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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 2 6, 2020

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

For the transition period from to

Commission file number 0-14706.

INGLES MARKETS, INCORPORATED

(Exact name of registrant as specified in its charter)

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

(828) 669-2941

Registrant’s telephone number, including area code

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

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

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

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

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

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

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

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

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

‎

1

INGLES MARKETS, INCORPORATED

INDEX

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

‎

2

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

See notes to unaudited condensed consolidated financial statements.

‎

3

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

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

4

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

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

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

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

See notes to unaudited condensed consolidated financial statements.

‎

5

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

See notes to unaudited condensed consolidated financial statements.

‎

6

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

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

A. BASIS OF PREPARATION

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

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

B. NEW ACCOUNTING PRONOUNCEMENTS

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

C. ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

D. INCOME TAXES

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

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

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

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

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

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

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

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

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

F. LONG-TERM DEBT

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

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

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

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

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

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

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

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

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

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

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

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The Company has an interest rate swap agreement for a current notional amount of $41.0 million at a fixed rate of 3.92%. Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.

The Company has an interest rate swap agreement for a current notional amount of $146.0 million at a fixed rate of 2.95%. Under this agreement, the Company pays monthly the fixed rate of 2.95% and receives the one-month LIBOR plus 1.50%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.65 million and mature in fiscal year 2030.

The Company recognizes differences between the variable rate interest payments and the fixed interest rate settlements with the swap counterparties as an adjustment to interest expense each period over the life of the swaps. The Company has designated the swaps as cash flow hedges and records the changes in the estimated fair value of the swaps to other comprehensive income each period. For the three months ended December 26, 2020, the Company recorded $2.1 million of other comprehensive income, net of income taxes, in its Consolidated Statements of Comprehensive Income. Unrealized losses of $10.8 million are included as a liability at fair value in the line “Other Long Term Liabilities” on the Consolidated Balance Sheet as of December 26, 2020. For the three-month period ended December 28, 2019, the Company recorded $2.2 million of other comprehensive income, net of income taxes, in its Consolidated Statements of Comprehensive Income.

The Company’s long-term debt agreements generally contain provisions that under certain circumstances would permit lending institutions to terminate or withdraw their respective extensions of credit to the Company. Included among the triggering factors permitting the termination or withdrawal of the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents. The Company was in compliance with all financial covenants at December 26, 2020.

The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under all long-term debt agreements in the event of default under any one instrument.

At December 26, 2020, property and equipment with an undepreciated cost of approximately $298.1 million was pledged as collateral for long-term debt. Long-term debt and Line agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios. At December 26, 2020, the Company had excess net worth totaling $222.4 million calculated under covenants in the Notes, the Bonds, the Loan, and the Line. This amount is available to pay dividends; however, certain loan agreements containing provisions outlining minimum tangible net worth requirements restrict the ability of the Company to pay cash dividends in excess of the current annual per share dividends paid on the Company’s Class A and Class B Common Stock. 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.

G. DIVIDENDS

The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on October 15, 2020 to stockholders of record on October 8, 2020.

For additional information regarding the dividend rights of the Class A Common Stock and Class B Common Stock, please see Note 8, “Stockholders’ Equity” to the Consolidated Financial Statements of the Annual Report on Form 10-K filed by the Company under the Securities Exchange Act of 1934, as amended, on December 10, 2020.

H. EARNINGS PER COMMON SHARE

The Company has two classes of common stock: Class A which is publicly traded, and Class B, which has no public market. The Class B Common Stock has restrictions on transfer; however, each share is convertible into one share of Class A Common Stock at any time. Each share of Class A Common Stock has one vote per share and each share of Class B Common Stock has ten votes per share. Each share of Class A Common Stock is entitled to receive cash dividends equal to 110% of any cash dividend paid on Class B Common Stock.

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

The two-class method of computing basic earnings per share for each period reflects the cash dividends declared per share for each class of stock, plus allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock. Diluted earnings per share is calculated assuming the conversion of all shares of Class B Common Stock to shares of Class A Common Stock on a share-for-share basis. The tables below reconcile the numerators and denominators of basic and diluted earnings per share for current and prior periods.

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|  | Three Months Ended |  | Three Months Ended
|  | December 26, 2020 |  | December 28, 2019
|  | Class A |  | Class B |  | Class A |  | Class B
Numerator: Allocated net income |  |  |  |  |  |  |  |  |  |  |  |
Net income allocated, basic |  | $ | 38,813,986 |  | $ | 15,010,101 |  | $ | 12,728,647 |  | $ | 4,958,706
Conversion of Class B to Class A shares |  |  | 15,010,101 |  |  | — |  |  | 4,958,706 |  |  | —
Net income allocated, diluted |  | $ | 53,824,087 |  | $ | 15,010,101 |  | $ | 17,687,353 |  | $ | 4,958,706
Denominator: Weighted average shares outstanding |  |  |  |  |  |  |  |  |  |  |  |
Weighted average shares outstanding, basic |  |  | 14,213,562 |  |  | 6,046,214 |  |  | 14,182,683 |  |  | 6,077,093
Conversion of Class B to Class A shares |  |  | 6,046,214 |  |  | — |  |  | 6,077,093 |  |  | —
Weighted average shares outstanding, diluted |  |  | 20,259,776 |  |  | 6,046,214 |  |  | 20,259,776 |  |  | 6,077,093
Earnings per share |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 2.73 |  | $ | 2.48 |  | $ | 0.90 |  | $ | 0.82
Diluted |  | $ | 2.66 |  | $ | 2.48 |  | $ | 0.87 |  | $ | 0.82

I. LEASES

Leases as Lessee

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. Step rent provisions, escalation clauses and lease incentives are taken into account in computing minimum lease payments.

Operating lease cost for all operating leases totaled $2.7 million for the three months ended December 26, 2020. This amount includes short-term (less than one year) leases, common area expenses, and variable lease costs, all of which are insignificant. Cash paid for lease liabilities in operating activities approximates operating lease cost.

Maturities of operating lease liabilities as of December 26, 2020 are as follows:

Fiscal Year |  |
Remainder of 2021 | $ | 7,438,683
2022 |  | 9,732,036
2023 |  | 8,041,690
2024 |  | 5,257,390
2025 |  | 4,456,683
Thereafter |  | 25,611,667
Total lease payments | $ | 60,538,149
Less amount representing interest |  | 12,957,293
Present value of lease liabilities | $ | 47,580,856

The weighted average remaining lease term for the Company’s operating leases is 12.9 years. The weighted average discount rate used to determine lease liability balances as of December 26, 2020 is 3.51%, based on recent Company financings collateralized by store properties.

Leases as Lessor

At December 26, 2020, the Company owned and operated 83 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 20 years.

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Rental income is included in the line item “Net sales” on the Consolidated Statements of Income. Depreciation on owned properties leased to others and other shopping center expenses are included in the line item “Cost of goods sold” on the Consolidated Statements of Income.

|  | Three Months Ended
|  | December 26, 2020
Rents earned on owned and subleased properties: |  |
Base rentals | $ | 4,675,352
Variable rentals |  | 72,458
Total |  | 4,747,810
Depreciation on owned properties leased to others |  | (1,319,635)
Other shopping center expenses |  | (851,493)
Total | $ | 2,576,682

Future minimum operating lease receipts at December 26, 2020 are as follows:

Fiscal Year |  |
Remainder of 2021 | $ | 10,343,513
2022 |  | 12,969,906
2023 |  | 11,869,911
2024 |  | 10,918,920
2025 |  | 9,679,470
Thereafter |  | 36,937,146
Total minimum future rental income | $ | 92,718,866

J. SEGMENT INFORMATION

The Company operates one primary business segment, retail grocery sales. “Other” includes our remaining operations - fluid dairy and shopping center rentals. Information about the Company’s operations by lines of business (amounts in thousands) is as follows:

|  | Three Months Ended
|  | December 26, |  | December 28,
|  | 2020 |  | 2019
Revenues from unaffiliated customers: |  |  |  |  |  |
Grocery |  | $ | 442,121 |  | $ | 378,329
Non-foods |  |  | 279,688 |  |  | 246,030
Perishables |  |  | 321,263 |  |  | 280,805
Gasoline |  |  | 110,469 |  |  | 139,112
Total Retail |  | $ | 1,153,541 |  | $ | 1,044,276
Other |  |  | 36,902 |  |  | 34,079
Total revenues from unaffiliated customers |  | $ | 1,190,443 |  | $ | 1,078,355
Income from operations: |  |  |  |  |  |
Retail |  | $ | 71,519 |  | $ | 34,221
Other |  |  | 4,922 |  |  | 4,254
Total income from operations |  | $ | 76,441 |  | $ | 38,475

|  | December 26, |  | September 26,
|  | 2020 |  | 2020
Assets: |  |  |  |  |  |
Retail |  | $ | 1,737,607 |  | $ | 1,712,203
Other |  |  | 193,026 |  |  | 189,607
Elimination of intercompany receivable |  |  | (2,133) |  |  | (2,511)
Total assets |  | $ | 1,928,500 |  | $ | 1,899,299

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

The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.

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

For the three-month periods ended December 26, 2020 and December 28, 2019, respectively, the fluid dairy operation had $12.3 million and $11.5 million in sales to the grocery sales segment. These sales have been eliminated in consolidation and are excluded from the amounts in the table above.

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K. FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.

The fair value of the Company’s debt and interest rate swaps are estimated using valuation techniques under the accounting guidance related to fair value measurements based on observable and unobservable inputs. Observable inputs reflect readily available data from independent sources, while unobservable inputs reflect the Company’s market assumptions. These inputs are classified into the following hierarchy:

Level 1 Inputs – | Quoted prices for identical assets or liabilities in active markets.
Level 2 Inputs – | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs – | Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.

The carrying amount and fair value of the Company’s debt, interest rate swaps, and non-qualified retirement plan assets at December 26, 2020 are as follows (in thousands):

|  | Carrying |  |  |  |  | Fair Value
|  | Amount |  | Fair Value |  | Measurements
Senior Notes |  | $ | 295,000 |  | $ | 297,950 |  | Level 2
Facility Bonds |  |  | 68,030 |  |  | 68,030 |  | Level 2
Secured notes payable and other |  |  | 224,917 |  |  | 224,917 |  | Level 2
Interest rate swap derivative contracts |  |  | 10,799 |  |  | 10,799 |  | Level 2
Non-qualified retirement plan assets |  |  | 19,301 |  |  | 19,301 |  | Level 2

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

L. 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 is not expected to materially affect the Company’s financial position, the results of its operations, or its cash flows.

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

Overview

Ingles, a leading supermarket chain in the Southeast, operates 197 supermarkets in North Carolina (73), Georgia (66), South Carolina (35), Tennessee (21), Virginia (1) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and rural communities. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products. Non-food products include fuel centers, pharmacies, health/beauty/cosmetic products and general merchandise, as well as quality private label items. In addition, the Company focuses on selling high-growth, high-margin products to its customers through the development of certified organic products, bakery departments and prepared foods including delicatessen sections. As of December 26, 2020, the Company operated 109 in-store pharmacies and 106 fuel centers.

Critical Accounting Policies

Critical accounting policies are those accounting policies that management believes are important to the presentation of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to estimate 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.

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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 $1.0 million per occurrence for workers’ compensation and for general liability, and $450,000 per covered person for medical care benefits for a policy year. Self-insurance liabilities are established based on claims filed and estimates of claims incurred but not reported. The estimates are based on data provided by the respective claims administrators. These estimates can fluctuate if historical trends are not predictive of the future. The majority of the Company’s properties are self-insured for casualty losses and business interruption; however, liability coverage is maintained. At December 26, 2020 the Company’s self-insurance reserves totaled $34.5 million. This amount is inclusive of $4.8 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable.

Asset Impairments

The Company accounts for the impairment of long-lived assets in accordance with FASB ASC Topic 360. For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal associates. Estimates of future cash flows and expected sales prices are judgments based upon the Company’s experience and knowledge of local operations and cash flows that are projected for several years into the future. These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital spending decisions and inflation. The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether any indicators of impairment have occurred. There were no asset impairments during the three-month period ended December 26, 2020.

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 composed 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 applicable 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 practical, 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 the use of the retail method of store inventory 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 $29.7 million and $28.8 million for the fiscal quarters ended December 26, 2020 and December 28, 2019, respectively. Vendor advertising allowances that represent a reimbursement of specific identifiable incremental costs of advertising the vendor’s specific products are recorded as a reduction to the related expense in the period in which the related expense is incurred. Vendor advertising allowances recorded as a reduction of advertising expense totaled $1.9 million and $3.5 million for the fiscal quarters ended December 26, 2020 and December 28, 2019, respectively. Overall, v endor allowances have been lower during the current fiscal year as the COVID-19 pandemic has resulted in less vendor support for promotional activities.

If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising, as well as the volume and frequency of the Company’s product advertising, which could increase or decrease the Company’s expenditures.

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

Results of Operations

Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in September. The Condensed Consolidated Statements of Income for the three-month periods ended December 26, 2020 and December 28, 2019 both include 13 weeks of operations. Comparable store sales are defined as sales by retail stores in operation for five full fiscal quarters. Sales from replacement stores, major remodels and the addition of fuel stations to existing stores are included in the comparable store sales calculation from the date thereof. A replacement store is a newly-opened store that replaces an existing nearby store that is closed. A major remodel entails substantial remodeling of an existing store and includes additional retail square footage. For the three-month period ended December 26, 2020, comparable store sales included 197 stores. For the three-month period ended December 28, 2019, comparable store sales included 198 stores.

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The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the various segments of the business, see Note I “Segment Information” to the Condensed Consolidated Financial Statements.

|  | Three Months Ended
|  | December 26, |  | December 28,
|  | 2020 |  | 2019
Net sales |  | 100.0 | % |  | 100.0 | %
Gross profit |  | 26.4 | % |  | 23.9 | %
Operating and administrative expenses |  | 20.0 | % |  | 20.6 | %
Gain from sale or disposal of assets |  | — | % |  | 0.2 | %
Income from operations |  | 6.4 | % |  | 3.5 | %
Other income, net |  | — | % |  | — | %
Interest expense |  | 0.5 | % |  | 1.1 | %
Loss on early extinguishment of debt |  | — | % |  | 0.3 | %
Income tax expense |  | 1.4 | % |  | 0.5 | %
Net income |  | 4.5 | % |  | 1.6 | %

Three Months Ended December 26, 2020 Compared to the Three Months Ended December 28, 2019

Net income for the first quarter of fiscal 2021 totaled $53.8 million, compared with net income of $17.7 million earned for the first quarter of fiscal 2020. The COVID-19 pandemic resulted in various stay-at-home measures, as well as the closing of most schools and restaurants beginning in March 2020. Many of these measures were still in place throughout the quarter ended December 26, 2020. As a result, retail grocery sales increased substantially. Corresponding operating expenses did not increase as much, resulting in higher pre-tax income.

Net Sales. Net sales increased by $112.1 million, or 10.4%, to $1.19 billion for the three months ended December 26, 2020 compared with $1.08 billion for the three months ended December 28, 2019. Comparing the first quarter of fiscal 2021 with the first quarter of fiscal 2020, gasoline sales dollars and gallons sold were lower due to decreased demand as a result of the COVID-19 pandemic and oversupply. Excluding gasoline sales, total grocery comparable store sales increased 15.2% over the comparative fiscal quarters. Comparing the first quarters of fiscal years 2021 and 2020 (and excluding gasoline), the number of customer transactions decreased 4.3% and the average transaction size increased 16.8%. We believe that because of the COVID-19 pandemic customers consolidated trips to our stores resulting in a lower transaction count and a higher spend per visit.

Ingles operated 197 stores at December 26, 2020 and 198 stores at December 28, 2019. Retail square feet totaled approximately 11.3 million square feet at December 26, 2020 and 11.2 million square feet at December 28, 2019. During the twelve months ended December 26, 2020, the Company closed one store.

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

|  | Three Months Ended
|  | December 26, |  | December 28,
|  | 2020 |  | 2019
Grocery |  | $ | 442,121 |  | $ | 378,329
Non-foods |  |  | 279,688 |  |  | 246,030
Perishables |  |  | 321,263 |  |  | 280,805
Gasoline |  |  | 110,469 |  |  | 139,112
Total retail grocery |  | $ | 1,153,541 |  | $ | 1,044,276

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

The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.

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

Changes in retail grocery sales for the quarter ended December 26, 2020 are summarized as follows (in thousands):

Total retail sales for the three months ended December 28, 2019 |  | $ | 1,044,276
Comparable store sales increase (including gasoline) |  |  | 109,629
Impact of stores closed in fiscal 2020 |  |  | (494)
Other |  |  | 130
Total retail sales for the three months ended December 26, 2020 |  | $ | 1,153,541

Gross Profit. Gross profit for the three-month period ended December 26, 2020 totaled $314.2 million, an increase of $56.7 million, or 22.0%, compared with gross profit of $257.5 million for the three-month period ended December 28, 2019. Gross profit as a percentage of sales was 26.4% and 23.9% for the three months ended December 26, 2020 and December 28, 2019, respectively.

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There was less discounting and shrink during the current year quarter, and the gasoline gross margin was higher, as compared with the quarter ended December 28, 2019.

Operating and Administrative Expenses. Operating and administrative expenses increased $16.2 million, or 7.3%, to $238.2 million for the three months ended December 26, 2020, from $222.0 million for the three months ended December 28, 2019. As a percentage of sales, operating and administrative expenses were 20.0% and 20.6% for the December 2020 and December 2019 quarters, respectively. Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 21.9% of sales for the first fiscal quarter of 2021 compared with 23.4% for the first fiscal quarter of 2020. The fiscal 2021 first quarter expense percentages are lower due to additional pandemic-related sales during the first fiscal quarter of 2021.

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

|  |  |  | Increase
|  | Increase |  | as a % of
|  | in millions |  | sales
Salaries and wages |  | $ | 9.7 |  | 0.82 | %
Depreciation and amortization |  | $ | 2.0 |  | 0.17 | %
Repairs and maintenance |  | $ | 1.0 |  | 0.08 | %
Insurance |  | $ | 0.9 |  | 0.07 | %

Salaries and wages increased in dollars due to additional labor hours required for the increased sales volume, including extra labor needed in response to the COVID-19 pandemic.

Depreciation expense increased due to equipment purchased for store improvements and the distribution network.

Repairs and maintenance expense increased due to extra sales and enhanced cleaning protocols as a result of the COVID-19 pandemic.

Insurance expense increased due to increased claims under the Company’s self-insurance programs.

Gain (loss) from Sale or Disposal of Assets. Gain from the sale or disposal of assets totaled $0.5 million during the three months ended December 26, 2020. During the quarter ended December 28, 2019, the gain from the sale or disposal of assets totaled $3.0 million, primarily from the sale of land.

Interest Expense. Interest expense totaled $6.4 million for the three-month period ended December 26, 2020 compared with $11.9 million for the three-month period ended December 28, 2019. Total debt at December 2020 was $587.9 million compared with $850.0 million at December 2019. Over the past twelve months, the Company has reduced or refinanced higher rate debt. LIBOR decreased significantly during calendar year 2020, reducing the cost of some of the Company’s debt.

Income Taxes. Income tax expense totaled $16.9 million for the three months ended December 26, 2020, an effective tax rate of 23.9% of pretax income. Income tax expense totaled $5.3 million for the three months ended December 28, 2019, an effective tax rate of 23.1% of pretax income.

Net Income. Net income totaled $53.8 million for the three-month period ended December 26, 2020 compared with $17.7 million for the three-month period ended December 28, 2019. Basic and diluted earnings per share for Class A Common Stock were $2.73 and $2.66, respectively, for the December 2020 quarter, compared to $0.90 and $0.87, respectively, for the December 2019 quarter. Basic and diluted earnings per share for Class B Common Stock were each $2.48 for the December 2020 quarter compared with $0.82 for the December 2019 quarter.

Liquidity and Capital Resources

Capital Expenditures

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

Capital expenditures totaled $34.2 million for the three-month period ended December 26, 2020. These capital expenditures focused on construction on stores scheduled to open later in fiscal 2021, site acquisition, and smaller-scale remodeling projects in a number of the Company’s stores. Capital expenditures also included the costs of upgrading and replacing store equipment, technology investments, rolling stock, and capital expenditures related to the Company’s milk processing plant.

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Ingles’ capital expenditure plans for fiscal 2021 currently include investments of approximately $100 to $120 million. At this time the Company does not anticipate that the COVID-19 pandemic will have an adverse impact on its capital expenditure plans. The Company currently plans to dedicate the majority of its fiscal 2021 capital expenditures to continued improvement of its store base and also include investments in stores expected to open in fiscal 2021, 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 currently expects that its annual capital expenditures will be in the range of approximately $100 to $160 million going forward in order to maintain a modern store base. Among other things, planned expenditures for any given future fiscal year will be affected by the availability of financing, which can affect both the number of projects pursued at any given time and the cost of those projects. The number of projects may also fluctuate due to the varying costs of the types of projects pursued including new stores and major remodel/expansions. The Company makes decisions on the allocation of capital expenditure dollars based on many factors including the competitive environment, other Company capital initiatives and its financial condition.

The Company does not generally enter into commitments for capital expenditures other than on a store-by-store basis at the time it begins construction on a new store or begins a major or minor remodeling project. Outstanding construction commitments totaled $9.9 million at December 26, 2020.

Liquidity

The Company generated $57.8 million net cash from operations in the December 2020 three-month period compared with $16.2 million during the December 2019 three-month period. The increase is primarily attributable to higher net income as a result of increased sales due to the COVID-19 pandemic.

Cash used by investing activities for the three-month periods ended December 26, 2020 and December 28, 2019 totaled $33.6 million and $25.9 million, respectively, consisting primarily of capital expenditures offset by proceeds from property and equipment sales. Land sales during the December 2019 quarter account for the difference in investing activities between the two quarters.

Cash used by financing activities totaled $21.0 million for the three-month period ended December 26, 2020, compared with $9.5 million for the three-month period ended December 28, 2019. The increase is primarily related to the repayment of borrowings under the Line (as defined below).

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

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

In June 2020, the Company issued an irrevocable notice to redeem $150 million principal amount of the Notes. The Notes were redeemed at 100.958% of par value on July 9, 2020. In July 2020 the Company issued an irrevocable notice to redeem $100 million principal amount of the Notes. The Notes were redeemed at 100.958% of par value on August 27, 2020. Following this redemption, there were $295.0 million aggregate principal amount of the Notes outstanding at December 26, 2020.

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

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

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

The Company has an interest rate swap agreement for a current notional amount of $41.0 million at a fixed rate of 3.92%. Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%. The interest rate swap

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effectively hedges floating rate debt in the same amount as the current notional amount of the interest rate swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.

The Company has an interest rate swap agreement for a current notional amount of $146.0 million at a fixed rate of 2.95%. Under this agreement, the Company pays monthly the fixed rate of 2.95% and receives the one-month LIBOR plus 1.50%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.65 million and mature in fiscal year 2030.

The fair market value of the interest rate swaps are measured quarterly with adjustments recorded in other comprehensive income.

The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under the Company’s Line, Bonds and Notes indenture in the event of default under any one instrument.

The Company’s long-term debt agreements generally contain provisions that under certain circumstances would permit lending institutions to terminate or withdraw their respective extensions of credit to the Company. Included among the triggering factors permitting the termination or withdrawal of the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents. As of December 26, 2020, the Company was in compliance with these covenants. Under the most restrictive of these covenants, the Company would be able to incur approximately $1.72 billion of additional borrowings (including borrowings under the Line) as of December 26, 2020.

The Company’s principal sources of liquidity are expected to be cash flow from operations, borrowings under the Line and long-term debt financing. The Company believes, based on its current results of operations and financial condition, that its financial resources, including the Line, short- and long-term financing expected to be available to it and internally generated funds, will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future, including any debt service requirements of additional borrowings. However, there is no assurance that any such sources of financing will be available to the Company when needed on acceptable terms, or at all.

It is possible that, in the future, the Company’s results of operations and financial condition will be different from that described in this report based on a number of factors. These factors may include, among others, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery, changing demographics, and the impact of the COVID-19 pandemic, as well as the additional factors discussed below under “Forward Looking Statements.” It is also possible, for such reasons, that the results of operations from the new, expanded, remodeled and/or replacement stores will not meet or exceed the results of operations from existing stores that are described in this report.

Contractual Obligations and Commercial Commitments

There have been no other material changes in contractual obligations and commercial commitments subsequent to September 26, 2020 other than as described elsewhere in this Form 10-Q.

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 (sixteen and one-half cents) per share on its Class A Common Stock and $0.15 (fifteen cents) per share on its Class B Common Stock for an annual rate of $0.66 and $0.60 per share, respectively.

The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors periodically reconsiders the declaration of dividends. The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant. In addition, the Notes, the Bonds, the Line, and other debt agreements contain provisions that, based on certain financial parameters, restrict the ability of the Company to pay additional cash dividends in excess of current quarterly per share amounts. Further, the Company is prevented from declaring dividends at any time that it is in default under the indenture governing the Notes.

Seasonality

Grocery sales are subject to a slight seasonal variance due to holiday related sales and due to sales in areas where seasonal homes are located. Sales are traditionally higher in the Company’s first fiscal quarter due to the inclusion of sales related to Thanksgiving and

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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 quarter, sales are affected by the return of customers to seasonal homes in our market area. The Company’s fluid dairy operations have slight seasonal variation to the extent of its sales into the grocery industry. The Company’s real estate activities are not subject to seasonal variations.

Impact of Inflation

There have been no other material changes in the impact of inflation subsequent to September 26, 2020 other than as described elsewhere in this Form 10-Q.

Forward Looking Statements

This Quarterly Report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect”, “anticipate”, “intend”, “plan”, “likely”, “goal”, “believe”, “seek”, “will”, “may”, “would”, “should” 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 or described by such forward-looking statements. 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, financial position, growth strategies, 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 the potential continued impact of the COVID-19 pandemic on our business and economic conditions generally in the Company’s operating area; the Company’s ability to successfully implement its expansion and operating strategies and to manage rapid expansion; pricing pressures and other competitive factors; reduction in per gallon retail gasoline prices; the maturation of new and expanded stores; the Company’s ability to reduce costs and achieve improvements in operating results; the availability and terms of financing; increases in labor and utility costs; success or failure in the ownership and development of real estate; changes in the laws and government regulations applicable to the Company; disruptions in the efficient distribution of food products; changes in accounting policies, standards, guidelines or principles as may be adopted by regulatory agencies as well as the Financial Accounting Standards Board; and those factors contained under the heading “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K.

Consequently, actual events affecting the Company and the impact of such events on the Company’s operations may vary significantly from those described in this report or contemplated or implied by statements in this report. The Company does not undertake and specifically denies any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments, except to the extent required by applicable law.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As disclosed elsewhere in this Quarterly Report on Form 10Q, the Company is a party to interest rate swap agreements for a current aggregate notional amount of $187.0 million. Otherwise, the Company does not typically utilize financial instruments for trading or other speculative purposes, nor does it typically utilize leveraged financial instruments. There have been no other material changes in the market risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended September 26, 2020.

Item 4. CONTROLS AND PROCEDURES

(a)Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission. Disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that the Company’s system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of December 26, 2020, the end of the period covered by this report. In making this evaluation, it considered matters previously identified and disclosed in connection with the filing of its Annual Report on Form 10-K for fiscal 2020. After consideration of the matters discussed above and the changes in internal control over financial reporting discussed below, the Company has concluded that its controls and procedures were effective as of December 26, 2020.

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(b) Changes in Internal Control over Financial Reporting

The Company is currently planning and performing tests of internal controls over financial reporting for fiscal year 2021.

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

Part II. OTHER INFORMATION

Item 6. EXHIBITS

(a) Exhibits.

31.1 | * | Rule 13a-14(a) Certification

31.2 | * | Rule 13a-14(a) Certification

32.1 | ** | Certification Pursuant to 18 U.S.C. Section 1350

32.2 | ** | Certification Pursuant to 18 U.S.C. Section 1350

101 | * | The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Statements of Earnings; (ii) the Consolidated Balance Sheets; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Comprehensive Income; and (v) the Notes to the Consolidated Financial Statements.

104 | * | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

________

*Filed herewith.

**Furnished herewith.
‎

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

|  | INGLES MARKETS, INCORPORATED
Date: February 4, 2021 |  | /s/ James W. Lanning
|  | James W. Lanning
|  | Chief Executive Officer and President
Date: February 4, 2021 |  | /s/ Ronald B. Freeman
|  | Ronald B. Freeman
|  | Vice President-Finance and Chief Financial Officer

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