Plan—Medical and dental benefits are provided to qualified employees under a self-insured plan. Expenses under the plan include claims paid, administrative expenses and an estimated liability for claims incurred but not yet paid.

 

59


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

10. Lines of Business

 

The Company operates three lines of business: retail grocery sales (representing the aggregation of individual retail stores), shopping center rentals and a fluid dairy processing plant. All of the Company’s operations are domestic. Information about the Company’s operations by lines of business (amounts in thousands) is as follows:

 

     2009     2008     2007  

Revenues from unaffiliated customers:

      

Grocery sales

   $ 3,143,633      $ 3,107,264      $ 2,728,983   

Shopping center rentals

     10,499        11,261        12,305   

Fluid dairy

     107,301        130,783        122,609   
                        

Total revenues from unaffiliated customers

   $ 3,261,433      $ 3,249,308      $ 2,863,897   
                        

Income from operations:

      

Grocery sales

   $ 98,202      $ 109,081      $ 115,799   

Shopping center rentals

     2,432        3,322        4,419   

Fluid dairy

     12,589        11,042        13,293   
                        

Total income from operations

   $ 113,223      $ 123,445      $ 133,511   
                        

Assets:

      

Grocery sales

   $ 1,366,248      $ 1,221,769      $ 1,001,322   

Shopping center rentals

     126,853        125,473        114,051   

Fluid dairy

     26,450        30,226        29,851   

Elimination of intercompany receivable

     (1,942     (2,464     (2,418
                        

Total assets

   $ 1,517,609      $ 1,375,004      $ 1,142,806   
                        

Capital expenditures:

      

Grocery sales

   $ 135,630      $ 232,250      $ 119,505   

Shopping center rentals

     3,013        14,528        6,131   

Fluid dairy

     2,377        2,002        2,213   
                        

Total capital expenditures

   $ 141,021      $ 248,780      $ 127,849   
                        

Depreciation and amortization:

      

Grocery sales

   $ 71,859      $ 61,279      $ 53,359   

Shopping center rentals

     5,706        5,754        5,347   

Fluid dairy

     2,114        2,116        2,289   
                        

Total depreciation and amortization

   $ 79,679      $ 69,149      $ 60,995   
                        

 

Sales by product category for fiscal years 2009, 2008 and 2007, respectively, are as follows:

 

     Fiscal Year Ended September
     2009    2008    2007

Grocery

   $ 1,358,030,265    $ 1,295,946,749    $ 1,182,907,566

Non-foods

     664,376,193      624,957,153      589,204,228

Perishables

     768,604,794      727,072,477      670,206,118

Gasoline

     352,621,331      459,287,398      286,665,352
                    

Total grocery segment

   $ 3,143,632,583    $ 3,107,263,777    $ 2,728,983,264
                    

 

60


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

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

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

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

 

Revenue from shopping center rentals, net of shopping center expense of $8.1 million, $7.9 million and $7.9 million for the fiscal years ended 2009, 2008 and 2007, respectively, is included in the caption “Rental income, net” in the Consolidated Statements of Income. Grocery and fluid dairy revenues comprise the net sales reported in the Consolidated Statements of Income.

 

The fluid dairy segment had $54.2 million, $63.5 million and $56.1 million in sales to the grocery sales segment in fiscal 2009, 2008 and 2007, respectively. These sales were eliminated in consolidation.

 

11. Selected Quarterly Financial Data (Unaudited)

 

The following is a summary of unaudited financial data regarding the Company’s quarterly results of operations. Each of the quarters in the two fiscal years presented contains thirteen weeks.

 

     1st
Quarter
   2nd
Quarter
   3rd
Quarter
   4th
Quarter
   Total
     (amounts in thousands except earnings per common share)

2009

              

Net sales

   $ 804,865    $ 789,175    $ 826,766    $ 830,127    $ 3,250,933

Gross profit

     185,555      181,124      191,567      184,835      743,081

Net income

     11,128      7,772      4,737      5,191      28,828

Basic earnings per common share

              

Class A

     0.47      0.33      0.20      0.23      1.23

Class B

     0.43      0.30      0.18      0.21      1.12

Diluted earnings per common share

              

Class A

     0.45      0.32      0.19      0.22      1.18

Class B

     0.43      0.30      0.18      0.21      1.12

2008

              

Net sales

   $ 777,121    $ 782,787    $ 835,347    $ 842,791    $ 3,238,046

Gross profit

     171,082      174,445      180,383      180,426      706,336

Net income

     12,692      12,995      15,974      10,462      52,123

Basic earnings per common share

              

Class A

     0.54      0.56      0.68      0.44      2.22

Class B

     0.49      0.51      0.62      0.40      2.02

Diluted earnings per common share

              

Class A

     0.52      0.53      0.65      0.43      2.13

Class B

     0.49      0.51      0.62      0.40      2.02

 

12. Commitments and Contingencies

 

Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims will not materially affect the Company’s financial position or the results of its operations.

 

Construction commitments at September 26, 2009 totaled $28.5 million. The Company expects these commitments to be fulfilled during fiscal year 2010.

 

61


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

13. Fair Values of Financial Instruments

 

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

 

Cash and cash equivalents: The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents approximate their fair values.

 

Receivables: The carrying amounts reported in the Consolidated Balance Sheets for receivables approximate their fair values.

 

Long and short-term debt: The carrying amounts of the Company’s short-term borrowings approximate their fair values. The fair values of the Company’s long-term debt are based on quoted market prices, where available, or discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

 

The carrying amounts and fair values of the Company’s financial instruments at September 26, 2009 and September 27, 2008 are as follows (amounts in thousands):

 

     2009    2008
     Carrying
Amount
   Fair Value    Carrying
Amount
   Fair Value

Cash and cash equivalents

   $ 77,036    $ 77,036    $ 4,179    $ 4,179

Receivables

     50,402      50,402      47,272      47,272

Long-term and short-term debt:

           

Real estate and equipment

     293,207      293,412      339,917      327,351

Other

     556,107      590,813      377,239      382,293

 

14. Cash Flow Information

 

Supplemental disclosure of cash flow information is as follows:

 

     2009     2008    2007

Cash paid (received) during the year for:

       

Interest (net of amounts capitalized)

   $ 50,527,933      $ 46,514,289    $ 47,018,177

Income taxes

     (1,073,993     31,516,699      17,566,893

Non cash items:

       

Property and equipment additions included in accounts payable

     3,858,775        23,940,418      12,898,825

 

15. Major Supplier

 

The Company purchases a large portion of inventory from a wholesale grocery distributor. Purchases from the distributor were approximately $271 million in 2009, $258 million in 2008 and $241 million in 2007. This distributor owns approximately 2% of the Company’s Class A Common Stock and approximately 1% of the Company’s Class B Common Stock at September 26, 2009. Amounts owed to this distributor, included in accounts payable-trade and accrued expenses, were $10.7 million at September 26, 2009 and $10.6 million at September 27, 2008.

 

62


Table of Contents

Ingles Markets, Incorporated and Subsidiaries

 

Notes To Consolidated Financial Statements—(Continued)

Fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007

 

In addition, the Company sells dairy and juice products to this wholesale grocery distributor. Sales to this distributor were $36.3 million in 2009, $44.3 million in 2008 and $40.0 million in 2007. Amounts due from this distributor, included in receivables, were $1.4 million at September 26, 2009 and $1.8 million at September 27, 2008.

 

16. Related Party Transactions

 

The Company will from time to time make short-term non-interest bearing loans to the Company’s Investment/Profit Sharing Plan to allow the plan to meet distribution obligations during a time when the plan was prohibited from selling shares of the Company’s Class A common stock. During fiscal year 2009, a loan totaling $0.5 million between the Company and the Investment/Profit Sharing Plan was made and is expected to be repaid by the plan to the Company during the first quarter of fiscal year 2010. At September 26, 2009 no other such loans were outstanding.

 

17. Subsequent Events

 

The Company has evaluated events and transactions for potential recognition or disclosure in the financial statements through December 7, 2009, the day the financial statements were issued.

 

63


Table of Contents

SCHEDULE II

 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

SUPPLEMENTAL SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

 

DESCRIPTION

   BALANCE AT
BEGINNING OF
YEAR
   CHARGED TO
COSTS AND
EXPENSES
   DEDUCTIONS (1)    BALANCE
AT END
OF YEAR

Fiscal year ended September 26, 2009:

           

Deducted from asset accounts:

           

Allowance for doubtful accounts

   $ 752,267    $ 531,175    $ 644,827    $ 638,615

Fiscal year ended September 27, 2008:

           

Deducted from asset accounts:

           

Allowance for doubtful accounts

   $ 962,412      —      $ 210,145    $ 752,267

Fiscal year ended September 29, 2007:

           

Deducted from asset accounts:

           

Allowance for doubtful accounts

   $ 845,347    $ 161,362    $ 44,297    $ 962,412

 

(1) Uncollectible accounts written off, net of recoveries.

 

64


Table of Contents

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

INGLES MARKETS, INCORPORATED
By:   /S/    ROBERT P. INGLE        
 

Robert P. Ingle

Chief Executive Officer

  Date: December 7, 2009

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

/S/    ROBERT P. INGLE        

Robert P. Ingle, Chief Executive Officer and Director

   December 7, 2009

 

/S/    JAMES W. LANNING        

James W. Lanning, President, Chief Operating Officer and Director

   December 7, 2009

 

/S/    RONALD B. FREEMAN        

Ronald B. Freeman, CPA,

Vice President-Finance, Chief Financial Officer and Director

  

December 7, 2009

 

/S/    CHARLES E. RUSSELL        

Charles E. Russell, CPA, Director

  

December 7, 2009

 

/S/    ROBERT P. INGLE, II        

Robert P. Ingle, II, Chairman of the Board and Director

  

December 7, 2009

 

/S/    BETH A. SORRENTINO        

Beth A. Sorrentino, CPA, Secretary and Controller

  

December 7, 2009

 

 

John O. Pollard, Attorney, Director

  

 

/S/    CHARLES L. GAITHER, JR.        

Charles L. Gaither, Jr., President-Milkco, Inc. and Director

  

December 7, 2009

 

/S/    FRED D. AYERS        

Fred D. Ayers, Director

  

December 7, 2009

 

Laura Sharp, Director

  

 

65