Ingles Markets, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2012, ended June 23, 2012; comparable periods ended June 25, 2011. The quarter comprised 13 weeks. Financial statements are unaudited.
Business context
Ingles operated 203 supermarkets across six southeastern states, plus 80 in-store pharmacies and 71 fuel centers. Other operations include fluid dairy processing and shopping-center rentals. The company began operating a new 836,000-square-foot distribution facility in June 2012.
Financial performance
| Metric | Three months ended June 23, 2012 | Nine months ended June 23, 2012 |
|---|---|---|
| Net sales | $917.8 million; up 0.7% year over year | $2,717.7 million; up 2.4% |
| Gross profit / margin | $206.0 million / 22.4%, versus 22.1% | $600.1 million / 22.1%, versus 22.2% |
| Operating income / margin | $34.7 million / 3.8%; approximately flat | $88.9 million / 3.3%; up from $88.0 million |
| Net income / margin | $13.1 million / 1.4%, versus $12.7 million | $30.2 million / 1.1%, versus $28.1 million |
| Class A EPS | Basic $0.56; diluted $0.54 | Basic $1.29; diluted $1.24 |
| Interest expense | $14.9 million, down from $15.3 million | $44.9 million, down from $46.9 million |
For the quarter, grocery comparable-store sales grew 1.1%, or 2.1% excluding gasoline; transactions rose 1.4% and average transaction size 0.7%. For nine months, comparable-store sales excluding gasoline rose 1.8%. Quarterly results benefited from higher gross profit and lower interest expense, partly offset by higher operating costs. Prior-year quarterly and nine-month results included an approximately $2.8 million pretax land-disposal gain.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $84.9 million, versus $74.2 million. Investing cash outflow was $67.8 million and financing cash outflow was $23.2 million.
- Capital expenditures were $144.9 million, about half associated with the new distribution facility. Cash declined $6.1 million during the period to $6.3 million.
- At June 23, total debt was approximately $846.1 million; balance-sheet long-term debt was $812.5 million, plus $33.5 million current. Total liabilities were $1.165 billion and stockholders’ equity $448.0 million.
- The $175 million revolving credit facility had $20 million drawn; $8.9 million of letters of credit had been issued. The company reported compliance with financial covenants, with significant headroom, and approximately $824.2 million of unencumbered real property and equipment at net book value.
- Senior notes of $575 million principal carry an 8.875% coupon and mature in 2017. Recovery Zone bonds totaled about $99.7 million, with mandatory annual redemptions of $4.53 million beginning in 2014.
Outlook, commentary and risks
- Management expected sales growth for the remainder of fiscal 2012 to approximate the rate achieved in the first nine months. It cited gasoline and milk prices, commodity costs, general economic conditions, and maturation of new and expanded stores as influences.
- Fiscal 2012 capital expenditures were expected to be approximately $170 million; management estimated ongoing annual net capital expenditures of approximately $110 million to $180 million.
- The company expected to continue quarterly cash dividends, subject to board discretion, results, financial condition and debt covenants. The declared per-share amounts were $0.165 for Class A and $0.150 for Class B.
- Risks discussed include competitive and pricing pressure, economic conditions, gasoline prices, labor and utility costs, weather impacts on food supply, financing availability, execution and performance of store expansion, and real-estate development. Self-insurance reserves were $26.4 million; claims estimates can vary. Certain state tax returns for fiscal 2006–2009 were under examination.
- In May 2012, the company approved a $2.5 million purchase of real property and an aircraft from the estate of former CEO and director Robert P. Ingle, at appraised fair value; closing was expected before September 29, 2012.
- Management stated disclosure controls were effective as of June 23, 2012. Testing of internal controls, including controls for the new distribution center, was ongoing.
Most important facts to verify
- The filing’s nine-month Class A basic EPS is inconsistent: the income statement reports $1.29, while MD&A reports $1.30. Confirm the intended figure and any subsequent correction.
- Track operating performance and costs as the new distribution center becomes fully operational, including the effect on capital spending, depreciation and distribution expenses.
- Confirm actual fiscal 2012 capital expenditures against the approximately $170 million estimate and assess ongoing funding needs and cash generation.
- Monitor debt maturities, revolver availability, covenant headroom and the required bond redemptions beginning in 2014.
- Follow the related-party asset purchase, state tax examinations and changes in self-insurance claims or reserves.